InvestSA Magazine April 2014 by COSA Media

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2014 Budget Investment friendly or unfriendly?

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R37,50 | April 2014

INVESTSA

2014 Budget

APRIL 2014

Investment friendly or unfriendly?

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Budget 2014: investment friendly or unfriendly?

Retirement savings reforms

Unclear lines and mixed signals

The changing face of the hedge fund industry

Cautiously optimistic for 2014, but risks remain

Donâ&#x20AC;&#x2122;t overlook the opportunities in emerging markets

Head to head: Maarten Ackerman - Portfolio Manager and Investment Strategist: Citadel Wealth Management And William Fraser, Portfolio Manager: Foord Asset Management

INFORMATION AND NETWORKING AT THE FOURTH INVESTMENT FORUM

LISPs need to provide solutions, not products

MorninGstar SA Fund award winners

Profile: Ann Leepile, Head of Manager Research, Investment Solutions

RETIREMENT REFORM: Retirement fund costs yet again in spotlight

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the editor Wow, this year is clicking by like a runaway train. And financial markets are moving even quicker; it’s enough to give investors motion sickness. Here’s hoping you are sticking with your original investment plan and that the fast pace of the markets has not forced you into any ill-considered portfolio changes. Often the best way to deal with market speed is to just sit on your hands and let it whizz by. Unless the speed presents some compelling investment opportunities. This issue is full of good advice on potential investment opportunities; have fun exploring through the pages. Coronation’s Suhail Suleman provides an excellent look at the investment opportunities in emerging markets. Just about everyone is looking at emerging markets but he makes two thoughtful, original points: use the panic as a buying opportunity; and invest for the long term. There’s a fascinating analysis by Mahesh Cooper from Allan Gray of the pros and cons of top-down versus bottom-up investing. And Kevin Lings, chief economist at Stanlib, takes a thorough look at global economic prospects and what could happen here. Here’s hoping the South African economy lives up to his cautious optimism. We also have an overview of the recent Investment Forum which took place at Sun City. It brought together experts from top investment companies and a myriad advisers keen to benefit from their collective – and sometimes conflicting – financial acumen. Until the next time, whatever your preferred investment style, we hope you are keeping any motion sickness at bay.

Shaun Harris

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www.investsa.co.za Editor Shaun Harris | investsa@comms.co.za Publisher Andy Mark Managing editor Nicky Mark Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Layout and design Mariska Le Roux Editorial head office Ground floor Manhattan Towers Esplanade Road Century City 7441 phone: 021-555 3577 fax: 086 6183906

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Budget 2014

Investment friendly or unfriendly? By Marc Hasenfuss

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The 2014 Budget was, on reflection, a rather dull affair – understandable, of course, in an election year when risking an unpopular fiscal decision could provide ammunition for opposition parties.

hen again, a dull affair is perhaps not such a bad thing after last year’s painful decision on dividend taxes; a development that probably has every investor who peruses company results cursing after seeing the gross dividend declared, reduced a few lines later into a less sumptuous net dividend. This time there was no tinkering – as some fearful investors expected – with the dividends tax percentage. The dreaded capital gains tax, thankfully, also did not

come into the fiscal frame. On balance we could argue that this was an investor-friendly Budget. However, sceptics might counter that the Budget was investment-unfriendly.

The account will allow investments in bank deposits, collective investment schemes, the (increasingly popular) exchange traded funds and retail savings bonds.

In terms of investors, Finance Minister Pravin Gordhan was adamant that further steps would be taken to ensure many more South Africans have a secure income in retirement. By emphasising that superfluous costs in the retirement/savings industry would be cut away, he took a huge step towards removing a major impediment for first-time savers. While this is a noble (and long overdue) move by the government, it’s perhaps wiser to see how this initiative pans out before praising the finance minister.

The devil will be in the detail, but asset management companies will probably be hoping such accounts might be deemed exempt from dividends withholding tax and that switches between funds are not subjected to capital gains tax.

Still, Gordhan claimed an agreement had already been reached with the Association of Savings and Investment of South Africa (ASISA) on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms are expected to be published shortly, and should be very interesting to peruse – effectively allowing observers to gauge the levels of realism in the government’s goal of working steadily towards a ‘mandatory system of retirement for all employed workers’. Of course, the other key factor in promoting such a goal is keeping things as simple and accessible as possible – not something that has characterised the savings industry in the past. At least there can be no doubting Gordhan when he raised the threshold for tax-free lump sum amounts paid out of retirement funds from R315 000 to R500 000. Legislation to allow tax-exempt savings accounts will proceed this year, an initiative that should greatly bolster household savings. The Budget document envisaged such accounts would have an initial contribution limit of R30 000 a year, which will increase regularly in line with inflation, as well as a ‘lifetime’ contribution limit of R500 000.

Possibly more interesting was Gordhan’s admission that to complement this mooted tax reform, a new top-up retail savings bond would be introduced by the National Treasury this year. This will conveniently allow for regular deposits into a government retail bond and be open to uniquely South African savings schemes like stokvels. While savers and investors can feel comfortable with the Budget, there might be less confidence drawn from the efforts to stimulate new investment in SA Incorporated. The Budget does note a study is underway on the effective tax rates for companies in different sectors of the South African economy, including the effectiveness of some tax incentives. It seems to recognise that some sectors of the economy – perhaps the straining industrial manufacturing segment and the volatile mining sector – are more vulnerable than others. While there are various initiatives to bolster the business environment, the bottom line is that the bulk of government expenditure (more than 40 per cent) is earmarked for social spending (mainly health, social services and education). This might suggest that the well-being of South Africans remains firmly in the hands of the State, despite an admission from President Jacob Zuma that employment creation is mainly the responsibility of the private sector.

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The Budget does offer little tax relief (if any) for larger corporations, besides the much welcome delay in introducing the carbon tax. But changes to corporate tax policy do seem to effectively target small and medium enterprises (SMEs). The government is chucking a not insubstantial R6.5 billion at SMEs over the next three years. What is encouraging about this investment is that the spending is coupled to efforts to cut away the red tape that so often tangles SMEs and snuffs out much-needed entrepreneurial endeavours. But there are worthwhile tax breaks to spur SME activity, which will see businesses with a turn-over of less than R335 000 not being taxed. Companies with a turn-over up to the R1 million mark will be taxed only at a rather easy five per cent. As part of cutting the administrative burden on SMEs, Gordhan also proposed tax returns being submitted only once yearly (instead of twice yearly), removing a small headache for business people who sometimes need to spend more time on operational matters than administration. Perhaps the most critical issues facing driving new investment to accelerate South Africa’s sluggish economic growth were not addressed at sufficient length in the Budget. In the National Treasury Budget Review, the claim is made that the government’s macro-economic framework has proved ‘resilient and adaptable’. The document notes: “Prudent and transparent fiscal management, inflation targeting and a flexible exchange rate in the context of open capital markets enabled the economy to continue growing moderately following the 2009 recession.” Fair enough, but the private sector – especially the labour-intensive manufacturing sector – is hardly thriving or reassuringly competitive. Only weeks after the Budget, the South African mining industry remained crippled by labour disputes over markedly higher wages, and the industrial manufacturing hub was hobbled by capacity-curtailed Eskom's load shedding. No one can deny that South Africa has followed prudent macro-economic policies, but surely the Budget cannot (conveniently) talk over the twin threats of above-inflation increases in labour costs and soaring costs for unreliable energy supply? While labour costs eat into the viability of the industrial manufacturing sector (at the time of writing, industrial stalwart Delta EMD had opted to close up shop), we hope that the government’s allocation of R10.3 billion in manufacturing development incentives or the R15. 2 billion provided for business to upgrade machinery and increase productivity over the next three years is not all in vain.

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While it’s unlikely that the government will utter anything more than diplomatic chidings around sorting out the labour impasse at mines, a deeper look into the Budget document does at least show that electricity supply features strongly in the government’s major infrastructural drive for delivering on the National Development Plan (NDP). Besides the first unit of Medupi power station (expected to be completed towards the end of the year), contracts for 47 renewable energy projects were concluded between 2012 and 2013. These are expected to add generation

capacity of almost 2 459 megawatts between this year and 2016. A procurement round is finalising another 147 megawatts of capacity from another 17 projects. In our darkest hours, these initiatives should be welcomed, although it is questionable whether new power initiatives will be enough to lift the prevailing gloom hanging over both entrepreneurs and large industrialists that desperately need to commit more capital towards growing their causes for the long term.

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All things considered.

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Budget

Retirement savings reforms

he main objective of a retirement system is to facilitate and encourage individuals to save towards retirement. However, research shows that only a few individuals can comfortably retire and maintain a reasonable post-retirement standard of living. For a number of years, the South African Government has allowed certain tax deductions for contributions made to specified retirement funds. However, after a review of the retirement tax regime, it was considered to be complex, may have been inequitable and open to abuse. Therefore, over the past few years, various retirement reform budget proposals were made following extensive consultation with various stakeholders. In the latter part of 2013, the legislation was enacted and it will become effective 1 March 2015. It is current practice that employer contributions to retirement funds are not taxable benefits. The new legislation will include employer contributions to pension, provident and retirement annuity funds as fringe benefits. For funds consisting solely of defined contribution components, the value of the benefit would be the amount contributed by the employer for the benefit of the employee. In the case of defined benefit funds, the value of the benefit will be calculated based on a formula. The

methodology for calculating the formula will be published in 2014.

employee and will be subject to the deduction limits mentioned above.

The pension, provident and retirement annuity funds above refer to funds approved by the Commissioner. Therefore, foreign funds are not included in this legislation. As non-residents are subject to tax in South Africa on their South African-sourced income, the employer contributions to foreign retirement funds, for the period while working in South Africa, may well be required to fall within the fringe benefit legislation. A review of cross-border pension issues will take place over the next two years. For now, it appears that company contributions to foreign pension funds would not be considered a taxable benefit until such time that the legislation is amended in this regard.

Although these changes, including the company contributions as fringe benefits, will result in additional workload for employers, it appears that the increase in the deduction level to 27.5 per cent of employees’ remuneration or taxable income (whichever is higher) may leave employees in a similar position as they are currently in terms of their monthly take-home pay.

Contributions to provident funds are currently not deductible in an individual’s hands, while contributions to pension and retirement annuity funds are deductible up to specified limits. From 1 March 2015, the deduction to retirement funds (pension, provident and retirement annuity) will be allowed up to 27.5 per cent of the greater of ‘remuneration’ or ‘taxable income’ (excluding lump sums and severance benefits in both cases). This deduction will, however, be limited to R350 000 per annum. Company contributions to the retirement funds will be deemed to have been made by the

Pre-retirement lump sum tax table Taxable income (Rand)

Rates of tax

0 – 25 000

25 001 – 660 000

18% above R25 000

660 001 – 990 000

R114 300 +27% above R660 000

990 001 +

R203 400 + 36% above R990 000

From 1 March 2015 there will be various changes to withdrawals from provident funds. The full amount at retirement, relating to contributions made after 1 March 2015, will not be allowed to be withdrawn as a lump sum. Different rules will apply to the portion relating to pre 1 March 2015 and to individuals 55 years and older. The definition of a provident fund is being amended to provide for a one-third limitation on the amount that can be taken as a lump sum, similar to the legislation relating to pension and retirement annuity funds. The two-thirds balance will be converted to a monthly pension. However, where the two-thirds of the total value do not exceed R100 000, members will be allowed to withdraw it as a lump sum. Retirement lump sum tax tables Lump sum benefits are taxed in terms of two tables, namely either pre-retirement (for example, through resignation) and at retirement. From 1 March 2014, these tables have been amended as follows (see tables) Taking this into account, namely tax deductible fund contributions, tax deferral on growth in the fund and preferential tax rates when exiting the fund, more individuals may be encouraged to save towards their retirement.

Retirement lump sum tax table Taxable income (Rand)

Rates of tax

0 – 500 000

500 001 – 700 000

18% above R500 000

700 001 – 1 050 000

R36 000 +27% above R700 000

1 050 001 +

R130 500 + 36% above R1 050 000

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Zohra De Villiers Director: Tax International Executive Services, KPMG

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Unclear lines and

mixed signals By Shaun Harris

Events in South Africa’s boisterous telecoms industry move quickly – as quickly as it takes to run out of airtime on a cellphone, or for its battery to run out of power without being frequently recharged.

he result, however, is an industry currently in a high state of flux, with rumours flying of possible takeovers and mergers. Unlike the poor cellphone user, the telecoms industry shows no sign of running out of power. This has spectators, not least investors and financial markets, wondering where it might all be going? The dominant possible tie-up or merger talks are presently underway between MTN and Telkom, perhaps of some type of joint venture or alliance, of the respective companies’ cell or mobile-phone networks. At this stage, the envisaged deal would help Telkom’s lossmaking Telkom Mobile business unit reduce the cost of its wireless business, while giving MTN access to some of Telkom’s spectrum. But the outcome is clouded by statements that are vague and short on detail. Most of the information on the possible deal comes from unofficial sources in the industry. Telkom CEO Sipho Maseko tends to talk around the issue, admitting that Telkom needs to reduce costs

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without saying where and by how much, and then confounding the issue further by saying Telkom remains in discussions with “various parties regarding Telkom Mobile”. Despite Telkom’s legacy for vagueness as a semi-privatised, partially government-owned entity, its reticence is understandable given the complications introduced to the industry by the Independent Communications Authority of SA (ICASA) recently announcing new call termination rates, which will cut interconnection fees, that being the fees mobile phone operators pay each other to carry calls on each other’s networks. The outcome – as the proposed new regulations stand now – will negatively affect the profits of the dominant industry players MTN and Vodacom (together the two control 90 per cent of the market by revenue), while benefiting smaller mobile operators like Telkom Mobile and Blue Label Telecoms. In response, MTN and Vodacom are taking legal action in the South Gauteng High Court against ICASA and the new call termination regulations. There’s little doubt that profits are the reason for the court application by MTN and Vodacom, as well as retaining, or trying to stop the further loss of market share. Aggressive competition from the smaller mobile operators, mainly Cell C with offers of lower call and data rates, has been steadily eating away at the market share of the big operators. “Billions of Rand could flow from Vodacom and MTN to smaller networks Cell C and Telkom Mobile,” writes Duncan McLeod, the authoritative technology commentator, in an article published in Business Times. “It’s a move by ICASA calculated to undermine the pair’s long-running duopoly over the market and foster greater competition and lower retail prices.” Retail prices have been steadily coming down. “We have reduced our average effective price per minute by 22 per cent over the past year. Prepaid, typically used more by the lower income segment, has come down 25 per cent,” says Vodacom CEO Shameel Jossub in a recent interview. The point he was trying to make is that Vodacom supports lower mobile rates. “The only caveat is that the correct process must be followed.” Despite this, the large operators still earn a healthy margin on business, mainly from the call and mobile data rates they charge. In recent financial results, MTN’s EBITDA margin was up 0.4 per cent to 43.1 per cent. That’s a good margin for any industry. So while call rates are coming down, South African retail consumers are still paying more for airtime than in many other parts of the world, particularly compared to developed markets. This is what McLeod is critical of, saying while the cost of voice telephony is a big concern, the cost of mobile data is outrageous. As far as market share goes, an inside view

comes from Mark and Brett Levy, joint CEOs of Blue Label Telecoms. “Market share, in our space at least, is that Vodacom is roughly consistent, MTN is decreasing, and Cell C is increasing.” For smaller operator Cell C, gaining market share is important, as it is for all the cellphone companies – bigger market share means more consumers to sell products to, and therefore bigger profits. Cell C seems to need the capital. It is employing bullying tactics on subscribers who fall behind on payments, many of them teenage customers, threatening to blacklist them even while they may owe the company only a few hundred Rand. Despite the shake-up in the industry and talk of mergers and acquisitions, it’s unlikely anything beyond small acquisitions will take place. The large operators just don’t have much in the local market they could look at buying. And any potential big deal is likely to be negated by competition issues and regulatory red tape. The latest technological development, longterm evolution (LTE), is causing some angst in the industry as the implementation of the policy by the Department of Communications has again been delayed. LTE, also called 4G, is a data network allowing fast downloading of music, movies, games and other applications as well as the uploading of pictures to social networks. The current 3G technology is used extensively by people on smartphones and the mobile operators say 4G will take usage a step further. They are therefore pushing for broadband rollout to cover as many areas as possible; but to achieve this, they need the allocation of spectrum by the department.

per cent rise in the Top 40 Index over the same period. Having lost its growth stock status, MTN is best left alone by investors until the price falls further. Vodacom is second largest with a market capitalisation of R185.7 billion, and sits on undemanding trailing and forward PE ratios just above 13 times and a generous dividend yield of 6.6 per cent. It faces the same pressures as MTN but, as the dominant mobile operator in the South African market, is still worth buying. Third largest Telkom’s share price is a mystery, up 117.6 per cent over the past year, perhaps because of a recent overseas road show that has attracted foreign buyers. With the government as the largest shareholder, it is too important to fail. The link-up with MTN should prove beneficial, but it’s a long shot for the more risk tolerant investor. Blue Label Telecoms is a small but interesting share. It has made some recent small but attractive acquisitions, including Tickets Pros and Retail Mobile Credit Specialists. Its core business as the largest distributor of prepaid airtime and electricity tokens puts it in a good space in the market. This one is worth buying.

However, Communications Minister Yunus Carrim is well aware of the issue, and recently said he hoped to finalise the Spectrum Policy by March this year. Apart from the commercial needs of the mobile operators, Carrim knows the new technology is vital for government services like the police and health departments. More than any other telecoms share, MTN used to be one of the growth stocks on the JSE. But that has changed as the company comes under pressure on a number of fronts, such as intense competition forcing down margins and revenue from fees and South African operations underperforming compared to MTN’s foreign assets. Yet it remains the largest share in the JSE’s Telecommunications sector based on its market capitalisation of R384.1 billion. But investment views are mixed, with stock broker and investment house IG SA selling the share 69 per cent short, implying the share price will come down, while the broker forecast on Moneyweb rates it as a buy. Also mixed is the recent share price performance: the share price is up 16.7 per cent over the past year, but down more than 8 per cent so far this year, compared to the 3.8

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Alternative investments

The changing face of the

hedge fund industry

Risk return: Long Short Index vs Asset Allocation Funds (three years to end January 2014)

Are hedge fund managers really high-rolling risktakers who drive fast cars and take expensive holidays, cynically earning high performance fees off investor capital when the going is good before giving back their diminished assets when things go awry?

t is a misconception that may have been true of some managers, some of the time, in certain parts of the world. But it is now an outdated generalisation that reflects little of the actuality in todayâ&#x20AC;&#x2122;s world.

1. Source: South African Hedge Fund Survey 2013, Novare Investments 2. Source: Symmetry Survey September 2013; ProfileData and FE

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The global hedge fund industry has achieved new respectability and accountability in the years since the 2008

crash – with big institutional investors allocating increasing amounts of capital to strategies designed to protect capital and offer uncorrelated returns in an uncertain world.

funds are, in general, not created to keep pace with raging markets. Downside protection comes at a cost, and over time hedge funds have proved their ability to offer superior risk-adjusted returns.

The hedge fund industry in South Africa comprises some of the best investment talent around, often individuals who have made their names in big institutions before venturing out on their own to start niche, boutique alternative asset management companies.

The broader median numbers also don’t account for those individual managers that consistently outperform their peers and the broader indices. The recent HedgeNews Africa awards, based on risk-adjusted returns for the calendar year 2013, highlighted a group of managers doing just that. Single-manager fund management companies Capricorn Fund Managers, Kaizan Asset Management and Laurium Capital garnered double awards for their 2013 performances.

Some of these managers have been around for many years, and have long, proven track records – the Laurium Capital founders, for example, earned their stripes in leading roles at Deutsche Bank before setting up on their own in 2008. South African hedge funds are a small (R40 billion) section of the investment landscape relative to the size of local collective investment schemes (over R1.4 trillion as at end December 2013), but they nonetheless play a very important role.

In South Africa, the equity long/short funds dominate the industry, with more than 50 per cent of assets in this category. The second largest strategy is fixed income hedge (15.7 per cent of industry assets), followed by multi-strategy (9.0 per cent of industry assets). Market neutral strategies make up 14.6 per cent of industry assets. Volatility arbitrage, structured finance funds and other strategy funds make up the remainder.1 It is interesting to note that the Long Short Index outperformed the average of all CISCA registered multi-asset funds over the past three years (to end January 2014), with lower volatility than the MultiAsset Medium Equity, Multi-Asset High Equity and Multi-Asset Flexible categories, and with only slightly higher risk than the Multi-Asset Low Equity category.2 Hedge funds in South Africa are also highly regulated. In recent years, good performance numbers have put top domestic hedge fund managers on the radar of global investors searching for yield.

As a group, they have returned a median annualised 10.94 per cent net of all fees in the seven years between January 2007 and December 2013, according to HedgeNews Africa, which tracks monthly numbers from South African managers, versus the FTSE/ JSE All Share Index annualised return of 9.23 per cent over the same period (total return 12.4 per cent). That includes a median return of 9.03 per cent in the crash year of 2008, according to the HedgeNews Africa South African Single-Manager Composite, when the JSE All Share Index fell by 23.23 per cent on a total return basis. The Composite went on to gain 12.32 per cent in 2009, as the South African market bounced 32 per cent. The data clearly reflects that, as a group, hedge funds are doing what they are designed to do – protecting capital in bear markets, while capturing some of the upside in bull markets. The year 2008 is a convincing argument for including such alternative strategies in broader investor portfolios, while 2009 shows that hedge

In turn, managers have improved transparency, beefed up operationally, responded to investor concerns on fees and added to their investment teams to meet the stringent due diligence requirements of big investors. The result is a stronger and more robust hedge fund industry that certainly deserves the attention of investors looking to build diversified portfolios that stand the test of time.

How you live tomorrow depends on how you invest today. Laurium Capital is an independent and owner managed boutique asset manager.

Kim Hubner, Marketing and Business Development of Laurium Capital

www.lauriumcapital.com

Laurium Capital (Pty) Limited is an authorised financial services provider. (FSB License no. 34142)

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Asset management

The case for

platinum investing

The platinum industry is completely out of favour both locally and globally, with investors shying away from allocating capital to even the largest platinum producers due to the risk of near-term price weakness and share price volatility.

n addition to this, the trend globally, fuelled by a quest for higher yielding assets, has been to invest in ‘quality’ businesses paying dividends – and platinum producers do not currently fit this label. The platinum sector was already under significant stress before the labour issues surfaced as a result of being at a cyclical low, with the price of platinum dipping below the cost of extracting it from the ground, making it uneconomical to mine the metal. The tragic Marikana incident in 2012, which garnered much negative international attention, further exacerbated the unpopularity of the sector. Ongoing labour disputes ever since have further fuelled this negative sentiment.

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In terms of strike consequences on the platinum companies themselves, this is more about the health of their balance sheets and whether they will need to raise more capital at some stage. Companies like Amplats have cut costs dramatically by redirecting resources to mines like Mogalakwena, which has far lower costs than their other mines. Lonmin had a rights issue at the end of 2012, which has put them in a far healthier position from a capital perspective, and Implats we believe is also adequately capitalised. Ultimately it is up to the companies to rightsize their businesses and spend capital in a way that will provide returns for shareholders. Currently we are seeing that the decisions made by management teams in the industry are sensible. In the short term, the strikes will hurt profits but our assessment is that in the medium to long term, it is likely to increase the value of the businesses, as it focuses management on running the business for shareholders by focusing on costs and capital allocation. We certainly make a distinction between the gold mining versus platinum mining industries in terms of quality. We currently have approximately 20 per cent of equity invested directly in the platinum producers, with our focus being on the top three platinum producers: Amplats, Implats and Lonmin. They are differentiated from the rest of the producers in terms of quality since they have a permanent barrier to entry by

virtue of supplying the majority of the world’s platinum, as well as sitting on 90 per cent of the world’s known platinum reserves. Thus, any cost pressures they face should ultimately feed through to platinum price globally as the platinum cycle normalises. This is very different to the gold sector, where South African producers are only the fifth biggest producers globally and are, for the most part, high cost producers, which puts them in a weak competitive position to other gold producers. We also regard the ability to demonstrate being able to generate returns over the cost of capital as being an important quality criteria. South African gold producers have not been able to demonstrate this historically, whereas platinum producers such as Anglo American Platinum have evidenced very good excess returns on capital in the past. At this point in the platinum cycle, strikes aside, you would expect to see flat production volumes as part of the normal capital cycle adjustment. However, the strikes have caused an acceleration of these production declines. The Johnson Matthey Platinum Review officially reported that the industry has been in deficit for the past two years – which means the global demand for platinum is exceeding total supply. As abovethe-ground inventory is depleted, the price of platinum should increase to the marginal cost of production, which is considerably higher than the current price. In summary, despite the existing uncertainty in the platinum industry in South Africa, the metal is currently offering value while platinum producers are offering even more value. Although at the current price an investment in the metal is warranted on a stand-alone basis and we have invested in the metal (via platinum ETF), we expect to earn a higher return from owning the equity of producers. The current negative sentiment attached to the local platinum mining sector still provides local investors with a spectacular opportunity to invest in high quality platinum producers at cheap prices despite the recent uptick.

Linda Eedes, Senior Analyst, RECM

Balanced funds

Asset allocation

Top-down, or bottom-up? Mahesh Cooper, Head of Institutional Client Services, Allan Gray

Within a multi-asset class balanced portfolio, there are different ways to manage the asset allocation. Some managers prefer to follow a ‘top-down’ strategy, others a ‘bottom-up’ approach. It is also possible for a manager to implement a combination of a ‘topdown’ and ‘bottom-up’ approach.

nvestors tend to be more familiar with a ‘top-down’ process. This process typically begins with an assessment of the overall economic (macro) environment. Variables such as inflation, interest rates and economic growth are forecast and then, based on this information, a decision is taken as to which asset classes to invest in, and in what proportions. As a result, one team (or individual) is responsible for the asset allocation and another team (or individual) for selecting securities within the asset class. The team selecting the securities can only do so to the extent of their allocation, as determined by the asset allocation team. As a result,

there may be dissociation between stock selection and asset allocation. A bottom-up asset allocation process, on the other hand, focuses on building a portfolio of assets based on the attractiveness of those assets. The asset allocation is the result of the individual securities that the manager finds attractive from a bottom-up perspective. This process links the asset allocation process to the stock selection process and the portfolios have a higher weighting to those securities that the manager finds attractive and less to those they don’t. This is different to the ‘top-down’ approach where the asset allocation is determined by a ‘top-down’ view rather than a view of the attractiveness of the individual securities. It is important to note that because a ‘bottom-up’ process is driven by the attractiveness of individual securities, it is possible that there may be times when, for example, despite the stock market being expensive on the whole, a manager may still have a high weighting in equities if they can identify sufficient shares that are still cheap relative to the other securities. From an equity perspective, to the extent that the manager can find attractively priced equities relative to other securities, their portfolio will have a higher exposure to equities. When equities are expensive relative to other securities, the manager will ‘retreat’ to those securities that they believe are more attractive than equities. The

manager’s overall equity weighting would thus be the result of the number of shares that they find attractive in the market at a point in time rather than a macro view on equity markets. Bottom-up stock selection also influences the manager’s relative sector weightings. If the manager is able to find a number of attractively valued stocks in a particular sector, they will naturally have an overweight position in that sector. This won’t be a result of an active decision to have an overweight position relative to a particular benchmark; rather, it will be the result of the bottom-up stock selection process finding attractive investment opportunities in that sector relative to others. This bottom-up approach allows a manager the freedom to pay little attention to benchmarks and, starting from a clean sheet, to pursue investment opportunities in which they have the highest conviction. This process works well for multi-asset class portfolios, as the manager is able to invest in those individual securities that they believe are the most attractively priced. Where a manager is given a specialist mandate, their ability to select the most attractive assets across all asset classes is removed. In an equity-only mandate for instance, the manager is forced to hold the equities they find most attractive on a relative basis, even if they believe equities do not offer fundamental value or are expensive relative to other asset classes such as bonds or cash.

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Balanced funds

Comparing balanced and specialist funds Investors often question the merits of investing in balanced versus specialist funds. This is an evergreen debate because there is no definitive answer as it depends on the client’s preference, objectives and risk appetite.

• Investable – passively possible • Acceptable by manager as neutral position • Reflective of manager skill set • Constructed in a disciplined and objective manner • Specified in advance • Unambiguous – weights identifiable • Measurable – able to calculate frequently • Formulated from publicly available information • Consistent. Conversely, peer-related benchmarks don’t meet a number of these criteria. For instance, a peer-based benchmark is neither specified in advance nor representative of the asset class or mandate. The biggest difficulty for balanced funds is understanding what the neutral position is and how managers have added value. Each strategy has its own merits Which strategy is superior is debatable as each has its merits and may have the same ultimate real-return target. Both can and do work, although the route taken in achieving the target is different.

Who would find a balanced fund appropriate? Balanced funds are typically managed holistically against a long-term real-return target whereby the asset manager has full flexibility around the asset-allocation decisions, strategy selection and stock selection; all of which are informed by their market view. These funds are typically peer aware and if your objective is performance relative to a peer group, this strategy might suit you. Effect on risk The freedom to allocate assets across different asset classes can sometimes lead to drastically altered exposure. The average equity allocation for a balanced mandate in South Africa, based on the Alexander Forbes Large Manager Watch, is currently 59 per cent. However, in the last 10 years, this has been as high as 77 per cent. This means the capital risk profile of the fund alters as the asset allocation does. Effect on performance measurement The performance of balanced funds is expected to be more variable, relative to a targeted outcome, than that of specialist funds. This is because the balanced manager has no sight of the targeted outcome, so 18

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doesn’t manage against it. It is difficult to know beforehand the underlying asset allocation in balanced funds, making benchmarking against a static allocation to market indices more tricky. Who would find a specialist fund appropriate? Clients with a clearly defined target and who would prefer a higher probability of achieving the outcome would benefit from a specialist approach. In a scenario where you are targeting, say, a net replacement ratio (NRR), a specialist fund might be better suited. This is because the asset allocation of the specialist fund is modelled directly against the NRR and will therefore have a higher probability of achieving the desired outcome. Specialist funds allow for diversification at asset-class and strategy level while still being exposed to managers with different investment styles.

Investors must assess their preference upfront, choosing either a balanced or specialist approach. This is important as it frames what to focus on from a risk/return perspective and what to expect from your asset manager. Having said that, once clients choose a particular strategy, it is vital that they measure performance relative to their objectives, have appropriate short-term benchmark measures, and are not distracted by what is going on in other strategies. Most importantly, they need to stay invested. The biggest value distraction occurs when clients chop and change strategies. Choose one and stick to it. If well constructed, both balanced and specialist funds have a high probability of achieving investors’ longterm real-return objectives. Which one will perform better can be known only after the fact. So choose one, monitor appropriately and stay invested.

Performance measurement Benchmark selection and short-term performance evaluation is somewhat simpler than in a balanced fund. This is because the portfolio can be measured against a relevant market index composite that meets the criteria of a good benchmark. The criteria are: • Representative of asset class/mandate

Nina Saad, Head of Portfolio Management Solutions, Investment Solutions

Barometer

HOT

NOT

Manufacturing sector activity rises The seasonally adjusted Kagiso purchasing managers index (PMI) increased by 1.8 points to 51.7 in February, from 49.9 in January. An index level below 50 suggests a contraction in activity while one above 50 indicates expansion. This pick-up in February is attributed to an improvement in the new sales order index.

SA mining investment attractiveness improves The latest 2013/14 Survey of Mining Companies by Fraser Institute, which ranks the world’s most attractive regions for mining investment, ranked South Africa 53rd out of 112 jurisdictions and placed the country at seventh-best for mining investment attractiveness in Africa. The country was ranked 67th out of 79 jurisdictions in the previous survey. This rise in ranking is attributed to investor perceptions of current regulations and the country’s legal system, tax and infrastructure.

Finance Minister promotes increased investment in SA Finance Minister Pravin Gordhan’s 2014 Budget Speech states that the South African Government is making a concerted effort to cut more red tape and provide policy certainty, both to enable businesses to increase their competitiveness and to promote increased local and foreign investment.

House price accelerates The average house prices for February increased eight per cent year on year. This is according to the FNB House Price Index which indicated that the average house price transaction was R935 332, up from January’s R924 26

World debt soars The amount of worldwide debt has soared more than 40 per cent to $100 trillion (R1.07 quadrillion) since the first signs of the financial crisis. According to the Bank for International Settlements, this is as a result of governments borrowing to pull their respective economies out of recession and companies taking advantage of low interest rates.

Chinese inflation declines China’s inflation rate fell two per cent year on year in February 2014, down from 2.5 per cent in January 2014. The consumer price index figure announced by the National Bureau of Statistics matched the average forecast of 13 economists surveyed by Dow Jones Newswires.

Factors affecting business growth and stability Providing insight into the views of businesses, the latest Grant Thornton International Business Report (IBR) tracker survey for the fourth quarter of 2013 revealed that business executives listed crime, a shortage of skilled workers, political instability and poor provision of services by the government as factors hampering growth and stability.

s y a w Side

Sub-Saharan Africa catches attention of private equity investors A survey by the Emerging Markets Private Equity Association revealed that sub-Saharan Africa attracted $1.6 billion of private equity investment in 2013, the most in five years. Private equity investors have been encouraged by increasing consumer spending and natural resource discoveries in the East Africa region in countries such as Kenya and Uganda. However, private equity funds focused on sub-Saharan Africa raised less money year on year, with 11 funds taking in $922 million, down 46 per cent from 2012.

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Cautiously optimistic for 2014 but risks remain

Recent economic data in developed markets has, in general, been consistent with some pick-up in global economic activity during 2014, led by the United States.

onetary policy remains highly stimulatory in most parts of the world, including the US, Euro-area, UK and Japan. The European Central Bank (ECB) cut its policy rate to an all-time low of 0.25 per cent in 2013, and remains dovish given the downside risks to inflation and growth. Economic developments in the US over the past few months are consistent with the Federal Reserve deciding in December 2013 to adopt a cautious and gradual exit from quantitative easing. While data on economic activity has generally been a little mixed, continued low inflation provides room for the Federal Reserve to remain cautious on how quickly it scales back QE. For 2013 as a whole, the US economy grew by 1.9 per cent, and is now forecast to grow by around 2.7 per cent in 2014. In particular, the economy has created a little over 8.0 million

jobs since the recession ended in 2009, and there is a good chance employment will surpass the previous peak before the end of 2014. Fiscal and monetary policy uncertainty remains a risk for 2014. There is a substantial divergence in economic performance among emerging markets as some countries, such as India, Indonesia, Turkey and Brazil have chosen to tighten macroeconomic policy resulting in slower growth, while others such as Mexico, Thailand and Hungary have cut interest rates, hoping to stimulate an improvement in activity. Chinaâ&#x20AC;&#x2122;s economy grew by 7.7 per cent in 2013, slightly down from growth of 7.8 per cent in 2012, and is forecast to grow by 7.5 per cent in 2014. Importantly, the policy decisions formulated at the third plenum of the 18th Chinese Communist Party Central Committee sets out an impressively broad roadmap for reform in China over the next five to 10 years. These include the promotion of a market-based allocation of resources, including land. State-owned enterprises are to retain a core role in the economy, but will be required to be more efficient and market oriented. The plan also stresses the need to open up the economy to private activity and reduce regulatory impediments. The high and rising level of local government debt in China, including the use of special

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Economic commentary purpose vehicles, has raised concerns about local government’s capacity to service their debt. If left uncontrolled, this could be a source of significant instability in the Chinese economy and, by implication, the world economy. However, as long as the authorities are able to implement significant reforms, the situation should remain manageable. Ultimately, the central government has the fiscal space and managerial capacity to step in to maintain market stability and mitigate risks in the short term. Against this backdrop, it would appear that the central government is trying to find a compromise between addressing the past credit excesses and averting local government debt defaults and market volatility. Although many of these proposals require much more work to implement, the Chinese Government’s plan provides the basis for the country to make the transition to a more market-oriented economy, which is needed for the economy to achieve a balanced and more sustainable growth path. Sub-Saharan Africa continued to deliver an impressive performance, achieving GDP growth of over five per cent in 2013, with a forecast of six per cent in 2014, and an average growth rate of 5.6 per cent over the past 10 years. The sustained high growth has been led by Nigeria with growth of over six per cent in 2013 and an average growth rate of seven per cent since 2004. More broadly, sub-Saharan Africa’s economic performance has been supported by improved fixed investment activity in a number of countries, relatively prudent macroeconomic policy and resilient commodity prices. South Africa’s economic growth rate slowed to a disappointing 1.9 per cent in 2013, after expanding by 2.5 per cent in 2012. This was largely due to significant labour market

disruptions in the mining and manufacturing sectors. At the same time, the trade account recorded a record deficit in 2013, which became increasingly difficult to finance once the US announced the start of QE tapering. Consequently, the Rand weakened sharply and is now substantially under-valued.

policy leaders need to find a way to encourage business investment. Realistically, this is most likely to be achieved only through targeted infrastructure development as well as policy certainty that encourages South Africa’s corporate sector to become more expansionary.

Overall, South Africa has experienced 18 consecutive quarters of positive growth, following the recession in 2009. The growth rate since 2009 has actually been reasonable, averaging 2.7 per cent, with South Africa’s GDP easily surpassing the previous peak, in real terms. However, it is concerning that on a trend basis, there is a clear loss of momentum in the rate of improvement, especially consumer activity. It is also concerning that the recovery has not been robust enough to lead to widespread job creation in the formal sector, despite the government’s counter-cyclical fiscal policy.

Consumer inflation averaged a fairly respectable 5.8 per cent in 2013, up slightly from 5.7 per cent in 2012. This is despite the fact that the Rand has weakened by more than 40 per cent against the major global currencies since the beginning of 2011. The Rand weakness largely reflects South Africa’s significant and sustained current account deficit, which has become increasingly difficult to finance.

Looking ahead to 2014, South Africa’s economic growth rate is forecast to improve to 2.5 per cent. This is largely premised on the expectation that South Africa will experience an improvement in export performance, helped by a general pick up in world growth, including within Europe. South Africa’s exports to the rest of Africa have also become very significant, representing almost 30 per cent of total exports, and are expected to reach another record high in 2014. It is critical that there is less labour market unrest in 2014, especially in the mining and manufacturing sectors, and that further progress is made in implementing South Africa’s much-needed infrastructural development programme. This includes the partial commissioning of the Medupi power station. Ultimately, South Africa’s economic

Despite the relatively muted pass-through from currency weakness to consumer inflation, the sustained depreciation of the Rand has led to increased concerns that inflation could, ultimately, move sustainably above the three to six per cent inflation target. This prompted the South African Reserve Bank to increase interest rates in early 2014, and a further increase in rates is expected later this year.

Kevin Lings, Chief Economist of STANLIB

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Emerging markets

Donâ&#x20AC;&#x2122;t overlook the opportunities in emerging markets

There are huge differences between countries in the emerging market grouping. At a macroeconomic level, for example, there are the big commodity producers (Brazil, South Africa) and those countries that are very reliant on imported commodities (China and Turkey). Income levels are also vastly divergent: from $3 800 per capita at purchasing power parity (PPP) in India, to $17 000 in oil-rich Russia. More importantly, however, is the level of development of other emerging markets relative to South Africa. To some extent, South Africa is a mature emerging market, with most major industries having developed to their current state over the last century of industrialisation. Sectors are fully penetrated and growing slowly, with a few major players dominating the formal market. Furthermore, national players experience very little variation in regional market strength. For the most part, emerging markets are much further behind than South Africa in the development curve. Their major industries such as food production, grocery retail, clothing retail and banking are still fragmented. Informal operators are a significant presence and there are strong differences in regional market share. This represents a great opportunity, as the combination of rising incomes (as countries become wealthier) and the gradual consolidation of industries (at the expense of the informal sector) has the potential to provide significant earnings growth momentum over the medium to long term.

ncreased market volatility triggered a heavy sell-off in both emerging equity markets and their currencies in January of this year. However, unlike momentum-based funds (which frequently buy shares that are rising and sell shares that are falling, with a disastrous impact on returns for their investors), we saw this as an buying opportunity. At Coronation, our investment philosophy is focused on the long term. We research companies exhaustively to understand the long-run earnings prospects of a business. We then value this earnings stream and compare our assessment of fair value to the current share price. If the share price is trading at a significant discount to what we believe the business is worth, we would typically want to own the company in question. The long run fair value of a business does not change significantly in a short space of time due to external factors that have little to do with company fundamentals, yet share prices often plummet due to market contagion, with no apparent change in underlying earnings prospects. If a company was cheap to begin with and subsequently falls 10 per cent due to declining markets, in our view, it is even cheaper and

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we should be adding to our shareholding. The recent decline in emerging markets (ostensibly due to US Federal Reserve tapering that has led to record outflows of capital from emerging markets) has created what we believe to be a buying opportunity. Many of the businesses in our emerging market funds today offer a compelling (50 per cent or more) upside to what we estimate they are worth, and we are confident that investors who take a long-term view will benefit from this. South African investors in particular should not overlook the investment opportunities in other emerging markets. Collectively, emerging markets represent about 20 per cent of the global investment market, of which South Africa constitutes just two per cent. Thus, in avoiding these markets, investors are effectively ignoring 18 per cent of the potential investment universe. Typically, this is driven by the mistaken belief that their existing domestic exposure is somewhat equivalent to a typical investment in emerging countries.

For this reason, Coronationâ&#x20AC;&#x2122;s philosophy of investing over the long term is particularly useful in emerging markets. Many businesses in these markets will benefit from strong earnings growth for many years to come, as well as from rising share prices. Our focus is to identify and value these investment opportunities. In the six years that we have offered emerging market funds, we have outperformed our benchmarks by a considerable margin, largely by ignoring shortterm noise and concentrating on the long-term earnings prospects offered by companies. The recent market panic presented, in our view, yet another rewarding investment opportunity for our clients.

Suhail Suleman, Analyst and Portfolio Manager in Coronationâ&#x20AC;&#x2122;s emerging markets investment team

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TRUST IS EARNED. For two decades we have worked hard to earn our clientsâ&#x20AC;&#x2122; trust, making investment decisions that provide for their future. To find out more, speak to your financial advisor or visit coronation.com

Coronation Asset Management (Pty) Ltd is an authorised ďŹ nancial services provider. Coronation is a full member of the Association for Savings & Investment SA. Trust is EarnedTM. investsa 00

South Africaâ&#x20AC;&#x2122;s

first Business Debt Index The launch of South Africaâ&#x20AC;&#x2122;s first Experian Business Debt Index in mid-February 2014 has shown some surprising results.

he benchmark, launched by Experian SA and Econometrix, was presented as being an indicator of the overall health of businesses, as well as the South African economy. The benchmark indicates that South African businesses are doing better than expected, according to Dr Azar Jammine, director and chief economist at Econometrix. The index has been presented as a vital benchmark for the interpretation of the

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state of South African businessâ&#x20AC;&#x2122;s debtpaying abilities and will be published on a quarterly basis. It measures the relative ability for businesses to pay outstanding creditors on time and tracks macro-economic indicators that can impact on the ability of companies to pay their creditors. A number of debtors and macroeconomic variables are combined into a single indicator of business debt stress.

Experian launch

business debt is looking relatively favourable due to a number of factors.” “Because businesses have been trying to survive rather than embark on major new ventures, they have been ensuring that their financial positions are more sound,” he adds.

The Q4 2013 Experian BDI shows that the debt stress among businesses continued to fall in the final quarter of last year, but did not do so at an extraordinarily rapid pace. The rate of improvement in business stress remained more or less constant compared with Q3 2013. Dr Jammine comments, “When I first looked at the findings of the index, by way of being an analyst rather than a composer, I was initially surprised based on headline news reports about the current state of the over-stressed consumer. However, closer inspection shows that

Michelle Beetar, managing director at Experian SA, adds: “The financial health of businesses seems to be much more stable. This is reflected in the continuing decline in the average number of debtors’ days. The debt age ratio has also been declining significantly.” Although average debtors’ days for businesses in South Africa increased slightly from 45.7 days in Q3 2013 to 46 days in Q4 2013, the yearon-year growth fell sharply to -2.8 per cent in Q4 from another steep contraction of -2.0 per cent experienced in Q3 2013. “This is a distinct indicator of the sharp fall in credit risk premiums that should be attached to the domestic business sector,” says Beetar. Consistent with the fall in average debtors’ days’ growth was the relatively sharp decline in the debt age ratio in Q4 2013. After falling from 10.8 to 9.5 between Q1 and Q2 2013, the debt age ratio declined further to a reading of 6.9 in Q3 and 6.2 in Q4 2013. This represented a steep -27.0 per cent decline on a year-on-year basis. “The declining trend in the debt age

ratio is an indicator that total debt owed in the greater than 90 days’ age spectrum is falling faster than that in the less than 60 days’ debt age categories. This is consistent with a decline in systemic credit default risk for businesses in the fourth quarter of the year,” says Dr Jammine. He adds, “Ironically, it is also a function of the relative lack of business confidence in the long-term future of the South African economy. This has resulted in businesses refraining from undertaking substantial capital investment. There are growing signs that the global economy is picking up some momentum. Given the high correlation between the growth of South Africa's economy and the world economy, the improved growth of the latter augurs well for some amelioration in the domestic economy and local business conditions more generally.” However, he noted that, linked to the increase in inflationary pressures emanating from the fall in the Rand, interest rates have begun to rise for the first time in almost six years. “With further such increases in store, unless there is an unexpected and sharp improvement in the Rand, we may start seeing the relatively light business stress of 2013 increasing over the course of 2014, causing the Experian BDI to decline as the year progresses.”

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Financial markets

Two decades of financial markets’ success in South Africa

South Africa accounts for just under one-fifth of Africa’s GDP, 0.7 per cent of world GDP and less than two per cent of global assets under management.

et despite its modest global standing, the country has a highly developed financial services industry when benchmarked globally.

Significant financial sector reforms, which began after the first democratic elections in 1994, have completely transformed local financial markets. The 1990s were marked by the deregulation of investment markets, significant corporate governance reforms and the gradual relaxation of foreign exchange controls and the return of foreign investors. This resulted in investors having to adjust to dynamic capital markets as a new South Africa reintegrated and began to compete fully on the global stage. In 1995, the Johannesburg Stock Exchange (JSE) started a series of changes that modernised South African investment markets. The stockbroking industry transformed beyond recognition as foreign bank entrants acquired local firms, variable commissions replaced fixed commissions, stockbrokers were allowed to trade stocks and bonds as principals, and electronic screen trading and settlement replaced the trading floor and ‘open outcry’ system. Corporate governance reforms to promote transparency and new legislation have had

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a profound effect on the market, including broadening institutional ownership, eliminating dual classes of shares, and pyramid group company structures. The first version of the King Code on corporate governance, released in 1994, was a real innovation for an emerging-market economy at the time. Today, it is a listing requirement and, since March 2010, all companies listed on the JSE are required to produce environmental, social and governance (ESG) reporting.

inflation-linked bonds, the rise of corporate bond issuance, and the development of securitisation and derivatives and over-thecounter products. In the past two decades, BESA has become one of the most liquid and efficient emerging bond markets in the world.

Another significant change in markets in the late 1990s was the migration of local firms listed on the JSE, such as Anglo American, SAB, Didata and Investec, to offshore financial centres. Today, 14 of the top 40 and six of the top 10 largest capitalisations listed on the JSE are also listed in London or New York or in both London and New York.

At the end of 2012, South Africa was ranked the 10th largest pension market in the world by the Towers Watson Global Pensions Asset Survey, with total assets of US$252 billion.

These changes saw trading volumes skyrocket and market liquidity soar. The structural reforms, the re-integration of South Africa into global financial markets and the opening up to foreign investors led to the inclusion of the country in the MSCI Emerging Market Index in early 1995. As volumes improved, foreign ownership of the JSE increased from an estimated nine per cent in 1996 to 47 per cent in 2014, according to Bank of America Merrill Lynch. Indeed, according to the World Federation of Exchanges, at the end of 2012, the JSE Securities Exchange was the 19th largest stock exchange with a total market capitalisation of nearly US$1 trillion, as well as the most liquid emerging market. In 1996, the Bond Exchange of South Africa (BESA) was granted an exchange licence. Structural improvements since then have seen the development of the yield curve, the rise of a vibrant secondary bond market, the creation of bond indices, the introduction of

The progressive development of the local capital markets has led to the creation of a well-developed financial sector with a sizeable pension fund, unit trust and asset management industry.

The past 20 years have seen prolific development and innovation in local markets that have put SA firmly in the top five emerging markets and made it a notable world player. Looking to the future, a lot is at stake if South Africa is to uphold its premier league status. Economic growth, retirement reform, expansion into other markets by local firms to eke out growth, as well as keeping abreast of market developments, will be key to continued success.

Muitheri Wahome, Investment Solutions, Head Technical Solutions

Global economic commentary

Pullbacks

now and higher market at year end? Despite the early wobbles during January 2014, global equity markets had largely recovered, but then all lost ground by the end of February. We continue to believe that the year will end with the market higher, but that the possibility of another pullback in the near term is growing.

Europe’s growth has improved but more needs to be done, although there are some hopeful signs. Likewise, China appears to be making progress towards reform and could outperform other emerging markets in the near term. Japan, however, continues to send mixed messages, combining tax hikes with sluggish monetary action. We continue to believe that the year will end up a positive one for equities, but the possibility of a correction in the near term can’t be ruled out. We don’t believe rate hikes are in the cards for this year. The Federal Open Market Committee (FOMC) remains concerned about the long-term unemployed, as well as the low labour participation rate, while inflation remains below its target, allowing it the flexibility to hold rates lower for longer. Finally, in testimony before Congress, Fed Chairwoman Janet Yellen sounded a decidedly dovish tone. Turning to the international picture, we believe the Eurozone’s economic growth

Japan’s economy could likely see-saw near term, with a sales tax hike in April likely to pull forward demand into the March quarter, then subsequently drop. Looking past this volatility, there are questions about the rise in inflation that the Bank of Japan (BoJ) is targeting and whether it will break the deflationary cycle or simply reduce consumers’ purchasing power. Despite Prime Minister Abe’s call to boost wages, they aren’t keeping up with inflation. In the meantime, until the BoJ increases the size of its asset purchase programme, the Yen, and therefore Japanese stocks, could be range-bound. Investors are uncertain about the trend for economic growth in China. Pessimism towards Chinese stocks reigns, with mutual funds experiencing outflows in 30 of the last 38 months. Meanwhile, we believe reforms to China’s economy could result in higher quality and more sustainable growth in the future. As investors gain confidence about the reforms as the year progresses, the valuation discounts for Chinese stocks could decrease. We believe Chinese stocks could outperform the emerging market (EM) universe.

S economic data continues to be skewed by the severe winter weather and equity investors seem willing to ignore weak data for January/February. The Federal Reserve also remains in that camp as it continues to reduce asset purchases (tapering), while discussing how to better communicate its monetary policy intentions.

balance sheet continues to contract, which is an effective tightening of monetary policy. The complex picture for inflation resulted in the ECB postponing action at the February meeting, but there are also complexities in terms of options for the ECB. Despite the risks and the potential for volatility, we remain positive on European stocks, due to the prospects for economic and profit margin improvement.

will continue to recover in 2014, as leading economic indicators, PMIs and confidence continue to improve. Unlike 2013, the Eurozone could add to global growth rather than subtract from it. Unfortunately, the Eurozone’s recovery is not yet self-sustaining. Lingering after-effects of the recession are evident, with lending still contracting, and prices of goods and services moderating to levels that have brought about concerns of deflation, or a broad-based decline in prices. The drop in prices in countries such as Greece is a natural outcome of their internal devaluation, where economic adjustment is accomplished through a drop in prices within the country, rather than by a weaker currency. However, subdued prices have extended to stronger countries, with German wages less inflation falling in 2013, French core inflation increasing at a very modest 0.1 per cent in January, and Eurozone wholesale prices falling by 0.8 per cent in December. Pressure is increasing for the European Central Bank (ECB) to act, given that its

US stocks have bounced and we think the market’s still attractive and in the midst of a secular bull market. But there are likely to be bumps along the way; notably given that this is a mid-term election year – these are known for first-half pullbacks. A diversified portfolio is important and both European and Chinese stocks appear to have upside, while Japan continues to frustrate with a two-steps forward, two-steps back sort of approach. And a final reminder not to replace fixed income assets with equities in search of higher income without recognising the risk profile of a portfolio has changed.

Anthony Ginsberg Director, GinsGlobal Index Funds

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Head To Head in Offshore investing

Portfolio Manager and Investment Strategist, Citadel Wealth Management

Maarten Ackerman

Where do you see the Rand going this year – by mid-year and by year-end? Over the past year the South African currency has experienced many headwinds. Many of these came from local issues like the deteriorating local economic landscape, negative sentiment related to labour strikes and high unemployment coupled with an unsustainable large current account deficit. The international landscape also affected the Rand. Most emerging market currencies came under severe pressure as the US Federal Reserve (the Fed) started with its tapering programme. Given the significant depreciation of the Rand over the past few months, we could argue that most of these headwinds have now been priced in. Currently, underlying fundamentals (such as the current account deficit, interest and inflation differentials, commodity prices and global economic activity) suggest that the currency should trade at around R10.50 over the medium term. The Rand, however, remains vulnerable to deteriorating risk appetites for emerging markets. It is difficult to see the currency appreciating significantly given the uncomfortable current account deficit, so most fundamentals suggest that the currency is likely to trade in a range of R10.00 – R11.00 over the course of 2014. What impact does the Rand’s decline have on the desirability of offshore investments? At Citadel, we believe that the Rand should not stand in the way of making a great offshore investment. If we can buy a better

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quality offshore asset at a bigger discount relative to a local alternative, the level of the Rand shouldn’t be the decisive factor. You can actively manage currency risk after you invest by applying a currency overlay. For example, after a significant depreciation of the Rand, you may hedge the currency exposure (locking in the current level of the Rand) to protect the portfolio against a significant currency appreciation. The hedged portion will dynamically change as the valuation of the Rand changes. In other words, as the currency depreciates, the more the hedge portion will increase, locking in more of the currency gains. Actively managing the currency overlay gives investors the benefit of offshore investing without worrying about the currency impact. Which offshore asset class do you see as being the most attractive during 2014? We believe that because there is a broadbased improvement in global growth, company profits are well positioned to increase further. Yet, most markets are still trading at historically low priceearnings ratios. Given current valuations, our fundamental asset class analysis strongly suggests that equities are likely to be the best-performing asset class over the next year. Emerging market equities have underperformed their developed market peers over the past year so we see better potential growth for emerging markets in future. Within the emerging market space,

South African equities appear overvalued and some sectors are rather expensive. Do you agree with the restrictions of Regulation 28 of the Pension Funds Act with regard to offshore investing for retirement funds? While we understand the reasons behind this regulation, we believe that fewer constraints will eventually result in more optimal investment solutions. While we ensure that we are compliant with Regulation 28, within this constraint, we still offer optimal solutions to our clients. What offshore limits could be appropriate for a fairly aggressive individual investor under the current Rand parameters? Global equities are currently our preferred asset class. With local valuations also stretched, we suggest that aggressive investors without any constraints invest the majority of their wealth abroad (more than 60 per cent offshore). Furthermore, given the current level of the Rand, we suggest hedging a significant portion of the currency exposure on the offshore investments.

Most emerging market currencies came under severe pressure as the US Federal Reserve (the Fed) started with its tapering programme.

Portfolio Manager, Foord Asset Management

W illiam F raser

Where do you see the Rand going this year – by mid-year and by year-end? Calling the Rand is an almost impossible task, particularly over shorter time periods. I wouldn’t expect a sharp turnaround over the short term, as long as sentiment towards emerging markets remains negative, and outflows of South African assets continue. However, using long-term valuations versus trading partners, the currency does appear less overvalued than before, and has the potential to appreciate. Unfortunately, factors such as inflation and interest differentials – often used to calculate relative attractiveness of currencies – are only small components in defining value in currencies. South Africa has significantly faster unit labour cost growth than most of our trading partners, which necessitates some currency depreciation over the long term, over and above what a purchase power parity calculation may infer. What impact does the Rand’s decline have on the desirability of offshore investments? Offshore investments, in absolute terms, continue to offer value. The translation of earnings into Rand is a small component of the overall decision to either include or exclude international assets (but does play a bigger part when valuations are at extreme levels). It is important to look at the benefits international assets bring to the overall portfolio structure. The earnings and return streams of

international assets are often uncorrelated to domestic assets returns, and lend stability to the overall portfolio. Which offshore asset class do you see as being the most attractive during 2014? Global equities are best placed to deliver on the long-term return objectives of investors. On a forward-looking basis, the price to earnings multiples of international developed market indices compare favourably to those of the FTSE JSE. And while the South African economy is entering a period of faster inflation, developed economies, in particular the Eurozone, are worried about very low levels of inflation. For this reason, offshore cash remains a poor destination for cash, given a low probability of increases in short rates in the near future. The risk of capital losses in long duration interest rate assets in offshore markets remains high, in a world where economic activity is increasing and liquidity conditions are less supportive than in the past. Do you agree with the restrictions of Regulation 28 of the Pension Funds Act with regard to offshore investing for retirement funds? Portfolios unfettered by asset class restrictions have a far greater probability to achieve an investor’s investment objective. The spreading requirements of Regulation 28 forces investors into asset classes with limited potential, if any, to achieve returns in line with or above the objectives of a

particular portfolio. However, cognisance must be taken of the return requirements of investors; in particular, the factors that affect the purchasing power of members in retirement funds. For this reason, a portfolio structure fully invested in offshore assets is inappropriate despite the potential to achieve higher returns from offshore markets. In an import intensive economy like South Africa, a higher level of offshore assets in retirement fund portfolios can be easily justifiable. What offshore limits could be appropriate for a fairly aggressive individual investor under the current Rand parameters? The Foord Flexible Fund of Funds, free from the restriction placed on retirement funds by Regulation 28 and an investment objective of achieving returns in excess of domestic inflation + 5 per cent, currently invests 60 per cent of the fund’s assets abroad, with the remaining 40 per cent in domestic assets.

South Africa has significantly faster unit labour cost growth than most of our trading partners, which necessitates some currency depreciation over the long term, over and above what a purchase power parity calculation may infer. investsa

Industry associations

Global best practice keeping a close watch on international intermediary trends

The Financial Intermediaries Association of Southern Africa (FIA) recently took part in the World Federation of Insurance Intermediaries (WFII) 15th World Council and Executive CSE Committee meetings in Sydney, Australia, from 15 to 17 March 2014.

ustus van Pletzen, CEO of the FIA, and Seamus Casserly, past president and director of the FIA and the current chairman of the WFII, represented the Africa Regional Structure at this important global event. The FIA was one of the founding members that launched the WFII in January 1999. Today the WFII represents over 400 000 insurance intermediaries from more than 100 national associations and more than 80 countries. “The purpose of the WFII is to detect international trends in intermediary-related issues as well as to give policy direction to its members on current and future issues on the international agenda,” says Casserly.

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The principles and positions of the WFII are defined each year at the organisation’s World Council and Executive CSE Committee meetings. These principles then serve as guidelines for intermediary associations around the world.

US-introduced Foreign Account Tax Compliance Act (FATCA). The event was also an opportunity to further discuss remuneration structures in the life risk and investment space as well as the global trend towards comprehensive financial consumer protections.

As an advocacy group representing the interests of global insurance intermediaries, the WFII is invited to provide input to the powerful International Association of Insurance Supervisors (IAIS) which represents more than 170 insurance supervisors and is instrumental in debating and steering global insurance regulation. The event affords country representative bodies such as the FIA with an opportunity to interact with and lobby global insurance regulators.

“A number of European countries have already adopted a no-commission approach with respect to intermediation in the life risk and investment disciplines,” says Casserly. “Stakeholders in the South African financial services industry are still formulating policy in this regard.”

“The WFII is a useful additional channel through which the FIA can engage with our own market regulators,” says Casserly. “Jonathan Dixon, deputy executive officer of insurance at the Financial Services Board, along with other FSB staff, is active in a number of the IAIS committees that are responsible for setting the rules that global insurance regulators abide by.” Part of the WFII’s role is to steer the ongoing liberalisation of insurance intermediary markets globally, to the ultimate benefit of consumers. It does so by focusing on the IAIS Core Insurance Principles, in particular those that lay down market conduct rules for intermediaries. South Africa is on track with its consumer protection responsibilities through the phased introduction of the FSB’s Treating Customers Fairly (TCF) regime and various other proconsumer legislations. “The FIA’s participation in WFII structures ensures that we are kept up to date on the open exchange of information and the frank assessment of issues that are potential future drivers of change in the industry,” adds Van Pletzen. “It is important for South African intermediaries to be represented on the global platform in order to anticipate regulatory interventions and to inform their ongoing discussions with local regulators.” Issues that featured on this year’s agenda included structural regulatory impediments to cross border insurance trade as well as the

The FSB is currently leading a comprehensive review of broker remuneration through its Retail Distribution Review (RDR) discussion paper. This review will redefine advice, intermediary services and product sales along with appropriate ways to remunerate financial intermediaries for each of these activities. “The experiences of other countries' markets have informed our position on the remuneration issue and we will not support regulatory reform just for the sake of it,” says Van Pletzen. “Intermediaries must be adequately remunerated for what they do, whether it is for advice-giving or related intermediary services. Without the involvement of an intermediary, no financial product will fulfil the purpose for which it is sold – so each sale must be accompanied by sound advice. Independent financial advice to consumers is a critical component for adequate consumer protection and we fully expect fair remuneration for advice and intermediary services as an outcome of the RDR process.”

Gareth Stokes, Communications Manager of the Financial Intermediaries Association of Southern Africa (FIA)

Investment strategy

Constantly aligning our

interests with those of our clients At Kruger International, we specialise in asset allocation when constructing portfolios for our clients to fulfil their unique financial needs. A thorough balance sheet and financial requirements analysis for every client enables us to determine the unique financial circumstances of each individual.

hen it comes to investing, the primary goal is to at least retain real purchasing power with your assets over time. The most widely used gauge of price increases in South Africa is the CPI index. Unfortunately, most households that we work with experience a much higher personal inflation rate than the quoted figure of around six per cent. In an article published by Beeld newspaper in August 2013, DebtBusters collected data to show that the annual food inflation for households who earn more than R20 000 per month was in the region of 18.8 per cent over a 12-month period. These figures emphasise the importance of having enough exposure in your portfolio to asset classes that offer high capital growth over time. Our investment decision-making starts off with the relative comparison of asset classes to one another as well as to their own historic yields. This leads us to the most attractive investment sectors at a particular time. Despite the short-term attractiveness that one asset class may offer over another, we have seen a very definitive and fairly consistent trend in the average annual asset class returns over time. Consider the asset class performance over the past 30 years in the graph. The table ranks average annual asset class returns over the past 30 years, with equities delivering an average of 17.9 per cent per annum, listed property 16 per cent per annum, bonds 13.9 per cent per annum, cash 12 per cent per annum, gold 11.5 per cent per annum, residential property (without the use of a bond) 9.5 per cent per annum, and lastly, CPI at 8.9 per cent per annum. The inclusion of equities and listed property in a portfolio is key to ensuring that investments can keep track with the annual increase in living costs over the long term, while the inclusion of cash and bonds ensures liquidity over the short and medium term, if desired. Over time, South Africa has migrated from being a net exporter to a net importer of foreign goods. A gradually depreciating Rand has helped to create a situation in which our country is an importer of inflation. Partially hedging your portfolio against Rand depreciation has

Asset Class Performance 30 Years to 31 December 2013

Nominal Return

Real Return

Standard Deviation

Equity (ALSI)

17.9%

8.3%

20.0%

Property (AJ255)

16.0%

6.5%

18.9%

Bonds (ALBI)

13.9%

4.6%

8.4%

Cash (STEFIND)

12.0%

2.9%

1.3%

Gold (ZAR) (GOLR)

11.5%

2.4%

18.6%

Residential Property (ASAHPI)

9.5%

0.6%

2.8%

CPI (ECPI)

8.9%

Source I-Net Bridge, Prudential Portfolio Managers

become an effective way to outperform rising prices. A sufficient exposure to foreign assets should either be acquired through direct foreign investment, when it can be afforded, or through indirect investment and asset swap funds. The Kruger Investment Committee is responsible for compiling and managing diversified portfolios to fulfil the unique short-, mediumand long-term needs of our clients. By adhering to strict processes, we ensure our investment decisions are sound and based on fundamental investment principles, while remaining strictly within the regulatory framework. Our hands-on process involves the quantitative screening of global markets and asset classes to identify developments, trends and opportunities in the investment universe. Our analysts consistently screen and compare available investment opportunities, both locally and on a global scale. By comparing and modelling our screened data, we are able to determine an optimal asset allocation and a balance between risk and return for our funds. Through our processes we identify an optimal combination of consistent top performing unit trust funds, on an after-cost basis, to construct our diversified Kruger portfolios with their different targets of CPI +3 per cent, CPI +5 per cent, CPI +7 per cent and global exposure.

When choosing an investment vehicle for our clients, we prefer to go the most direct route in order to maximise the cost-effectiveness over time. Where the size and structure of the portfolio allows, we choose to manage direct blue chip local and foreign equity portfolios for our clients. At Kruger International, we remain focused on growing and using our scale to consistently negotiate lower costs for our clients. We pride ourselves on being possibly the most costeffective wealth and fund manager in South Africa, and through our simple fee structure, ensure that our interests remain aligned with those of our clients.

Mia Kruger, CFA速, Director, Equity Analyst and Portfolio Manager, Kruger International Private Wealth Management, A Member of StoneHouse Capital

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Information and networking at

the fourth

Investment Forum

ach, Siobhan Left to right Carl Rautenb , all of Investec Simpson, Eudré Craven

Left to right Hami lton van Breda, Pru dential and Mario Schoeman, Foord Asset Mana gement

The fourth Investment Forum was once again held at Sun City on 11 and 12 March and was attended by nearly 700 delegates. Eleven asset management companies shared their wit and wisdom over the two-day event. They were Allan Gray, Coronation, Foord, Investec, Momentum, Prescient, Prudential, PSG, RECM, Sanlam Investment Management (SIM) and STANLIB. 32

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Bongani Mageba of STANLIB

ay one featured three main sections, all in the form of panel discussions. The opening theme in the morning was ‘Practices … well managed?’ Chaired by Rob Macdonald, chief operating officer of MitonOptimal South Africa, the diverse panel of successful financial advisers explored what the best run practices do differently and how they define their value proposition. The panellists were Tracey Devonport, Janet Hugo, Mark Jurgens, Joubert Strydom, Pieter Stead and Philip Knibbs. Among other issues, revenue models and portfolio constructions were compared. The theme of the second discussion was ‘Facing regulatory change’. The panel, chaired by

Investment forum

Left to right Delegate Thuthuka Ngobese asks a question of Kevin Lings, STANLIB Chief Economist

It was only fitting that INVESTSA was at the Investment Forum. After all, human beings have been communicating with each other since the dawn of time. Sumayya Davenhill of Prudential, one of the speakers, probably agrees that we have moved on somewhat from days of rock paintings. In the middle of the serious issues, Davenhill’s colleague and fellow speaker, Lindi Davies, showed her fun side by posing obligingly with this handsome sable antelope.

Lindi Davies of Prudential

Bongani Mageba of STANLIB was happy to go head to head against another of Sun City’s unique artworks. He commented that he had really enjoyed the conference and that it was great to network and benefit from the fruitful discussions. Hamilton van Breda of Prudential and Mario Schoeman of Foord were proud to be part of the 11 companies sponsoring the event. Van Breda says, “We’ve been a sponsor every year since the Investment Forum began four years ago and we think it is getting better and better. We are committed to delivering the quality that our delegates need and listening to them as they are the ones who are in touch with the investors.”

Sumayya Davenhill of Prudential

John Kinsley, MD of unit trusts at Prudential, included Richard Carter of Allan Gray, Pieter Koekemoer of Coronation, Sangeeth Sewnath of Investec, Rowan Burger of Momentum, Meyer Coetzee of Prescient and Thabo Dloti of STANLIB. Key issues included looking at how the proposed changes could affect product design and how these products are distributed by financial advisers, as well as what constitutes an appropriate remuneration structure within this environment.

presentations that would be of the most interest to them personally. These were:

Panellists here included Ian Liddle of Allan Gray, Neville Chester and Mark le Roux of Coronation, Dane Schrauwen of Foord, Clyde Rossouw and Rhynhardt Roodt of Investec, Liang Du and Jean-Pierre du Plessis of Prescient, David Knee and Chris Wood of Prudential, Chris Hamman of SIM, Conrad Wood of Momentum, Henk Viljoen of STANLIB and Piet Viljoen of RECM.

Allan Gray (Richard Carter): An in-depth look at the remarkable returns of the Orbis Global Equity Fund and how to navigate between the various offshore funds and currencies. Coronation (Pieter Koekemoer and Peter Kempen): An update on Coronation’s key views for 2014 and beyond. Investec (Clyde Rossouw): Expanding investors’ return horizons. Momentum (Andries Kotzee): A guide to making manager selection count. Prescient (Liang Du): Upside potential with downside protection – strategies for uncertain times. Prudential (Lindi Davies and Sumayya Davenhill): Independent or Restricted: does it really matter? PSG (Shaun le Roux): An in-depth look at the award-winning PSG Equity Fund and the reasons for its success. SATRIX (Helena Conradie): Opening your mind to the benefits of passive management. STANLIB (Kevin Lings): The progress that South Africa has made as a country in key economic areas – and where we have fallen down – and the potential impact of these changes on your clients’ investment strategies.

The second day featured a number of individually presented parallel presentations and delegates had to choose between the

There were great opportunities to benefit from what was shared, both in the sessions and during the breaks.

‘The battle of the funds’ was the third and longest session and took place after lunch. Chaired by Rory Maguire, director of manager research at Fundhouse, this discussion pitted top fund managers against each other in three separate sub-themes as they gave insight into their views on asset allocation, income generation and equity selection.

Schoeman adds, “The number of delegates attending this event certainly shows the need for a forum like this. This conference attracts quality delegates and in return they expect high quality feedback from the event.” Eudré Craven of Investec says, “Last year was the first time I attended the Investment Forum and I was pleased to be able to come again this year. I did think that it was better planned this year. It was more investment focused than last year, and gave the delegates more of what they actually wanted. It was great to have an opportunity to chat to some of the real experts in the industry and an opportunity to touch base with advisers who work in different parts of the country and compare; for example, how operational aspects might differ slightly between Johannesburg, Cape Town and Durban. All in all, it was definitely a worthwhile experience.”

Vivienne Fouche, Content Editor, InvestSA

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LISPs

LISPs need to provide

solutions, not products

successful Linked Investment Services Provider (LISP) will be one that differentiates its service and client relationships, and works closely with financial advisers to deliver an excellent service to clients. Only a select few LISPs will take major market share in the future, and these LISPs will offer investors and advisers financial solutions and the tools and applications to make the best financial decisions. Currently, LISPs in South Africa manage assets of R696 billion (according to June 2013 ASISA figures). The landscape for investors, advisers and LISPs has changed enormously over the last few years, and the next few years will see many more changes. In the new environment, advisers and investors will need an investment partner, a service provider that will offer them products, service and processes that make their lives easier, and allow for better and faster decisions. The LISP that offers these financial solutions will be the one that succeeds. Regulation is continuing to increase, and clients have become more demanding. Offering tools that assist the adviser The Portfolio Construction Tool is the most recent tool introduced by STANLIB Linked Investments. The tool allows a financial adviser to construct, analyse, monitor and review their client’s portfolio. Another addition is an income drawdown tool. With living annuities, it is critical to manage drawdowns to ensure that the annuity income lasts for life. With the STANLIB Linked Investments drawdown tool, advisers and retirees can see how long their income will last in different funds and at different drawdown levels.

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Advisers are facing the challenge of running a successful business, ensuring their clients meet their financial goals, and complying with required legislation, good business practice and new regulations that will continue to be implemented. This increase in regulation has made the process of finding investment solutions more rigorous. While this is certainly in the interests of both the client and the adviser, it has increased the complexity of the decisions on where and when to invest. It has also added to costs and increased the time taken to make financial decisions.

their business. Transparency will be key and the services offered by LISPs need to complement those of the adviser and ensure a better outcome for the client.

LISPs – Linked investment service providers A LISP is a company that enables investments in a wide range of collective investment schemes, such as unit trust funds, through one source.

While regulation offers investors more protection and a more sustainable financial services sector, it has dramatically changed the way investors, advisers and LISPs do business. As the landscape changes, LISPs need to offer advisers tools and products that make investing an ongoing success.

Effectively an investment administration and product packaging business, a LISP also offers access to traditional life insurance products such as endowments, retirement annuities, preservation funds and living annuities to cater for the full range of your investment needs.

Relationships will be key and should embrace how the LISP adds value and makes the investment decisions and management an easier process to manage.

All LISPs must be licensed with the Financial Services Board (FSB) as administrative financial services providers. LISPs are regulated by the Financial Advisory and Intermediary Services (FAIS) Act.

Advisers have upped their game in the past few years. LISPs must now offer services and products that match this higher skill level. Clients are looking for a financial solution – not just a product – and our products must be capable of providing these solutions.

Source: Association for Savings and Investment South Africa

Relationships are built on real value. Investors and advisers are looking for reputable LISPs with which to do business. They are also looking for LISPs that offer them the right opportunity to make the right investment decisions with the minimum of fuss. Keeping ahead in the LISP market in the future lies in innovative and flexible service. Innovations, arguably, don’t lie in products but in simplification. We need to make it easier for the financial advisers and to partner them in

Shaan Watkins, Head of STANLIB Linked Investments

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Morningstar

South Africa Fund Award winners of 2014 The 2014 Morningstar South Africa Fund Awards recognise retail funds and fund groups that added the most value for investors within the context of their relevant peer group in 2013 and over longer time periods. The Morningstar fund category awards and fund house awards are based on Morningstar fund data for the period 1 January 2013 to 31 December 2013. The winners were announced at a gala dinner and ceremony at The Table Bay Hotel, V&A Waterfront in Cape Town, on 19 February 2014. Winners are selected using a quantitative methodology with a qualitative overlay developed by Morningstar that considers the one- and three-year performance history of all eligible funds, and adjusts returns for risk using the Morningstar Risk, a measure that imposes a higher penalty for downside variation in a fund’s return than it does for upside volatility. “We are pleased to have a mix of high-quality asset managers winning across all of our award categories. Our fund house winners, Coronation and Foord, are highly respected investment managers that have delivered outstanding risk-adjusted returns for investors in South Africa,” commented Tal Nieburg, managing director for Morningstar South Africa.

at the Left to right: Stephen Cranston, Associate Editor Personal Financial Mail and Pieter Koekemoer, Head of Investments, Coronation Fund Managers

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Left to right: Mark Thompson, CEO, Southern Charter, Ursula Maritz, Chief Investment Officer, Southern Charter and Tal Nieburg.

Left: Jeanette Marais, Retail Distribution and Client Service, Allan Gray. Right: Tal Nieburg, MD, Morningstar South Africa

The winners of the 2014 Morningstar South Africa Awards are: • Best Aggressive Allocation Fund: Southern Charter MET Growth Fund of Funds • Best Cautious Allocation Fund: 27four Stable Prescient Fund of Funds Left to right: Tal Nieburg, MD, Morningstar South Africa and Fatima Vawda, MD, 27Four

• Best Diversified Bond Fund: Allan Gray Bond • Best Flexible Allocation Fund: Coronation Optimum Growth • Best Global Bond Fund: Prudential Global High Yield Bond Fund of Funds • Best Global Equity Fund: RECM Global Limited • Best Indirect Property Fund: Nedgroup Investments Property • Best Moderate Allocation Fund: 27four Balanced Prescient Fund of Funds • Best Regional Offshore Equity Fund: Templeton European • Best Sector Equity: Nedgroup Investments Mining & Resource • Best Short-term Bond Fund: Coronation Strategic Income • Best South Africa Equity Fund: Mazi Capital MET Equity • Best South Africa Small-Cap Equity Fund: Nedgroup Investments Entrepreneur • Best Fund House – Larger Fund Range: Coronation Fund Managers

There’s only one Investment Solution In an industry riddled with jargons and complexity, we offer our clients investments they can count on, delivered with simplicity and transparency -- and we’ve been doing it for 17 years. So, when you need an investment solution, cut to the chase and go straight to www.investmentsolutions.co.za or call 011 505 6000. Follow us on twitter @InvestmentSolZA. Investment Solutions. 17 years. With confidence

Investment Solutions Limited is a licensed Financial Services Provider. FAIS licence number 711. Registration number 1997/000595/06.

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Profile

Ann Leepile

Head of Manager Research, Investment Solutions

nn Leepile has been head of manager research at Investment Solutions for almost four years, having started in June 2010.

What is it about your job that most excites you as you prepare to come to work every day? The constantly changing environment, the difference we make to the lives of the many South Africans who’ve entrusted us with their retirement and/or other savings, and the wonderful team I work with. What do you regard as your greatest business success to date? My success would definitely be shared success. With the unpredictable economic environment we continue to experience, we have maintained steady growth in our portfolios, which is not easy to do. As a woman in the business world, do you believe you have had to prove yourself more than your male peers? I am blessed to have always worked with males who’ve judged me on my performance in my role. However, in the external environment I have experienced challenges and there have been instances where being a woman, a wife and a mother were seen as an impediment to my work. Over time, as I’ve continued to perform in my various roles, I think I’ve managed to change the minds of a few sceptics.

What is your advice to retirement fund members in these interesting investment times? Stay calm and block out the noise. Avoid the temptation of chasing the latest hot stock or portfolios and take a long-term approach to investing your retirement savings. Believe in good quality managers who take a prudent approach to investment and accept that no investment style will do well in all cycles. Good managers will experience short periods of what seems to be tough performance periods, but in the long term you will be rewarded for your patience. If you had R100 000 to invest, what would you do with it? R20 000: My top-rated fixed-income manager. R60 000: My top-rated aggressive equity managers with a global mandate. R20 000: Always leave a little to spoil yourself on a holiday with the family. How do you strike a balance between your personal life and your work schedule? Balance? Not possible! However, I am blessed to have a great support structure at home and at work. No one can operate effectively without help. Each day is different, though, and some days I have far less sleep and sanity than others.

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Practice management

A shift

in focus is required Nearly 10 years after the introduction of the Financial Advisory and Intermediary Services Act (FAIS) in September 2004, practical realities have forced the authorities to cast their nets a little wider.

s happens with all legislation, there is often a disparity between the intended outcomes and the actual ones. The financial services industry is vibrant and innovative, and adapting legislation in a constantly evolving environment is a challenge. This has been added to by resistance to change, both on a corporate and individual level. The industry must be convinced to act in the spirit of the act, and not only in the letter. This has led the regulatory authorities to adopt a new approach, shifting the focus from complying with regulatory prescription to achieving desired outcomes. Managing a practice in terms of the FAIS Act and the General Code of Conduct may be timeconsuming, but at least there is a set of rules to guide you. Under outcomes-based regulations, you may have ticked all the right boxes, yet failed to deliver the desired outcome for your client. Possibly the biggest challenge for financial services providers, in this regard, is the implementation of Treating Customers Fairly (TCF), which brings an ethical element into the equation. In essence, the fair treatment of clients will be measured against a similar system developed in the United Kingdom. “Firms are expected to demonstrate that they deliver the following six TCF Outcomes to their customers throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling – and throughout the product value chain: 1. Customers can be confident they are dealing with firms where TCF is central to the corporate culture. 2. Products and services marketed and sold in the retail market are designed to meet the

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needs of identified customer groups and are targeted accordingly. 3. Customers are provided with clear information and kept appropriately informed before, during and after point of sale. 4. Where advice is given, it is suitable and takes account of customer circumstances. 5. Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect. 6. Customers do not face unreasonable postsale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.” It seems that the biggest demand will be on product providers, while only outcome 4 specifically refers to financial advisers. This is not necessarily so. Debunking the untruths in misleading point of sale material, for instance, is as much the responsibility of the product provider under outcome 3 as it is that of the adviser.

requirements for Treating Customers Fairly are already contained in the current legislation. Section 2 of the FAIS General Code of Conduct obliges FSPs to “at all times, render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry”. A key element in the implementation of a TCF framework is the formulation and documentation of a TCF policy for the practice, setting out how the fair treatment of customers will be ensured. Ethical advisers should not have too much of a problem implementing a TCF framework and culture in their business. It comes down to formalising in writing what they have been doing all along. On the other hand, those who sailed close to the wind may find themselves up the creek without a regulatory paddle to steer themselves out of trouble.

It also appears that, where a problem may have originated with the product provider, the adviser will be expected to assist his client in trying to resolve the matter. Failure to do so will entail liability for the adviser. A TCF road map, published in 2011, provides timelines for the implementation of the six desired outcomes. The intended launch date of January 2014 did not materialise due to sweeping changes envisaged under the new Twin Peaks model of regulation. The Regulator indicated that there would, in fact, not be an official launch date. All the

Paul Kruger, Head: Communications, Moonstone Information Refinery (Pty) Ltd

Partner of Choice – STANLIB Linked Investments Shaan Watkins

Head of STANLIB Linked Investments

LISPs must offer competitively priced comprehensive product ranges and services that complement those of the financial adviser. LISPs have always placed a lot of focus on products and have led the way in innovative solutions like flexible retirement annuities and living annuities. Today’s financial advisers require more than just a product provider – they require a partner. A position STANLIB Linked Investments is ready to take up. Shaan Watkins, Head of STANLIB Linked Investments, says that successful LISPs must still offer innovative and flexible products and services, but key going forward will be the value they add to financial advisers in the advice and planning process. Staying ahead in the LISP market in the future lies in innovative and flexible service. “I don’t believe that innovation only lies in product,” says Watkins. “It lies in simplification. We need to make it easier for the financial adviser and partner them in their business.” Transparency will be key, and the services offered by LISPs need to complement those of the adviser, and ensure a better outcome for the client. Watkins says financial advisers are much more aware of the service they offer – financial advice. “Platforms like STANLIB Linked Investments need to assist financial advisers by offering them the tools and services that will ultimately give them more time to spend with their clients.” For STANLIB, this includes expanding their offering to include model portfolios for category I and II FSPs, a wider product range of collective investments, share portfolios, structured products and endowments; and a range of tools to assist in the advice process. “These developments have been done with the financial adviser in mind. We want to offer solutions that range from products to advice and will be introducing products such as personal share portfolios which will be available in retirement products. Personal share portfolios will add to the collective investment schemes and ETF Funds we already have available on our platform. We will also be launching structured products and expanding our wrapper range to include endowments in the coming months,” says Watkins. STANLIB’s model portfolios for category I and II FSPs are another innovation developed specifically with the financial adviser in mind. The model portfolios for Category I advisers will use STANLIB Multi-Manager as an advisory service, and the Category II model portfolios will allow advisers to build and rebalance their own portfolios. Both will offer online functionality and a range of reporting choices, and can be blended with other products. The model portfolios allow the adviser to offer the client a more defined product – at the right price. Watkins says STANLIB will still offer its Linked Fund Range. “We need to recognize that not all clients will be served by a limited range.”

www.stanlib.com

Last year STANLIB Linked Investments introduced its Linked Fund Range. Watkins says uptake on this has been good and one of the key focus areas – competitive pricing – has been well received in the market. The aim is not to be the cheapest, says Watkins, “we must offer competitive pricing.” STANLIB LISP uses clean pricing – this makes it a lot easier for the financial adviser and client to view and evaluate total costs. Advisers and clients are cost sensitive, says Watkins, but our experience of our clients is that price is not the only consideration in product choice. Advisers are focused on finding the most appropriate product – not just the cheapest. Another significant benefit STANLIB now offers is its wide offering of advice tools and services. From electronic forms and straight-through processing, to a selection of calculators and tools, STANLIB has services that assist the adviser in the advice and product-selection process – all available online. Watkins says advisers can select the most appropriate tools and reports – from basic statements to advanced risk return calculations. “A LISP is an admin platform – and at STANLIB we use our administrative capability to offer advisers the products and services they need to best serve their clients,” concludes Watkins.

Regulatory developments

hedge fund regulation evolution

aving reached an all-time high of R46 billion, South African hedge fund assets are positioned to show strong growth in assets as new regulation is expected to come into play during the course of the next couple of months. However, despite product regulation coming into effect only now, hedge fund asset managers have been regulated under the Financial Advisory and Intermediary Services Act since October 2007, in a separate licence category.

and the Financial Services Board (FSB) published the proposed framework for the legislation of South African hedge fund products. In the document, a tiered structure was proposed, with the distinction between retail and qualified hedge funds. Retail hedge funds will have stricter regulation to ensure protection for investors, while qualified investor funds will focus on monitoring systemic risk. Retail hedge funds will also be available to the general public, with qualified funds being accessible to qualified investors.

This, combined with typical outsourced functions such as fund valuation, prime broker, mandate compliance monitoring, fund audit, FAIS compliance monitoring and client administration, has put the industry at the forefront of regulation.

A further positive highlight from the proposed regulation is that all funds should have a risk management programme. The framework proposes that the risk management programme covers risk relating to investments in unlisted instruments, the use of derivatives and the trading process employed.

The National Treasury has determined that hedge funds should be regulated in line with G20 commitments. One of the objectives of the proposed regulatory framework is the monitoring of systemic risk. Due to most hedge funds in the South African context operating as pooled investments, it was decided that the regulation should be in accordance with existing collective investment regulation. According to the Association for Savings and Investment South Africa (ASISA), South Africa will be one of the first countries to incorporate hedge funds into collective investment legislation. In September 2012, the National Treasury

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In February 2014, the regulatory bodies released their responses to comments made with regard to the proposed regulation. Some of these comments include: • The valuation of South African hedge funds must be done by an external third party administrator. As of June 2013, all South African-based hedge funds that participated in the Novare Investments SA hedge fund survey used an external administrator. • Retail hedge funds will require 30 days’ notice for redemption with qualified investor funds requiring a maximum of 90 days. As

of June 2013, more than three-quarters of the industry allowed monthly dealing. Overall, the Treasury’s proposed framework, together with its ongoing commitment towards dealing with some of the required details, will place hedge fund product regulation in a positive light. There will be practical points around the implementation which still need to be clarified, but, as far as the formal inclusion of hedge funds within the CIS mainstay is concerned, it is encouraging. While the work is far from over, this is a very promising push in the right direction. Hedge funds as a strategy are here to stay, even if they become more mainstream and accessible in both name and nature.

Eugene Visagie, Portfolio Manager: Novare Investments

Melissa Zeeman, Head of Operations: Novare Investments

Retirement reform

Retirement fund costs

yet again in spotlight

In his 2014 Budget Speech, Finance Minister Pravin Gordhan again emphasised the government’s commitment to reforming the retirement industry.

his includes improved coverage and preservation of retirement funds as well as lowering costs associated with these measures. The move to cut costs is a positive step for the industry, especially in light of the 2013 National Treasury discussion paper on retirement charges in South Africa. When compared to countries with similar mature retirement systems, this report highlighted that retirement costs in South Africa are higher. The value of reducing costs For members of defined contribution funds, the benefit at retirement depends on the contributions paid into the fund, plus the investment return on those contributions, less expenses incurred by the fund. Unnecessary charges will reduce the benefits paid to members. To put the matter in perspective, a reduction of annual investment returns each year over 40 years by a margin as small as 0.5 per cent per annum can reduce the maturity proceeds by approximately 10 per cent.

The survey also found the following with regard to fund scheme costs: Nature of expense Administration fees

Level of expense Average of 2.5 per cent of contributions Range of values from one to 14 per cent of contributions Higher percentage for smaller schemes (less than 1 000 members)

Consulting fees (including actuarial fees)

Average of 1.24 per cent of contributions , or 0.03 per cent of fund assets

Audit fees

Average of 0.85 per cent of contributions, or 0.05 per cent of fund assets

Governance fees (trustee costs, levies and fidelity cover premiums)

Average of 0.69 per cent of contributions, or 0.04 per cent of fund assets

fund from its investments is therefore reduced directly by these expenses. Other fund charges include actuarial consulting fees, auditor’s fees, costs of communicating with members, levies imposed by the Financial Services Board (FSB), cost of fidelity insurance for trustees and the cost of trustee training. This group of expenses is commonly met out of the investment returns earned by the fund. What does the cost landscape look like?

Given the boost that members’ benefits may experience, retirement fund investors and trustees will need to understand the government’s full intentions and plans regarding its cost-cutting endeavours, which is expected to be released later this year.

In a study released last year, Old Mutual Corporate surveyed 49 defined contribution schemes between 2011 and 2012 and the results showed that large funds enjoy lower charges. This is not surprising as large schemes enjoy economies of scale.

Costs necessary for effective fund governance

This survey also found the base investment management fees averaged 0.4 per cent of assets of the fund, and fell in a wide range between 0.15 and 0.80 per cent of fund assets. Conservative portfolios like cash and money market had lower costs and aggressive growth-oriented portfolios had higher fees. The fee percentages were in the lower end of the range for larger funds (those with assets over R150 million), and the percentages were in the upper end of the range for smaller funds (those with assets below R150 million). The trustees should consider not only the total fees with performance fees, but the net returns or benefits to members.

The main expenses of a typical retirement fund include administration, investment and other fund charges, which are all necessary to run a well-governed and effective retirement fund. Administration charges cover expenses incurred in managing member records, collecting and administering contributions and paying out benefits to members. Investment charges cover expenses of managing and growing the investments of the fund. These are levied on the base of assets of the fund, and therefore vary with the size of assets of the fund. The return earned by the

The range of both administration and investment management fees supports a move

from stand-alone to umbrella funds, as costs will ultimately be saved in umbrella funds. It is not surprising that one of the proposals from the Treasury is to encourage fund consolidation, as many funds do not enjoy the economies of scale associated with larger funds. Retirement reform: consolidation to umbrella funds The drive to increasing retirement savings is still a high priority for the government and the pressure is on employers to do their part. As such, a growing numbers of corporates are turning to umbrella funds as a solution for their employee benefits. As the retirement reform proposals expect funds to offer more to members such as facilitating and funding advice, more communication and better governance, all at a lower cost, we expect to see further consolidation into umbrella and industrial funds in the near future.

Craig Aitchison, GM of Customer Solutions, Old Mutual Corporate

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NEWS Old mutual private equity acquires stake in 10X investments Old Mutual Private Equity (OMPE) has acquired a shareholding in retirement fund administrator and investment manager 10X Investments (10X). OMPE has over time made investments in blue chip South African private companies such as Consol Glass, Pepkor, Life Healthcare, Tourvest and Shanduka. 10X provides simple, low-cost retirement solutions for companies and individuals. 10X’s offering is also aligned with the government’s retirement reform proposals to provide consumers with better value retirement products by eliminating unnecessary investment choices, reducing high fees and improving investment returns using index funds. Steven Nathan, chief executive of 10X, says, “OMPE’s investment is a strong vote of confidence in 10X’s innovative business model, the quality of our operations and systems, and the strength of our management team. We are looking forward to a prosperous long-term partnership.” Paul Boynton, head of Old Mutual Investment Group’s Alternative Investments, will become a non-executive director of 10X. He commented that OMPE was pleased to invest in an entrepreneurial management team in a business that is well placed in an attractive market space with a good track record.

Novare launch investment solutions The independent financial services group, Novare Holdings, announced the establishment of a newly formed subsidiary, Novare Investment Solutions, which will facilitate the expansion of the range of investment products the group offers to clients. According to René Miles, newly appointed CEO of Novare Investment Solutions, Novare took a strategic decision to expand the range of solutions offered to its clients. “In future we will, through our own licensed entities, offer products like unit trusts, retail retirement vehicles and post-retirement solutions. These will be rolled out during the course of 2014 as we obtain the required licences.”

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Johan Henn, CEO of Novare Holdings, says that the establishment of this new venture is in line with the progression of Novare to become a leading emerging markets investment adviser. “Among others, we have established and growing investment, investment consulting and private equity businesses. “Novare Investment Solutions, which takes us into the retail market for the first time, will complement these businesses and benefit from their products and expertise. This is an exciting new direction for Novare and consistent with our philosophy of always striving to bring innovative investment solutions to the market.”

Image: www.xzibit.co.za

International recognition awarded to Investec’s private banking and investment services The latest Euromoney Private Banking and Wealth Management Survey has revealed Investec as South Africa’s leading provider of private banking and investment services – a distinction the company has received for the second year in a row. Tim Moxon, head of group research and market data at Euromoney, says that the results of its annual Private Banking and Wealth Management survey within South Africa revealed that Investec has demonstrated a consistent approach to its private banking and investment management offering by winning the Best Private Bank Overall in consecutive years. “To receive this award based on peer nominations as well as strong fundamental performance data only highlights its strengths within the private banking landscape in South Africa. Aligned with its wide range of investment products and

wealth management services, it shows Investec’s private banking capabilities are respected by both their clients and the industry at large,” said Moxon. Ciaran Whelan, global head of private banking at Investec, says it is an honour to win the award once again, particularly given the highly competitive environment. “This is the result of Investec Private Banking and Investec Wealth and Investment working closely together to deliver on our promise of an exceptional client experience.” The Euromoney Private Banking and Wealth Management Survey covers more than 35 different product and client categories on a global and regional basis and has ranking results in close to 100 countries. The results are based on a combination of bank-provided data and peer review.

NOVARE EQUITY PARTNERS EXPANDS AFRICA TEAM Novare Equity Partners, the private equity business in the Novare Group, announced the appointment of Basil Boyns as project manager of Nigeria, based in Abuja.

Basil Boyns

Basil Boyns started his career as a management trainee in the mining industry. In 2000, he joined Liberty Life Properties as a regional property portfolio manager responsible for managing a large commercial and retail property portfolio. In 2005, he joined Emaar Property Development in Pakistan as a development

manager responsible for the management plan of a $980 million development. Since 2006, Boyns has been involved in multiple projects in Mauritius. Derrick Roper, chief executive officer of Novare Equity Partners, says that Boyns has extensive international experience as a project leader of capital projects, especially within developing nations. “Novare Equity Partners has grown rapidly over recent years and Boyns’ skills will contribute significantly to an expanding team with unrivalled expertise in subSaharan Africa.”

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Products

New Africa equity opportunities fund launched by Ashburton Investments Ashburton Investments, the investment management business of FirstRand Limited (FirstRand), announced the launch of its new Ashburton Africa Equity Opportunities Fund to South African investors.

investment manager in Africa offering South African, African, Asian and Chinese investment opportunites. “The fund will offer investors more sources of return through an attractive African investment opportunity.”

The fund will focus on targeting undervalued listed African equities (excluding South Africa) across various sectors to achieve long-term capital growth. It is aimed at experienced retail and institutional investors, including the private wealth and family office space.

While this is a new fund for us, Africa is extremely familiar territory, says Grobler. “As part of the FirstRand Group, Ashburton Investments is part of the largest financial services group on the African continent, giving us on-the-ground presence and local insights. We are extremely well placed to capture the high growth opportunities Africa offers.”

Paul Clark, lead adviser to the fund, will run a high-conviction portfolio, using a bottom-up stock selection process. Clark says that now is an exciting time for Ashburton Investments to launch an Africa fund. “Africa is a growth story and seven of the 10 fastest-growing economies globally will be in Africa in the next five years. “Valuations are cheap relative to emerging markets and the consumer boom is leading to greater demand, which is extending to infrastructure development, construction and leisure. Improving operating environments across the continent means investors now have access to previously unobtainable opportunities and greater investor protection.”

Investing in frontier markets

Boshoff Grobler, head of Ashburton Investments, says that the launch of the Africa Equity Opportunities Fund is consistent with the company’s goal of becoming the leading new generation

Lead fund manager

Fund objective

Why invest in Africa?

(ex South Africa) Ashburton’s Africa Equity Opportunities Fund is an Africa-focused across various Fund that identifies and invests in undervalued listed African equities sectors to achieve long-term capital growth.

Investing in Africa presents a significant opportunity to capture the high-growth associated with newly emerging economies.

A part Demographics based on a large youth population and growing workforce, of the are FirstR and Group which is driving consumer demand across diversified sectors including technology, consumer and retail products as well as financial services.

Investment approach

An African growth story

and uses The Fund Manager has extensive experience in investing in Africa intensive research to identify opportunities based on:

Combined African GDP is estimated to reach US$5.0 trillion by 2018.

•

Company fundamentals

•

Share price valuation

•

Strength and experience of the company’s management team

which looks Companies are chosen using a bottom-up stock selection process, price. The for appreciating fundamentals not reflected in the company’s share teams of Fund Manager travels extensively within Africa to meet the management companies and to cross-check information sources prior to investment. of the The Fund Manager will identify companies and sectors that are beneficiaries landscape. strengthening macro-economic conditions and improving political manager runs The Fund will benefit from an unconstrained approach where the levels of a portfolio to maximise investment opportunities. However, minimum through a formal diversification will be maintained and liquidity risk will be managed governance framework.

Fund features

Africa’s combined population of over 1 billion people is the third largest in the world behind China and India.

Widespread urbanisation and consumerism is driving a population hungry for products and services. Africa has the highest projected working age population of all emerging markets. 7 of the 10 fastest growing economies globally in the next five years will be in Africa.

Launch date

May 2013

Benchmark

The hurdle is the MSCI Emerging Frontier Markets Africa ex. South Africa Index

Minimum investment

USD100,000 (institutions) USD10,000 (retail)

Dealing

Weekly (Wednesday)

Annual Management Fee

1.5% per annum (institutions) 2.0% per annum (retail)

Performance fee

15% (on outperformance above hurdle)

“Relatively low PEs and increasing earnings’ momentum, could provide investors significant growth opportunity as African markets mature.”

Paul Clark, CFA

Continuously improving operating environments across the continent are providing access to previously unobtainable opportunities, while providing greater protection for investors’ interests.

of income is The Fund Manager will invest in companies whose primary source anticipated derived from Africa, or whose major assets are Africa-based. It is on African that at least 80% of the Fund will be invested in companies listed The stock exchanges and the balance on stock exchanges outside Africa. in selected mandate would also allow for up to 10% of the portfolio to be invested opportunities, such as pre-IPO companies or unlisted investments.

Africa Equity Opportunities Fund

Technology uptake is leapfrogging developed markets. Mobile phone subscriptions across Africa increased from 283 million in 2007 to 695 million in 2012.

The consumer boom is leading to increased demand in other sectors such as infrastructure development, construction and leisure. The Africa investment opportunity is no longer a singular resources investment, it represents a multi-faceted investment opportunity in some of the fastest-growing economies in the world.

Why invest in African listed equity markets now? High growth forecasts - The IMF estimates combined African (ex South Africa) GDP growth of 6.1% for 2014 compared to 2.0% for advanced economies. Markets set to mature - With 28 recognised stock exchanges in Africa representing 37 countries’ capital markets, listed equity provides investors with exposure to a diversified selection of companies across a range of markets. Over time, these markets will start to mature but before then they will experience significant growth and a broadening and deepening of capital markets, which presents investors with early stage investment opportunities. Diversification benefits - African listed equity markets provide good diversification through a collection of individual countries with independent economies. The chart below indicates that, over the past decade, African markets have been relatively uncorrelated to either emerging or developed markets.

African markets are relatively uncorrelated to emerging and developed markets 1.0 0.8

Source: IMF, WEO October 2012. McKinsey Global Institute, Lions on the move, June 2010

0.6 0.4 0.2

Africa to Developed World 0.27 Africa to GEM 0.32 GEM to Developed World 0..83

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Paul has over 15 years’ experience in the African listed equity markets. Based in South Africa, Paul joined Ashburton in January 2012 to help establish and manage the Africa Equity Opportunities Fund. In June 2007, he launched his first African fund and was the lead portfolio manager from inception. Prior to that, he was head of research for the African Alliance Group, where he was responsible for the Group’s African research operations as well as developing research in new countries. Paul has experience of investing in Africa before, during and after the global financial crisis and has in-depth knowledge of African listed equity markets. Paul also held previous research positions with HSBC Equities South Africa and Standard Corporate and Merchant Bank’s Asset Management division. Paul has a Bachelor of Engineering (Chemical) degree from the University of Stellenbosch, South Africa as well as a Bachelor of Commerce (Accounting) degree from the University of the Witwatersrand, South Africa, and is a CFA charter holder.

Equity research analyst Kathy Davey, CFA Kathy began her career as an equity research analyst covering listed Pan-European Retail stocks at Bear Stearns International in the UK in 2007. She subsequently moved with her team to Cenkos Securities, where she continued to cover the Retail sector from London. In 2010, Kathy moved back to South Africa, where she joined Barclays to cover the South African listed Retail sector. Kathy joined Ashburton Investments in South Africa in February 2013 as an equity research analyst for the Africa Equity Opportunities Fund. She has a Bachelor of Commerce (IT and Accounting) degree from The University of the Witwatersrand, a Masters of Professional Accounting degree from the University of Southern Queensland, and is a CFA charter holder.

Risk management

Liquidity - liquidity can be a concern when investing in emerging markets particularly in times of market stress. Investors should carefully evaluate the liquidity terms of their chosen fund. The Ashburton Africa Equity Opportunities Fund will provide weekly liquidity. In addition, the Fund’s investment process includes liquidity as a key investment criteria.

Reliability of information - securing reliable and accurate company information can present challenges. Investors should invest using an experienced Africa manager who is familiar with the nuances of each country and market. The manager of the Fund has over 15 years’ experience investing in and managing companies in Africa. The manager will meet the management team of each company before placing an investment and uses the vast network of the FirstRand Group to verify information sources and obtain further in-depth research.

For more information The Study of Culture The study of culture is to recognise and celebrate diversity. Our differences make us stronger, our uniqueness unlocks opportunity. We are all different, yet so similar. At Ashburton, we see diversity as opportunity and we look beyond complexity to find the simple truths that bind us. We walk alongside you, as an investor, to help you capture the unique opportunities of global investing.

International

South Africa*

Ben Leach Telephone: +44 (0)207 939 1844 Email: ben.leach@ashburton.co.uk

Dave Christie Telephone: +27 (0)11 282 4435 Email: david.christie@ashburton.co.za

For the latest Fund performance, application forms and find out about similar products offered by Ashburton please visit: www.ashburtoninvestments.com/ucits

Insight

into diverse economies - the political landscape in Africa is diverse. Investors should choose an investment manager that has local knowledge of the nuances and legislative regime of each country. The team spends well over 25% of their time in various African countries and has long-standing relationships with local brokers, law firms and legislative bodies. In addition, the team uses the local presence of the FirstRand Group to strengthen its on-the-ground team and quickly adapt to market news.

Why Ashburton? Ashburton forms part of the investment management business of the FirstRand Group, one of the largest financial services groups on the African continent. Ashburton Investments combines its expertise in investment management with the vast FirstRand network to obtain local information, insight and financial intelligence to invest across African markets. FirstRand has a growing physical presence in sub-Saharan Africa through investment and retail banking and other investment capabilities. It also has a strong research base and significant experience of investing in different African markets, which is shared across the Group. Ashburton Investments is a new generation investment manager providing global investors with traditional and alternative South African, African and Asian corridor investments. Our assets under management exceed US$13.25 billion, and we have international reach with representatives in South Africa, the United Kingdom, Channel Islands, United Arab Emirates and India.

This document is for professional financial advisers only and not intended for distribution to private investors: The Africa Equity Opportunities Fund is a sub-fund of the Ashburton Investments SICAV, a Luxembourg-registered collective investment scheme approved by the Commission de Surveillance du Secteur Financier (CSSF). This document does not constitute or form part of an offer or an invitation to subscribe to the Fund and is expressly not intended for persons who due to their nationality or place of residence are not permitted access to such information under local law. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Past performance is not necessarily a guide to future performance. Where investments involve exposure to a currency other than that in which the Fund is denominated, changes in rates of exchange may cause the value of the investments to go up or down. Consequently, investors may receive an amount greater or less than their original investment. Issued by Ashburton (Jersey) Limited which has its registered office at 17 Hilary Street, St Helier, Jersey JE4 8SJ, Channel Islands and which is regulated by the Jersey Financial Services Commission. This document has been approved for issue in the UK by FirstRand Bank Limited (London Branch) which has its registered office at Austin Friars House, 2-6 Austin Friars, London EC2N 2HD. Authorised and regulated by the South African Reserve Bank. Authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. *The Africa Equity Opportunities Fund is not currently authorised for promotion in South Africa.

Source: Bloomberg

The world

FRANCE, CHINA, GERMANY, AUSTRALIA, JAPAN, IVORY COAST, PUERTO RICO, THAILAND, PORTUGAL, MALAYSIA, SA

Budget troubles for France With France’s total debt standing at 89.3 per cent of its GDP, the country has been urged to cut spending as it runs the risk of overshooting its budget deficit target for the 2013 financial year end. Didier Migaud, head of Cour des Comptes, an auditing agency, says France is in the danger zone in terms of its economic and public finances, and a possible debt spiral cannot be ruled out. A recent report by Cour des Comptes shows that the government must find between €6 billion and €10 billion in new revenue or spending cuts by the end of this year, and extract an additional €33 billion in 2015 in order to meet promised budget targets. China to impose Tobin Tax on foreign exchange transactions China is looking to impose tax on foreign exchange transactions to deter speculative capital flows. The levy is known as the Tobin Tax and will impose a charge on individual currency transactions to reduce speculation in the global markets. Yi Gang, head of the State Administration of Foreign Exchange (SAFE) says that the key to good foreign exchange management is to persistently guard against cross-border liquidity flow shocks. Germany optimistic about economy 2014 has seen German business confidence climb to its highest level since July 2011. Monthly surveys compiled by the Ifo (Institute for Economic Research) revealed that the economy should grow by 0.5 per cent in the first three months of 2015. The report shows that the German private sector has been growing at its fastest pace in more than two-and-a-half years, with investor confidence staying close to its highest level in nearly eight years. Free trade agreement between Australia and Japan After four years of negotiation, Australia and South Korea have reached a free trade

agreement (FTA). The agreement is predicted to boost both economies by $5 billion by 2030. Japan currently has $61 billion invested in Australia, while Australia has $220 million invested in Japan. Yasunori Nakayama, official of the Japanese Ministry of Economy, Trade and Industry, says the deal is a very strategic agreement that exceeds economic values. Positive growth for Ivory Coast economy Ivory Coast has seen a 10 per cent increase in its economic growth over the last three years. The economy grew 9.8 per cent in 2012 and 8.7 per cent in 2013, and is set to grow between eight to 10 per cent in 2014. Even though there is positive growth for the economy, there has been a decline in investment into the region. Ivory Coast is the world’s largest producer of cocoa, which contributes to 15 per cent of its GDP, and the second-largest producer of cashew nuts in the world. Puerto Rico’s status cut Moody’s Investor Service has cut Puerto Rico Electric Power Authority’s rating to junk status due to the shrinking economy and population, which has wounded the already cash-strapped authority’s capacity to invest. Moody says the weakness in the economy, including negative demographic trends and the lack of economic growth drivers, weighed heavily on the rating. World Bank projects growth for Thai economy According to Kirida Phaophichit, a senior economist at the World Bank’s Bangkok office, Thailand’s gross domestic product growth for 2014 is projected at four per cent. Exports are predicted to grow by six per cent with a total worth of $238.92 million, and imports are likely to increase by five per cent, to $229.99 million. The country will, however, experience a current account deficit of around $1.07 million, or about 0.3 per cent of GDP, and risk factors which could result in disrupted expansion include high levels of household

debt and delays in the government’s investment into infrastructure. Portugal tests market with 10-year bond issue The Portuguese Treasury and Government Debt Agency is preparing to issue a 10-year bond to see if the country can cleanly exit its bailout in May 2014. If the 10-year bond issuance is successful it will prove that Portugal can finance itself at affordable rates on the markets when it exits its three-year €78 billion bailout from the European Union and International Monetary Fund in May. Steady economic growth for Malaysia Growth of five per cent is expected for Malaysia, which will result in a recovery in exports, and will be a pillar of strength for the economy in 2014. Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia, says the country’s economy will also see private and foreign investments pouring into the construction, oil and gas industries. He says that the investments into these sectors will help create jobs for skilled workers, and the positive benefits of job creation will be absorbed into the economy. South Africa set to benefit from global economic growth Stephan Hanival, chief economist of the Department of Trade and Industry, says South Africa is well located to benefit when global economic growth and demand improve this year. South African economists are reported to be looking for economic growth of about 2.5 per cent this year, which is less than the Reserve Bank’s predicted 2.8 per cent and the Treasury’s three per cent. A recent increase in manufacturing production was positive for other sectors as manufacturing drew inputs from a range of primary and tertiary sectors including agriculture, mining, electricity and services.

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They said

A collection of insights from industry leaders over the last month

“There is added uncertainty in emerging markets (partly due to elections being held in most large emerging markets countries this year), but once the uncertainty has settled down, bond yields at these levels offer decent investment opportunities for real yields.” Portfolio manager at Investec, Malcolm Charles, expects the bond market to perform better from the second to the third quarter in 2014 after the conclusion of emerging market elections. “I don’t think the bond market is a great place to fish for financing at the moment. The yield curve has changed, the spreads have increased. The syndicated markets are probably better.” Chief executive at Gold Fields, Nick Holland, comments that South Africa’s mining firms may depend on bank loans for financing this year because the bond market is becoming too expensive. “Buying and selling decisions driven by greed and fear will ultimately result in loss.” Deputy CEO of the Association for Savings

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and Investment South Africa (ASISA), Peter Dempsey, says that it is impossible to time the markets and decisions should be determined by a solid long-term financial plan drawn up by a trusted adviser, which will remove emotion from investment decisions. “This follows on demand from investors who prefer to implement their own asset allocation but look to outsource stock selection to competent investors.” CEO at RECM Jan van Niekerk comments on the asset manager’s decision to dedicate a new global fund to exploiting the opportunity to buy cheap stocks in a fully invested equity fund. “I think the opportunity really lies in the fact that there are several thousand companies overseas that we can pick from. That should be the rationale for investing overseas.” Portfolio manager at Allan Gray, Simon Raubenheimer, says that despite the Rand having weakened, he would not advocate taking money overseas purely to benefit from a further weakening, which may or may not happen.

“What you need to look at is where we are in a global economic cycle. I think we’re [moving] upwards.” While speaking at a presentation arranged by financial consultancy firm deVere Group International, investment strategist Tom Elliott explains that long-term investors should not really be perturbed by day-to-day headlines, but should focus on time and diversification. “South Africa is an important centre for financial services such as fund and asset management. We propose new foreign member funds, which will simplify the foreign exposure rules. These funds will support South Africa as a hub for African fund management and provide a domestically regulated channel for investors to obtain foreign exposure.” As part of the announcement of further steps to simplify trade and investment in Africa, Minister of Finance Pravin Gordhan also recognised that foreign assets owned by South African firms are an important source of income and this reduces the country’s vulnerability to future domestic downturns. “It is possible for the gross domestic product (GDP) to grow at five per cent for the next 20 years. This would give us a $1 trillion (R11 trillion) economy by 2030, halving unemployment and the debt-to-GDP ratio, while doubling GDP per capita. But the age of easy money has ended. South Africa needs to raise its game to attract the investment needed to achieve its potential.” Partner managing director of Goldman Sachs, Colin Coleman, discussing how investors abroad view the South African economy. “Pitfalls include poor fund selection, underperforming fund managers and high fees. These mistakes can potentially halve your final pension.” Chief executive officer of 10X Investments, Steven Nathan, says that most investors don’t do enough homework when investing and often end up with funds that are not optimal for their investment goals. “Valuations are cheap relative to emerging markets and the consumer boom is leading to greater demand, which is also extending to infrastructure development, construction and leisure. Improving operating environments across the continent means investors now have access to previously unobtainable opportunities and greater investor protection.” Lead adviser of Ashburton Africa Equity Opportunities Fund, Paul Clark, comments on Ashburton Investments, the investment management business of FirstRand Limited (FirstRand), launching its new Ashburton Africa Equity Opportunities Fund to South African investors.

You said

A selection of some of the best tweets as mentioned by you over the last four weeks.

@Investor_Quotes: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Warren Buffett Investment Quotes – Quotable quotations from major investors for inspiration, motivation and insight.

@MichaelJordaan: “Whatsapp just got sold to Facebook for $19 billion. That makes it more valuable than entire FirstRand.” Michael Jordaan – Venture capitalist and wine enthusiast.

@chrislbecker: “Amazing how much focus placed on GDP data, when it tells us so little about what’s going on in reality.” Chris Becker – Global market strategist @etmanalytics.

Co-founder @Mises_SA. Economics and markets with an Africa focus.

@stuartlowman: “Adcock fell below R60/share after CFR (Santiago based pharmaceutical company) pulled its bid, do we buy the stock because Brian Joffe has his finger in the pie?” Stuart Lowman – Rocket ship builder, pizza expert, love the 'Blues', parent.

@ShaunleRoux: “Based on this week’s share price performances, the platinum sector should organise a strike every week.” Shaun le Roux – Market watcher, equity fund manager, Cape Town. Tweeting in my own capacity.

@GerhardVisagie1: “Long way to go before value investors will be getting back in market, but licking my lips when market starts to drop. Panic brings opportunity.” Gerhard Visagie – Listed and private equity Investor, sports enthusiast, follower of Jesus Christ.

@TheBubbleBubble: “Desperation doesn’t make for good investment decisions. Now’s the time to keep your powder dry and focus on capital preservation.” Jesse Colombo – Analyst warning of economic bubbles; Forbes columnist; recognised by the London Times for predicting the Financial Crisis.

@laurenfosternyc: “There is nothing that is more emotional & less rational than the

relationship people have with their money.” Lauren Foster – Blogger and content curator @CFAInstitute. Former @ft journalist. RTs ≠ agreement. Runner. Adventurer. Cookbook addict.

@paulrabenowitz: “Knowing what's best and doing what’s best are two different worlds.” Paul Rabenowitz – Financial planning educator, speaker and author. Humanist. Classical guitarist. Fencer. Scrabbler. Word Freak. Critical thinker. Atheist.

@RomanCabanac: “Save SA Economy in 3 Steps: Incentivise savings. Have a real interest rate. Simplify tax regime.” Roman Cabanac – Anarchist.

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And now for something completely different

A touch of

Madiba magic Investing in the Mandela legacy

eralded as the father of our modern nation and one of history’s greatest global icons, Nelson Rolihlahla Mandela has left a legacy not only for South Africans, but for the entire world. In the wake of his passing in December last year, many people tried to sell Mandela memorabilia in the hope of making a quick return. Political memorabilia can often acquire immense value and, with Mandela’s recent passing, a whole new group of collectors has been attracted to this market. For example, a portrait of former president Nelson Mandela by acclaimed British royal portrait painter Richard Stone sold for R1 million at an auction in Cape Town. Before his passing, Mandela’s signature was considered to be the most valuable of any living figure in the world. If you plan on investing in items with Madiba’s signature, be sure to go for items that are hard to find, such as signed copies of the Long Walk to Freedom. Three factors should always be considered before investing in any autographed items: rarity, supply and demand, and the legacy or history of the item. The key to investing in memorabilia is knowing what items hold value and what don’t. The rarer the item, the more likely you are to get a greater return on your investment if you sell it. Good examples include items that are linked to significant events in Madiba’s life, for example the Rivonia trial, Mandela’s day of release and his first day in office. Days before President Jacob Zuma announced the passing of our national icon, Anant Singh,

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the South African producer of the movie Mandela: Long Walk to Freedom, bought a set of 79 photographs, memorabilia and documents signed by Nelson Mandela at an auction for R950 000. The collection of signed mementos dated from 1964 to 2010, which included the historic ‘I am prepared to die’ speech Mandela delivered from the dock in 1964 during the Rivonia trial that sent him to prison for 27 years, as well as a signed photograph of Mandela with boxer Muhammad Ali. While not every item in this collection will be worth millions, particular items will only grow exponentially in value. As an alternative investment, Mandela collectable coins can yield a powerful return. The rarity of some of these coins, coupled with the worldwide iconic symbolism attached to Nelson Mandela, makes these coins a sought-after product both locally and internationally. The Mandela coins that were minted in South Africa were all part of a oneoff minting, so they will never be produced again and will become more scarce and valuable as they age. If you want to invest in any Mandela coins, be sure to buy ‘proof coins’ (which are the highest grade of coin assigned by experts), as they often provide a better return than other coins due to their rarity and resale price. Although not all Mandela coins are proof coins, the coins which were circulated for only a short while (or even for a few years) are worth a lot today. As time passes, the Mandela coins will become even scarcer, leading these collectable coins to become a great investment.

Most expensive Mandela Coin sold Three of the finest known specimens of the 90th birthday Mandela R5 coins have recently sold for R100 000 each. These coins are expected to be freely trading at the end of the year at R150 000 each. The Mandela series of rare R5 coins have become a global billion Rand market that is expanding more rapidly than any rare coin issue in history ever.

Hand of Africa lithograph series In 2007, Nelson Mandela presented his famous lithography series titled My Robben Island. The idea of hand prints, however, intrigued him and he began to make several images. Only later did an assistant point out the iconic image inside the right hand print of one particular print, which shows, in the centre of the imprint of Mandela’s right palm, a clear silhouette of the African continent. This lithograph sold for $32 000. The Robben Island Series of charcoal and pastel sketches was completed by Nelson Mandela between March and June 2002. Based on the value of this series, Nelson Mandela became the most commercially successful artist of the 20th century.

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