INVESTSA July 2012 FPI by COSA Media

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Contents

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Multi-management maze Acquisitions – a time to buy? PROFILE Trevor Pascoe – Ceo Symmetry Multi-Manager Transparency of costs – good for advisers? HEAD TO HEAD Ian Anderson, Chief Investment Officer at Grindrod Asset Management / Mariette Warner, Manager of the Absa Property Equity Fund An India with potential for investors Regulation 28 – What’s the fuss?

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Letter from the editor

letter from the

EDITORIAL Editor: Shaun Harris investsa@comms.co.za

editor

Features writers: Maya Fisher- French Miles Donohoe

It’s all in the price. Well, not entirely. I suspect that when it comes to investments, at times, investors and their financial advisers are unaware of exactly what is in the price, or rather how much of the amount being paid actually goes into the investment. Often a large amount is siphoned off along the way into various, often not obviously disclosed, fees.

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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 Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages,

Investment fees should be a concern. What might not seem a lot to pay for a particular investment product or its management can, over time, have a devastating effect on the return from that investment. If there is one service that financial advisers can do for clients, it’s to very closely examine fees and, if even the smallest amount does not tally, take it back to the service provider and negotiate a better deal. Fees are at the heart of this issue. David O’ Leary from Morningstar looks at this issue of performance fees. And he asks the question I’ve long wondered about. Why does an investor pay a fund manager more, as with performance fees, for what the manager should be doing anyway? Look at his conclusion. In her column Maya Fisher-French breaks down the costs on a retirement annuity. It’s frightening how little gets through to the investment. Read why she says transparency of costs is good for advisers. Andrew Ratcliffe from Private Client Holdings gets to the core of the subject when he answers his rhetorical question: what are you really earning from your investments? See his summation of the effect of charges on returns. There’s a lot more to read. Mark Mobius on India, overcoming fraud and offering long-term potential for investors; John Caulfield from Momentum on how hedge funds preserve capital in times of market stress; Jeanette Marais of Allan Gray on how to recruit the right people; and Annabel Bishop from Investec offering the economic insight on the global environment. Regular contributor Chris Hart from Investment Solutions follows up with his take on the fears of Greece exiting the Eurozone, while Sunél Veldtman’s column ponders why the providers of financial products and banks dominate advertising space at airports, something I’ve pondered about too in the long check-in queues. Enjoy the read.

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

10001631JB/E

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Roughly 28.63g. Anything more or less than the precise amount of beech for the rim, maple for the pinblock, cast iron for the frame, spruce for the soundboard or high carbon steel for the strings, and it wouldn’t be a Steinway. It’s in the quality, the configuration and the precise quantity of each material that the instrument gains a sound and a value that appreciate with time.

Similarly, at SYm|mETRY Multi-Manager, we combine the most appropriate single-asset managers into investment portfolios that enable you to grow your wealth. Our experienced investment team spend over 40% of their time on manager research to ensure the most optimal choices are made for our funds. Don’t compromise when it comes to your financial peace of mind. Invest with a multi-manager that:

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To invest contact your Old Mutual nancial adviser or broker or call 0860 INVEST. www.symmetry.co.za

SYm|mETRY Multi-Manager is a division of Old Mutual Life Assurance Company (South Africa) Limited, a licensed nancial services provider.

SHAUN HARRIS

Multimanagement

maze

by Shaun Harris

Multi-management companies have been around for a long time and are growing in popularity. This is probably because multi-management funds have become more accessible and affordable for retail investors. Multi-management products used to be confined to large institutional investors, like retirement funds. But now many of the large multi-managers have funds specifically designed for individual investors. There are many benefits, and also possible dangers, for investors who choose to invest in a multi-management product, including hidden or not very transparent underlying costs. Multi-managers also present some unique challenges for financial advisers, not least the possibility that the multi-management company could replace the advisory role played by financial advisers.

MAKING THE RIGHT CHOICE

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The history of multi-management goes back to the early years of unit trusts, or mutual funds as they are called overseas, and where the multi-management concept originated, though under various different names. The idea stems from an investor wanting to invest in a range of products, possibly a number of stock market shares or a broader range of investments including bonds and property, but through one investment vehicle rather than directly in all the underlying investments. This is broadly what an actively managed unit trust fund manager does. Multi-management goes a step further in that it will select a range of different fund managers and possibly other products like retirement annuities and bundle them together so that the investor can buy the package through the top company or fund instead of investing individually in all the underlying funds. It’s a simple concept. One manageable and easy to track investment instead of a complex choice of many investments, which are the underlying funds and investment vehicles in a multimanagement fund.

Once again fees can be sky high as commission to intermediaries and other additional costs may be included in the wrap. Usually Lisp fees are high as there are two annual charges, one to the Lisp and the other to the management company running the investments. And life products, though we accept the new so-called new generation products are better than what came before, are still not the optimal products for an investment portfolio. They might have a place for particular investors looking for life-type products, like guaranteed funds, as part of

“Multi-management is essentially putting funds together to run the money.They are put together and sold on to the retail investor. It’s a blending process.”

“Multi-management is essentially putting funds together to run the money,” says Tony Bell, head of multi-asset fund management at Vunani Fund Managers. “They are put together and sold on to the retail investor. It’s a blending process.” Multimanagement companies claim to have many advantages for investors. This will in most cases come at additional, quite significant cost. One advantage of multi-management listed by Fairbairn Capital, part of the Old Mutual Investment Group, is reduced exposure to the performance of a single asset manager. “Doing so adds more diversification depth to a portfolio. In other words, the investor is not just diversifying across asset classes, but also across asset managers. An asset manager might perform very poorly under certain economic and market conditions.” It would not be hard for the informed investor to put together a multi-managed type portfolio. So why endure the additional costs? Fairbairn admits as much but says ordinary investors will not have the time or expertise to do due diligence and ongoing monitoring of various asset managers. “But the fact remains that to justify extra fees, a multi-manager has to reduce the risk or volatility of a portfolio and deliver consistent long-term returns.” Fairbairn offers a range of funds, through SYmmETRY Multi-Managers. They would

possibly cater for all investor risk profiles. It also offers funds through Galaxy and Investment Frontiers on Lisp and life platforms respectively. Without wanting to be too critical, this is where the multi-management proposition runs into waters that get a little muddy.

saving for retirement. But apart from costs, life products should always be viewed carefully when included in a multi-management solution. “If you look at the structure of most multi-managers, they are usually aligned to a large institution,” says Guy Fletcher, chief investment officer at Vunani Fund Managers. “They can be a shop window for their products.” Often these large institutions are life companies. The multi-manager will claim and in effect have to offer the most suitable products for retail clients, depending on their risk tolerance. But does this actually happen? To be harsh, in some extreme cases the aligned multi-manager might be no more than an additional distribution channel for the life company products. This is one area that financial advisers need to be very aware of if they are helping clients to select the most appropriate multi-manager. A related problem is the selection of fund managers in a multi-management portfolio. The big names are the ones that count. Often they will be the best for the particular portfolio the multi-manager is constructing. But not always and more specialised, though smaller, fund managers could be left out.

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Sygnia Asset Management has been looking at including smaller funds in its multimanagement if they are deemed best for investors. “Small and mid-size funds can now have an investment strategy tailored to their own needs,” says Simon Peile, head of investments at Sygnia Asset Management. “This is very helpful to trustees, particularly in terms of the revised Regulation 28 which requires them to apply their minds to and adopt policies for their funds on a number of investment-related issues.” Among other things, the revised Regulation 28 of the Pension Funds Act says trustees must match the assets and liabilities in a fund, a daunting task especially if the trustee does not have sufficient investment training and experience. “Through a multi-manager, funds can ensure that their investment portfolios suit their stated investment policies, rather than adapt their investment policies to match the investment portfolios that are available to them,” Peile says. But Fletcher points to a potential problem that he has seen happening in the market. “Many multi-managers in the retail market have complained that investors are so brand conscious that if particular large asset managers aren’t included they aren’t interested. If the underlying asset managers don’t include Allan Gray, for example, the clients don’t want it.” Surely, though, the evolution of multimanagers, who in many cases make the all-important asset allocation decisions, is reaching a stage where they replace the financial adviser. The multi-manager has the product package, will offer advice according to the client’s risk profile, and make the asset allocation decision. This must squeeze the financial adviser out of the picture. Not really, says Fletcher. “The multi-manager is providing a package of products to the IFA that they can use for the client’s portfolio. That’s where their decisions and advice come in.” The tough choice for the financial adviser then becomes choosing the right multi-manager for the client. And even when they choose the most appropriate, the multi-manager has to be monitored constantly with a close eye on costs, especially what could be unnecessary switching costs when multi-managers rebalance the underlying fund managers and other investments. It’s a hard job but that’s what good financial advisers do.

SHAUN HARRIS

Acquisitions a time to buy? Acquisitions are part of business. At some stage every company will consider buying another company, for a host of reasons. It could be to enhance growth in earnings, enter a new market or buy an existing brand. Often the reasons for wanting to make an acquisition are good. The difficult part is getting the acquisition right and this goes beyond price. Any significant acquisition should be watched closely by investors and financial advisers. It might present an opportune time to buy the companyâ&#x20AC;&#x2122;s shares, either the acquirer, the target, or maybe both. But it can be a tough call because the investor is really second-guessing the deal being done. 8

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hakespeare had an eye for deals, mainly who was or wasn’t buying one of the theatres in London. So instead of contemplating life and death, Hamlet might have ended up saying, “To buy or not to buy, that is the question.” Skip forward a few centuries and the quote might have been: “It was the best of times to buy; it was the worst of times to buy.” And readers would have shaken their heads and asked what the Dickens is going on. But to bring the quotes up to date, this is what Warren Buffett has to say about acquisitions: “We like to buy when the patient is on the operating table.” The current economic climate is like an operating table. In general, it’s a good time to look at potential acquisitions. Prices should be lower as companies come under financial pressure or just decide that they want to get out. The acquirer, though, has to look at the ‘patient’ carefully and determine whether it will recover and get off the table at some stage in the future. You wouldn’t want to buy a dog that goes into convalescence. Corporate SA is certainly in a strong position to make acquisitions. Drawing on figures from the Reserve Bank, Sean Segar, head of product of cash solutions at Nedgroup Investments, says corporate deposits presently stand at R534 billion. That’s 14 per cent up on the R469 billion of 12 months ago. But far from being deployed for acquisitions, it looks more like companies are hanging onto lazy balance sheets like comfort blankets. Segar says it’s understandable that many corporates are being overly conservative in the face of market uncertainty. His point is that the huge surplus cash piles on balance sheets could be earning higher returns, warning that with interest rates at the lowest level in 30 years these fortress balance sheets will create a significant drag on earnings and returns on equity. That will soon translate to declining share prices for listed companies. Apart from upsetting investors in these companies, declining share prices attract predators. At some stage the hunter could become the hunted. Companies have been bought in the past for little more reason than the amount of cash they were sitting on. One reason for acquisitions is to grow earnings. On the face of it it’s a simple game of sums. A company with a price-to-earnings (PE) ratio of 10 times buys a company on a PE rating of five times and, hey presto, earnings growth is boosted. But it’s a short-term tactic that can go very wrong over the long term.

Going on an acquisition spree is one way of boosting a company’s earnings, often translating into an increased share price, says Craig Butters, a fund manager at Prudential Portfolio Managers. He adds that management incentive schemes based on share price performance can lead to company management focusing on short-term strategies to boost the share price, rather than on creating long-term shareholder value. As with the example above, Butters adds one of the common methods of doing this is for a company with a high PE ratio to buy a company with a lower PE rating. But he warns that the gap created by illusory earnings growth becomes increasingly difficult to fill. “For as long as the market continues to reward acquisitive earnings growth, this vicious circle can continue for some time, as a rising share price reflects an increased rating of a company and management remain well

They are good examples, but also show that even top companies sometimes get acquisitions wrong. For instance, though long, very long-term history might prove us wrong, SABMiller’s acquisition of Miller Coors’ in the US seems a disaster. The joint venture has consistently drained SABMiller’s profits in the US. Investec too has made several great acquisitions. But the Kensington business in the UK looks like a mistake. CEO Stephen Koseff, discussing recent financial results, painfully explained that Kensington had diluted profits in the UK. But big business leaders will admit when they have potentially made a bad acquisition. And shareholders probably accept this. Even a top company cannot get acquisitions right all the time. One name surprisingly absent from the list above is Bidvest. If ever a company

“The current economic climate is like an operating table. In general, it’s a good time to look at potential acquisitions. Prices should be lower as companies come under financial pressure or just decide that they want to get out. “ incentivised through an increase in the value of their shares and share options. This further raises earnings growth expectations, often placing increased pressure on management to pursue risky acquisitions to generate earnings growth.”

has grown through well-considered, wellpriced acquisitions, both in South Africa and overseas, it’s Bidvest. And CEO Brian Joffe is the king dealmaker here. But he also admits that sometimes he gets it wrong and has made some less favourable acquisitions.

Risky acquisitions are the danger signal for investors and financial advisers. The acquiring company could overpay or the company being acquired might not perform to expectation. “The expected benefits from an acquisition are very seldom realised to the extent envisaged.”

Where are the best acquisition opportunities at present; in SA or overseas? It’s a relative question as companies in SA, as measured by the JSE, are generally more expensive than some of the top companies overseas. But offshore acquisitions have become clouded through the sovereign debt crises in Europe. That makes it a tough call for local companies considering overseas acquisitions and even tougher for financial advisers. Few have the time or knowledge to weigh up an offshore acquisition. Instead they should examine the acquiring company, making sure they know why the deal is being done. And then decide if it might offer a secondary buying opportunity for investor clients.

Butters emphasises, however, that not all acquisitions are bad and provides examples of companies on the JSE that have made strategic acquisitions at a reasonable price, which have been a significant driver of long-term shareholder value. These companies include Aspen, Steinhoff, SABMiller, EOH, Imperial, BHP Billiton, Investec, BCX and Redefine.

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TREVOR PA S C O E CEO SYMMETRY M U LT I - M A N A G E R

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TP PROFILE | CEO SYMMETRY MULTI-MANAGER

“I define success as achieving my goals while

benefiting others. I want my relationships to remain strong, no matter what may happen in life.”

You have been CEO of Symmetry for two years now. How has the South African financial services industry changed during this time?

Regulation 28 amendments have created opportunities for greater exposure to alternative assets like hedge funds and private equity. Reporting requirements for retirement funds increased substantially as a result of the changes and the industry has also had to manage compliance to Regulation 28 at an individual level, which has been challenging.

The changes to dividends withholdings tax have added to the complexity in reporting and managing funds. We have seen changes at SIM and StanLib; RMB and Metam merging into Momentum Investments; changes within OMIGSA’s equity boutiques; and Coronation closing some of its equity funds to institutional investors. The FAIS exams have caused some consternation among providers, especially advisers, and it will be interesting to see how many advisers leave the industry after the September cut-off. What have been the biggest challenges in establishing Symmetry as a specialist multi-manager? When I joined, Symmetry was already an established specialist multi-manager. The key challenge then and now is how to differentiate ourselves from other multimanagers, single managers and asset consultants. This has been easier in the retail market. We are currently developing an offering that I believe will stand out from the rest. The multi-management market has evolved from focusing only on pure asset management, to also offering investment platform services. To gain access to larger funds, multi-managers now offer multi-

management services that most retirement funds need, while allowing the funds, through their asset consultants, to provide the manager research/manager decision-making. Who are multi-manager funds best suited for?

Retail investors: we offer specialist skills, access to good asset managers at a lower cost than going directly to these managers and optimal manager blends.

Multi-Manager funds are also suited to umbrella funds and smaller retirement funds that can’t get access to asset consulting skills or where fees are prohibitive to allocate funds across a range of managers also benefit. Large retirement funds, that cannot gain access to asset managers who have closed their funds to institutional investors, but where these managers form part of a multi-manager solution; and for funds where the risk/return outcome is more important than relative performance. It is also suited to funds looking for life-stage solutions where a number of managers would be used and for funds looking for specialist or niche solutions such as a fund of hedge funds, Islamic funds, SRI Funds or an Africa Fund of Funds. What do you think are the biggest challenges currently for investors?

The uncertainty in the global and local markets. There are no quick solutions to the debt levels in the developed markets of the USA, UK and Europe. In addition, there are fears around China as to whether its growth is sustainable and the subsequent impact on resource prices. With the economic environment pointing to low growth for a number of years, high levels of real returns are going to be difficult to achieve, and so investors should reduce their expectations of high real returns.

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Do you think the current debt crises in Europe have made South Africa more or less attractive to investors?

As the European debt crisis has been with us for almost four years now, I think that we have already seen that South Africa has been an attractive place for foreign investors. Currently, the risks of investing in SA are greater than before, especially if there is a hard landing in China and commodity prices fall. Many industrial stocks have been pushed to extremely high levels by foreigners, and are unlikely to deliver the kind of returns expected by foreigners. As Europe is SA’s key export partner, a weaker Europe will impact on the SA economy. How do you wind down from the pressures of your position?

I spend time with my wife and two young children who are a great joy for me. As an older father they keep me young. I enjoy swimming and want to start swimming in a few masters’ galas. I also try and run with church friends on Saturday mornings. How do you define success?

Achieving your goals while benefiting others; be it family, friends or colleagues. I want my relationships to be strong and remain strong despite what may happen in life. Also having a balance in life; I don’t define my life by my work. Finally, if you had R100 000 to invest, where would you put it? Symmetry’s Balanced Fund of Funds unit trust– it has a great range of asset managers that have the right risk/return focus for current market conditions. This is where I allocated a recent bonus.

MAYA FISHER-FRENCH

TRANSPARENCY of costs good for advisers? by Maya Fisher-French

he client has a retirement annuity to which he contributes R600 per month. In addition, he has changed jobs several times and each time he has transferred his company fund into his retirement fund. He is doing exactly what National Treasury, and the industry, wants him to do. However, he is now in the insidious position where the R2 000 monthly management fee (three per cent per annum on the investment value) is more than three times his monthly contribution. Understandably the client feels he is going backwards very quickly. His perception is that he receives more value from his bank, which charges him R100 a month, than he does from the product.

Despite attempts by the adviser, as well as the broker consultant, to obtain further information on the product to explain the fees, the client received no real explanation, hence the e-mail to the media. The reality is that more often than not it is only when the media gets involved that decent answers are provided.

“Many retirement products have multiple layers of charges, such as administration and investment management charges, and brokerage, adviser and performance fees, making comparisons across products and channels difficult. Costs of investment management in particular are high,” says Treasury.

In the case of this product, the actual fees are not as high as they appear. The product has a very strange rebate system where every five years the client receives a portion of their fees back in order to encourage him to stay invested; it also has a life benefit component. The fees should average around 1.7 per cent per annum over the entire period, although it is not quite clear how performance fees would affect that figure.

Godfrey Nti, CEO of the Financial Planning Institute (FPI) has also raised concern around product design.

“It is very difficult to compare products; in most cases the product house provides only the marketing information and not the nitty-gritty. For the average consumer, even those who are educated, it has become a science to try and find their way around the product.” Usually when fees are questioned, product designers blame the costs of the adviser. Basically the fees are due to the fact that the company has to recoup the upfront commission. Except in this case the adviser receives no fees on the ad hoc payments of R700 000 and the monthly commission recovery fee of 0.06 per cent per month (0.72 per cent per annum) applies only to the reoccurring premium. This is probably why the adviser was so surprised to discover the full costs of the product.

We have to trust the product house that these estimations are correct as it is certainly beyond the scope of the client to calculate it, which highlights the issue National Treasury raised in its paper Strengthening Retirement Savings. Treasury would like to see a simplification of products where providers compete on price rather than design, which tends to complicate products and reduce the level of transparency for consumers.

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“Our members (certified financial planners) are well qualified and competent, but we need to make sure the products are suitable for consumers,” says Nti who argues that the complexity of product design makes it difficult even for advisers to fully understand the cost implications. “It is very difficult to compare products; in most cases the product house provides only the marketing information and not the nitty-gritty. For the average consumer, even those who are educated, it has become a science to try and find their way around the product,” says Nti who blames the use of jargon and even the deliberate poor communication of salient product information. He believes advisers are often locked into a contract arrangement with a product provider before they will disclose additional information so an adviser cannot simply compare all the products in the market to make the best decision. The fact that the advice component is tied into the product costs makes it very difficult to see who is really receiving the largest share of the pie. Product designers blame financial advisers and asset managers while asset managers blame product platforms and advisers.

What is also clear from the paper is that National Treasury acknowledges the costs of regulation and, in particular, the Financial Advisory and Intermediary Services Act (FAIS). Realistically the amount of time an adviser needs to spend with a client to sign a R200 debit order into a unit trust cannot be covered by the fees, which is why advisers are driven to selling higher fee products and possibly why passive investment funds continue to be under-utilised in the retail space. Treasury will be looking at excluding certain products from the FAIS Act. “We want to have standardised products that can be bought without advice and without costs,” says Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy at National Treasury. These products will possibly underpin Treasury’s plan to introduce tax-free savings plans. In recognition that compulsory preservation will limit people’s access to emergency funding, there are proposals to introduce a tax-free short- to medium-term savings product. Individuals will be able to save up to R30 000 a year tax-free with a lifetime limit of R500 000. This could have a major impact on the retirement annuity industry as clients may replace their retirement annuity top-up with the new savings plan. It is also proposed that this new savings plan will replace the existing tax-free thresholds on interest income so savers will have to save in designated products in order to receive this exemption. It is because of this lack of transparency that the call by National Treasury to separate the costs of advice from product fees should be seriously considered by the advisory industry rather than be seen as a threat. The complication in the design of products obscures exactly what services the consumer is paying for and Treasury wants consumers to fully understand which fees are going where. How exactly advice will be charged for in the future is a more complicated issue. However, Nti agrees that advice needs to be separate from the selling process. “You can fol-

low the process for giving advice as defined in the FAIS Act but still end up with shocking advice.” Nti would like to see attention being paid to the quality of advice. Currently the FAIS Act, with its primary focus on products, sees advice only as incidental to the process of selling a product. “We would like to see a review of the FAIS Act where more focus is placed on planning and quality of advice which may or may not lead to selling of a product as we believe that this will definitely be in the interest of consumers,” says Nti.

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While the standardisation and simplification of products is a step in the right direction, Treasury may be overestimating how many people save without interaction with an adviser. Take-up of two savings products initiated by government, namely the RSA Retail Savings Bond and education savings fund Fundisa, have been much lower than expected suggesting that products are still sold rather than bought. Time will tell if the tax incentive will be enough to change behaviour.

MULTI-MANAGERS

The income dilemma

in a low interest rate environment Ronnie Retief | Head of Novareâ&#x20AC;&#x2122;s Multi-Manager Portfolios

â&#x20AC;&#x153;Many investors, however, rely on money market funds for their income requirements. These funds invest at the short end of the money market curve, and leave investors with no exposure to any of the other instruments.â&#x20AC;?

he current low interest rate environment poses some challenges, especially for more conservative portfolios that investors use for their income requirements. These typically have lower targeted returns but also much lower risk budgets. A portfolio that targets around CPI+2% usually consists of mainly fixed interest instruments, given the objective to limit negative returns over shorter periods. During normal interest rate cycles this can be achieved by primarily investing in fixed interest instruments, including the money market, nominal bonds, inflation-linked bonds and various credit instruments. A small amount of property exposure can also be employed to enhance returns. Many investors, however, rely on money market funds for their income requirements. These funds invest at the short end of the money market curve, and leave investors with no exposure to any of the other instruments. In the current environment it is considerably more challenging to achieve these real returns. Cash is delivering a negative real return as short-term interest rates yield less than the prevailing inflation rate. Times when cash rates fall below inflation are characterised by financial crisis and central banks cutting lending rates aggressively to try and avoid recession. Post-1990, cash rates were never in negative real territory for long before a normalisation of interest rates occurred. And the last 10 years has been a time of high real interest rates. The period from 2002 to 2008 saw real cash rates of in excess of 2 per cent for most of the time. Currently, however, we find ourselves in a cyclically low period for interest rates that could continue for some time. This is due to central banks around the world having cut interest rates to historical lows in order to try and stimulate their economies post the financial crisis. Our

INVESTSA

long-term interest rates, represented by the notional 10-year government bond, are also currently in cyclically low territory. While it is not uncommon for interest rates to be low compared to their long-term averages, what is concerning is the possibility that the situation could continue for longer than in the past due to the magnitude of the financial crisis we have endured and that persists in Europe and to a lesser extent the US. The problem this introduces at the portfolio level is that we cannot rely on money market instruments to provide real returns. And if investors are drawing income from a portfolio yielding a negative real return, they will increasingly be drawing down on their capital. A viable alternative is to diversify into a wide range of fixed interest instruments in conjunction with some property and protected equity exposure. This would provide enhanced yield at a volatility level similar to that of a money market portfolio. In constructing a portfolio along these lines it is essential to have an in-depth understanding of the strategies employed to ensure appropriate correlation between the different strategies. While many of these strategies invest in fixed interest instruments, a thorough understanding and analysis of the strategies will reveal some areas of differentiation which can lead to good diversification benefits at the portfolio and see-through asset allocation level. Merely picking the best performers at a point in time will seldom lead to the optimal longterm portfolio. Given the nature of the portfolio and its unique position for clients as a source of income, any exposure to equity within the above context should most likely be limited to protected or hedged exposure to ensure that the overall portfolio preserves capital, even during periods of adverse market conditions.

MULTI-MANAGERS

Choose a multi-manager for a

Simpler Selection

process David Crosoer | Executive: Research and Investments

oo much choice can produce a paralyzing uncertainty.” This is one of the findings of professors Hazel Rose Markus and Barry Schwartz, in a study on the meaning and significance of choice published in the Journal of Consumer Research1. If a plethora of seemingly simple selections – from choosing a breakfast cereal to a cellphone operator; a brand of toothpaste or the make and model of a car – can leave the average investor riddled with indecision; what does this mean for your clients’ investment decisions? With over 900 unit trusts currently on offer in South Africa, each with its own mandate and investment objectives, it’s understandable that investors and intermediaries alike may at times feel overwhelmed. Even the performance of those unit trusts grouped together in categories set by the Association for Savings and Investments South Africa (ASISA) has the potential to vary significantly. A selection process goes beyond identifying an appropriate class of unit trusts and picking the fund currently topping performance rankings. There is no guarantee, of course, that a unit trust that performed well over the short term or historically will continue to do so over the long term or in future, and so a detailed analysis is required. Then there’s one step further still: once good has been distinguished from mediocre

(and the downright dire completely cut out), an investor or the appointed intermediary needs to determine the optimal combination of unit trusts in structuring a portfolio that most adequately targets the investor’s needs. By combining unit trusts, an investor stands to benefit from diversification not only across various asset classes, but also across different asset managers, with varying investment processes and views. Such a strategy allows you, for example, to complement a manager who performs best in a climbing market with a manager who is defensively positioned to offer better protection in a falling market. How then do you go about evaluating all asset managers available to you, both quantitatively and qualitatively? How do you make sure that the retail unit trust offering is actually the most appropriate building block for your client? And if choosing even a single manager may feel overwhelming, how do you go about choosing more than one and about allocating a client’s savings between them? An effective solution may be to appoint a multi-manager, who will construct a portfolio around specific investment objectives by selecting the most appropriate combination of single manager investments on investors’ behalves. These managers often don’t use retail unit trusts as building blocks, but construct bespoke solutions for clients by mandating directly with the asset manager.

Why choose a multi-manager? Ask yourself the following: am I able to distinctly differentiate between asset managers? Do I have the qualitative insight to distinguish between closely grouped unit trusts? Can I successfully choose the correct mix of unit trusts to achieve the diversified result I need to target my clients’ goals? Can I negotiate bespoke mandates with managers that best suit my clients’ objectives? Multi-managers construct portfolios that are explicitly focused on specific long-term goals. They spend considerable energy understanding the differences between asset managers and determining which blend of managers will benefit a portfolio from an overall perspective. This not only offers moderated levels of risk (by removing reliance on any single manager to achieve an investor’s objectives on its own), but also has the potential to offer more consistent performance. The reality is that regardless of how good a single manager is, no single manager can perform well all of the time. In contrast, multi-managed investments tend to generate more reliable returns by smoothing out the periodic downswings in performance that any single manager typically experiences when market conditions don’t favour their particular approach. If too many choices prove to be too much of a good thing, why not consider choosing a multi-manager to do most of the choosing for you?

1’Does Choice Mean Freedom and Well Being?’, HR Markus, B Schwartz. Journal of Consumer Research, February 2010

INVESTSA

Investment costs

What are you

REALLY earning

Andrew Ratcliffe | Private Client Holdings

from your investments?

s an investor, your main concern may be about how the current volatile stock market is affecting your investments and the returns you receive. However, share prices aren’t all you must take into account; the charges you have to pay with investment funds also have an effect on your returns.

those charged by an investor’s bank), value-added taxes and liquidity costs (like net negative interest charges), which are applicable in the unlikely event of a fund owing interest to a bank as a result of temporary liquidity pressure,” says Ratcliffe.

Have you considered what it is costing you to have your investments managed and how this is eating into your returns? What is your actual real return after inflation, taxation and after all costs? These are important questions to ask when establishing targets and managing expectations. For example, assume an annual return of 10 per cent, inflation (CPI) at six per cent and the costs of managing your investment at two per cent, your net real return is two per cent. This figure would be further reduced if you were drawing down any capital as in the case of a living annuity.

Performance fees

Andrew Ratcliffe of Private Client Holdings cautions that no one can expect to invest free of charge. There will always be costs involved. It is important to know what those costs are otherwise it is impossible to make a properly informed choice. “Investors must calculate their total expense ratio (TER). This is the amount of your assets that have been sacrificed as payment for the services rendered in the management of your investments and is expressed as a percentage of the daily average value of the portfolio and calculated over a set period, usually a financial year. “The costs incurred in the management of a fund are deducted from the fund’s assets. These costs include management fees (including performance fees), fixed operating costs, (like custody and trustee fees), audit fees, bank charges (other than

Performance fees do not always sound much, but they can result in total charges of more than double the advertised annual management charges. For example, if a fund generates gains of 10 per cent over its benchmark and has a 20 per cent performance fee, the fund managers can claim an extra two per cent fee. If it has a 1.5 per cent annual management fee which, with additional running costs, becomes a basic TER of 1.65 per cent, the addition of the performance fee will bring total deductions to 3.65 per cent. “Performance fees must be included in the TER calculation and must also be disclosed separately. This is to enable investors to distinguish between costs that may be charged to a portfolio regardless of its performance and a performance fee that may vary significantly from one year to the next. The cost of the performance fee, in Rand terms, will be disclosed as a percentage of the average net asset value of the portfolio.” Ratcliffe advises that Private Client Holdings charges flat advice and asset management fees and does not charge a performance fee on top of this. This allows for a myriad of benefits to investors such as transparency, simple calculations, easy budgeting and enhanced long-term performance.

INVESTSA

Investor expenses not included in a TER According to Ratcliffe, costs that are incurred directly by the investor and not the fund itself are not included, such as the costs of entry to an investment (e.g. initial fees and ongoing costs for financial advice if applicable), other costs incurred directly by the investor because of the investment (e.g. bank charges, exit costs and costs that are related to specific products, where these products invest in collective investment schemes, such as some life and LISP products). “An example of this would be the cost of a retirement annuity which invests in collective investment schemes.”

Where will TERs be disclosed? “TERs will be available through the newspapers and magazines that carry fund performances and charges, in monthly, quarterly and annual reports, in fund fact sheets, in Internet publications, with annual unit holder communications and on the ASISA website with the fund prices. The latest TER must be disclosed to an investor prior to making an investment and this TER disclosure must be in addition to the other disclosures required under CISCA and the FAIS Act, e.g. notifications of risk and costs.” “Investors must urge their asset managers to explore ways in which to reduce TERs. An example would be getting institutional pricing on asset managers in our unit trust portfolios, as opposed to retail prices as experienced on most LISP platforms,” concludes Ratcliffe. In addition to published TERs don’t forget the additional platform costs.

HEAD TO HEAD

Grindrod Asset Management I an

A nderson

Ian Anderson | Chief Investment Officer at Grindrod Asset Management 1. Are investments in listed property still a good choice for investors? Absolutely. Listed property in South Africa is the one asset class offering investors a real income yield, meaning an income yield in excess of consumer inflation, as well as the opportunity to enjoy inflation-beating income growth that should translate into capital growth. 2.What are the misconceptions about listed property investments? The first misconception is that listed property is like a bond and therefore a direct comparison with bond yields is appropriate when determining the relative value of listed property. By doing this, investors are not considering the income growth potential of listed property and are therefore undervaluing the asset class. The second misconception is that long-term distribution growth will be approximately 80â&#x20AC;&#x201C;90 per cent of inflation. This was true of the sector 15 years ago, when its market capitalisation was just R5 billion and there was little or no exposure to high quality retail shopping centres. Today, the sector is substantially larger and dominated by high quality retail assets which allow for inflation-beating rental and net property income growth over the medium and long term. Managers employ prudent levels of gearing to enhance bottom-line growth. Significantly more value is being added for shareholders by the active asset management taking place across every portfolio in the sector. As a result, distribution growth is likely to exceed inflation by as much as two per cent per annum over the medium and long term. 3. Before 2010, listed property was offering returns of up to 60 per cent. Have investors missed the boat? Importantly, the sector has not rerated since yields hit eight per cent in 2005. That means that investors are paying exactly the same price

for the income stream today as they would have in 2005. However, the income stream from listed property has grown substantially since 2005, a level of growth that was matched by capital growth over the same period. The prospects for that income growing by eight per cent per annum into the future are improving, as vacancies resulting from the credit crisis are now being filled and retail sales have accelerated through 2011 and the first half of 2012. 4. What is the best way to invest in listed property, i.e. individual stocks, property funds? Investors with significant sums to invest, R5 million plus, could explore the option of investing directly into listed property companies through stockbrokers, constructing diversified portfolios without incurring significant trading costs. For other investors, a property fund offers the benefits of being in a diversified portfolio, with low transaction costs and professional managers constantly reviewing the underlying securities. 5. What are the challenges one faces with these forms of investments? While there are not many challenges, there are subtle differences between stocks which could lead to significant differences in long-term distribution growth, and therefore long-term capital growth and total returns. These include the level of gearing and the companyâ&#x20AC;&#x2122;s policy towards hedging out interest rate risk. The quality and location of the properties will also impact on long-term distribution growth, as well as on the valuation (initial yield) of the individual stock. It is therefore best to seek out the services of a professional asset manager who is able to maximise returns.

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6. What type of investor is listed property best suited for? Listed property, with an impressive track record, remains an attractive option for both discretionary and retired, income-dependent investors; any investor looking to create wealth in the medium and long term. Historically, listed property has been used as a means of generating a significant level of income and has typically been used by income-dependent investors. As investors become increasingly aware of the sector long-term growth prospects, it is likely that the asset class will feature in most portfolios irrespective of investment objectives, since listed property provides income, capital growth and inflation protection. 7. Do the returns in listed property vary greatly between funds? How can an investor choose the right option? According to Morningstar, over the past three years the top-performing listed property fund has outperformed the worst-performing listed property fund by more than 11.5 per cent per annum. This disparity in performance is mainly due to the level of cash held in the various funds. High flexibility in the past has lead to significant underperformance, as has holding too much cash. Investors wanting exposure to listed property should assess what the fund managerâ&#x20AC;&#x2122;s attitude is towards holding cash and the degree to which the asset allocation in the portfolio can be adjusted. 8. Should a financial adviser recommend listed property investments? It is the one asset class in South Africa that can provide both an inflation-beating income yield and inflation-beating capital growth over the medium and long term. It further offers investors the benefits of portfolio diversification as it has a relatively low correlation with other asset classes.

HEAD TO HEAD

ABSA Property Equity Fund M ariette

W arner

Mariette Warner | Manager of the ABSA Property Equity Fund

1. Are investments in listed property still a good choice for investors? Listed property offers a yield of about 7.5 per cent which is better than money market investments. The income grows over time as a result of increasing net rental income from the underlying property portfolios which also generates capital appreciation. However, there is capital volatility as with any listed investment. Listed property therefore remains a good investment choice, as long as investors are prepared to accept capital volatility. Because of this, an investment horizon of at least three years is recommended. 2. What are the misconceptions about listed property? The major misconception is that because listed property has had such a strong run historically, it must correct at some point. There are two major cycles that drive listed property prices. These are long bond yields and GDP growth. The strong performance over the past 10 years was first the impact of a significant drop in long bond yields followed by strong GDP growth. We are now in a low interest rate environment with sluggish GDP growth. The greatest downside risk to listed property is rising bond yields. However, this is likely to happen only when long rates in the US go up. Given the global quest for yield, this is unlikely to happen in the near term. Sluggish GDP growth has reduced earnings growth from property portfolios as market rental growth has slowed down. Earnings growth is no longer in double digits; however, many of the listed portfolios are still generating real growth. A correction is not expected, but rather a moderation in returns. The crucial issue now is astute share selection.

3. Before 2010, listed property was offering returns of up to 60 per cent. Have investors missed the boat? Very high returns can be achieved only during times of falling interest rates or strong GDP growth. Returns going forward are expected to be much more moderate, similar to last yearâ&#x20AC;&#x2122;s total return of 8.9 per cent. 4. What is the best way to invest in listed property, i.e. individual property stocks, property funds? Individual property stocks have different risk profiles, so investors need to have a thorough understanding of the financial structures, property portfolios and management styles. A common mistake is to make decisions based on yield only. It is much safer to invest in a fund where the focus is on in-depth fundamental research based on a solid understanding of the physical property market. 5. What are the challenges that one faces with these forms of investments? Challenges are always the potential risks that investors could face, as with any investment. In the case of listed property, the risks are rising bond yields and sluggish GDP growth. Rising bond yields cause declining capital values for both bonds and listed property. In a weak economy, the income generated by listed property is very resilient on the downside. This is because quality listed property stocks own many individual buildings with literally thousands of tenants. The source of income is spread across the entire economy.

INVESTSA

6. What type of investor is listed property best suited for? In the current investment environment, listed property is best suited for investors with a longterm view. These investors could be either those looking for income returns higher than money market or those with a total return objective within a balanced portfolio. Growing income streams over time will generate capital appreciation through any volatility around interest rate cycles. 7. Do the returns in listed property vary greatly between funds? How can an investor choose the right option? In the short term returns are generally quite similar. Mandates differ between funds; for example, the amount of cash that may be held or whether or not they may have offshore exposure. Investment styles also differ between fund managers. Some have a short-term trading style while others are long-term value investors. As listed property is recommended for a long investment horizon, it is best to select a fund with a consistent track record, rather than one that had the best performance in the short term. 8. Should a financial adviser recommend listed property investments? Listed property was established as a viable asset class when it grew to a market capitalisation that made it more accessible. In 2002, the market capitalisation was R13 billion and constituted one per cent of the All Share Index. It is now R167 billion and constitutes three per cent of the All Share Index. Therefore on a relative basis it has tripled in size, which is significant. As listed property has a risk return profile that is different from other asset classes, financial advisers should include it in investment choices for their clients.

FRANKLIN TEMPLETON INVESTMENTS

Mark Mobius | PhD. Executive Chairman, Templeton Emerging Markets Group

INDIA

WITH POTENTIAL FOR INVESTORS The global investment community has been up in arms (and rightly so) about the Indian Government’s attempt to address possible past tax evasion through retroactive tax measures. Many investors started to express their disapproval by withdrawing their Dollars, and amid the pressure, the Indian Finance Ministry decided to hold off on enacting the general anti-avoidance rule (GAAR) for a year. I believe this is a step in a positive direction, although the debate has simply been delayed and not completely resolved. And, retroactive capital gains taxes are still on the table. The tax-evasion question leads to another thorny subject: corruption. Corruption can muddy the investment outlook and erode investor confidence, and no nation – developed or emerging – is completely immune. The good news is that in today’s era of information technology, it’s harder to sweep corrupt practices under the rug. Social media has intensified the pressure on policymakers to address these problems, because citizens are watching and reporting them to the world. India has recently found itself in the uncomfortable position of having the media spotlight on some of its struggles with corruption, and the world is watching as the country searches for solutions to squash it.

China.org.cn, China cuts GDP growth to 7.5 per cent, 5 March 2012. 2 The World Bank, China Quarterly Update, April 2012. 3 National Bureau of Statistics China, 13 April 2012. 4 National Bureau of Statistics China, National Real Estate Development and Sales, 16 April 2012. 1

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Activism and change I believe there are a number of needed reforms in India, but am optimistic the country will find a way to work through these challenges. India has a lot of potential in its favour, for both its people and for long-term investors. It’s important to keep those factors in mind, and not be overly influenced by some of the shocking headlines. All the BRIC nations have a better economic outlook right now than many developed economies, which are still weighed down by sluggish growth and debt. Over the past year, fierce protests in India have pushed corruption to the top of policymakers’ agendas. I see activism as the first step to address these problems, and think the actions of anticorruption activists have made great strides toward rallying public support and engaging officials. This is a good thing. However, a handful of people backed by the power of social and electronic media can influence the system only so

“Over the past year, fierce protests in India have pushed corruption to the top of policymakers’ agendas. I see activism as the first step to address these problems.” much. Inevitably the state has more power to bring about change than individuals do, so these protests must be met with action at state level.

consequences are apparent for the next generation of politicians who are likely to be extra cautious in their dealings and, I hope, not as corrupt or pliable.

The intention is that the Citizens Charter will give citizens the right to service within a certain time-frame without being subject to endless waiting time.

In one recent corruption scandal, India lost up to US $211 billion in revenue by selling coalfields too cheaply, according to a draft report by the state auditor which was leaked to the press.1 However, it should be noted that many nations undergo such periods where national assets are misused or misallocated to people close to those in power. In that sense, India is not an isolated example.

The road ahead

5) Independence of police and investigative arms. This was another element of the Lokpal Bill, written in with the apparent intention of enabling an independent ombudsman body called the Lokpal, to be completely independent of the government and free from ministerial influence in its investigations.

On the brighter side, after a multitude of corruption cases were exposed, it appears to be much harder to indulge in blatant corruption as it was over the last decade. I doubt the existing crop of politicians and bureaucrats will reform the system entirely, but dire

To accomplish that, there are some areas where India will need to build on the small steps it has already taken: 1) Title rights and licenses. Having clearly defined title and licensing rights – be it in telecom licenses or mining rights – is key. Once the title is clear and marketable, I believe the opportunities for corruption will decline.

ABOUT MARK MOBIUS Mark Mobius, PhD. Executive Chairman Templeton Emerging Markets Group • Mark Mobius, PhD., executive chairman of Templeton Emerging Marketing Group, joined Templeton in 1987. Currently, he directs the Templeton research team based in 17 global emerging markets offices and manages emerging markets portfolios. • After more than 30 years in global emerging markets, Dr Mobius has received numerous industry awards, including Emerging Markets Equity Manager of the Year 2001by International Money Marketing,

The positive thing about scandals coming to the forefront is that they can provide impetus for change. The power of the media, the Right to Information Act2, and the increasing use of information technology in delivering public and private services should help reduce corruption in public and private transactions in India. I am optimistic that the country will eventually be able put some of these high-profile scandals behind it.

Ten Top Money Managers of the 20th Century in a 1999 Carson Group survey. • In 2006, Asiamoney magazine listed Mobius as one of the Top 100 Most Powerful and Influential People. The World Bank and Organisation for Economic Co-operation and Development appointed Dr Mobius joint chairman of the Global Corporate Governance Forum Investor Responsibility Taskforce. • Dr Mobius earned bachelors and masters degrees from Boston University, and a PhD in economics and political science from the Massachusetts Institute of Technology.

2) Creation of surpluses. One of the root causes of corruption is the general shortage of surpluses in the economy. By creating surpluses and opening up the economy, this could support an eventual reduction in corruption. 3) Clarity in law. With clarity, the courts and citizenry are better able to comprehend what is correct or incorrect. Some recent court rulings in India seem to show that India’s judicial body supports the fight against corruption and considers citizen and country interests as paramount. 4) Citizens Charter. This was part of the proposed Jan Lokpal Bill or Citizens Ombudsman Bill which is a draft anti-corruption bill drawn up by the civil society.

INVESTSA

While there is still room for significant improvement, India has enacted measures showing it is starting to adopt the right path, particularly in the public sector. As part of its public welfare effort, the government announced plans to provide a unique identity number (known as Aadhaar) to all Indians in the next four to five years in an effort to prevent fund leakage. Many state-owned companies in India are also opening up following the development of integrity pacts. Forty-four stateowned companies have adopted and implemented integrity pacts with Transparency International India3. Of participating stateowned companies, a reported 95 per cent believe the integrity pacts have helped to make procurement processes more transparent.4 While it is easy to become discouraged by scandal, I choose to continue to look for long-term investment opportunities in India. I think India’s vast natural resources and current positive (if uneven) trends of a growing middle class, GDP growth and domest ic hunger for consumer goods hold opportunity for the diligent researcher. Our approach is, and always has been, bottom-up evaluation of individual companies. Investing in India is no exception.

Momentum Collective Investments

Quarterly roundtable

Eurozone crisis still the hot topic Conrad Wood | Head of Fixed Income at Momentum Asset Management

The continuing crisis in the Eurozone has remained a hot topic well into 2012, with concerns over how the situation will play out remaining paramount in the minds of most asset managers. This uncertain environment has led to many in the investment industry putting the brakes on risk assets as the rand and local equity markets have come under pressure. This is according to Conrad Wood, head of fixed income at Momentum Asset Management, who was speaking at the Momentum Collective Investments Roundtable discussion, held in conjunction with INVESTSA on Thursday, 14 June 2012 in Pretoria. “Fixed-income investments can provide excellent diversification in a portfolio, particularly in an environment such as the current one where economic growth is benign and inflation is stable. However, it should be noted that they have performed exceptionally well in recent years and the potential real returns from these assets going forward may well be lower than traditionally expected.” “Investors who are seeking higher returns will have to take on more risk, but it is important for investors to understand the risks of more aggressive fixed-income products. Since May, fixed-income investments have seen a slowdown in the level of returns due to deterioration in certain structural and fundamental difficulties in Europe.” This trend is likely to continue for some time, where risk-off periods globally coincide with under performance of local assets and, when temporary interventions are announced, these assets rebound positively. It is simply the uncertainty of the environment in which we find ourselves. Wood adds that, despite many attention-grabbing headlines, Italy and Spain appear to be posing more potential problems than either Greece or Portugal. They are much larger in size and their survival is integral to the functioning of any fiscal union in Europe. “In fact, Spain’s banking sector is going to require a major capital injection in order to restore liquidity, which further adds to the current solvency woes we are seeing in the region.” He notes that something has to give in the Eurozone area as the uncertainty is resulting in greater levels of volatility for many countries, including South Africa. In addition to the current environment being supportive of fixed-income assets, a new structural factor that may underpin these assets is the increasing levels of regulation in the financial services industry – such as Basel III, pension fund regulations and retirement reform – as this is likely to have a significant impact on the investment industry by forcing a greater level of investment within the fixed-income space.

INVESTSA

Fixed income funds Conrad joined Momentum Asset Management in 1994 and has been involved in the management of fixed-income portfolios from the start of his career. He was appointed as head of the fixed-income team in October 2007 and currently oversees the management of R80 billion across various mandates. He has managed the Momentum Money Market Fund, the Momentum Maximum Income Fund and the Momentum Diversified Yield Fund since their inception. Momentum Money Market Fund The Momentum Money Market Fund’s objective is to provide investors with a high, regular income without exposing capital to undue risk. The fund is benchmarked against the Alexander Forbes STeFI Composite Index (Short-term Fixed-interest Benchmark). Investment objective: The primary performance objective of the portfolio is to obtain a high level of current income as is consistent with capital preservation and liquidity. Capital gains will be of an incidental nature. The portfolio is managed in compliance with prudential investment guidelines for retirement funds in South Africa.

Momentum Diversified Yield Fund The Momentum Diversified Yield Fund is an actively managed, flexible fixed-interest fund. It has the ability to invest in incomeenhancing instruments across the fixed-interest universe, as well as listed property and preference shares. Flexibility to invest offshore provides further yield opportunities. The mandate allows for positions to be taken across the yield curve in order to maximise returns. Investment objective: The Momentum Diversified Yield Fund is an enhanced-income portfolio. The investment objective of the portfolio is to provide investors with a high level of income from a diversified range of investments. Momentum Maximum Income Fund The fund’s objective is to generate a regular, reliable source of income while attempting to grow capital prudently by monitoring the fund’s positioning on the local yield curve. Duration will be limited to a maximum of two years and various yield enhancement strategies, including exposure to credit, will be employed with the aim of enhancing returns. Investment objective: In selecting investments for the portfolio, the manager will seek to achieve an investment medium for investors, which shall have maximum income return from interestbearing instruments as its primary objective.

VIEWS FROM THE EVENT Ben de Kock | wealth manager at RMB Private Bank Some highlights were Conrad’s views on the current situation in Europe and the potential impact it could have on our economy and the investment environment, as well as his insight into South Africa’s fixedincome space. The event was much more fruitful and insightful than the usual road shows where a lot of time is spent on products. Gerda Prinsloo | regional manager at Momentum The session was very informative and the discussion around the table gave everyone the opportunity to ask questions and hear different opinions on what to expect in the market, especially in the uncertain environment that we are experiencing at the moment. Kobus Jan Tromp | specialist investment marketing adviser at Momentum Distribution Services It was a great event, especially the interactive format, which really added value to the discussion. The big question was where he would find yield in the near future. His response was that income would be found in traditional money market instruments such as negotiable certificates of deposit (NCD), floating rate notes (FRN), including credit-linked notes( CLN), asset-backed securities, corporate paper and structured deposits. A more flexible mandate increases the universe of investable securities, which will allow some additional yield pick up over time while monitoring capital stability.

“Fixed “income investments can provide excellent diversification in a portfolio but it should be noted they have performed exceptionally well in recent years.” INVESTSA

Industry Associations

The importance of

succession planning Joe KotzĂŠ | National Manager: Compliance at the FIA

or advisers looking to retire or exit the industry, the sale or unwinding of a practice can be a lengthy and time-consuming process. Firstly, we need to consider whether the business is an asset or a liability. The reality is that in many cases it may well be a liability as a result of the ownerâ&#x20AC;&#x2122;s failure to plan ahead. A tool to ascertain whether your business may be a going concern is to ask yourself whether you would buy your own business. If your answer is no, then the right course of action may well be simply to transfer your clients rather than look to sell your client book or practice. Even if one is ready and able to sell a business there are certain considerations that need to be addressed such as unrealistic expectations about the sale, determining whether your clientsâ&#x20AC;&#x2122; affairs are in order and their willingness to accept other advisers in your business, as well the tax implications of a sale. Many business sales tend to be lost as a result of poor financial records or because the buyer is forced to work from old information. Accounting and financial statements must be kept up to date and must

With the average age of a financial adviser already over 50 and continuing to rise, the issue of succession planning is set to become an increasingly important factor for the intermediary industry over the next decade. be available readily and accurately. The secret is not to wait for your accountant or auditor but to dictate processes. When it comes to valuing a book, there is no set formula. Value models differ and any potential buyer will perform a due diligence check on your business to decide whether the practice should be bought at all, how much the business may realistically be worth and how to structure the acquisition. The purpose of due diligence is to assess the potential risks in a planned transaction to avoid any nasty or costly surprises. The buyer is actively looking for reasons not to invest in the business. Advisers should be aware that in order to negotiate a sale of a business or a book, one must comply with both FAIS and FICA legislation. One of the key principles to bear in mind is that clients cannot be unduly prejudiced by the buying or selling of a practice or book. Advisers who are selling will need to have regulatory returns and levies up to date, client files and compliance records in good order, key risk documentation recorded and

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all pending matters duly disclosed. When selling a business, the FSB must be informed in writing to lapse the license with the reason why and the effective date. The compliance officer must also provide the FSB with a letter of resignation and submit a handover compliance report. Clients must immediately be informed and steps put in place to ensure that outstanding business is completed promptly or transferred to another provider. Of course, succession planning does not just concern retirement. The FSB expects each provider to have a business continuation plan in place in the event of death, disability and retirement of key staff so that clients are not prejudiced in any manner. When considering all these aspects it should be clear that succession planning should start at an early stage of any business. Just like the clients whom intermediaries advise, it is essential that advisers engage the services of experts to assist and guide you through the process of due diligence and valuation of your business.

Economic Commentary

The global

environment Annabel Bishop | Investec Group Economics

fter climbing since 2009, global inflation peaked in the latter part of 2011, at 4.8 per cent year on year, along with the gold price at a historic high of just above $1 900 an ounce. The value of the precious metal has since dropped to close to $1 500 an ounce and the IMF’s measure of world inflation to 3.6 per cent year on year (the rate at which prices increase slowed to 3.8 per cent year on year. Gold is often viewed as an inflation hedge (store of value in times of rising prices). When prices are either expected to rise less rapidly (disinflation) or fall (deflation), the price of gold might be expected to fall. Specifically, movements in the precious metal price tend to be strongly related to the value of the US Dollar. Dollar weakness (strength) often sees gold gain (lose) value. The US, UK, EU and Australia have all seen CPI inflation fall since Q4 in 2011, as has been the case for the BRICS (with the exception of SA) reflective of global weakness. Indeed, fears are rising that economic activity will slow further. Risk aversion levels have risen on increasingly poor news from the Eurozone, ranging from the potential for Greek exit (not likely the end of the Euro if well managed) to a deposit run on banks in the Euro area (which could spell the end of the currency). A deposit run could precipitate the down case of recession (given the absence of deposit insurance and legal synchronisation across the zone) and so a renewed sharp fall in global inflation, if not

deflation under the extreme down case (QE3 is likely under the down and extreme down cases and so renewed ascent in the gold price). The recent uptick in the gold price is indicative of the markets leaning towards this down case, as is Rand weakness above the fair value of R7.71/USD this quarter. The down case could also be triggered by automatic fiscal consolidation in the US next year (and/or stalling Chinese growth) which would push global inflation lower and send risk aversion levels spiralling, likely prompting the flight to the safe haven of US treasuries. This resultant US Dollar strength (in the immediate absence of QE3) would see the Rand weaken further, causing South African CPI inflation to climb

supporting global economic activity in an environment of negative real interest rates. United States QE3 is unlikely to occur in the expected case but the down case is one of growth in the world’s largest econo-my slowing markedly, potentially also on failure to avoid markedly higher taxes and lower fiscal spend (fiscal cliff) in 2013. However most, including the OECD, believe that the worsening Eurozone crisis is the biggest risk to the already slow recovery in the global economy. The Organisation for Economic Cooperation and Development (OECD) says, “The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems,

“The down case could also be triggered by automatic fiscal consolidation in the US next year (and/or stalling Chinese growth) which would push global inflation lower and send risk aversion levels spiralling, likely prompting the flight to the safe haven of US treasuries.” sharply. However, it should be borne in mind that QE3 would then substantially raise money supply globally, weakening the US Dollar (potentially the gold price will resume its upward trend) and so substantially strengthening the Rand (and other EM currencies), with inflation in SA moderating – deflation under global depression. Quantitative easing elsewhere (increasing money supply) has been instrumental in

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excessive fiscal consolidation and lower growth.” We believe the trade-off between fiscal consolidation and growth will continue to dog the Eurozone until it decides to embrace joint fiscal liability (including Eurobonds), while the granting of a banking license for the ESM is becoming an increasing necessity. It remains clear that monetary union cannot succeed without fiscal union.

ASSET MANAGEMENT

Mirror, mirror on the wall

t’s human nature to look for a guarantee of future success – some small sign that the decisions we make are the right ones. Sometimes we want this reassurance so much that if the signs aren’t there, we will invent them. The same can be said about many investors in the current economic climate. The problem with basing investment decisions on the wrong signs it that it could mean a potentially devastating financial mistake.

For example, investors should be wary of basing investment decisions too heavily on the plethora of economic data they are exposed to on a daily basis, such as GDP growth rates, inflation, manufacturing and production numbers, confidence indices and rating agency outlooks. Razeen Dinath, investment analyst at RE:CM, says research has disproved the existence of a positive relationship between real economic growth and stock market returns. “Research by Dimson, Marsh and Staunton, academics of the London Business School, analysed the relationship between real GDP growth per capita and real stock returns of 83 countries from 1972 to 2009. Investors in emerging stock markets are most frequently guided by the alluring prospect of rapid economic growth leading to higher corporate earnings and associate this with higher stock returns. The study, however, refuted the existence of a positive relationship between GDP growth and stock returns and found that the correlation was negative, except for the highest growth countries. “The reason for this is that when the market anticipates a high economic growth rate, the price paid by the market for those earnings and increase in book value is usually high. Growth is an important component of the return equation, but a more important aspect is the re-rating of the stock market from cheap to fair value which then usually progresses to expensive territory,” she says. Nedgroup Investments recently released a similar case study, using China to illustrate the disparity between GDP growth and

The discrepancy

“For many investors, making an investment choice is like trying to predict the future. However, asset managers warn against using economic data as an indicator of investment success”

equity market returns. “The country has experienced one of the greatest economic booms in history over the past 15 years, with åGDP growth clocking in at a mouthwatering 10.4 per cent per annum, compared to the poor old US with its rather lacklustre 2.6 per cent per annum. Yet, with all that economic growth, company earnings growth has actually been marginally negative, while in the US it is been a healthy 5.4 per cent per annum. Similarly, Chinese equity market returns have been -2.3 per cent per annum compared to the +6.1per cent per annum in the US. This is certainly not a result that many would have expected and surely most of us, if offered the opportunity to invest in an economy growing at 10 per cent per annum, would choose to do so over an economy growing at less than three per cent.”

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Asset managers are in agreement that the issue lies with valuation. When the outlook is positive and the signs are indicating future success, investors are happy to pay a premium for their investments – and therefore tend to overpay. The same is true when things are not going well in the market. Investors perceive the downturns as an indication of future losses and tend to shy away from investments at a time when prices are at their lowest. Matt Brenzel, portfolio manager at Cadiz Asset Management, says this behaviour is a perfect example of the effect of emotions in investments. “Psychologists have written volumes about the contrasting emotions of fear and hope and how the dissipation of one will lead to the enhancement of the other. We have seen clearly the effect this has on investment returns. The key is to communicate to investors that valuation is the most important indicator of long-term investment returns,” he says. Having said that, RE:CM’s investment outlook on the South African market is that South African equity is priced around fair value to expensive. Paul Stewart, head of asset management at Grindrod Asset Management, says that while an underweight position in equities seems to be the right strategy for now, with uncertainty and volatility likely to continue for some time to come, he believes equities still have the best return potential over the long term compared to other asset classes such as cash and bonds. The bottom line is that while asset managers have varying views on equities at the moment, using GDP growth as the primary indicator of future growth is likely to be a costly mistake.

Alternative Investments

Hedge funds

steady through market turmoil John Caulfield | Chief Investment Officer at the Momentum Alternative Investments Fund-of-Hedge Funds business

2008 was a watershed year for the investment community as performance and risk management strategies based on historical correlation models were both found wanting. Asset price correlation spiked, eliminating the diversification benefits of traditional portfolios.

esearch by Momentum Alternative Investments using objective data and historical performance information demonstrates hedge funds can and do preserve capital during periods of market stress and adding them to traditional portfolios offers investors significant benefits. The research indicates appropriate hedge fund selection increases a balanced portfolio’s risk-adjusted returns. “A skilled investor could have generated positive, mid-teen returns on diversified domestic hedge fund portfolios during the worst of the 2008 market slump,” says John Caulfield, chief investment officer at the Momentum Alternative Investments Fund of Hedge Funds business. “The average return for fixed income arbitrage (FI), equity market neutral (EQMN) and equity long short (EQLS) hedge fund strategies in 2008 was +14.30 per cent, +11.13 per cent and +2.06 per cent respectively, compared to -26.24 per cent for the JSE sectors.” Hedge fund managers have an expanded opportunity set relative to traditional longonly portfolio managers as a result of their unconstrained mandates. They are able to take long and short security positions by using a range of investment strategies meaning, if positioned correctly, they can profit from both rising and falling markets. The pool of investable securities is also greater and thus a further means of generating absolute returns. To test the assertion that hedge funds can protect capital, Momentum Alternative Investments investigated the year-to-date (YTD) returns for the local industry in 2008. The period was characterised by extreme uncertainty and volatility and has been compared to the Great Depression in terms

of drawdown severity. “The research involved the three major South African hedge fund strategies, determined by assets under management, specifically EQLS, EQMN and FI,” adds Caulfield. “To provide fair illustration of the performance of the South African hedge fund industry, the full spectrum of 2008 returns for the larger managers in each category were included.” The 2008 performance of seven FTSE/JSE investable indices was also included for comparative purposes (the FTSE/JSE ALSI, FINI15, INDI25, RESI20, Small-Caps, Top-40 and Mid-Caps. What is evident from the research is hedge funds preserve capital (the average return for each hedge fund strategy was positive in 2008, which was not the case with JSE sectors). Furthermore, volatility in the markets caused wide dispersion of returns within hedge fund strategies; the difference between the best and worst EQLS returns was spread between -25 per cent and + 31 per cent, illustrating how hedge funds within the same strategy can still have very different underlying positions. In other words, it was possible to generate positive returns but skilled manager selection was a crucial component of doing so. We extended the stress testing to between August 2007 and January 2012 to check whether the same results were achievable over a longer period. The period is an interesting one in that it incorporates a number of very different investment environments, including bull and bear markets, as well as periods of high and low volatility. Stress testing is an evaluation methodology that focuses attention on negative monthly returns for traditional asset classes, namely equities and

government bonds, and then compares these returns to the corresponding hedge fund return. As a benchmark for hedge fund performance over this period, Momentum Alternative Investments constructed three equallyweighted indices using monthly hedge fund returns obtained from HedgeNews Africa. The first, named Hedge Fund Composite Index (HFCI) was a composite including all the funds from the three underlying strategies. The second included only managers employing EQLS strategies and the third, named Fixed Income Arbitrage Index (FI HFI) encompassed those managers trading only relative value in the fixed income markets. Comparing the FTSE/JSE All Share Index (JSE ALSI) to the Equity Long Short Hedge Fund Index (EQLS HFI) for the period gave the following results: A summary of the statistics indicates that; of the 24 negative months on the JSE ALSI, 13 were positive for the EQLS HFI. While the worst month and the maximum drawdown for the JSE ALSI was -13.24 per cent and -40.44 per cent respectively, the corresponding returns for EQLS HFI were -3.91 per cent and -6.10 per cent. The EQLS hedge funds showed lower losses and improved risk statistics compared to the JSE ALSI over the period. These results clearly show the value hedge funds bring to traditional asset portfolios through their diversified return streams and ability to preserve capital. “Skilled hedge fund selection can increase returns while simultaneously reducing risk in a tradition portfolio, as is evidenced by the hedge fund performance in our research,” concludes Caulfield.

The above article is an edited version of the research done by Momentum. For the full report, which includes graphics and results, please download Momentum Alternative Investments | Hedge funds steady through market turmoil on http://www.momentuminv.co.za/Libraries/Alternative_Investments_Hedge_Funds/Hedge_ Fund_Study_-_May_2012_Updated.sflb.ashx.

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SUNEL VELDTMAN

Have you noticed how financial product providers and banks dominate advertising space in airports?

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.

unél 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. I recently noticed the advertisement of a specific financial product at a local airport. The billboard referred to the spectacular returns achieved by this product, over the past number of years. If my memory serves me right, the return quoted was about 18 per cent per annum. I specifically looked for the obligatory disclaimer that past performance is not an indication of future performance and that financial products carry risk. Indeed, the disclaimer was there but completely unreadable from where I was standing. Advertising past performance emits a subliminal message: “If you buy this product now, you can achieve the same returns in the future.” You may also recall similar ads (let’s call them high return ads) for offshore investments, small cap or commodity funds. If you believe that returns eventually move back to a historical average, then of course you should be wary of financial products advertised in high return ads. The probability of achieving the same returns in the future is low. In fact, the probability of achieving below average returns is higher, compared to other products that have recently experienced a sub-average performance. Unfortunately, high return ads are effective because they play on our irrational decisionmaking patterns. Behavioural finance studies give evidence that when analysing

complex situations, we place the most weight on the most recent data we have received. In addition, it is very difficult for us to foresee or predict trend changes, because we tend to extrapolate events from the most recent past. Other evidence points towards our tendency to avoid complicated thought in favour of jumping to conclusions based on limited information. In one such experiment, conducted in 1996 by Lyle Brenner, Derek Koehler and Amos Tversky, two groups of students were presented with a legal scenario. One group received both sides of the story, essentially acting like a mock jury. The other group was knowingly presented with only one side of the case. This group was more confident and biased with its judgments than the group that had heard all the facts from both sides. They jumped to conclusions after hearing only one side of the story. It remains a real challenge to sell on any other basis than selling past performance. Financial advisers are frequently faced with the choice of making an easy sell on past performance, rather than helping clients make rational decisions based on a broad array of facts. This might entail having to choose underperforming products. I have maintained that helping clients make educated and informed decisions is the right thing to do (it is also the law). But when you lose an important client to the pastperformance game, it hurts. Mr High Stakes is looking for a higher yield than a call account. Do you explain a number of options to him; options that have better yields, increased risks and the uncertainty of future returns, even on money market funds? Undoubtedly, he will have to make a complicated decision. Or do you just offer him the best performing

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money market fund over the past year? Mr High Stakes has a simple choice to make and is more likely to buy the product. His needs will be met, but he will be left on the likelihood of the product continuing as the top-performing fund or even maintaining the same level of returns. The FAIS Act does not precisely define what information is required to make a wellinformed decision. When you choose the moral high ground, behavioural finance tells us that the odds are stacked against you. High return ads don’t help either. We all have an obligation to fight this battle against the odds.

“Behavioural finance studies give evidence that when analysing complex situations, we place the most weight on the most recent data we have received. In addition, it is very difficult for us to foresee or predict trend changes, because we tend to extrapolate events from the most recent past.“

blue ink

CHRIS HART

A dramatic exit Chris Hart | Chief Strategist at Investment Solutions

ears are growing that an exit by Greece from the Eurozone will result in contagion of the banking sector that will be the catalyst for the departure of other countries, such as of Spain and Portugal, which are extremely vulnerable. Within Greece, deposits are being drained from the banks. This is a natural response of people to protect themselves as far as possible because deposits within the banking system would be subject to a forced conversion. A bank run would lead to measures such as a banking holiday, which would also trap depositors within the system and force them to take losses. A forced conversion is unpalatable to depositors, as any new currency issued by the Greek Government would rapidly depreciate. With confidence in the Greek economy extremely low, the government may also introduce capital controls to deal with the withdrawal from the formal economy. Essentially, the insolvent position of the Greek state places a very heavy burden on the thrifty sector of society, as it is from the savings pool that the resources will be extracted during a sovereign default – with the country’s capital depleted as a consequence. The aftermath of a Greek exit from the Eurozone (following a debt default) would be a severe contraction in the economy and higher inflation. The response of the ordinary citizen would be to withdraw where possible from the formal economy and with that the tax base would also shrink. The more entrepreneurial Greeks would probably also look to emigrate along with the wealthy. Tax rates would be high but so would evasion. There is no doubt Greece finds itself in a bad place with no good choices. Remaining

“Within Greece, deposits are being drained from the banks. This is a natural response of people to protect themselves as far as possible because deposits within the banking system would be subject to a forced conversion.” in the Eurozone will bring several more years of deepening austerity and economic hardship. An exit would essentially result in the same, except there would be some flexibility but with much higher inflation. However, a Greek exit will not end the Eurozone woes. It will probably merely hasten the day of reckoning for other vulnerable countries. At its core, the Eurozone debt crisis is a welfare state crisis: wealth consumption has exceeded wealth production and the state has become too big for the tax base to support, with the excesses having to be funded through debt accumulation. Measures to ease the problems may actually be aggravating the crisis as they are adding to debt and raising tax levels when a proper resolution requires the opposite. Resolving the Eurozone crisis requires political courage from politicians

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who are more populist opportunists. This means Europe’s problems have a political origin and require a political solution, but the politicians are not even remotely moving in that direction. The consequence is that the best that can be done is to kick the can further down the road. The Eurozone debt crisis has become unstable and continues to deteriorate. Greece is receding in relevance as the Spanish economy unravels at a rapid pace. The contagion will become more extensive and spread more rapidly as there is no bailout possibility with Spain, Italy and France. The lesson about to be experienced is that austerity is not a policy choice but a policy consequence, and it is a lesson Europe will have to learn.

Responsible Investing

RETIREMENT INVESTING

FIVE years

of optimal returns! Fred van der Vyver | Head: Guaranteed Investment Portfolios, Old Mutual Corporate

n a perfect investment world, the ideal investment would be one that offers maximum growth and maximum protection at the same time. However, in our imperfect world investors have become used to investments that perform well on one measure, but not both at the same time. However, there is one vehicle that to a large extent, does allow investors to enjoy both good growth and limited volatility. Over the past five years since its inception in April 2007, Absolute Smooth Growth has been more successful at producing returns, as well as reducing the volatility of returns, than a typical balanced fund and a typical absolute return fund in the CPI+6 per cent category. This is testament to the fact that the smoothing mechanism is the most effective way to reduce volatility without giving up long-term growth. This is according to Fred van der Vyver, head of guaranteed investment portfolios at Old Mutual Corporate, following an analysis of the Absolute Growth Portfolio’s pitted against two popular choices when it comes to retirement savings vehicles: absolute return funds and market-linked balanced funds. “We focused on the five-year period between 1 April 2007 and 31 March 2012 only, and compared Absolute Smooth Growth (2007 series) to the average absolute return fund and balanced fund. Absolute Smooth Growth provides a 50 per cent capital guarantee and targets a return of CPI+6 per cent per annum over rolling three-year periods,” he says.

absolute return funds available in the market, the analysis focused on the median fund of the Alexander Forbes Absolute Return Fund Survey for funds in the CPI+6 per cent return target category. Furthermore, there is also a wide variety of market-linked balanced funds in the market. However, a spokesperson says the analysis focused on the median fund of the Alexander Forbes Large Manager Watch Survey as a good benchmark for the investment type. The analysis revealed that Absolute Smooth Growth outperformed the average absolute return fund and the average balanced fund by 1.5 per cent and 3.6 per cent per annum respectively.

provision of positive (or absolute) returns. However, many absolute return funds did not manage to achieve this over the fiveyear period shown. “Meanwhile, Absolute Smooth Growth did not deliver any negative monthly returns over the period considered in our analysis, which includes one of the most severely detrimental periods for financial markets in recent history,” Van der Vyver says.

“This is an outstanding result for a product that is usually thought of as conservative. It should also be noted that as at 31 March 2012, the 2007 Series of the Absolute Growth Portfolios held healthy reserves of between zero and five per cent. Had these reserves not been held and declared away as bonuses, the five-year returns would have been even more favourable,” adds Van der Vyver. According to him another important note is that returns for Absolute Smooth Growth are net of capital charges and are therefore directly comparable with the absolute return and balanced fund returns.

Van der Vyver concludes that although investment returns are often unpredictable and variable, it is still possible to measure their track records and compare the levels of growth and protection they provided in the past. He says it is crucial for both asset managers and investors to regularly investigate the levels of growth being achieved by their funds over the medium to long term as it can reveal some valuable insights.

The analysis of the funds also measured the volatility of each investment vehicle. The most absolute returns funds aim to provide capital protection through the

According to Van der Vyver, instead of focusing on one of the wide variety of

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The typical balanced fund lost almost 12 per cent during the months of September 2008 to November 2008. “Clearly over this period Absolute Smooth Growth provided the safer option for investors.”

Regulatory Developments

Ryan van Breda | Risk Management and Portfolio Compliance, Prescient Investment Management

REGULATION28 What’s the Fuss?

fter months of engagement between the Retirement Fund Industry (RFI) and National Treasury (NT), the new Regulation 28 of the Pension Funds Act, No. 24 of 1956 (Reg 28) became effective 1 July 2011. As with most new pieces of legislation, obstacles truly present themselves only in the implementation phase. The new Reg 28 presents a policy shift of NT to incorporate a hybrid of paternalistic rules coupled with key broad principles, each with its merit and drawbacks. The old rules-based Reg 28 fostered tick-box compliance; loopholes were found to exceed the permissible asset limits and neglected to guide fund trustees on the appropriate investment strategies.

THE ISSUES The preamble now codifies fiduciary duties which trustees are required to uphold as the fund retains the responsibility for compliance. A notable inclusion is that funds are now required to assess factors which may materially affect the sustainable long-term performance of a fund’s assets including factors of an environmental, social and governance nature. The new Reg 28 introduces concepts of economic exposure and look through which was intended to clamp down on corporate structures and guaranteed products used in the past to circumvent asset limits based on their legal form. Funds are now required to report and disclose on a full look-through basis each underlying instrument’s economic exposure. This new provision has caused administrative complexities when funds such as Retirement Annuity Funds (RA’s) invest

in policies or unit trusts as disclosure is required per instrument irrespective of the vehicle. The Registrar did, however, award the RFI a reprieve on disclosure by incorporating a five per cent de-minimis rule; if an asset held is less than five per cent of a fund’s total assets, it may be disclosed in the category to which the predominant underlying asset relates.

THE SCOPE The permissible asset classes of the new Reg 28 remained largely unchanged, however, additional capacity was granted to hedge funds, private equity funds, unlisted/alternative debt and other listed commodities. The most notable change can be seen by the increase in non-government guaranteed debt limits from 25 to 75 per cent of a fund’s assets. Reg 28 has always required that funds as a whole be compliant. This has resulted in some members being able to be fully invested in, for example, off-shore equities in their RAs. The new Reg 28 now requires that individual members offered a choice in respect of the investment of individual contributions in a fund be compliant. NT has been criticised in its paternalism as individuals are now limited to the maximum 75 per cent equity limit (local and foreign), irrespective of age.

THE CONSOLATIONS NT did recognise the practical implications of this provision and allowed individual members who had investments prior to 1 April 2011 to not comply with Reg 28,

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provided that the contractual terms of the investment would not change. Due to the complexities of ensuring fund and member compliance the Financial Services Board (FSB) has released two exemptions, one which now requires funds to report, within 90 days after each quarter, any instances where the fund or member may have exceeded any limits (which include market value movements). These reports for quarter one and two are due by 30 September 2012. One of the complexities is in obtaining an instrument’s economic exposure in, for example, a unit trust fund of funds as these managers are reluctant to release their intellectual property. The managers have agreed to disclose all holdings quarterly in arrears to facilitate the reporting of compliance in the specified format, as prescribed by the FSB. The RFI has implemented intra-quarter compliance by making use of intended maximum limits provided by the unit trust management companies. These limits are used to ensure fund and member compliance by making use of the overall asset class limits of the underlying building block unit trust fund. This ensures that at the point of investment, the member and the fund are compliant at asset class level.

THE COST AND BENEFIT The overall cost of compliance is yet to be determined but will ultimately be borne by the individual. In return for this cost, the individual is rewarded by the additional oversight of the FSB and the principles now codified into the new Regulation 28.

morningstar

Performance fees Heads I win, tails we flip again David O'Leary | CFA, MBA, Morningstar

Performance fees, which have predominantly been associated with the hedge fund world, are becoming increasingly common in the retail fund industry across the globe. A common hedge fund performance fee structure is the ‘2 and 20’, where the fund charges a two per cent base management fee plus 20 per cent of the outperformance relative to a benchmark, provided certain requirements are met. Normally, these requirements include surpassing a high-water mark after periods of underperformance.

Even when dealing with well-intentioned firms the complexity of the rules that govern the performance fee structure leaves the potential for all manner of unintended consequences. For example, imagine you are running a fund and are slightly below your targets. You may be tempted to ratchet up the risk with the hope that you surpass your hurdle and trigger a fat bonus. Conversely, if you are ahead of the game, you may be tempted to decline attractive opportunities because you are unwilling to risk any bonus you already stand to earn. Not to mention that you have the incentive to take on a lot of risk much of the time because that gives you the best chance of striking it rich. After all, if it doesn’t work out and the fund performs very poorly, you can always close it and start up another one with a clean slate.

In the retail mutual fund world, performance fee structures are often a little different and vary from one company to the next. Many performance fee structures include a minimum fee that is lower than a typical TER on non-performance fee funds. And there are often limits on the maximum performance fee a fund can charge, but broadly speaking they are structured in a similar fashion. Ostensibly the purpose of performance fees is to benefit investors by aligning the fund manager’s interests with theirs. You have to wonder why the well-paid professionals you’ve entrusted your hard-earned savings to are asking you for more money when they produce strong returns. Isn’t that what they are being paid for in the first place? We don’t pay doctors more money if they perform a successful operation; they get paid a market rate for their services and they do everything in their power to save a person’s life no matter what. A more practical objection is that performance fees often don’t benefit investors. The reason is that by and large performance fee structures have asymmetrical payoffs: if the fund outperforms, it collects a fat performance fee; if it underperforms, it still collects a lower but still meaningful base management fee. The potential upside to the fund company is usually multiples of any potential downside. In the worst case scenario, the odds are so skewed that the structure can actually encourage portfolio managers to swing for the fences and in the process take excessive risk with investor capital. Furthermore, the complexity of these structures can allow the more ethically challenged firms to quietly stack the odds in their favour by manipulating the fine print. For instance, a firm might choose an inappropriate benchmark, calculate performance fees on gross (not net) returns, or manipulate or even exclude a hurdle rate or high water mark.

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This is not to say that there are no upsides to performance fees or that there is no situation where they might be appropriate, but for the most part they aren’t necessary and their benefit is questionable. Basically performance fees are really just a set of rules that attempt to synthetically mimic the alignment of interests that naturally exists when fund managers become investors in their own funds. So my modest proposal is that fund companies ditch performance fees and simply require their managers to invest alongside their clients. After all, what more incentive could a fund manager need than having their own capital on the line, too?

BAROMETER

HOT

South Africa climbs in World Competitiveness Yearbook According to a study released by IMD, a global business school, South Africa climbed two places to 50 in the annual World Competitiveness Yearbook. The report, which tracks 59 countries, attributes South Africa’s improvement to gains in government efficiency and social and economic factors. -

Increase in Japanese companies investing in South Africa Toyota and Kansai Paint invested R2.6 billion in South Africa last year, according to trade and industry minister, Rob Davies. This brings the number of Japanese companies that have invested in South Africa to approximately 108.

Investors prosper as SAB flourishes Impressive growth in emerging markets has boosted SAB’s financial performance in a market where beer consumption has declined in developed markets, such as Europe and North America. SAB’s most recent financial results indicated a 12 per cent increase in full year earnings and a 12 per cent raised year dividend to 91c.

SIDEWAYS

African Development Bank economic forecast for Africa The African Development Bank (AfDB) forecasted a 4.5 per cent economic growth for Africa this year, outperforming the 3.4 per cent growth rate posted last year. According to AfDB, this increase is attributed to Africa’s strong growth rates in recent years due to rising inward investments but warns the forecast could be affected by the ongoing Euro crisis and high levels of youth unemployment.

NOT

SAA pays R18 million in settlement agreement A recent ruling by the Competition Tribunal will require South African Airways to pay an R18 million administrative penalty. SAA and three other airlines were found guilty of fixing rates of fuel and transport costs along the South Africa to Hong Kong route.

Facebook Fail Facebook’s much vaunted IPO turned out to be a disappointment with the share price tanking after its initial listing. According to a recent survey four out of five respondents have never bought a product via Facebook, while 34 per cent spent less time on the social media site, compared to the previous six months. The study also revealed that 44 per cent of respondents’ perceptions decreased as a result of the troubled IPO. Moody’s cuts German Banks’ credit ratings Moody’s justified the credit rating cut of six German banking groups, on increased risk of more economic shocks occurring in the Eurozone. The downgrades came after Moody’s said that German lenders faced risks to the quality of their assets if the crisis worsens or if the global economy slowed further.

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ALLAN GRAY

How to recruit

the right people Jeanette Marais | director of distribution and client service, Allan Gray

ne of the biggest challenges when building an advisory practice is finding talented, committed staff to help you grow your business. In South Africa, with its serious skills shortage, employers are sometimes tempted to rush into recruitment decisions. However, given our rigorous labour laws, the old adage ‘marry in haste, repent at leisure’ is pertinent. Successful recruitment is about striking a balance between opportunism and prudence. Rather like successful investing.

Approaches to recruitment Sourcing and hiring the right talent is challenging and you will need to decide if you wish to use a recruitment consultant or do it yourself. Using a recruitment consultant can save you a lot of time and administration in terms of filtering suitable candidates and creating a shortlist. There are various other options available for attracting candidates. You can use traditional advertising in newspapers or market your position online through relevant job portals such as www.careerweb.co.za or www.careerjunction.co.za. You can also use your Facebook page or Twitter account, if you have these set up. But be aware – you could be inundated with responses, most of them inappropriate. The fees charged by consultants can make their services too expensive for smaller practices. Consider undertaking a cost-benefit analysis to help you decide what route is best for your practice. When recruiting for more senior positions, word-of-mouth continues to be one of the

“The key to a successful appointment is when both parties can clearly see what’s in it for them. If you start wondering why a candidate is keen on the role, be careful, the appointment could be short lived. ” best approaches. Actively engage your own staff for referrals and use industry functions as networking opportunities.

Your value proposition is a key differentiator

2. Look for patterns in performance For each career move, ask the candidate why they left. Are they interested only in chasing money? Do they typically leave employers on good or bad terms?

Strong candidates are assessing you as much as you are assessing them. Objectivity, speed and great communication in your recruitment process will ensure a positive candidate experience. Also, make sure you have an appealing story. Start your recruitment process by developing a solid value proposition. What is your vision for your practice? What are you trying to achieve for your clients? What makes your workplace appealing? What benefits can you offer and what is the potential for career growth? Don’t forget psychological factors such as offering candidates a sense of identity and status.

3. Let candidates talk

Interview guidelines

The key to a successful appointment is when both parties can clearly see what’s in it for them. If you start wondering why a candidate is keen on the role, be careful, the appointment could be short lived.

When interviewing appropriate candidates, you’re walking a fine line between trying to interest them in the position and trying to find out if they are a good fit. There will always be a measure of risk when taking on a new employee, but the following guidelines can help you manage that risk: 1. Accept that there are no perfect people One of the biggest risks to a successful appointment is the gap between your wish list and a real human being with imperfections. A measure of compromise is usually necessary.

Give candidates the space to talk and eventually clarity will emerge whether or not they are right for the position. 4. Don’t be intimidated by great CVs If you’re too impressed with a candidate before they’ve entered the room, you might end up not asking all your questions and accepting general answers. 5. Make sure the appointment will be mutually beneficial

Finally, to complete the recruitment process, make sure your new employee has a proper induction. This helps them feel empowered and can be achieved through team introductions, client handovers and providing any required training so that they can quickly begin working at an optimum level. Sources: Jack Hammer blog, Labournet.com

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched adviser services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser services shortlists third-party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser services performs research and maintains the shortlist of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.

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etfSA.co.za

Lump sum investments versus recurring (debit order) investments Mike Brown | Managing Director | etfSA.co.za In theory, the investor who makes regular (debit order) contributions will, through Rand cost averaging, be able to buy units at varying prices over the life of an investment. This should enable them to achieve better returns than an investor who does a once-off investment, in other words, makes a timing decision. Unless the investor is fortunate enough to buy at the bottom of the market and sell at the top, Rand cost averaging should provide superior performance over time. In practice, however, there are two important qualifications. • Investment returns are product specific. • The duration of the investment period can act in favour of the recurring investment. Let’s assume an investor who does a lump sum investment of R6 000 and look at the returns of this investment over a five-year period in two different ETF products, namely NewGold ETF and the Satrix 40 ETF. This is compared with a regular investment of R100 per month over a five-year period, i.e. an investment of R6 000 in all, but spread evenly over the five-year period. The results show that a lump sum investment of R6 000 in NewGold ETF, would now be worth R15 939 after five years, whereas the R100 per month investment would be worth only R9 436 at present. That would mean one up to the lump sum investment over regular investments. However, for Satrix 40 ETF, which is a closer proxy for the overall performance of the SA equity market, the R6 000 lump sum is worth only R7 862 after five years, whereas the R100 per month nearly equals this with a current value of R7 670. This is a draw. This illustrates the first qualification that

Performance to 11 May 2012 (NAV to NAV including dividends) NewGold ETF Period

Return

Satrix 40 ETF

Current Value (R)

Return

Current Value (R)

R6 000 lump sum 1 Year

24,75%

7 485,00

7,22%

6 432,20

3 Years (per annum)

17,80%

9 808,80

17,53%

9 740,40

5 Years (per annum)

21,58%

15 939,00

5,55%

7 862,00

10 Years (per annum)

n/a

13,19%

20 715,00

R100 per month debit order 1 Year

6,29%

1 241,69

10,08%

1 267,57

3 Years (per annum)

17,45%

4 755,14

11,29%

4 301,47

5 Years (per annum)

16,80%

9 436,12

9,34%

7 670,33

10 Years (per annum)

n/a

14,19%

26 509,11

Source:

etfSA.co.za (Product Quick Sheets) data supplied by Profile Media (www.etfsa.co.za).

Based on actual historical performance. Please note that past performance is no gauge of future performance.

investment returns can be very product specific. If the investor continues to make R100 per month contributions, say over a 10-year period, the results are interesting. Here we have only 10-year figures for Satrix 40 as NewGold hasn’t been listed for 10 years, but the R6 000 lump sum investment in Satrix 40 would have grown to R20 715 for the 10 years ended 11 May 2012, whereas a R100 per month investment over that period would have grown to R26 509. So the second qualification applies for this case, duration is important. As they say: it is not timing the market, but the time in the market that counts.

Taking a more real-world situation where the investor puts away R300 per month (which is the normal minimum debit order investment), a five-year investment of R300 per month in Satrix 40 would be worth R23 011 and R28 308.36 for NewGold. Certainly, from an affordability point of view, putting away R300 per month, over time, can amount to a considerable sum and should therefore be encouraged. Gauging the optimal timing of when to invest and when to disinvest, requires levels of skill and wisdom (or luck) not typically possessed by most individual investors, which is why the recurring investment strategy might make more sense for most investors.

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) INVESTSA

INDUSTRY NEWS

Appointments

Paul Stewart, previously the managing director of Plexus Asset Management has been appointed as executive director and head of asset management at Grindrod Asset Management. Stewart, who joined Plexus in 2005, has 17 years’ experience in the investment and asset management industry. Previously the managing director of m Cubed Unit Trust Management Company, Stewart also chairs the Association of Savings and Investment South Africa’s (ASISA) fund mandates committee.

Sam Houlie joined Momentum Asset Management to establish a new contrarian investment capability to complement the firm’s existing offering. Houlie will head up the new team and will be managing local and global strategies for institutional and retail clients. Houlie, a chartered accountant and CFA charter holder, brings 16 years of domestic and global investment experience to the firm. Prior to joining Momentum Asset Management, Houlie was at Investec Asset Management until September 2011, where he held the positions of director, head of South African equities and portfolio manager in the global contrarian team.

Gordon Webb has been appointed by Investment Solutions to serve as a client servicing account manager to various blue-chip companies, and will be responsible for building and maintaining relationships with institutional clients on retirement and investment opportunities. With this addition, the institutional business team is well positioned to provide service to over 1 900 retirement funds. Due to an incorrect image being printed in the May issue, this appointment has been re-printed with apologies and the correct image.

Investec Asset Management posts record AUM Investec Asset Management has announced that its assets under management have risen to a record R755 billion (£61.5 billion), supported by net annual inflows of R61 billion (£5.2 billion) as it reported results for the financial year to 31 March 2012.

Earnings increased by five per cent to a record R1.58 billion (£133.7 million). Flows were generated across all seven client groups worldwide, and across its balanced range of seven distinct investment capabilities. Over the past three years, the group has seen net inflows average in excess of R65 billion (£5 billion) per annum. “We enter our third decade with

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confidence,” says Hendrik du Toit, chief executive officer. “Our focus remains unchanged: to manage our clients’ investments to the highest standards possible; to ensure appropriate alignment with the interests of our clients; to remain open to sensible innovation; and to generate investment insights to support our delivery to clients.

“The combination of our emerging market roots and our global footprint positions us well for the future. We have a strong culture, a broad range of investment capabilities and a stable and experienced leadership team. This has helped us navigate through these volatile times while maintaining our long-term focus.”

Study shows M&A motivated by new tech and established brands

The acquisition of new technology or an established brand is considered a key driver for growth through mergers and acquisitions (M&A), according to half of business owners in South Africa. These are the findings from the Grant Thornton IBR, which provides insight into the views and expectations of 12 000 businesses each year across 40 economies with a total of 150 interviews conducted every quarter in South Africa. “Investors are still cautious and they want to secure their future earnings by investing in companies that offer more solid growth potential,” says Steven Kilfoil, director, corporate finance at Grant Thornton Johannesburg. The results from the 2012 report show that of those South African companies seeking to expand through acquisition in the next three years, 46 per cent expect to do so through a cross-border transaction, a rise from 31 per cent in 2011. When it comes to financing of acquisitive growth, 70 per cent of South African respondents indicated that they would fund such activity through retained earnings.

Bermuda-based investment firm acquired by Sanlam Sanlam Investment Holdings has purchased a majority stake in Bermuda-based investment firm, P2international Ltd (P2), delivering an additional global distribution partner for Sanlam’s insurance-based and asset management products. Furthermore, the transaction provides the group’s local and international clients access to international equity and bond funds through long-term, risk-managed investment strategies designed to provide clients with risk-adjusted compound returns over time. The addition of P2 to Sanlam’s stable of local and international businesses is a considered move, says Johan van der Merwe, CEO of Sanlam Investments. “We have worked with P2 through Glacier, Glacier International and Sanlam Global Investment Solutions (SGIS) for a number of years and are now looking forward to deepening and widening this relationship through the new ownership arrangement.” Cobus Kruger, MD of SGIS – a division of the Sanlam Group that provides international investment solutions, including the P2Strategies to international clients – has taken up the post of CEO of P2, in addition to his role at Sanlam.

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In South Africa, however, the proportion of businesses seeking to grow through acquisition has declined from 41 per cent in 2011 to 32 per cent in 2012. The BRIC economies also revealed a decline in respondents seeking to grow through acquisitions from 44 per cent in 2011, down to just 35 per cent in 2012. The BRIC economies consider – like their South African counterparts – opportunities in new technology and established brands as key drivers for M&A expansion. The global statistics indicate, though, that the core factors, which drive growth by acquisition, are access to new geographical markets (58 per cent) and a need to build scale (55 per cent). Globally 33 per cent of companies seeking to expand through acquisition expect to do so through a cross-border transaction, a rise from 28 per cent in 2010. In contrast, across the BRIC economies, international acquisition expectations have declined with just 22 per cent of businesses in the region expecting to undergo a cross-border acquisition, compared to 2011 figures of 26 per cent.

Momentum Manager of Managers nominated for Imbasa Yegolide Award Momentum Manager of Managers (Pty) Ltd has been nominated for a service excellence award at the fourth annual Imbasa Yegolide Awards for 2012. The nomination, which was submitted under the multi-manager category, recognises exceptional service within the retirement fund industry with emphasis placed on leadership and exceeding customer expectations; customer-focused values reflected in service standards; and innovative service provision, among others. “The high service ethic within the business unit and investment team has, undoubtedly, culminated in us being nominated for this award,” says Kevin Milne, head of investment services at Momentum Manager of Managers. Momentum Manager of Managers (Pty) Ltd has developed a number of technology-based service platforms, including the well-received Alpha-lab suite, which comprises online investment advice, analysis and research tools.

PRODUCTS

Making budgeting for education simple In an effort to connect with parents of young children in an engaging, innovative way, Old Mutual has launched the SmartMAX Education Plan website which offers various useful tools for planning and budgeting for education, as well as tools for fun events like baby showers and birthday parties. We’ve chosen to relate to our customers in an holistic way, says Jaco Gouws, product manager at Old Mutual. “Saving for education is a hugely important parenting responsibility, but we understand that it’s only one part of the whole adventure of parenting.” All the tools have been created with timestrapped parents in mind and are quick and easy to use. “Education is expensive: it’s estimated a child who begins Grade R at a public school in 2012 will cost his or her parents more than R450 000 for primary and high school education. So our online financial tools have been designed to help parents be fully prepared for the cost of their children’s education,” says Gouws. The budgeting tool helps parents budget intelligently by providing them with an easy four-step process that will give them a

New Africa index tracking fund now availalbe The Old Mutual S&P Africa Custom Index Fund – which provides investors with broad and lower-cost exposure to African equity markets outside of South Africa by holding the larger shares listed in 20 countries and controlling for concentration and liquidity risk – has been introduced by Dibanisa Fund Managers, the specialist index tracking boutique in Old Mutual Investment Group SA (OMIGSA). The fund allows investors to gain exposure to the fast-growing markets and populations of the continent’s diverse economies. It tracks the S&P Africa ex-South Africa Custom Index, a customised free float-adjusted index comprising 80 securities from the S&P Africa 40, S&P Africa Frontier and S&P Pan-Africa indices. It includes companies that are domiciled in Africa, or that have the majority of their assets and operations in Africa. “Investors may ask why we use a passive approach in an inefficient market like Africa,” says Marinda Nel, head of international distribution for Dibanisa. “Low liquidity and

graphic view of their monthly income and expenses. The cost of education calculator allows parents to quickly determine how much they’ll need to pay for a child’s education over a given period of time and helps them keep track of what they need to save. Also included is a milestone development guide, through which parents can keep track of every stage of their baby’s development from pregnancy through to age three. What’s more, these pages can be printed to create a baby scrap book that will record when that first tooth arrived, what their first words were and other special memories. Through the useful school finder tool parents can access a comprehensive list of available schools in their preferred area – helping them to make the right choice for their youngster. The new SmartTRACKER tool is essential for all existing customers who like to keep up to speed with what their education savings. It informs the parent whether the current savings and monthly premium is enough to cover their education goals. Parents can then take a future look at the impact of making a few changes to their premiums or investment choices. This tool along with many other is available in a secure environment on MyPortfolio.“

high transaction costs make it difficult to outperform the index. At the same time, the low management fees and transaction costs of index tracking improve net returns, and using the S&P Africa Custom Index offers better liquidity and good diversification across countries, sectors and companies.” Offshore index tracking funds now offered by Dibanisa include: FTSE RAFI All World 3000 Index Fund, MSCI Emerging Markets Index Fund, MSCI All Country World Index Fund, Frontier Markets and Japan, to name a few.

New fixed income fund by Efficient Select Efficient Select has announced the launch of the Efficient Fixed Income Fund, with the objective of the fixed income portfolio to provide investors with reasonable real income while preserving the investor’s capital. Efficient believes that in the current period of uncertainty, a fund that targets capital preservation with moderate income in excess of inflation should appeal to investors. The fund is available for direct investments and on select linked investment service provider platforms.

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First of its kind in SA - app keeps investors current An industry-first app that provides functional tools for trustees, employers and members to keep up to date with their funds has been introduced by Metropolitan Retirement Administrators (MRA), South Africa’s fourth largest retirement administrator of standalone funds. The app offers trustees tools to check on real-time fund performance and related updates. Designed by MRA’s IT manager, Nico du Preez and his team, the app is available for smartphones and tablets. “Not only have we found an innovative way to bring the principles of PF130 for trustees to life, but we also noticed the increasing desire for accurate information to be available to trustees and members whenever they need it,” says Du Preez. “The app is expected to give trustees an opportunity to actively monitor their funds as opposed to waiting for monthly status meetings with the administrator to discuss the fund’s performance,” concludes Du Preez.

PORTUGAL, SPAIN, china, France malawi,CROATIA, greece

Greeks to expect the worst if they exit from Eurozone An exit from the Euro would see Greeks lose more than half their annual income and encourage a high rise in unemployment and inflation figures. This is according to a survey of the National Bank of Greece (NBG) that states that an exit would undoubtedly cause a significant drop in the living standards of Greek citizens – with a reduction of at least 55 per cent in per capita income. African nations aim to free trade area by 2014 Plans are underway to create a free trade bloc between the East African Community (EAC), the Common Market for Eastern and Southern Africa (Comesa), and the Southern African Development Community (SADC) by July 2014. By integrating three existing African trade blocs, a 26-nation freetrade area will be born giving life to a free market of 525 million people with an output of $1 trillion. Portugal passes fourth review Portuguese Finance Minister, Vitor Gaspar, has passed a fourth review of continuing spending cuts and economic reforms. He says that Portugal has fulfilled all the bailout criteria set by inspectors from the EU, European Central Bank and International Monetary Fund (IMF). Portugal has already cut public sector wages and raised taxes to reduce its budget deficit in order to deal with its economic crisis. China approves 100 key investment projects in one month China has approved over 100 key investment projects in May alone, as part of a campaign to support growth in the world’s second-largest economy. The investment projects range from new

steel mills and hospitals to water treatment plants and clean-energy projects. France lowers retirement age from 62 to 60 Newly elected President François Hollande has announced that the country will consider lowering the national retirement age from 62 to 60 for a small class of workers who entered the work force at age 18 or 19. The bold move will cost the state more than $1.25 billion, which is said to be fully paid for by a 0.1 per cent rise in taxes on employees and companies. IMF agrees to lend $157 million to Malawi The International Monetary Fund (IMF) has agreed to lend the poverty stricken African country Malawi, $157 million in an effort to boost the economy. So far, financial aid from global donors makes up the majority of the country’s national budget. Since taking on her new position in April, President Joyce Banda has implemented many changes to appease donors, such as devaluing Malawi’s currency by one-third against the Dollar, introducing a floating exchange rate regime and lifted controls on currency trading. Spain maintains its status as having the highest unemployment rate The unemployment rate in Spain is currently the highest in the Eurozone at 24.3 per cent, with the number of people looking for work in May having risen by 524 463, or 12.5 per cent, according to European Union figures. Engracia Hidalgo, the Spanish junior labour minister says that the country is in its second phase of recession, which has had a negative impact on employment.

Facebook gets sued by investors Facebook and its IPO underwriters are being sued by hundreds of their investors who claim that the social network misled many shareholders about revenue projections. Investors claim that companies failed to disclose to investors that Facebook was experiencing a severe and pronounced reduction in revenue growth due to an increase of users of its Facebook app or website through mobile devices rather than a traditional PC. Croatia to receive a cash injection from Australian investment bank Macquarie Group, Australia’s biggest investment bank, is making plans to inject 1.3 billion Euros into Croatia. Investment will go into projects renovating Croatian schools and other government buildings. Interest to invest in Croatia arose when deputy prime minister and the minister of economy, Radimir Cacic, and finance minister, Slavko Linic, met in London to attend the annual meeting of the European Bank for Reconstruction and Development (EBRD). Indian effect boosts jobs in the US Bilateral trade and investment between India and the US has been growing in recent years, with foreign investment from India into the US having supporting thousands of new jobs in the US. India is one the fastest-growing sources of inward investment into the United States, with a total of $3.3 billion in 2010. India plans to spend more than $1 trillion on infrastructure in the next five years, and US firms are well-positioned to support India’s economic expansion

LIFESTYLE

My business lunch partner was Anil Jugmohan, an investment analyst at Nedgroup Investments. Anil is a vegetarian and the chef was more than obliging to prepare a dish that catered to his needs. His tomato-based vegetarian curry made me a bit jealous but I tucked into the Cajun spiced chicken pita, with humus and onion marmalade sauce with chips, while Anil offered me his introspection on the world of finance. His philosophy on his investments is, “Protect your capital, and don’t take undue risks.” Anil, while being professional and courteous, went a bit further. For more risk-averse investors, he highlighted the importance of diversifying risks according to your objectives; an optimal robust portfolio involves a low equity portfolio, 35 per cent making up equities and the maximum offshore that Regulation 28 will allow, with 22 per cent of that in global equities. “Fill up the rest of it in bonds and cash.” For the more risk-seeking investor, Anil thinks that there is still a good enough reason to invest in global equities, as these companies’ earnings are not concentrated in one specific area.

Sinatra’s Restaurant Pepperclub Hotel & Spa Ground Floor Cnr Loop and Pepper Street, Cape Town http://www.pepperclub.co.za/ sinatras Tel: 021 812 8826

Sinatra’s Restaurant business lunch with Anil Jugmohan Anil Jugmohan | Investment Analyst at Nedgroup Investments

ontrary to the old adage, the most important meal of the day may actually be the business lunch. Professionals get together to share ideas over a good meal in a great setting. Sinatra’s Restaurant at Pepperclub Hotel & Spa, located on Pepper and Loop Street in central Cape Town is easily accessible and serves delicious food in a casual-sophisticated environment. Music from the iconic Frank Sinatra era plays in the background and gives you that sense of sophistication, style and a cool, suave seriousness. The ambience and design is warm with deep earthy tones and the service isn’t intrusive.

The R50 in 50 minutes business lunch menu is concise, so decision-making is easy. It offers everything from the smoked chicken salad with feta and avo for the more health conscious, to the mushroom penne pasta with pecorino and rocket salad for the carboloading athlete. The Italian-influenced a la carte menu is even more alluring. Starter dishes range from carpaccio of beef fillet Roman and seafood and potato gnocchi to soups and salads. From the grill, the grilled beef fillet candied shallots and truffle- infused red wine jus leaps out, as does the grilled lamb rump and the grilled sole Cleopatra served with capers, prawns and chateaux potatoes.

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Sharing a meal forms a level of trust and honesty and when it comes to investments, you need to know who to trust and often, you can be your own worst enemy if you’re not actively involved. Anil advises, “Investors should ask themselves: what can I do to influence my investment-making decisions for the better?” For one, many of us make decisions from an emotional bias while we aren’t cognisant of this fact. He suggests that besides talking to a financial adviser, any investor should make the time to educate themselves about the markets. “The biggest challenge is to overcome your emotions and make an informed, not a reactionary, decision.” And while the markets are in turmoil, a robust portfolio that will yield results over the long term is the way to achieve results. On investing in South Africa and emerging African markets, there is a lot of hype about Africa and Anil feels that South Africa is ideal for investing as the country has done extremely well, while there are still greater risks and difficulty in doing business in Africa. As Anil says, “It’s easier to know where not to invest, position a robust portfolio, seek financial advice and take the time to be better informed.” If you’re looking to expand your understanding of the markets, the business lunch is a good place to start. Where to eat couldn’t be simpler and the rewards are worth it.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Antique weapons An investment worth a shot

Antique weapons, which include swords, daggers and pistols once used as self-defence mechanisms, not only make for great display items, but can serve as a very lucrative investment too. Most antique weapons are very detailed and represent an era of history by its style and sophistication. More often than not, antique weapons were tailor made for their owners and often come with a rich history and pedigree; the most valuable of them would have actually been used in battle. Here is a list of the most valuable antique weapons. Gold encrusted sword used by Napoleon Bonaparte – $6.5 million The most expensive antique weapon ever sold on auction is a gold-encrusted sword which was used by Napoleon Bonaparte around 200 years ago. The sword brought €4.8 million ($6.5 million) against a €1.2 million pre-sale estimate at an auction in Fontainebleau, France in 2007. It is thought that the sword was used by Napoleon in a battle at Marengo in June 1800, before he became emperor.

Pair of steel-mounted saddle pistols owned by George Washington – $1.96 million A pair of pistols marked by Jacob Walster and owned by President George Washington during America’s War of Independence sold for $1.96 million at a Christie’s auction in New York in 2002. The pistols were also linked to the Marquis de Lafayette and later, Andrew Jackson. They were purchased at an auction by the Richard King Mellon Foundation in commemoration of the 250th anniversary of the French and Indian War and the critical role that Washington played in the history of the region and the United States. They are currently on display at Fort Ligonier in Pennsylvania. Pair of Nicolas-Noel Boutet pistols owned by Simon Bolivar – $1.76 million In November 2004, a pair of flintlock pistols made by Nicolas-Noel Boutet sold for $1.76 million by Christie’s, New York. The pistols were once owned by Simon Bolivar (1783–1830), the first president of Venezuela, and one of the most influential politicians in the history of Latin America.

Mughal Emperor, Shah Jahan’s gold dagger – $2.72 million A gold dagger which was owned by Shah Jahan, the Mughal emperor who built the Taj Mahal, was sold by Bonhams in London for £1.7 million ($2.72 million) in April 2008. The dagger, which dates back to 1629–30, came from the collection of Jacques Desenfans, who spent 50 years collecting south-east Asian, Indian and Islamic art.

General Ulysses S Grant’s Civil War presentation sword – $1.6 million This sword was presented to the future president, General Ulysses S Grant by the citizens of Kentucky in 1864, upon his promotion to General in Chief of the Armies of the United States. The sword, which features 26 mine cut diamonds composed to form Grant’s monogram ‘U.S.G.’, was sold for $1.6 million in June 2007.

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THEY SAID...

“The deteriorating global outlook poses a downside risk to domestic growth. The bank’s central forecast for GDP growth is more or less unchanged.” Gill Marcus, the reserve bank governor commenting on why the MPC has kept rates constant.

“If we don’t stop the real crisis (of youth unemployment), then those 3 000 DA marchers will become 6 000. It will eventually succeed. Eventually all of us will be in very hot water.” Zwelinzima Vavi, general secretary of COSATU, commenting on South Africa’s current youth unemployment crisis.

“We hope we’ll get back into the market at the back end of 2013 but we might not because there is much uncertainty in Europe now.” Michael Noonan, Ireland’s finance minister, describing Ireland’s continued financial woes.

“The data doesn’t paint a good picture for export growth or overall economic growth for this year.” Nedbank’s chief economist Isaac Matshego discussing South Africa’s drastic increase in its trade deficit.

“From what we discussed, Mugabe said he is tired and wants to retire but he cannot do so now because Zanu-PF would die.” The former minister of defence in the 1980’s Enos Nkala recently divulged a recent personal conversation he had with the Zimbabwean president on his views of stepping down.

“Our economic plan’s priorities are growth and recovery. Without growth ... the economy will collapse.” Antonis Samaras declared his political aims during his Greek election campaign.

“Both South Africa’s formal and informal educational structures do not prepare the youth to become skilled entrepreneurs. Not only has the structure ill-equipped the youth to become entrepreneurs, but it has created a culture where young South Africans dream of becoming employees rather than employers.” Nimo Naidoo, of the 2012 Sanlam/Business Partners Entrepreneur of the Year competition.

“Derivative instruments are not as controversial as they are made out to be and have a very definite place in South African portfolio management.” Craig Massey, director of stockbroking at Sanlam Private Investments said that derivative instruments have huge potential for growth in SA despite some international trading disasters.

“There are some signs that Facebook may be in real trouble and could turn out to be a disastrous investment.” Oliver Pursche, president of Gary Goldberg Financial Services, warned investors, prior to the stock price dive, to stay away from the IPO because of the difficulty in valuing Facebook.

“We must ask of our beloved ANC, now that the first decade benefited the capitalist class, how are we going to ensure that that the second transition belongs to the working class?” Cedric Gina of NUMSA speaking at its national congress.

A selection of some of the best homegrown and international quotes that we have found over the last four weeks.

OM3772/INVEST/E

HOW TO BECOME YOUR OWN SUGAR DADDY Wouldn’t it be great to have someone in the background to bail you out if things went pear-shaped or when life throws you a curve ball? Or better still, to treat you to that thing you always dreamed of, like a round-the-world trip or owning a beach cottage somewhere? Sure it would. Sadly, these ‘someones’ are few and far between. But, the good news is, we know of a very good alternative. You! And it’s way easier than you think. It’s called the Classic 5 Investment Collection from Old Mutual. Five hand-picked unit trusts that will deliver returns you never dreamed possible in years to come. Even setting aside a small monthly amount can achieve a hefty payout over time, thanks to the power of compounding. And if you’re feeling commitment anxiety, don’t! • Unit trusts do not lock you in. • You can get access to your money in one day – without penalties. • You can miss monthly payments. Also, no penalties. • And no upfront admin fees, so your money works from day one. So, who needs a Sugar Daddy when, with a little planning, you can be your own?

Classic 5 INVESTMENT COLLECTION

1. Contact your Old Mutual Financial Adviser or your Broker 2. Call 0860 WEALTH (932584) 3. Visit investmentcollection.co.za

Old Mutual Enhanced Income Fund

Old Mutual Stable Growth Fund

Old Mutual Balanced Fund

Old Mutual Flexible Fund

Old Mutual Top Companies Fund

Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider (FSP No: 604). Unit trusts are generally medium- to long-term investments. Past performance is no indication of future growth. Shorter term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. A schedule of fees, charges and maximum commissions is available from Old Mutual Unit Trust Managers Limited (OMUT).