INVESTSA April 2013

R37,50 | April 2013

PROFILE

John Field CEO Fedgroup The Emergent

Africa

Focus on

the budget

Contents O6 RISK, REWARD AND GETTING IT WRONG IN AFRICA 08

EMERGING MARKETS

14

PRIVATE EQUITY IN AFRICA

S U B S C R I P TI O NS

16 HEAD TO HEAD: David Murrin, CEO at Emergent Asset Management Ltd and Nicholas Piquito, CIO, African Alliance Asset Management

18

Profile: John Field, CEO FedGroup

20 Budget Focus 36

News

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3

letter from the

editor P

eople and companies are battling financially. And I don’t just mean poor people who struggle to buy a loaf of bread. They need all the help we can give them. Everybody, I suspect, is feeling a financial pinch to some extent; including financial advisers and their clients – the investors whose money keeps the wheels of the industry turning.

Many investors are rich on the relative scale of wealth in South Africa, but not immune to what’s going on with the slow economy and rising inflation.

And cost pressures on individuals and companies, and therefore shares on the JSE, are linked. How many financial results from retailers complain of subdued spending for their substandard results; and strikes at the mines, which have become a perilous problem in this country? Sure, often it might be rival unions fighting for members. But those mine workers probably feel the financial crunch more than most and probably can’t afford to feed their families on what they earn. So they go on strike.

Sorry about the gloomy start to this note, but financial pressure is something advisers should be helping their clients with; looking for lower cost investments to structure a portfolio that’s not only suitable to the particular client, but also as cost effective as possible.

Looking at the main themes in this issue, the budget and emerging markets can play a vital part for a long-sighted investor. Finance Minister Pravin Gordhan probably did what he could, within the limited means available, to try and ease cost pressures on individuals. Whether jobs can be created remains to be seen.

We also have some excellent articles on the budget. Space will not permit me to name them all but readers will find them on the pages that follow.

Emerging markets, and particularly those in Africa, offer some potentially rewarding investment opportunities. There is more disposable income being spent in much of the rest of the continent than there is here. And it’s not just the listed companies, in many cases undervalued, on the stock markets in Africa that are worth looking at. Private equity could also be a great investment.

What’s needed is the right advice; and this is where advisers can provide clients with a valuable service. The experts are out there, scattered mainly through sub-Saharan Africa. Find them for your client and negotiate the best deal. You will also find a few interesting features aimed specifically at advisers or issues that affect them directly. And there’s a brilliant piece on the oftenmisunderstood bond markets. We’ve got a lot for advisers and investors to assist them to find value for money and the right investments.

But watch the pennies, until the next time.

Shaun Harris

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

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Risk,reward Africa should one day be recorded in the history books as the comeback story of the century. Less than a decade ago, the vast continent was being written off as a hopeless case, destined to always be a drain on developed country aid funding. Afro-pessimism culminated in a cover story in the influential Economist magazine that painted a picture of a dark continent.

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and getting it wrong in africa

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oday some analysts are predicting that Africa could lift those same developed economies out of the global recession in to which most have plunged. The reason is fairly simple. Austerity rules in much of Europe, even the US. Many African countries are still plagued by poverty and lack of jobs. But across most of this continent, economic growth has taken off, driven to a large extent by a large, young, rapidly urbanising population that finds itself in the position where they can spend money on more than just the basics to survive.

Africa is now being called the final frontier for investors. The International Monetary Fund (IMF) says of the 10 fastest-growing economies in the world, six are in Africa. The IMF forecasts that average gross domestic product (GDP) growth in sub-Saharan Africa for 2012 will be 5.8 per cent, while the United Nations says foreign direct investment into the region has increased from US$9 billion in 2000 to more than US$88 billion last year. That’s explosive growth, and investment, in Africa.

International investors in the West, the large multinational companies, want a piece of the action. But many are going about it the wrong way.

The main fault, it seems, is that when they look at Africa as an investment destination, they look at a map of the continent, seeing it as a homogeneous whole, as one large country. This is, of course, a completely wrong perception.

Africa consists of 53 individual countries, each unique in its own way.

To invest in Africa, the multinationals need to understand this and fashion an investment policy that targets the continent’s countries individually.

“Viewing Africa as one is the biggest mistake foreign investors make. Those investors with more knowledge of emerging markets have enjoyed very high returns,” says Mark Tunmer, CEO of Imara Holdings. Perhaps of all the fund managers, Imara has the best knowledge of and experience in Africa.

Today, 40 per cent of Africans have some secondary or tertiary education.

“The complexity of Africa is often not understood by outside companies.

They need to learn how to set up a business; for example, do you find a partner or make an acquisition,” says Anthony Thunstrom of KPMG. “Another potential problem is finding the skilled human resources to help the business.”

KPMG advises a number of clients already in or wanting to do business in Africa. Thunstrom says advising on tax is probably one of the most complex areas in Africa, with regulations and requirements different for each country.

India and 66 per cent in China have been educated at this level.”

The need for education and skills is echoed by the African Development Bank (AfDB). “Africa’s economic growth relies on its ability to develop human capital,” says the bank’s Agnes Soucat, director of the human development department. “With one billion people in Africa today, and 2.3 billion people projected for 2050, the continent’s greatest asset or potential risk in the coming decade will be in its capacity to harness its rapidly increasing reservoir of human capital.”

This is an issue multinationals have to weigh up. Do they invest in education in the African country they are in, assuming it has the facilities to do so, or should it take human capital development upon itself, either through in-house training or setting up a school or college? Fortunately many of those needed skills are returning to Africa from abroad. Young Africans, who left the continent decades ago when there were little education, training or job opportunities, are returning.

“Partly as a result of the deteriorating economic situation in the West, partly due to Africa’s strong growth prospects and booming economies, and partly because of a genuine sense of patriotism to return home and make a difference, expatriate young professionals have, in recent years, been returning to their homelands in droves to capitalise on the vast career and business opportunities on offer,” says Ronak Gopaldas, a country risk analyst at Rand Merchant Bank.

He terms it the “brain gain” and says the returnees typically have degrees from top universities in the West and work experience. This makes them attractive to multinationals in Africa looking for such skills. “As businesses begin to grow and become more profitable, this can foster the growth of the middle class, create a wider tax base, and create a more active and vibrant civic society, all of which bring a long-term benefit to a country.”

Invest in an economically expanding club There was some scepticism when South Africa joined other leading emerging market countries which brought about the change from BRIC to BRICS late in 2010. The economy was too small, it was argued, and the appointment was seen as political; a chance to bring Africa into the spotlight.

That aside, BRICS is a positive investment for a number of reasons. The grouping accounts for about 25 per cent of global gross domestic product (GDP). The rest is largely in developed economies, so BRICS is an attractive alternative investment to the debt and recession plagued countries in the developed world.

While South Africa is a member, the grouping is increasingly being seen as the entry to the African continent. An investment in BRICS also becomes an investment in the emerging market of Africa.

BRICS countries are trading more with Africa than they are among themselves, notes Simon Freemantle of Standard Bank. He estimates total BRICS trade with Africa reached US$340 billion last year; and BRICS trade among members was US$310 billion.

The other members also provide significant export opportunities for South Africa, especially China and India. According to data from SA Revenue Services, China bought exports worth R77.8 billion from South Africa last year and India exports worth R27 billion.

South Africa can replicate what has worked for other BRICS members. “This is in terms of positioning the country to potential global investors, strategic partners and visitors. All of this means new business opportunities, new foreign investment, much-needed new jobs and economic growth,” says Millar Matola, chief executive of Brand South Africa. “There are definite parallels between South Africa and the other BRICS countries in terms of its economic growth potential.

It simply has to be harnessed, something these other countries have managed to achieve.”

All of which suggests that an investment in BRICS is a positive investment.

When assessing Africa, multinationals tend to put political risk high on the table of concerns. It is a factor but not the risk it was. In many countries dictatorships have given way to democracies and revolution to the evolution of the rising middle class and its escalating spending power.

Finding the necessary skilled human resources is an important area often overlooked by investing multinationals.

“Today, 40 per cent of Africans have some secondary or tertiary education.

By 2020, it will be nearly half. But African countries still need further progress to remain economically competitive,” says Susan Lund and Arend van Wamelen, members of the global research arm of McKinsey.

“While 33 per cent of Africans in the labour force have received secondary education, 39 per cent of workers in investsa

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Emerging

markets

The blurring of the line between emerging and developed markets

O Suhail Suleman, Portfolio Manager within Coronation’s emerging markets team.

ur process often leads us towards consumerfocused companies as they typically have most of the qualities we look for in our investments. These include high barriers to entry, strong branding, stable margins, low capital intensity, high cash generation and little risk of falling prey to technological obsolescence. With this in mind, we are often asked by prospective investors why our emerging markets equity funds contain wellknown US and European-listed companies that one would typically associate with global funds, particularly when there are so many world-class emerging market consumer businesses to choose from already. Our response is always that, for our clients, we look for the best emerging market-related investment opportunities and, therefore, where the company is domiciled is no reason for exclusion.

The example of South Korea is a good illustration of the choice investors face. From a post war waste land 60 years ago, the country today is no less developed than most of the countries making up the European Union. South Koreans have a high standard of living, great infrastructure and long life expectancy, while their domestic economy has little in common with other emerging markets like Indonesia, Mexico or Turkey.

In spite of this, it remains one of the largest weights in the MSCI Emerging Markets Index and several of its well-known conglomerates feature in emerging market funds. Even the country’s famed exporters that have become global brands, like Samsung, LG and Hyundai, typically sell more to their domestic market and in the saturated developed

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markets of North America, Western Europe and Japan than they do to the developing world. Funds that hold these stocks are ultimately buying exposure to the developed world, but without the regulatory oversight and corporate governance that they would face as developed market listed companies.

It seems strange to us that investors looking to benefit from the development potential of emerging markets are comfortable holding businesses that are all but developed in nature when there are more appropriate investments at hand. When we first launched our emerging markets funds five years ago, there were only a handful of global stocks that derived a material proportion (which we defined as 40 per cent) of their revenue and/ or profits from outside developed countries.

Since then, the list has grown exponentially thanks to two phenomena – the continued rapid growth in developing countries and the stagnation in the developed world, following the global financial crisis. Today, there are more than 25 of what we consider to be among the best businesses in the world that meet our materiality threshold.

It seems strange to us that investors looking to benefit from the development potential of emerging markets are comfortable holding businesses that are all but developed in nature when there are more appropriate investments at hand.

Yum! Brands (Yum), owner of KFC and other global fast food brands, is one of the best examples of a global business that is predominantly driven by its exposure to emerging markets. In 2007, 70 per cent of Yum’s company-owned restaurants were located in developed markets. By the end of 2012, the proportion had fallen to 32 per cent. Almost 60 per cent of group profits are now generated in emerging markets, 45 per cent in China alone.

These proportions will continue to rise over time as 80 per cent of incremental capital spend is being deployed outside the US, with the bulk of this in places like China, Southeast Asia, Latin America and Africa. Yum is, in our view, a far more appropriate means for investors to obtain emerging market exposure. Similar arguments can be made for holding several other global consumer businesses in emerging market funds.

It should be clear that drawing a line in the proverbial sand between emerging and developed markets is increasingly becoming an exercise in futility. Our perspective is that domicile is far less important than the source of the earnings. Companies with high exposure to emerging market consumers are likely to be able to deliver above average long-term earnings growth and we prefer those that convert their earnings into cash for reinvestment in expansion, or distribution to shareholders.

The overriding objective is to purchase these businesses at a substantial discount to what we believe they are worth. In today’s market environment, many of the premier emerging market consumer companies that are very popular with investors are trading at, or above, our assessment of their intrinsic value. These include Walmart de México, British American Tobacco’s Indian affiliate ITC, Brazilian beer brewer Ambev, and the aforementioned Unilever subsidiaries. The ability to rather invest in eligible global businesses with significant emerging market exposure like Yum! Brands, Heineken, CocaCola Hellenic and luxury goods distributors LVMH, Richemont and PPR broadens the investment universe to the benefit of our clients, while still managing to achieve the desired emerging market exposure.

SA remains highest ranked African emerging economy Grant Thornton’s recent report, ‘Emerging Markets Opportunity Index: high growth economies’, has ranked South Africa as the leading emerging economy on the African continent, ahead of Nigeria in terms of potential investment destinations.

The survey highlighted that inflows of FDI into SA’s local economy have been volatile over the past decade. They peaked at US$9 billion in 2008 before the financial crisis struck, recovering to US$6 billion in 2011. Inflows over the first half of 2012 were down 44 per cent compared with the same period in 2011.

Deepak Nagar, National Chairman, Grant Thornton South Africa

I

n terms of the results for 2012, South Africa is also the only African country to be ranked in the top 15 emerging economies worldwide. “Although recent events in the mining sector have hurt our country’s reputation as a destination of choice for foreign direct investment (FDI), there are significant benefits that continue to attract investors,” says Deepak Nagar, national chairman, Grant Thornton South Africa.

The Grant Thornton Emerging Markets Opportunity Index brings together a number of key indicators incorporating the firm’s International Business Report (IBR) data with the emerging markets research from the World Bank, the International Monetary Fund (IMF) and the United Nations Human Development Report. Indicators include economic size, population, wealth, involvement in world trade, growth prospects and levels of development in order to rank the 27 largest emerging economies in terms of their potential for business investment.

SA has climbed one place to 14th in terms of global rankings in the Emerging Economies survey, maintaining its position as the highest ranked African economy, ahead of Nigeria which climbed nine places to 17th.

“With Nigeria improving its ranking by nine places since the previous survey, South Africa will need to improve its competitive edge in order to maintain its leading ranking in the years to come,” says Nagar.

SA’s banking sector has long been rated among the top 10 globally and its financial system, one of the most developed in Africa, continues to grow. The Johannesburg Stock Exchange (JSE) is the largest securities exchange on the continent and ranks among the top 20 exchanges in the world in terms of market capitalisation.

“It is well-known that SA’s financial systems are sophisticated, robust and well-regulated while its economy boasts a world-class securities exchange,” adds Nagar. “The government has identified massive infrastructure projects as key to boosting the economic growth rate, as well as creating employment, and it is spending billions of Rand on getting the investment ball rolling.”

But Nagar urges international investors to get to grips with the regulatory complexities in SA because the country has a host of rules and compliance requirements. “Foreign companies looking to take advantage of what South Africa offers need to be aware that there are some negative administrative barriers as well as processes which lack consistency, efficiency and transparency – and which generally interfere with the operation of free markets,” he says.

This situation, however, is not unique to SA. When business leaders were asked what they saw as the major challenges to the international growth prospects of their operations, executives stated over-regulation and legislation (red-tape) as the biggest constraint in terms of growth and expansion and nearly one in every two (45 per cent) said it was a barrier.

Looking ahead to 2013, the report revealed that 71 per cent of local businesses expect an increase in revenues in their businesses over the next 12 months and forecast growth for 2013 to 2017 is 4.1 per cent (compared to 2.5 per cent for 2012).

In terms of international expansion by SA business owners, 80 per cent of South African businesses are looking at other parts of Africa

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for investment. In addition, 12 per cent are looking to expand internationally, with 47 per cent of these businesses looking specifically at countries with better access to skilled labour when choosing an economy in which to invest.

Ranking the emerging economies globally When looking at other countries ranked in the survey, mainland China remains way out in front at the head of the emerging economies index. India, in second place, also has a large population and is forecast to grow robustly over the medium term.

Russia is once again in third place, owing to high GDP per capita and strong exports, especially of natural resources. Brazil has moved above Mexico (fifth position) in this year’s survey, to fourth position, thanks to strong GDP growth rates in 2010 and 2011.

Investing in africa in 2013

Petri Greeff, head of liability-driven investment services at RisCura

T

he global search for yield will continue to see investors viewing Africa with interest this year, despite corporate governance and other concerns about the continent.

Towards the end of November last year, the FTSE/JSE All Africa (ex-South Africa) 30 index, which tracks the top 30 stocks on the continent, returned a remarkable 33.96 per cent in US Dollars, which amounts to 41.45 per cent in Rand terms. Looking at individual bourses, Rwanda stands out with a return of 56.05 per cent, followed by Uganda at 37.30 per cent and Kenya, which rewarded investors with 33.78 per cent.

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These returns notwithstanding, investing in Africa should be approached as a long-term strategy, and this won’t change in 2013, says Petri Greeff, head of liability driven investment services at RisCura, a global investment consultant and financial analytics provider. “Together, the lack of liquidity and the volatility of African markets, many of which are classed as ‘frontier’, dictate an investment horizon of at least five years,” Greeff says.

Their volatility is demonstrated by the fact that last year’s strong returns were preceded by a year of negative returns in 2011, when the index returned a dissatisfying -28.15 per cent in US Dollars. While this is disappointing, when converted into Rand this amounts to -12.29 per cent.

Greeff says pension funds are viewing African investments as a diversification strategy, as Africa (ex-SA) returns show a low correlation to other markets, including South Africa. “When it comes to a choice between African markets and emerging markets, we would choose Africa, as it is less correlated to South Africa, itself an emerging market.”

With Regulation 28 now giving pension funds leeway to invest up to 25 per cent outside the Republic, and an additional five per cent in Africa, funds could essentially invest up to 30 per cent in Africa. RisCura is advising its clients to at least consider an investment into Africa (if they haven’t already), to the tune of about five per cent depending on the governing investment strategy of the fund, even if they aren’t investing the remaining 25 per cent in other markets.

It’s no secret that Africa is where the growth will be for the foreseeable future.

GDP rates of anywhere between seven per cent and 10 per cent depending on the country, compare extremely favourably to the two per cent expected for the Eurozone and the USA, and around three per cent

for South Africa. Further, African equities are a lot cheaper, with PEs averaging around seven.

“Africa’s potential is enormous. The continent is where China was 30 years ago, and India was 20 years ago, with a similar population to both those countries, but with vast amounts of undeveloped land, not to mention Africa’s rich resources.” Beyond commodities and agriculture, Greeff says a growing consumer theme has emerged on the continent. As a result, sectors such as telecommunications, retail and, of course, banking, will all benefit.

Africa’s potential is enormous. The continent is where China was 30 years ago, and India was 20 years ago, with a similar population to both those countries.

However, many investors wanting exposure to the continent will continue to seek it through the Johannesburg Stock Exchange. They know that companies such as Shoprite, MTN and Mr Price have rapidly growing footprints outside of SA’s borders, and the Rand is more liquid than other African currencies.

“But when you compare the price of the South African market to the low PEs of most African markets, it’s definitely worth investing some percentage of your portfolio in Africa ex-SA, even though it comes with political and geographical risk, and potentially high levels of volatility,” adds Greeff.

Emerging markets as vital as developed in client’s investment portfolio

I

n the past, advisers believed that the emerging market box had been ticked by having exposure to South Africa.

They thought it best to concentrate on developed markets rather as homegrown exposure took care of the need for emerging market exposure. However, STANLIB fund manager, Paul Hansen, disagrees.

“The fastest-growing countries in the world are emerging markets. We think they are currently offering good value and warrant inclusion in any well-diversified investment portfolio. The recovery underway in the world economy is expected to be good for emerging market growth in general,” says Hansen. “Although we also like developed markets, there is a place in a diversified investment portfolio for emerging market exposure.”

Paul Hansen, Fund Manager, STANLIB

For investors wanting to capitalise on their fast-growing nature, investing in emerging markets is the route to go. Russia, Brazil, India and China are the stalwarts in the emerging market world, but other countries are also worthy of attention. Thailand, Turkey, South Korea and Taiwan have captured the attention of Hansen, who says each has attributes worth noting.

“These emerging market countries have huge, and constantly growing, consumer buying power. So we believe that these countries offer good investment opportunities,” he adds.

A good rule of thumb is to aim for 20 per cent of an investor’s offshore equity exposure to be in emerging markets. Hansen advises looking for international equity or asset allocation funds with higher emerging market exposure.

Exposure is not limited to equities – listed property and bonds are also compelling.

The fastest-growing countries in the world are emerging markets. We think they are currently offering good value and warrant inclusion in any well-diversified investment portfolio.

“In 2012, interest rates were lowered again and again in country after country. This means the cost of money was reduced many times,” explains Hansen, “which is good for economies and markets. It stimulates business, entrepreneurship and consumer spend. It stimulates investment, and I believe emerging market exposure in 2013 will be a sound investment choice.” 

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Although emerging markets have underperformed the developed markets so far in 2013, they do seem to offer better value at this stage (they are trading at only 10.5 times expected earnings vs.

12.5 times for developed markets – so-called P/E ratio). Hansen says emerging markets currently look undervalued relative to developed markets.

The biggest country in the Emerging Market Index, comprising around 19 per cent, is China. Although its stock market has performed poorly over the last three to four years, three months ago green shoots started appearing. So much so that the stock market is now up about 20 per cent.

“Chinese shares continue to offer what seems to be very good value. The economy has turned after a slowdown in 2011/2 and we expect company earnings growth to pick up this year in line with the recovery underway in global economy. This growth is in large part driven by huge capital spending, building infrastructure, exports and growing consumer spend,” says Hansen.

Another country of interest is Brazil, with two compelling factors pushing in its favour: a population of 200 million, and a country rich in resources. Although its economy slowed down sharply in 2012, measures were taken to counter this slowdown. Interest rates were lowered four or five times in the course of last year to counteract this. The stock market performed poorly and the currency also took a knock. However, the stock market is now trading at nine times earnings, expected for 2013, so Brazil looks somewhat undervalued.

There is no question that emerging markets carry a higher risk than developed markets do.

Hansen says South Korea is also looking attractive.

It is now the second-biggest market in the Emerging Market Index, and is trading at around nine times earnings. However, as with all investments, there is an element of risk. A risk factor in South Korea is its competition with Japan, most notably on car sales, with Toyota and Hyundai direct competitors.

The recent sharp fall in the Japanese Yen exchange rate is a competitive threat to the Korean exporters.

The two also compete closely in terms of technology and consumer products.

South Africa is the fifth-biggest market in the Emerging Market Index, comprising around seven per cent. Investors must understand that if they are investing in emerging markets, they are most likely holders of local shares.

As with any investment, one’s eyes must be open to risks. “There is no question that emerging markets carry a higher risk than developed markets do,” says Hansen. “They are, broadly speaking, less regulated than their developed market counterparts, and have a larger Third World element to consider. They can also be subject to more government interference, which could change the playing field. Having said that, we tend to believe that on the whole, emerging market currencies are undervalued relative to developed market currencies, which supports our investment case.”

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Morningstar Award Finalists 2013 Best Global Bond Fund: STANLIB Global Bond Fund – Paul Hansen Best ZAR Diversified Bond Fund: STANLIB Bond Fund – Victor Mphaphuli and Ian Scott

Focus leads to Performance

STANLIB was named Runner Up, Best Fund House – Large Range, at the 2013 Morningstar South Africa Fund Awards.

The Morningstar South Africa Fund Awards recognise fund managers in South Africa who have demonstrated excellence in the past year and in their stewardship of fund shareholder capital over the long term. The awards methodology emphasizes both competitive returns and the associated level of risk.

STANLIB was also named finalist in two individual fund awards for best performance in their respective categories: Best Global Bond Fund: STANLIB Global Bond Fund Best ZAR Diversified Bond Fund: STANLIB Bond Fund STANLIB Asset Management Managing Director, Ben Kodisang, said, “STANLIB has continued to improve investment performance across its Franchises. We are doing this by remaining relevant - with new capabilities established - and competitive with awardwinning investment professionals in markets across funds that matter. With a stable investment team and enhanced performance, we are comfortable that this positive trajectory will continue into the foreseeable future, and we remain focused on our investment goals”.

STANLIB’s Fixed Income franchise has been a consistent performer – and beneficiary of various industry awards – for several years. STANLIB Fixed Interest returns, relative to peers, have historically ranged between first and second quartile. As at the end of 2012, its Fixed Interest capabilities, from short maturity solutions – including the STANLIB Income Fund – to long maturity solutions – including the STANLIB Aggressive Income or Bond Funds – have maintained first or second quartile rankings over all time periods.

The SA Equity Funds managed within the Equity franchise are continuing their trajectory up the performance rankings, with an average first quartile position over 2012. This improvement has enabled other capabilities – including the Balanced and Absolute Return Franchises – to noticeably improve on their performance rankings (relative to peers).

In addition to its single-manager capabilities, the STANLIB Multi-Manager Franchise has also been a consistently strong performer. Its Flexible Property Fund is a recent Raging Bull winner, and its Global Equity and Global Bond Funds have also outperformed their respective benchmarks and peers for the fourth calendar year running.

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Harris

Private equity in africa

Great returns but hard to find

Africa may have as many as 200 ‘hidden’ billionaires operating in unofficial economies who will seek to legitimise their wealth in the future. That’s according to emerging markets champion Mark Mobius, executive chairman of Templeton Emerging Markets. That’s not to say these wealthy people are engaged in illicit businesses, though stories abound about shady oil deals in Nigeria. What it does show is the size of the private equity market in Africa. Many substantial businesses are not listed on stock exchanges. They could be prime targets for investors but they are not that easy to find.

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rivate equity is maturing as an asset class in Africa, says Ngalaah Chuphi, head of sub-Saharan investing at Ethos Private Equity. “We see the continent in two ways. First we have a mandate within our fund to invest directly, being up to 20 per cent, into consumerfacing companies of scale where we can partner with local like-minded investors. More importantly, we will invest in South African companies that are looking to exploit the growth taking place in Africa.”

The listed companies markets in Africa tend to be quite small, says Rory Ord, head of RisCura Fundamentals. “Look at investments in listed companies in Nigeria. You can buy the big capitalisation companies. But when it comes to the whole economy, you will not have much of a picture.” He says the private equity market across Africa is estimated to be worth US$25 billion to US$30 billion. “About half of that is in South Africa and the rest across Africa.”

Probably the first large South African retailer to move into Africa was Shoprite, opening a store in Luanda, Angola, in 2003.

It is now in several African countries and these operations are performing well, better than stores in South Africa where shopping has been curbed due to the sluggish economy and pressure on consumer spending. In recent interim results, CEO Whitey Basson said Africa was paying handsome dividends.

Supermarkets outside South Africa grew sales by 28.2 per cent in Rand terms, benefiting from what Basson described as “a number of fast-developing African economies”. Back in South Africa, sales grew by a more modest 11.5 per cent. “During the period under review, 15 outlets were opened to bring the group’s number of outlets outside South Africa to 179,” he said.

It’s not something most investors would try on their own. They need to use an experienced manager.

You want private equity managers to be on the ground and know the investments in the African country they are based in.

SABMiller has had significant interests in a number of African countries, including breweries and bottling plants, for a long time. Its latest initiative, though, is aimed at making a more affordable beer for consumers in 10 countries in Africa and supporting farmers, who supply the ingredients for the new brands, Chibuku and Chibuku Super. The countries it is targeting are Tanzania, Ghana, Nigeria, South Sudan, Angola, Zambia, Zimbabwe, Uganda, Botswana and Malawi. Research shows these countries represent a value opportunity of about R32.2 billion.

“We have been investing heavily to grow capacity and stay ahead of demand across Africa,” says Mark Bowman, MD of SABMiller Africa.

“The expansion of our Chibuku operations illustrates how we are driving our affordability strategy, production innovation and maintaining momentum behind our ‘Farming Better Futures’ programme.” SABMiller has so far invested US$16 million on the Chibuku brands.

Another big South African company investing in Africa is Tiger Brands.

Late last year it bought 63 per cent of Dangote Flour Mills in Nigeria, the company with a dominant share of the flour and pasta markets in Nigeria. The seller, who will retain a 10 per cent interest in the company, is Aliko Dangote, the richest person in Africa. He is not one of Mobius’ hidden billionaires but a very public figure, with a net worth estimated by Forbes magazine of R91.8 billion, nearly double the wealth of South Africa’s Nicky Oppenheimer.

Dangote has business interests, including cement, in a number of African countries, which Tiger says may offer further opportunities.

The price Tiger is paying will total R4.1 billion if profit targets are met. Tiger also owns two other businesses in Nigeria and has interests in Zimbabwe, Ethiopia, Kenya and Cameroon.

Sasol is investing in Africa, building a new R1-billion plant at Secunda that it says will supply fertiliser to meet the growing agricultural markets in South Africa, the Democratic Republic of Congo and Zambia. Other attractive markets in Africa include Mozambique and Zimbabwe, where Sasol is selling increasing quantities of blasting material to the mines.

An interesting South African investor in Africa is the Government Employees Pension Fund (GEPF). Principal officer, John Oliphant, says the fund decided to jump in ahead of pension funds in developed countries by targeting private equity investments in Africa’s high-growth markets.

He says many foreign pension funds have been hit by poorly performing stock markets in Europe and the US, and were battling to match their assets to liabilities. For this reason, they would seriously look at seeking higher returns in many of the fast-growing economies in Africa.

Oliphant says aviation has been identified as an area with potential, and for this reason the GEPF had bought an airport in Tunisia.

Ord described the GEPF investment as one targeting developing projects in Africa.

He believes many pension funds will have to invest in both listed companies and private equity.

While it’s mainly institutional investors looking at private equity in Africa, the private retail investor is not excluded from this market. Most of the private equity companies in South Africa run funds that retail investors can invest in. The manager of the fund will choose the investments.

But Ord warns that investors seeking to make their own direct investments in private equity companies will probably need advice. “It’s not something most investors would try on their own. They need to use an experienced manager. You want private equity managers to be on the ground and know the investments in the African country they are based in.” He identifies investing in infrastructure in Africa as vital, because it is so far behind and because better infrastructure would improve investment opportunities. But it’s going to be very expensive. “RisCura did research on this and found that it would cost around US$300 billion to US$400 billion for infrastructure development across Africa. And that’s just to catch up.” Ord says investing in private equity in Africa is fairly cheap at this stage. “It’s roughly in line with private equity investments in Latin America and Asia.”

Private equity sectors attracting attention from investors include retailers, due to the growing discretionary spending in a number of countries in Africa.

Telecommunications are also seen as a good investment.

In many countries in Africa, most of the population, up to 80 per cent, make and receive payments on mobile phone accounts rather than conventional banks. Banks are also a favoured investment due to the large number in many countries and what could soon be consolidation in the various banking sectors, offering acquisition opportunities.

And perhaps surprisingly, wine exports from South Africa are starting to become big business. For example, wine exports to Nigeria grew by 12 per cent last year. Local wine producers note a change in African markets, with preference shifting from bottled wine to bulk wine. investsa

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Head to head

CEO

Emergent Asset Management Ltd Dav i d 1. Africa has traditionally been plagued by political and economic uncertainties. Why has it now become an attractive investment destination?

Applying my model of the five stages of empire to Africa, www.breakingthecodeofhistory.com (which describes the way empires and nations rise and fall), then Africa has been going through the first stage of regionalisation.

During its earlier stages of turbulent growth and changing leadership, long-term sustainable investment opportunities were hard to find. However, more recently, over the past 20 years the regionalisation stage has matured. Driven by expanding demographics and rich veins of natural resources, the continent and specifically a few countries within it have been going through a powerful expansive stage that has made Africa the foremost investment destination for those seeking growth returns. In addition, whereas once Africa was the vacuous space in western foreign policy, the competition for resources started by the Chinese has once more made Africa an area of foreign policy focus for America and Asia.

2. What regions do you believe offer the most value?

There is a big difference between the perception of value and the ability to extract it. On the one hand, Nigeria is very wealthy but operating there is a bit of challenge for investors. On the other side of the equation, the region where I would consider that the two criteria coincide is the SADC region of Africa. This area is high on the growth curve, and yet is influenced by the South African economic model. It also has 16

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Murrin

Zimbabwe to use as an example of how not to run a country.

3. What are the challenges facing investors who wish to profit from Africa’s emergence?

I would suggest they avoid the unstable zones. I would expect that the belt across the middle of Africa that divides the Islamic nations in the north and the tribal Christian nations on the south will become highly contested, i.e. it will become a continuous war zone, so avoid that region and those affected by it at all costs. Climate change is another consideration as the continent undergoes major changes that include water and associated food shortages in some regions.

On the micro level, it will be key to cross the cultural divide and to socially integrate investment into the local population.

Climate change is another consideration as the continent undergoes major changes that include water and associated food shortages in some regions.

4. Are there particular sectors/asset classes that investors should avoid in Africa?

They should stay clear of high leverage products, which have become the norm in the developed world and are not necessary in

Africa due to the high underlying growth.

5. Do SA investments count as African exposure or are the risks very different?

In my opinion they do. However, they have a different risk profile as SA is at a different stage of its economic growth cycle compared to the countries to its north. Such differences allow investors to build a diversified portfolio in African assets.

6. Have you seen an increase in appetite for emerging markets with the relaxation of exchange controls in SA? We have seen an ever-increasing appetite for emerging markets globally as the west’s growth has slowed to a snail’s pace. Of special note is the growing interest in Africa.

Seven years ago it was impossible to get investors to consider Africa, but today the continent has become the hottest investment designation in the world.

7. What would be your suggestion to investors considering gaining African exposure to their portfolios?

It is essential to remember that business practices that we might consider normal in the developed world cannot be taken for granted in Africa. It is a different culture and one that has to be respected if you are to build longterm business partnerships. Thus as the bar to entry into the region is still high, it’s all about the quality of the manager or the company management team which you invest in.

CIO

African Alliance Asset Management N i c h o l as

1. Africa has traditionally been plagued by political and economic uncertainties. Why has it now become an attractive investment destination?

In an environment where developed world institutions are engaged in a global search for return to fund their increasing liabilities, Africa continues to provide extremely attractive risk-adjusted return opportunities.

This is particularly true if we are not fixated on short-term price volatility. Relative to the continent’s growth opportunities African stocks excluding South Africa are among the cheapest in the world, and have the potential to provide reasonably uncorrelated returns going forward.

2. What regions do you believe offer the most value?

We do not invest on a top-down regional allocation basis given the practical difficulty of monetising such views in certain markets.

Our regional allocation is effectively the result of our focus on bottom-up fundamental valuation within the constraints of managing a prudently constructed portfolio. We continue to find value across multiple sectors and countries.

3. What are the challenges facing investors who wish to profit from Africa’s emergence?

Liquidity risk management has historically been, and remains to this day, a key focus for us. The construction and ongoing management of a prudent portfolio of African assets is also challenging given the often skewed nature of the opportunity set, whether by liquidity profile or investment capacity.

Transaction costs, particularly on foreign exchange, remain an issue, although these have improved significantly over the past five years. That said, the nature of the opportunity more than compensates for these challenges, and we expect to see continued positive

development of Africa’s financial markets in the future.

4. Are there particular sectors/asset classes that investors should avoid in Africa?

We don’t write anything off categorically, because the in-price ultimately determines the nature of the potential pay-off profile for a particular investment. However, we do prefer to focus on areas where we believe we have an identifiable investment edge. On this basis, there are two areas we generally do not focus on; South African-listed stocks and the primarily offshore-listed African resource stocks. While resources are clearly beneficial on average, for the African continent as a whole, we find far more interesting valuation opportunities related to the emerging consumer theme across the continent.

Our regional allocation is effectively the result of our focus on bottom-up fundamental valuation within the constraints of managing a prudently constructed portfolio.

5. Do SA investments count as African exposure or are the risks very different?

Currently a limited number of listed South African companies provide reasonable economic exposure to the rest of Africa, although we expect this to increase over time.

However, the nature of the South African investment space is wholly different to that of the rest of the continent, particularly in terms of liquidity and informational efficiency.

Thus while investing in South Africa may be

Piquito

seen as an African investment by some, the nature of the risk-return profile is typically quite different. In our experience most international investors consider South Africa totally separate to the rest of Africa.

6. Have you seen an increase in appetite for emerging markets with the relaxation of exchange controls in SA? In general, yes. That said, many South African institutional investors are only starting to get to grips with the nature of the African investment opportunity, and as with any such new opportunity, there is a learning and investigative process which typically takes some time. The marginal benefits of Africa excluding South African exposure in a diversified investment portfolio are incontrovertible, however, and we see increased investment into Africa out of South Africa as inevitable.

7. What would be your suggestion to investors considering gaining African exposure to their portfolios?

Targeted exposure to the emerging Africa opportunity as part of a diversified portfolio makes financial sense; although in our experience, investors are often unsure of how best to achieve this. This is driven by the fact that the notion of African investments often means different things to different people, which makes understanding the nature of the opportunity set and how best to access the growth of this last emerging frontier an important part of the ultimate investment decision.

From a current valuation perspective, direct investment in these markets, via regulated exchanges or otherwise, is likely to provide the best risk-adjusted returns over time, and we believe this will best be achieved in partnership with an experienced on-theground investment team with a track record of investing across the continent outside of South Africa. investsa

17

Profile

JF

High quality service breeds investor confidence. In a well-run company, service costs nothing and buys everything. All too often, executives, directors and management are not aware of problems pertaining to service.

1. You joined Fedsure in 1991 as managing director and 35 per cent shareholder of its participation bond scheme, FedBond. Tell us more about its near collapse after the FSB’s application to have FedBond placed under curatorship and your battle to save the company.

In March 2001, Investec bought out and dismantled Fedsure. As a 35 per cent minority shareholder, I had a pre-emptive right to purchase Fedsure’s 65 per cent majority in FedBond. I exercised this right, despite many overtures from Investec to sell FedBond to them.

The FSB applied for FedBond’s curatorship as the back door to liquidation, when no grounds to curatorship or liquidation existed.

Once the FSB made an application to have FedBond placed under curatorship, Investec saw an opportunity and intervened in the FSB application, asserting that its unsecured loan (inherited from the Fedsure acquisition) was a regular participation bond investment and therefore secured. Had the application been successful, the FSB would have claimed victory, the curator would have become rich, Investec would have laid claim to the assets, investors would have lost over one billion Rand and I would have been the villain.

However, the FSB application was postponed, which dragged the curatorship application out for four years. It eventually lost the case, appealed and then withdrew from the appeal, tendering costs. FedBond was cleared of any wrongdoing, at R10 million in legal costs.

Despite being cleared, there was a run on the scheme and we repaid over R800 million before confidence returned. No investor has ever lost any capital in FedBond and interest was always paid, monthly in advance, as and

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when due – even throughout the four-year curatorship application ordeal.

leaders in employee benefits and pension fund administration.

2. Did you take any lessons out of this experience?

5. FedGroup recently launched its Dear John campaign. How does the “direct line of communication to the CEO, an open-door policy to employees, clients and the public”, contribute to investor confidence?

Remain liquid, as it will be the lack of funds that sink you before the court. Greed is the driver, dishonesty is the method and the innocent are the victims. If you are innocent, do not allow postponements, as this will destroy you financially and spiritually.

3. In an increasingly regulated industry, where reputation is everything, what is your advice to a company that suffers wrongful allegations of dishonesty or mismanagement?

There are three rules to keeping afloat during allegations of mismanagement: 1. Instead of shying away from the media, create a relationship that is mutually beneficial. Answer their questions, proofread their articles. This will give you the chance to correct any misrepresentation of information.

2. Keep your employees and clients informed.

High quality service breeds investor confidence. In a well-run company, service costs nothing and buys everything. All too often, executives, directors and management are not aware of problems pertaining to service. This starts with communication.

When I receive feedback, in the form of a compliment, complaint or suggestion, the first thing I do is thank the person. Without their feedback, I may be completely unaware of what is required to ensure the growth of my group. To provide unsurpassed service is my aim and, most importantly, my passion.

6. There are still concerns around the global market following the 2008 economic crisis. What do you think investors can expect for 2013?

3. Keep your family informed. False allegations can either destroy a family unit or bring it closer together.

In my opinion, investors can expect much of the same. There is a Chinese saying: fish can be caught in muddy water; while Buffett says be brave when others are fearful. I say, be thankful for the opportunities these conditions present.

4. What motivated you to stay in the industry?

7. Finally, if you had R100 000 to invest, where would you put it?

My motivation is simple. We did nothing wrong, so why turn away from the industry.

We grew from the smallest PartBond scheme to the market leader in 10 years. This growth is testament to the fact that we are good at what we do. We now look to be market

I would invest R100 000 into Participation Bonds. These are fully secure and interest bearing which means that you can earn monthly income, or grow your capital.

Personally, I would select a variable interest rate and reinvest the interest to grow the capital.

John Field C EO F e d G r o u p

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Budget

focus

Treasury proposals

impacting on retirement and saving “The budget indicated that all retirement products (pension, provident and retirement annuity funds) will be regarded as one product and no differentiating tax treatments will exist between these funds,” says Kotze.

It appears that these changes are to be introduced during the February 2015 year of assessment.

Dirk Kotze, Tax Partner at global audit, tax and advisory firm, Mazars

P

roposals hinted at in the 2011 budget regarding the reform of the taxation of retirement funding were once again one of the main areas of discussion in the 2013 Budget. According to Dirk Kotze, tax partner at global audit, tax and advisory firm, Mazars, if the proposals are accepted, there may be limited time for taxpayers to top up their retirement annuities (RA) to maximise deductions.

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The main features of the proposal are as follows: • A ll contributions to funds (including provident funds) will be limited to 27.5 per cent of the greater of remuneration or taxable income.

• The maximum deduction will, however, be R350 000 per annum. This means that a taxpayer with taxable income of R1 500 000 per annum will be limited to a R350 000 tax deduction although his 27.5 per cent limit is R412 500.

• Contributions in excess of the limits will be carried forward as is currently the case.

“Consultations will take place later in 2013 to investigate proposals to similarly align

withdrawal benefits from provident funds with those of pension or retirement annuity funds from a specific date, i.e. on retirement only one-third of the fund may be withdrawn as a lump-sum with the balance to be drawn as an annuity,” adds Kotze. “This change will, however, not impact provident fund members older than 55 years at the date of the implementation.”

Kotze says a further change is that employer contributions to retirement funds will all become taxable fringe benefits regardless of the current status quo. “The fringe benefit will then be allowed as a deduction, subject to the above limits.”

The 2012 budget also mentioned a potential change to stimulate savings and this was fleshed out in the 2013 budget. The interest exemption increased from R22 800 to R23 800 for taxpayers under 65 years and from R33 000 to R34 500 for taxpayers over 65 years. “It was suggested that these limits will not be changed in the future,” he says.

Instead, Treasury proposes to introduce tax preferred savings and investment accounts

as alternatives to current interest-bearing products. All returns and accruals within these accounts will be treated as tax exempt, as will withdrawals from these funds. It is proposed that minimum investment limits be set at R30 000 with a lifetime limit of R500 000.

The budget indicated that all retirement products (pension, provident and retirement annuity funds) will be regarded as one product and no differentiating tax treatments will exist between these funds.

2013 BUDGET

HIGHLIGHTS In this year’s Budget Speech, Finance Minister Pravin Gordhan highlighted a number of key developments aimed at promoting household savings and reform within the retirement industry, as well as improving the country’s post-retirement savings situation.

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“The question can be asked: what must persons, wishing to invest surplus cash in excess of these lifetime limits and tax exemption limits, do with the cash in order for the investment to be tax effective?” says Kotze. “It may be possible that this will disincentivise the savings of these cash surpluses as not all investors are prepared to invest in non-cash investments.”

South Africa already has a low savings rate and only about eight per cent of the population can retire comfortably. “The proposed changes will most likely not negatively impact the majority of individual taxpayers too much, but if savings and retirement products are no longer going to be tax efficient, higher income earners might think twice about investing in these products,” says Kotze.

“The concern is whether they will then invest in South Africa at all, or whether the surplus savings may find its way abroad,” he concludes.

Sanisha Packirisamy, economist at Momentum Asset Management

hile the budget did not reveal anything new about a national social security fund or elaborate further on the idea of introducing a mandatory pension scheme, a number of reforms, which are likely to increase the size of the potential market in the insurance industry and could ultimately give rise to a number of new savings products, were announced.

Contributions made by individuals to pension and retirement annuity funds are currently tax deductible. Pension fund contributions are capped at 7.5 per cent of retirement funding employment remuneration, whereas retirement annuity fund contributions are capped at 15.0 per cent of taxable income (other than retirement funding employment remuneration). The February 2013 budget proposed an increased deductibility of contributions to 27.5 per cent of remuneration/taxable income, which is simplified from the 2012 budget proposal which imposed age dependency. Deductions are to be capped at R350 000, with the option to roll excess contributions into future years. Government furthermore aims to harmonise the taxation of pension, retirement annuity and provident fund taxation in order to reduce the complexity of the retirement system. 

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Personal income rebates not fully adjusted for inflation Although there were no direct increases to personal income tax or VAT, the amount of personal tax relief announced did not fully compensate for inflation effects. Going forward, a number of indirect tax proposals, including fuel levies, sin taxes and a proposal for carbon taxes, are likely to impact the consumer negatively. For employees in the government sector, real wage increases are set to increase by 1.3 per cent per annum over the fiscal horizon (compared to the 8.3 per cent growth rates seen over the last three fiscal years), suggesting less of a tailwind for consumer spend.

Despite no announcement of higher direct taxes being imposed on the upperend consumer, we need to be aware that personal income tax brackets and rebates have not been fully adjusted to take inflation into account, despite government announcing personal tax relief to the value of R7 billion. The R7 billion personal income tax relief is concentrated mainly in the lowerto middle-income earning bands, with consumers earning more than R500 001 per annum receiving 7.4 per cent of the total tax relief announced.

labour unions by announcing an employment tax incentive for firms hiring young workers.

The tax incentive will be introduced at an entry level and is expected to fall to zero as earnings reach the income tax threshold.

More favourable tax treatment is expected for special economic zones, which will also promote further investment as a result of the tax benefits achieved through an accelerated depreciation allowance.

Small business development was also addressed in the recent national budget, with the minister announcing increased tax relief for small businesses. While the brackets have been shifted upwards, tax for small business enterprises in their initial stages of development remains a headwind and further tax relaxation, in our view, warrants consideration in an effort to encourage entrepreneurship.

Fiscal outlook

Tax incentives and rebates

National Treasury has announced that it will be publishing a paper on long-term fiscal sustainability and tax proposals needed to meet these expenditure plans. Despite the president allaying mine nationalisation fears, we await proposals on taxes for the mining industry. Furthermore, the 14-year National Health Insurance plan may pose a further threat to taxes down the line.

In response to the call for a youth wage subsidy, National Treasury aimed to appease

Gordhan alluded to signs of improvement in the global economy, but highlighted

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continued risks to recovery. Treasury downgraded South Africa’s GDP growth forecasts from 3.0 per cent to 2.7 per cent for 2013 and from 4.1 per cent to 3.5 per cent in 2014. Government also envisions South Africa’s real GDP growth increasing to 3.8 per cent in 2015, although we expect growth to disappoint relative to Treasury’s latter year assumptions and, as a result, remain concerned about the path to fiscal consolidation should revenues disappoint.

Treasury assumes a higher rate of growth on the back of stronger public sector investment, stable inflation and a benign outlook for interest rates. While Treasury upwardly revised its inflation forecasts to 5.6 per cent and 5.5 per cent for this year and 2014, persistent Rand weakness could see further upward risks to the inflationary trajectory.

More worryingly, Treasury stipulated that the current account deficit is expected to remain in excess of 6.0 per cent to GDP, implying a greater reliance on global flows in the order of c.R700 billion over the next three years.

Going forward, a number of indirect tax proposals, including fuel levies, sin taxes and a proposal for carbon taxes, are likely to impact the consumer negatively.

Underperforming economy makes the fiscal maths hard

The Finance Minister Pravin Gordhan has held the line on spending in absolute terms, although the Treasury needed to make use of its contingency reserve to achieve this.

Arthur Kamp, Economist at Sanlam Investment Management

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Arthur Kamp, Economist at Sanlam Investment Management

Alwyn van der Merwe, Director of Investments at Sanlam Private Investments

hile the Treasury revised its real growth projections down, the forecasts for the gross domestic product (GDP) deflator were revised higher, leaving growth in GDP in current prices largely unchanged over the medium term. Even so, because of the GDP growth disappointment in 2012–2013, the ratio of expenditure to GDP declined more slowly than previously expected over the medium term. But, the real problem is that the economy is not performing and revenue growth has disappointed.

What are the options?

1.

2.

3.

4.

Cut spending.

Raise taxes.

Sell assets.

A ccept fiscal slippage, run larger deficits and let the debt ratio increase more than previously projected.

Currently, we are opting for outcome number four. There is significant deterioration in the expected deficit outcomes over the medium term compared with previous projections made in February 2012. The consolidated budget deficit for 2012–2013 was projected at 4.6 per cent of GDP in February last year.

We have ended up with 5.2 per cent. By 2014–2015, the deficit is now budgeted to decline to 3.9 per cent (previously the Treasury expected 3.0 per cent). So there is material slippage and the debt ratio continues to increase in the medium term.

Gross debt is now expected to increase to 44.6 per cent of GDP (40.3 per cent for net debt) by 2015–2016 from 41.8 per cent of GDP (36.3 per cent for net debt) at end 2012–2013. The upward trajectory is slowed to a degree in that Treasury is running down its cash balances.

Moreover, for funding purposes it is the main budget deficit that is relevant (this excludes the social security funds that run surpluses and is therefore larger than the consolidated deficit). For 2012–2013, the main budget deficit is now expected at 5.7 per cent of GDP, followed by 5.2 per cent

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in 2013–2014. This is still high and the borrowing requirement for the year ahead (2013–2014) goes up from the R158 billion expected when the budget was read in February last year to a revised R178 billion.

The Treasury has held off on hiking the tax burden this time, probably because it is wary of burdening an already struggling economy further. But, if growth continues to disappoint, then in the absence of cutting spending, it probably can’t hold off on taxes indefinitely.

In any event, more taxes (read carbon tax) are already in the pipeline.

Alwyn van der Merwe, Director of Investments at Sanlam Private Investments The minister had very limited scope to manoeuvre as it became very clear late in 2012 that, against a background of slowing local economic activity, revenue was unlikely to match the target. The revenue stream and continued political demands meant that the minister delivered a balanced yet rather conservative budget.

Following the weakness in revenue and expenditure in line with expectations, the deficit before borrowings was 5.2 per cent as a percentage of gross domestic product (GDP) against initial expectations of 4.6 per cent a year ago which was a disappointment.

Going forward, the minister was quite bold in his assumptions as he budgeted to reduce the deficit from the current 5.2 per cent to 3.1 per cent in 2015–2016. Underlying this number are annual growth assumptions of 10 per cent per annum; however, he has budget for approximately only

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seven per cent per annum growth in expenditure over the same period. The latter assumption is rather brave against the political demands, an expected inflation rate of five per cent plus and the recent record of increases, albeit at a time when he was expected to aid the economy following the global financial crisis in 2007– 2008. Containing the wage bill will pose a challenge given reduced room from contingency reserves, an upcoming wage review and the risk of unplanned employment creation.

Rating agencies are likely to take note of the conservative expenditure budget. In addition, it is expected that government debt is likely to stabilise at around 40 per cent of GDP. However, the fiscal slippage in the 2012 – 2013 budget will not be viewed in a positive light.

The bond market should expect higher issuance.

Net local issuance has been revised higher over the next three fiscal years to around R165 billion for each year relative to the declining local issuance trend set out in the October mediumterm budget policy statement. The increase in net issuance is being driven by the revision higher of the government’s borrowing requirement, but also due to a more aggressive decline in the use of cash balances to finance any shortfalls.

The Treasury has held off on hiking the tax burden this time, probably because it is wary of burdening an already struggling economy further.

Industry

associations

The necessity of

offshore investments

M

any local investors have benefited from the JSE’s performance over the last 12 months. However, with this growth likely hard to beat in 2013, investors need to ensure their portfolio is fully diversified to protect against any downside risks. One way of doing this is to ensure a client has an offshore element to their portfolio; in fact, most advisers agree that up to 25 per cent of an investment portfolio should be offshore.

There are a number of ways to gain offshore exposure, including investing in local funds that offer growth in foreign currency; investing in locally listed companies that generate the bulk of their revenue offshore; investing in portfolios comprised of offshore assets without actually buying foreign currency; and by buying foreign stocks on offshore exchanges.

‘Calling the Rand’ is arguably the most complex of investment predictions. Choosing between market sectors, for example moving an investment out of retail shares and into commodities, tends to be easier.

To predict a currency you must consider both domestic and international inputs. There are considerations beyond the Rand to be brought into the equation, such as: what will the US Dollar do against the British Pound or Euro? What are the outlooks for the interest rates in the various currencies? Currency should never be the basis for an investment decision, but rather as guidance for the diversification of underlying investments. In addition, a decision to go offshore should

be a long-term commitment rather than an attempt to make short-term profits.

It is essential that financial advisers discuss diversification strategies with their clients and – where appropriate – assist them to gain access to international markets to implement the strategy.

‘Calling the Rand’ is arguably the most complex of investment predictions.

Choosing between market sectors, for example moving an investment out of retail shares and into commodities, tend to be easier.

The client’s personal circumstances must form the basis of any decision to invest offshore.

There are various questions that need to be answered. Is the client planning to emigrate in the foreseeable future? Is emigration under way? Are all/any of the client’s beneficiaries already living and working offshore? Is the capital under consideration surplus to the clients planned lifestyle funding needs? The offshore weighting – or percentage of a client’s portfolio invested offshore – would be higher the more “yes” answers are given. Any “no” answers, particularly to the last question, indicate a lower offshore weighting.

The second consideration is how your clients

gain access to offshore investments? The simplest method is to make use of one of many domestically registered offshore funds that are designated in Rand and structured to use the offering institutions’ offshore allowance.

These funds typically present simple and manageable options. If the client is emigrating or contemplating emigration, the more complex use of the client’s personal offshore allowance should be explored.

When it comes to offshore investing, it is crucial that the intermediary fully understands the funds their clients are invested in. Collective investments are regulated very differently from one country to the next. A good example of this is that many jurisdictions allow unit trust funds to suspend dealing or to have lengthy notice periods for disinvestment. Advisers need to disclose these limitations to their client upfront, or risk contravening provisions in the Financial Advisory and Intermediary Services.

Peter Atkinson, National Technical Portfolio Manager of the Financial Intermediaries Association of Southern Africa (FIA)

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Etfs

The increasing allure of

Exchange-Traded Funds

F

or the first time, an exchange traded fund (ETF) won a Morningstar South Africa award, perhaps signifying the growing popularity and success of the passive investment products in the country.

Though ETFs have been growing in popularity internationally for many years, they have been a relatively unexplored investment product in South Africa. However, recent growth has been significant with assets under management in South African ETFs growing to around R42 billion in 2012. The number of ETFs listed on the Johannesburg Stock Exchange has risen from two in 2002 to 38 at the end of 2012.

But South Africa is a small market for ETFs compared to larger global markets.

Global ETF assets grew to US$1.76 trillion during 2012 amounting to almost 30 per cent year-on-year growth. According to a Deutsche Bank research report, “About 18 per cent of it came from new cash flows (+$249-billion), while the remaining 11 per cent came from asset price increases.

Global growth was led by the US ETF market that saw record inflows of $174 billion in 2012.”

ETFs track the performance of an index in terms of both price performance and the income from the securities which are part of the index. This is achieved by purchasing the constituent securities in the same weighting as they are included in the relevant index. They are therefore relatively

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low risk investments with the only real risk to an investor being the timing of the selection of an asset class. The benefits include their low cost compared to actively managed investments – costs can sometimes be more than 50 per cent less than those of actively managed funds – and access to a broad spread of sectors and sub-sectors. ETFs are also transparent, liquid and are easily traded, being listed on the Johannesburg Stock Exchange, which provides a regulated trading environment.

“ETFs can suit the needs of both experienced and novice investors,” says Yusuf Wadee, ETF fund manager at Rand Merchant Bank. “Broad-based ETFs give investors access to diversified investments as the portfolio is spread over a number of shares. Novice investors can easily invest in these portfolios while experienced investors can use these as a core or as a satellite to their investment portfolio.”

It is also possible to construct an investment portfolio using only ETFs as they provide investors with a balanced fund exposed to all relevant asset classes. ETFs offer investors access to equities, bonds, property and commodities, as well as less traditional categories. For example, investors can buy an exposure directly linked to gold or to inflation-linked bonds. The winner of the Morningstar diversified bond fund category, for example, was an inflation-linked ETF that invests in a selection of government-issued inflation-linked bonds. “We believe the low risk of capital loss and low volatility are

good incentives to invest in inflation-linked bonds,” says Wadee. “The great run in the inflation-linked bond sector in 2012 helped this sector outperform other bonds, largely due to the interest rate cut in July 2012 (which increased demand for the bonds, leading to higher prices), and the elevated inflation over the latter half of the year.”

Investment in ETFs is likely to grow further and investors, who select the correct sectors, will clearly continue to make good returns.

Timing is critical but the benefit of low costs may continue to make ETFs an attractive and sustainable investment.

The RMB Inflation-X ETF, which tracks the performance of the Government InflationLinked Bond Index, realised an 18.74 per cent return during 2012 and 15.54 per cent (annualised) for the two years to December 2012.

Yusuf Wadee, ETF fund manager at Rand Merchant Bank

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Alternative

investments

Proprietary research and

on-the-ground presence

key to private equity success in africa Investors concerned about the accuracy of African economic statistics and national account figures should rely on proprietary research and an on-theground presence in subSaharan Africa.

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ccording to Pieter de Wet, head of research at Novare Equity Partners, the private equity unit of Novare Holdings: “Placing too great an emphasis on official statistics when making decisions about frontier markets like sub-Saharan Africa could mean that planned outcomes are not achieved. Additional research is required to make suitably informed decisions, compared with more developed markets. Also, having a physical presence 28

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when doing business in Africa is hugely beneficial. Hands-on experience helps companies grasp the subtleties of the environment in which they’re operating.”

Recent questions about the statistical capacity and accuracy of some subSaharan countries seem to be based on changes to national account figures provided by Ghana and Nigeria.

In 2010, Ghana’s statistics office said that, due to a change in the base year, the GDP growth figure would be adjusted upwards by roughly 60 per cent. In 2011, Nigeria announced that it was also reviewing its numbers, and the effect would be to increase the overall size of the economy by some 15 per cent.

De Wet said this led to investors asking: if national data is so unreliable, is subSaharan Africa really the growth story that the world is starting to accept?

“For investors the question is an important one. African markets tend to be relatively illiquid, with the result that investments are

long term. Although potential rewards are significant, the associated risks need to be managed more carefully perhaps than in the developed world and some developing countries. If a country’s statistical agencies are seen to be unreliable, investors need to go the extra mile to establish how best to access sub-Saharan Africa’s potential and how to benefit from economic growth taking place across the ‘last investment frontier’.”

Pieter de Wet | Head of Research at Novare Equity Partners

Asset

management

All that

GLITTERS Gold is losing its shine but still presents some investments opportunities, say asset managers

F

ollowing months of meagre returns and mounting industry uncertainty, gold is falling out of favour compared with equities. A number of leading portfolio managers have reduced their exposure over the past year or in the first quarter of this year in response to the receding threat of a Eurozone collapse or US debt default. However, opinion among asset managers on the outlook of the resources remains mixed, with some top managers confident that gold will recover lost ground this year.

Economic data has improved recently in both the US and the Eurozone and signs are that the world economy is positioned to perform better this year. It seems this optimism is rejuvenating interest in other assets, such as equities and having a knock-on effect on the levels of interest in gold and other resources.

Earlier this year, commodity fund managers indicated that they currently favour industrial metals such as copper and iron-ore, as well as platinum and palladium, over gold.

Notable institutional investors, including George Soros, Julian Robertson and Allianz’s PIMCO reduced their bets on gold during the first quarter of 2013, when bullion posted its biggest quarterly loss in more than four years. However, some leading fund managers believe that there are still many positives for gold.

Patrick Armstrong, at Armstrong Investment Managers, says that his fund added a little more gold to its holdings earlier this year, after cutting exposure towards the end of last year. Neil Gregson, manager of the JP Morgan Natural Resources Fund, also still sees solid support for gold prices but adds that he expects to hold or even reduce his fund’s holdings in coming months. “Our investments have already gone down on the gold side,” Gregson says. In February this year, the fund’s exposure to gold was around 24 per cent, against 30 per cent at the same time last year.

this year starting to allocate a portion of their investment to gold. This includes endowments, pension funds and the like,” he said. Having said this, he believes the gold price for the next 12 months could show a 10.5 per cent annual rise; and adds that the global macroeconomic environment is still very favourable for the gold price because of the continuation of negative real interest rates in the US, the Eurozone and the UK. “It’s difficult to see a major lasting setback to the gold price while we still have these conditions.”

We need to see real money investors into the gold space this year starting to allocate a portion of their investment to gold. This includes endowments, pension funds and the like.

Meanwhile, Frank Holmes, CEO and chief investment officer, US Global Investors, says due to the global easing cycle and the continuous running of monetary printing presses, he believes the fear trade will continue to be a driver of gold over the next several months. Furthermore, as concerns over an impending currency war mount, many asset managers are looking to gold as a potential long-term opportunity in the event that the value of paper money is compromised.

Philip Klapwijk, global head of Thomson Reuters GFMS metal analytics, believes that gold is needed to attract different investors and diversify from the more traditional investors. “We need to see real money investors into the gold space

Indications are that the revered resource may be losing its shine as some asset managers adjust their holdings downwards.

However, the jury is still out in terms of the long-term prospects of gold and it seems that some holding of gold is still advised.

The question is: just how much? investsa

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Chris

Hart

Bond markets Chris Hart | Chief Strategist, Investment Solutions

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o the dedicated equity investor, bonds may not necessarily be of great interest and a market sector best left to the banks and professional fund managers.

However, the fortunes of this market directly affect other asset classes. Bonds or fixed income are regarded as a safe-haven asset class and over the short term, often trade in an anti-correlated manner to equities. This means that if there is greater risk aversion, equities are sold and bonds bought. With greater risk appetite, the reverse is true.

However, over the long term, a bullish equity market generally moves in tandem with a bullish bond market. The reason is the central role the bond market plays in setting benchmark yields and interest rates.

Market valuations are determined using bond yields set in the market. When discounting future cash flow of a share, benchmark bond yields are used to determine the expected value of that equity. The higher the interest rate applied as a discount factor, the lower the present value of the future cash flows.

Likewise, when bond yields are low, the lower discount rate has the effect of enhancing present valuation measures.

The bull market that began in global bonds at the start of the 1980s has been a strong secular trend for more than 30 years. This trend has resulted in bond yields falling from more than 15 per cent to less than two per cent recently in the case of the US. This long secular bull trend has been in the background of the long bullish trend in global equities, which also started in the early 1980s. As bond yields have fallen, the perception of value in equities has been sustained and has helped support their bull market. Falling bond yields provide a tailwind for equities.

However, bonds have become extremely expensive or overvalued over the past few years. This applies particularly to the developed world, where bond yields are exceptionally low but face deteriorating fundamentals. Central banks have been propping up bond markets through quantitative easing (QE), and risk aversion means a great deal of investor money is parked in fixed income. Bonds are expensive as, in many instances, yields are below inflation rates and government finances are deteriorating on over-extended expenditures and exhausted tax bases. There is every probability of the long secular bond bull

market shifting to a bear market. Rapidly climbing government debt and weak economies are sapping confidence. This being the case, equity markets will start to face headwinds.

Initially, rising bond yields will be seen as a rotation into equities and shares will still go up. This is a short-term response that will eventually capitulate to the bond bear. This is not a problem in the short to medium term if yields rise slowly, as it would be manageable.

Of concern is that government debt has been spiralling out of control and that if government solvency were to be tested, yields would rise rapidly. The Greek experience is a case in point. The 10-year yield, which was still at six per cent at the start of 2010, had spiked to almost 40 per cent in early 2012 and by the time the Athens stock market had bottomed in mid-2012, it had lost almost 80 per cent of the value it had at the start of 2010 and more than 90 per cent from its 2007 peak.

However, in the aftermath of the Greek Government bailout, Greek 10-year yields have fallen from their 40 per cent peak back down to almost 10 per cent. And the Greek stock market has more than doubled from its mid-2012 low.

The key to gaining insight into the influence of the bond market on equity markets is to understand that these markets have a strong long-term correlation, even if anti-correlated in the short term. Small moves in the bond market are not as consequential but the big moves and prevailing secular trend have a substantial influence.

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Economic

commentary

The good, the bad, and the worrisome After a hectic start to the year, February provided little respite on the macro front. January saw South Africa downgraded by a major ratings agency, the Rand sold off aggressively and a big platinum producer announced restructuring that could see as many as 14 000 workers retrenched. The Reserve Bank Monetary Policy committee also left its benchmark repo rate unchanged at five per cent, as expected, despite deterioration in the bank’s inflation outlook.

M

inister of Finance Pravin Gordhan gave his Budget Speech in Parliament on 27 February. Given some negativity around fiscal sustainability ahead of the budget release, amplified by recent downgrades in South Africa’s sovereign debt, there were no major surprises, and it was both positive and negative.

Positive in that there were no attempts at quick fixes. However, this was also negative in the sense that the concerns, which market participants had going into the budget, remain.

The government’s consolidated budget deficit was projected to be wider than estimated, except for the outer year of the government’s medium-term expenditure framework. The budget deficit is projected to be 0.6 per cent wider in the fiscal years 2012–2013 and 2013–2014 than was anticipated in the 2012 budget and 0.9 per cent of GDP wider in 2014–2015, while the projection for 2015– 2016 was unchanged from the 2012 MTBPS estimate. The bigger deficit estimates were due to a combination of lower than previously expected revenue collections, largely because of a weaker growth performance and outlook, and higher current expenditure.

The latest budget had no significant tax policy changes, although the minister did confirm that Treasury will initiate a review of South Africa’s tax policy framework later this year. We think there’s a good chance that it will lead to increased taxes over the medium term. In the meantime, the bigger budget deficits will be funded largely through additional domestic bond issuance.

Stats SA figures showed that the economy grew more rapidly over the final quarter

of 2012. Gross domestic product (GDP) expanded at an annualised rate of 2.1 per cent over the quarter, up from 1.2 per cent over the third quarter.

We expect growth to continue its recovery through 2013. Although the calendar year growth figure for 2013 will likely be sub-three per cent, the sequential quarterly performances will look more encouraging with rates of growth above three per cent annualised.

Other high-frequency data released last month showed mixed performances, with car sales weaker in February, credit extension weaker in January, and purchasing managers’ index data stronger in February. Trade figures were horrible, with South Africa’s trade deficit widening to R24.5 billion in January, from R2.7 billion in December.

Stats SA published South Africa’s rebased and reweighted Consumer Price Index (CPI) in February. The figures showed that consumer inflation fell to 5.4 per cent in January from 5.7 per cent in December 2012, driven by base effects and relatively small increases in bi-annually surveyed prices such as insurance fees. Consumer inflation is likely to decline further, but we see an increasing trend, with consumer inflation temporarily breaching six per cent over the third quarter. Although we expect consumer inflation to slip back into the target by the fourth quarter of 2013, it will likely remain close to the upper end of the Reserve Bank’s target range. There is significant risk that the inflation target will be breached by the end of 2014.

One positive for consumer inflation was Nersa’s announcement on 28 February that it will grant Eskom tariff hikes of eight per cent

per annum over the next five years, rather than the 16 per cent per annum that the power utility initially asked for in its price application.

The forecast assumes that municipal tariff increases are capped at Eskom’s rates.

Notwithstanding the positive news on inflation, we maintain that the Reserve Bank’s July 2012 repo rate cut was the last in the cycle. But this does not mean that a rate hike is imminent.

Indeed, we see a hike at the end of 2014 at the earliest, with an increase likely sometime in 2015.

While recent inflation figures were encouraging, the expected trajectory over the next two years remains worrisome, with recent labour market developments, Rand weakness and oil price increases adding upside risks.

And while growth is not expected to shoot the lights out, South Africa’s wide current account deficit remains of major concern.

Adenaan Hardien, Economist, Cadiz Asset Management

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Regulatory

developments Choosing an

investment platform: lessons from the UK PSG explains the potential impact of recent regulatory changes in the UK on financial advisers and their choice of investment platform.

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ccording to the UK Retail Distribution Review (RDR), the way UK investors invest and receive financial advice has changed since the beginning of this year.

Lize Visser, executive: distribution, sales and marketing, says that they started a formal investigation into the potential impact of the RDR in the UK in November 2011. “We met with adviser firms and platforms to hear their divergent views. We also wanted to see how advisers and platforms were preparing for the implementation of RDR,” she explains.

Visser provided us with an overview of the main changes: Independent vs. restricted advisers Financial advisers will be split into two distinct categories: independent and restricted. When consumers speak with any adviser, they will have to tell their clients which category they are in. Independent financial advisers (IFA) will be required to have more qualifications starting in 2013. They also need to consider all the different kinds of investment products such as stocks, funds, ETFs, investment trusts, pensions, annuities and more before giving investment advice and cannot simply specialise in one area.

Restricted advisers will not have to increase their qualifications and will not have to be knowledgeable about all areas of the market. They may focus simply on ethical investing or a limited product set. Some restricted advisers will advise clients on nearly all investment opportunities in the market, but if they lack knowledge in just one area or if they lack the proper qualifications, then they will not be able to call themselves independent. Their ability to advise on all investment products will be limited, hence the name ‘restricted’.

This move to increase the level of demonstrable professionalism and minimum

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educational standards is not new to South African advisers. Whether the same definitions come into play as explicitly in South Africa is something that remains to be seen.

No more commissions from fund companies to IFAs for new fund sales Research has shown that many UK consumers don’t realise that IFAs make money through commissions. It is therefore unlikely to be any different here in South Africa. But the new RDR rules stipulate that IFAs will no longer be able to receive commissions from fund companies for selling new funds to clients in 2013. In the UK, IFAs will now have to ensure that they have an upfront, transparent agreement with each of their clients about fees before giving financial advice. The new rules requiring an upfront agreement on client fees instead of commissions aim to make IFAs’ charges more transparent for investors and to ensure that investors receive unbiased investment advice.

For South African advisers, this is something to consider already as part of a post-TCF (Treating Customers Fairly) regime. We are also already hearing a lot of talk in the industry about ‘clean’ unit classes, without built-in trail or ongoing adviser fees.

Choosing a platform for the future In the context of the above regulatory changes, many South African advisers, like their UK counterparts, may be forced to review their platform choices and evaluate the varying platforms’ capabilities.

Selecting the most suitable platform has the potential to give advisers much greater control over their clients’ investments both in terms of the overall costs to the client and the structure of their portfolio(s). In addition, it can also help to lower the costs of running a financial planning practice and increase revenue.

Visser’s view is that regulatory trends and changes elsewhere tend to filter down to South Africa “in one form or another”, which is why they are ensuring that through the PSG platform, advisers can choose to access the whole universe of investment options.

“Independent advice lies at the heart of our product and service proposition because we offer the broadest range of investments instruments and products through one platform,” she concludes.

The changes may imply a new charging structure for many IFAs Different IFAs will charge their clients differently. For clients who need once-off advice, IFAs may agree to charge a flat fee or an hourly fee. For clients who want more regular contact with their IFA, an annual charge may be arranged where the client pays the IFA a percentage of their portfolio each year.

For South African advisers, the fees/ commission debate is not new, but it is likely to gather regulatory steam once again.

Lize Visser, executive: distribution, sales and marketing

Sunél

Trust

veldtman

(or the lack thereof )

The Merriam-Webster dictionary defines trust as the following: a: assured reliance on the character, ability, strength, or truth of someone or something; b: one in which confidence is placed.

I

am often amazed by how easily prospective clients trust advisers. After meeting an adviser for the first time, some people are willing to hand over their life savings within a matter of minutes.

Interestingly, research shows that people trust outgoing types more easily than they trust introvert types. In her book, Quiet: The Power of Introverts in a World That Can’t Stop Talking, Susan Cain refers to studies, which reveal that people rate fast talkers as smarter than listeners.

Although there seems to be an outward ease, with which people hand over their savings, there is a deep mistrust in advisers, product providers and the financial industry as a whole. I am always freshly struck by this mistrust when I present workshops to groups of women, and ask them to tell me their stories. It is surprising how few people trust their advisers, let alone like their advisers.

Similarly, I spoke to a wealthy, educated man recently who told me that unit trust companies are like sharks. He had the impression that they were double-dealers and unstable – that they could fold at any point in time and lose all their clients’ money. Clearly the industry has failed if even the most educated members of society have this perception. After all, people’s perceptions are their reality.

During a recent media interview, I mentioned that retirement annuities are a viable investment option – the producer nearly fell off her chair. Sadly, these vehicles have such a bad reputation that those who actually need them, are shying away from them. It doesn’t help that phony schemes pop up on a regular

basis. Despite the concern of many informed people, they are allowed to mushroom and fail spectacularly. Just last year many retirees and widows lost millions in the Relative Value Arbitrage Fund.

I’m all for regulations, fees over commissions, transparency over opaque fee structures and all those good things. But I’m also for an industry that inspires trust, and an industry that encourages savings.

The media is not helping either. Week after week, plenty of articles appear, highlighting numerous incidents of misconduct in the industry. Yes, there are crooks. Yes, consumers need protection and they need awareness. However, we know that bad news sells better than good news. If media commentators focus only on exposing the worst, they are creating mistrust in a vital industry.

Trust is built by reinforcing the positive attributes of a product, service or person. Trust is built by informing consumers.

During a recent media interview, I mentioned that retirement annuities are a viable investment option – the producer nearly fell off her chair.

In the old days, retirement products were ‘sold’ to customers. Financial advisers earned commission. But guess what? People saved! Now, the savings rate in South African is close to zero. I think that many people so distrust the industry that they would rather shy away from saving than invest. I would go so far as to say that I’d rather have someone saving into a somewhat flawed product than not save at all.

Consumer education should be a top priority, so that saving is encouraged. One of the best things that the government can do to promote saving is to ensure trust in the financial industry. In every decision that is made, every industry participant should ask themselves: am I instilling trust in the industry or not?

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

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Practice

management

Death of a

SALESMAN Arthur Miller’s play, for which he won a Pulitzer Prize as well as a Tony award, came to mind when I read a recent determination by the ombud on yet another Sharemax investment.

T

he main character in the play is Willie Lowman, a salesman, who, according to Wikipedia, is 63 years old, unstable, and tends to imagine events from the past as if they are real. He vacillates between different perceptions of his life.

We sometimes come across similar symptoms when talking to advisers who find it difficult to let go of the past. A typical example is the constant refrain that the Regulatory Examinations are unfair, as they have been in the industry for 30 or 40 years and never had a complaint from a client. The fact that the examinations were set to test their ability to comply with the requirements of legislation, which became applicable only in September 2004, appears to have slipped their minds.

In the Wessels determination, a couple invested, between them, R1.5 million in the Sharemax property syndication, called The Villa Retail Park Holdings 2 Limited. These investments were made over a period of 14 months, between 28 May 2009 and 12 July 2010. Some of the investments were placed in the Villa after news broke that the Reserve Bank was investigating the scheme.

The ombud quotes the following passage from the respondent’s reply to the complaint: “Isn’t it strange that the insurance industry, or the bodies that govern it, is the only industry that holds its sales force accountable when the product fails to perform? For instance, if a car salesperson sold a car that turned out to be a dud, is he/she blamed or the manufacturer?

And this applies to all aspects where a salesperson is involved. You cannot hold a 34

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salesperson accountable for product failure unless he was withholding material evidence that led to its failure, which is extremely difficult to prove.”

• Advice has to be based on solid facts; • Gleaned from conducting a thorough needs analysis; and • Should assist the client in making an informed decision.

The ombud’s response to this was as follows: “Of serious concern to me is the first respondent’s attitude that he is merely a salesman and that salespersons cannot be held liable in the event of product failure. At the outset I have to remind the first respondent that he is not a salesman, he is a licensed FSP. As a licensed FSP, he is obliged to comply with the provisions of the Act and the Code as well as the relevant board notices that are published from time to time. He is certainly not in the same class as a car salesperson.

The first respondent cannot claim to be a mere salesperson as he rendered financial advice and intermediary services to the complainants as defined in the Act. It is alarming that the first respondent should even consider himself as nothing more than a salesman. This indicates a complete misdirection on the part of the first respondent regarding his role and function as a licensed FSP. One must now question his competence to retain his license.

The first respondent is equally misdirected about product failure. The complaint against him is not about product failure but about the competence of his advice to invest in this product in the first place.”

The critical mind shift that the industry, as a whole, had to make in the wake of the introduction of the FAIS Act and related legislation is that advice is now the driver, not sales.

Isn’t it strange that the insurance industry, or the bodies that govern it, is the only industry that holds its sales force accountable when the product fails to perform?

Regrettably, there are still far too many incentives to ‘sell’ available in the market.

Product providers who provide undeclared kickbacks, cleverly disguised as something else, do nothing to enhance the transition towards the required behaviour.

The view of the ombud quoted above confirms that the era of the smooth salesman is, indeed, over. It is now a professional occupation for those who put the clients’ interests first.

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

etfsa.co.za FEBRUARY 2013 – etfSA.co.za MONTHLY SOUTH AFRICAN ETF, ETN AND INDEX TRACKING PRODUCT PERFORMANCE SURVEY Mike Brown | Managing Director | etfSA.co.za

S

atrix INDI 25 ETF continues to remain the top performing passive investment tracker product over the five years, three years and two years surveyed for the year ended 28 February 2013.

Property funds such as the Prudential Property Enhanced Index Unit Trust and Proptrax SAPY ETF have also performed very consistently.

In the short-term performance periods of

up to one year, exchange traded notes (ETNs) are increasingly promising in the performance stakes, notably the DBX Africa Equity and Standard Bank Africa Equity ETNs plus the Platinum and Palladium Linker ETNs, issued by Standard Bank.

etfSA.co.za Monthly Performance Survey. Best Performing Index Tracker Funds – 28 February 2013 (Total return %)* Fund Name

Type

5 years (per annum)

Fund Name

Type

3 years (per annum)

Satrix INDI 25

ETF

19.10%

Satrix INDI 25

ETF

28.13%

Prudential Property Enhanced

Unit Trust

18.52%

Prudential Property Enhanced Index Fund

Unit Trust

23.70%

Proptrax SAPY

ETF

17.27%

NewFunds eRAFI INDI 25

ETF

22.89%

NewGold

ETF

16.73%

Proptrax SAPY

ETF

22.48%

2 years (per annum)

1 year

Satrix INDI 25

ETF

29.04%

Standard Bank Corn-Linker

ETN

42.78%

NewFunds eRAFI FINI 15

ETF

26.24%

Satrix INDI 25

ETF

39.00%

Proptrax SAPY

ETF

25.58%

DBX Africa 50

ETN

37.51%

Satrix FINI

ETF

23.12%

Standard Bank Africa Equity

ETN

36.11%

NewGold

ETF

22.62% 6 months

3 months

Standard Bank Palladium Linker

ETN

42.54%

Standard Bank Palladium-Linker

ETN

27.53%

Standard Bank Africa Equity

ETN

32.00%

Standard Bank Oil-Linker

ETN

13.70%

Standard Bank PlatinumLinker

ETN

31.76%

Source: Profile Media FundsData (28/02/2013)

* Includes reinvestment of dividends.

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

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

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Industry

news

Appointments

GLACIER INTERNATIONAL MAKES GLOBAL INDEX FUNDS AVAILABLE TO LOCAL INVESTORS Glacier International, a division of Glacier by Sanlam, has launched a range of global index funds within its Global Life Plan. The daily priced funds, available from BlackRock and based on principals pioneered in its popular iShares ETF (exchange traded funds) range, are offered at an annual management fee of 0.55 per cent, substantially less than most active funds on offer.

“Investment opinions differ, but we believe that active and passive funds both have a place in a diversified investment portfolio,” says Andrew Brotchie, head of product and investment at Glacier International. “A core-satellite strategy can help investors achieve cost-effective long-term growth with a level of outperformance,” he says.

According to etfSA.co.za, exchange traded products grew assets under management by 19 per cent to R47.8 billion at the end of 2012. Although growing steadily, the local market has some catching up to do with the global ETF market which was valued at US $2 trillion at the end of 2012, according to a BlackRock survey.

Bidvest Bank has appointed Thinus Liebenberg as the company’s financial director. Liebenberg, a chartered accountant, holds a bachelor of accounting science degree with honours and has more than 20 years’ experience in financial services. He entered the banking industry in 1990 at Volkskas Internal Audit. He is a former CFO of Absa Business Markets and currently a member of the South African Institute of Chartered Accountants and the Investment Analyst Society of Southern Africa.

Patrick Clackson and Ashock Vaswani have been appointed to the board of directors at Absa, commencing from 1 March.

Clackson replaces Ivan Ritossa, who stood down from the board on 31 December 2012, and Vaswani replaces Antony Jenkins. Clackson is currently the chief executive of Barclays Corporate and investment banking in Europe, the Middle East and Africa and Vaswani is the chief executive of Barclays retail and business banking.

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The new range of index funds is available as an investment option within the Global Life Plan, thereby giving investors all the associated benefits of investing within a life plan. “There are estate-planning advantages, too,” says Brotchie. “By investing via an offshore life plan issued by a South African life company, investors ensure that the investment forms part of their South African estate, thus avoiding the complications of having part of their estate located offshore.”

ABSA WINS AFRICAN WIND DEAL OF THE YEAR The corporate and investment banking division of Absa Bank Limited, member of Barclays, was yesterday awarded Euromoney magazine’s Project Finance Award, for the African Wind Deal of the Year, for financing the Dorper Wind Farm project.

The Dorper Wind Farm is an onshore wind farm in the Eastern Cape. The project will erect 40 Nordex N100 2.5 megawatt wind turbines resulting in 100 megawatts of electricity generation capacity. It is part of government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

“We are proud to be pioneering the winds of change in South Africa’s renewable energy landscape,” says Stephen van Coller, chief executive of Absa’s corporate and investment banking division. “This international accolade recognises Absa’s role as a leading financier of large scale renewable energy projects.”

Absa was appointed as a mandated lead arranger on the transaction, alongside other financiers. Together with Barclays, Absa was able to assist Dorper in arranging South Africa’s first renewable energy deal financed on an export credit backed basis. Maintaining the sustainability theme, Absa was also able to assist the Dorper project with global risk management and ongoing project finance expertise.

The Project Finance Awards, launched 14 years ago, recognise innovation, deal repeatability, best practice, problem solving, risk mitigation, value for money and speed of delivery in the financing of infrastructure projects, large or small. It covers a range of sectors, including oil and gas, power, renewable energy, transport and public-private-partnership.

With the ETF market set to grow in South Africa, Grindrod Bank aims to provide an extended suite of products, each with their own unique value proposition to investors.

GRINDROD FINANCIAL SERVICES PURCHASES PROPTRAX Grindrod Financial Services has concluded a deal to buy Property Index Tracker Managers (Pty) Ltd from the Resilient property stable for an undisclosed sum.

The deal remains subject to FSB approval. Property Index Tracker Managers manage the first two JSE-listed ETFs which track the listed property market in South Africa. Listed property has provided investors with approximately 26 per cent, 10-year annual compound, returns in South Africa, and these funds give investors a seamless and cost-effective way in which to invest.

ProptraxTen (JSE: PTXTEN) tracks the 10 largest listed property shares on an equally weighted basis, while ProptraxSAPY (JSE: PTXSPY) tracks the traditional property index and all its components. Both products have been well received by the market with a combined market cap of over R200 million.

Listed property investments are ideal for investors looking for income and a protection against inflation over the long term. For this reason, the asset class appeals to a broad set of investors. For more adventurous, risk-taking investors there are now also CFDs available from Nedbank Capital on the two ETFs. David Polkinghorne, managing director of Grindrod Bank, says, “With the ETF market set to grow in South Africa, Grindrod Bank aims to provide an extended suite of products, each with their own unique value proposition to investors.

Grindrod Bank will be launching the GTRAX range of ETFs over the course of 2013 and 2014. GTRAX will offer a broader range of ETF products in asset classes, suitable for retail, institutional and pension fund investors.”

Last year, Grindrod Bank listed PREFEX, an ETF which tracks the SA preference share market. This fund (again the first of its kind in SA) also raised just over R200 million since listing in March 2012. PREFEX is currently yielding 7.3 per cent gross and will change its name to PREFTRAX once regulators have given their approval to go ahead.

NEDBANK IS ONE OF SA’S MOST EMPOWERED COMPANIES Nedbank’s progressive transformation initiatives have ensured that the group maintains its Level 2 BroadBased Black Economic Empowerment (BBBEE) rating for the fourth successive year, further cementing its position as one of South Africa’s most empowered companies under this measure.

Spurred by the very successful Nedbank Eyethu Share Scheme that was launched in 2005, the bank’s BBBEE record is testament to its solid performance and ability to meet commitments to a broad range of stakeholders.

The Eyethu Scheme’s net value has grown by more than R5.8 billion, with R2.3 billion having already accrued free of any debt to the participants. In addition, over R710 million has been paid out in dividends to date. Widely regarded as one of South Africa’s most successful empowerment deals, the Eyethu Scheme has benefited more than 47 000 individuals – ranging from employees, retail clients, corporate clients Nedbank black business partners and communities.

Chief executive of the Nedbank Group, Mike Brown, explains that the objective of the scheme is to broaden Nedbank’s shareholder base and meet its business and moral commitment to South Africa’s economic and social transformation.

“Through this vehicle, we’re able to grow our business and play a meaningful role in the nation’s economic growth. The affirmation of our Level 2 Broad-Based Black Economic Empowerment rating attests to the success of our efforts in ensuring that transformation is not a compliance exercise but a strategic business imperative to ensure Nedbank remains relevant in a transforming society.”

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2013 Morningstar South Africa Fund Awards Coronation has a banner evening capturing five awards including Best Large Fund House; ETFs win an award for the first time in South Africa

C

oronation Fund Managers came away with top honours at the Morningstar South Africa Investment Awards which was held on 26 February at The Table Bay Hotel in Cape Town. The Cape Town-based firm won five awards during the evening, one of which was the overall award for Best Large Fund House; its third consecutive win in this category.

The award for Best Small Fund House went to Southern Charter for the second consecutive year.

At the individual fund level, Marriott Dividend Growth was named Best South African Equity fund for the third year in a row. The fund had yet another year of top quartile performance – 28.9 per cent in 2012 – while incurring less volatility than the vast majority of its peers over the past several years.

Other repeat award winners include the four-time winner Coronation Market Plus (Best Aggressive Allocation Fund); two-time winner Coronation Balanced Defensive (Best Cautious Allocation Fund); and two-time winner Coronation Strategic Income (Best Short-term Bond Fund).

Nedgroup Investments Entrepreneur won the award for Best South Africa Small Cap Equity. The Abax-managed fund has been a long-standing top performer in this relatively small category. The fund’s 40 per cent return for 2012 contributes to an 38

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impressive long-term track record.

Lead manager Anthony Sedgwick has outperformed the category average by 146 per cent cumulatively since taking the helm in July 2004.

The explosion of ETFs around the globe has begun to catch on, as 2013 marks the first year that an ETF has won a Morningstar Award in South Africa. Morningstar’s eligibility rules exclude funds that do not have at least three years of performance history; and of the 38 South African ETFs that Morningstar tracks, only half have a performance history of three years or more.

RMB’s Government Inflation-linked Bond ETF took home the award for Best Diversified Bond Fund while the NewFunds eRAFI Financial 15 ETF received top honours for Best Sector Equity. Both funds benefited from their meaningful fee advantages over their open-end unit trust peers.

Fund Category Awards Winner Best Global Bond Fund Prudential Global High Yield Bond Best Global Investec GSF Global Franchise Equity Fund Best Property – Coronation Property Equity Indirect Fund Best Regional Offshore Franklin European Growth Equity Fund Best Sector Equity Fund NewFunds eRAFI Financial 15 ETF Best South Africa Marriott Dividend Growth Equity Fund Best South Africa Nedgroup Investments Small-cap Equity Fund Entrepreneur Best Aggressive Coronation Market Plus Allocation Fund Best Short Term Coronation Strategic Income Bond Fund Best Cautious Coronation Balanced Defensive Allocation Fund Best Diversified RMB Government Inflation Bond Fund Linked Bond ETF Best Flexible ClucasGray Future Titans Allocation Fund Best Moderate MET Odyssey Balanced FoF Allocation Fund Fund Group Awards Winner Best Fund House: Southern Charter Small Range Wealth Management Best Fund House: Coronation Fund Managers Large Range

Two off-shore categories were also recognised at the awards. Investec GSF Global Franchise won the Best Global Equity Fund and Franklin European Growth won for Best Regional Offshore Equity Fund.

The Morningstar Awards are held annually to acknowledge those funds and firms that have delivered outstanding returns while maintaining prudent risk management over both the most recent year and the long term. This year 13 funds and two firms were honoured with awards.

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

Products INVESTEC ASSET MANAGEMENT LAUNCHES AFRICAN CREDIT OPPORTUNITIES FUND Investec Asset Management has launched the first dedicated African credit and debt capital markets fund of its kind globally. The Investec Africa Credit Opportunities Fund 1 is a dedicated closed-ended fund aiming to raise US $350 million.

The fund aims to provide growth capital to African companies, thus offering an alternative to traditional bank funding, encouraging growth and employment, and fuelling the long-term development of Africa’s debt capital markets.

This is done by a landmark investment from two established development finance organisations in CDC, the UK’s Development Finance Institution, and Dutch development bank FMO, which sees development capital allocating specifically to African debt capital markets in order to achieve its dual aims of development and return.

“Rising interest in the African investment opportunity has led investors to explore a range of means by which to participate in a multi-year growth story. Africa, with the world’s strongest population demographics, strong GDP growth and improving political governance has been identified as the last investment frontier. The African growth story is apparent; however, the best investment entry point to the growth story has not been so obvious,” says John Green, global head of client group, Investec Asset Management.

Stanlib launches property exchange traded fund Asset manager Stanlib’s property exchange traded fund (ETF) tracks the performance of the FTSE/JSE South Africa-listed property index (SAPY). Stanlib’s addition to the property ETF market forms part of the company’s long-term strategy to cover all asset classes in lowcost index products.

“Property is an entirely different asset class, and should be managed as such. This is why a specialist ETF makes sense in this … market,” says Stanlib’s head of ETFs, Len Jordaan.

Stanlib’s property ETF will become the second index to track the FTSE/JSE SAPY index, which is also tracked by competing fund the PropTrax SAPY index. Earlier this year, Resilient Property Income Fund sold the management company of its PropTrax ETF business to Grindrod Bank for R4 million.

Property is an entirely different asset class, and should be managed as such. This is why a specialist ETF makes sense in this market.

Jordaan says that while in the past it was lumped with other listed equities, property behaved very differently from company shares.

He adds that property had become a distinct and popular asset class with capital and income-generating attributes. South Africanlisted property extended its strong run last year, with total returns above 30 per cent, helped by the low interest rates and the positive performance of retail and industrial properties.

However, returns this year are expected to remain healthy but at more subdued levels, and Jordaan advises that an ETF provides the ideal means of exposure, rather than directly investing in listed property stocks.

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The fund, managed by Investec Asset Management’s South Africa and Frontier Credit team, has been designed with the aim of giving investors high yields, the ability to access the African public and private markets across all sectors, US$ exposure and lower volatility than other risk assets.

SANLAM SET TO LAUNCH AFRICA REAL ESTATE FUND Financial services group Sanlam is to launch its subSaharan Africa Real Estate Fund and intends to list it on the stock exchange of Mauritius. The fund, which forms part of Sanlam’s growth strategy into Africa, excludes South African real estate.

Sanlam Investments CEO, Johan van der Merwe, says that the fund aims to take advantage of the favourable supply and demand imbalance for quality real estate across the subcontinent, as well as its strengthening demographics and resultant return characteristics.

Sanlam expects to grow the portfolio to more than $500 million over the medium term, with the bulk of initial investors expected from the US and Southern Africa. Van der Merwe says while most of the developed world is struggling to find yield, Africa has seven of the top 10 growing economies in the world, creating an opportunity for Sanlam to provide the investor community with a suite of products that facilitates participation in these markets.

Sanlam Properties CEO, Thomas Reilly, says, “Sophisticated investors have struggled to find an internationally acceptable product to access the growing African market.”

Reilly adds, “While its holding in the Accra Mall in Ghana is the fund’s only property, we have been able to secure a strong pipeline of select assets with attractive returns.” The fund would not develop property but would acquire existing income-earning assets in countries where Sanlam had a footprint, including various West and East African countries, as well as Zambia and Mozambique.

The

world united states, jamaica, tunisia, europe, serbia, south africa,

Hopes of an economic recovery as Obama raises minimum wage President Barack Obama’s proposal in his State of the Union speech to increase the country’s minimum wage to $9 an hour by 2015 from $7.25 an hour, is an attempt to alleviate the country’s fragile economy. The president is expecting the decision to benefit the nation as a whole; however, economists are stating that the working class would now be more susceptible to unemployment due to higher salary expectations.

trade talks. European Trade Commissioner Karel de Gucht said that a free trade deal would be the most ambitious yet attempted, attracting half the world’s economic output and a third of global trade flows. The international deal progressed swiftly after President Barack Obama said in his State of the Union speech to “pursue an agreement to expand the world’s largest economic relationship”. The initiative is said to ease regulatory tariffs as well as expand access to investment globally.

Serbia set to sell bonds

Debt-swap plan to cure crisis in Jamaica After three years of facing serious “economic turmoil”, Jamaica has plans for its second debt swap. The nation’s debt, which currently stands at 140 per cent, is one of the highest in the world.

According to Prime Minister Portia Simpson Miller, the debt swap is aimed at lowering this number.

“If this debt is not reduced, Jamaica faces a dismal future,” she said. Approximately 55 per cent of government spending goes towards paying Jamaica’s debt and 25 per cent on wages, leaving 20 per cent for education, security and health.

Unemployment rate in Tunisia takes a dip Following a rise in foreign investment, unemployment rates in Tunisia fell to 16.7 per cent at the end of 2012 from 18.9 per cent in 2011, according to statistics released by the State Institute of Statistics. After regular uprisings within the nation’s government, job creation has been cited as one of the government’s greatest challenges. At the end of 2012, 653 000 people were out of work, a decline of 0.3 per cent from the previous year.

Europe sets two-year target to complete trade talks with US Leaders from the US and the European Union (EU) have pledged to move ahead and complete

Serbia is to sell a US$2 billion Eurobond next year and is looking to attract investors from the Middle East as an initiative to service its national debt. The country’s Finance Minister, Mladjan Dinkic, has confirmed that the country will embark on an international roadshow with the US and the UK. The former Yugoslavian state is also set to sell some of its assets in a bid to help raise funds to drag the country out of recession.

New Barclay’s strategy sees 3 700 jobs axed Barclays is looking to axe 3 700 jobs in order to structure its investment bank, which is currently being reorganised by its new chief executive.

The plan, which seeks to cut 1.7 billion Pounds in annual costs, will also ultimately improve economic standards. Antony Jenkins, CEO of Barclays, said the job cuts will include 1 800 in corporate and investment banking and 1 900 in its European retail and business banking.

South African authorised securities depository anticipates new rival South Africa’s authorised central securities depository, Strate, will soon face competition from a new, still un-named consortium. The rise in competitors will likely see regulators taking an increasingly intrusive approach to regulatory finance. The more detailed approach will be incorporated into the twin peak model for regulating the financial sector.

Growth in sub-Saharan Africa According to the MasterCard African Cities Growth Index, various sub-Saharan African nations have been identified as having the highest potential for growth over the next five years, including Accra, Lusaka and Luanda, as well the capital cities of Ghana, Zambia and Angola. The new index puts a spotlight on the economic and human factors driving urban growth over the next five years. Of the 19 researched cities, Accra was ranked as having the highest growth potential. “Some of the key reasons for Accra emerging as a high growth city included its consistent GDP rate, projected population and household consumption growth and its strong regularity environment.

Euroclear to service Russian treasuries Euroclear Bank will provide post-trade services for Russian OFZs, one of the most actively traded classes of Russian government bonds.

All international firms will now be able to trade and settle their positions as OFZs via Euroclear Bank’s account with Russia’s central securities depository, NSD (National Settlement Depository).

Eddie Astanin, CEO of the NSD, says that the Bank of Russia, Russia’s Federal Financial Markets Service and the Russian Ministry of Finance have combined forces to implement the necessary legislative changes of Russian federal bonds.

West Africa on the cards for RMB Rand Merchant Bank (RMB) has said it is looking to build a permanent franchise in Ghana following the official opening of RMB Nigeria last week. Planning to use the country as a platform, RMB is offering transactional banking in the hopes of getting absolute returns in the short term and economic returns in the medium term. “Although we have already established a track record through our representative office, RMB Nigeria enables us to significantly scale up our in-country offerings and play a more prominent role in the growth of the Nigerian economy,”according to RMB. investsa

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Barometer

Positive economic forecast for Nigeria

Hot

According to an economic outlook report by the national bureau of statistic (NBS), Nigeria’s economy is expected to grow 6.75 per cent this year. The country’s GDP is also expected to continue steady growth, averaging 7.27 per cent in 2014, 6.93 per cent in 2015 and 6.62 per cent in 2016.

Japan to increase investment in South Africa

and is key to strengthening the relationship between South Africa and Japan.

A memorandum of understanding to collaborate on increasing Japanese investment into South Africa has been signed between the Department of Trade and Industry (dti) and Japan’s largest bank, Bank of Tokyo-Mitsubishi UFJ Ltd. According to Trade and Industry Director-General Lionel October, the agreement would be assessed on an annual basis

Twin peaks model to stabilise SA financial system The Financial Stability Board (FSB) reported in a peer review of South Africa that the country’s move to a twin peaks model of regulation will boost the country’s resilience and further stabilise its financial system.

Slow economic growth rates but situation is improving According to the World Bank’s latest Global Economic report, the world’s economy performed badly in 2012. But although developing countries recorded their slowest economic growth rates for the past decade, developing-country stock markets were up 12.6 per cent since June, while equity markets in high-income countries are up by 10.7 per cent.

Sideways SA labour unrest erodes profits

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Anglo American Platinum (Amplats) has reported its first full-year loss due to persistent labour unrest, weaker prices and stagnant global demand. Amplats has invested, on average, $1 billion a year in South Africa over the past decade.

Global forecast cut by IMF Global growth forecasts have been cut by the International Monetary Fund (IMF) as the progress in battling Europe’s debt crisis fails to produce an economic recovery. According to its World Economic Outlook report, the 17-country Euro area is expected to shrink 0.2 per cent in 2013.

South African businesses unsure of future A survey by Grant Thornton revealed that almost half of South African business leaders are postponing making important decisions about the future due to the uncertainty of the political direction for the country. The survey also reported that around a quarter of companies are considering investing offshore in countries that are viewed more stable.

they

said

They said “It’s clear from volume and trading data, certainly in Nigeria, Kenya and Zimbabwe at least, that foreign investors continue to dominate. If you look across African markets, you will see that … (since mid-January) stock markets are up in quite a few of the bigger markets – 10 per cent across the board – as global investors and local investors have more risk appetite.” John Legat, manager of Imara’s African Opportunities Fund, commenting on the renewed interest by foreign investors which is currently driving Africa’s equity markets.

“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential non-public information.”

Daniel Hawke, a Securities and Exchange Commission official, discussing the fact that US Federal regulators have alleged that a brokerage account in Switzerland was used for illegal insider trading ahead of the HJ Heinz acquisition.

“Generally speaking, 2012 was a year of investors pursuing yield and safety, resulting in them bidding up the share prices of defensive businesses and smashing the share prices of cyclical businesses. Any signs of stability or an economic recovery in Europe could result in cyclical stocks doing very well.” Daniel Malan, investment director at RE:CM, on where the firm predicts that they will see value in 2013.

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“The notable change this year is the sectoral shift in terms of return expectations. Managers have significantly shifted their stance on resources when compared to last year’s less bullish outlook.” Thobile Thukani, market analyst at Investment Solutions, discussing how after the sharp de-rating of resource shares in 2012 due to factors such as labour unrest in the sector, it appears managers are positive on resources for 2013.

the top investment hotspots on the African continent, when considering boosting their growth prospects through international expansion plans.” Grant Thornton Johannesburg partner and head of corporate finance, Jeanette Hern, commenting on the fact that South Africa urgently needs to become more attractive to foreign investors if it wants to be a viable contender as a global investment hotspot.

“We expect the local equity market to grind higher in the absence of any exceptionally positive or negative global news. Our forecast is for a real return of 6.5 per cent per annum over the next five years. Although valuations are getting expensive, SA equities do offer the best absolute return.” Peter Brooke, head of MacroSolutions at Old Mutual Investment Group SA (OMIGSA), discussing what he expects from the local equity market in 2013.

“There are five good reasons why investors should invest offshore, namely asset and liability matching, tactical asset allocation, diversification, access to an unrestricted currency and sovereign risk.” Ian Beere of Netto Invest, on why South Africans should consider investing offshore.

“Investors still believe that they can time the market by switching between asset classes.

The opportunity cost of this approach is huge over the longer term as investors consistently lose out on market surges.”

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), on how many investors believe they can time the market and end up making emotional investment decisions based on either fear or greed.

“Potential investors from developed economies have highlighted South Africa as one of

“There is a general worldwide feeling of gradual and hesitant recovery after three years of nail-biting recession and it is this cautious optimism we see set to fuel growth and create rewards for those who invest in the right areas.” Ray Withers, CEO of investment agency, Property Frontiers, on how 2013 will pan out for investors.

“The good news is that South Africans have become more affluent (on average) since the ANC came to power in 1994. This cheering fact may appear at odds with the bearish views sometimes dispersed on SA, but the hard data confirms it.” Annabel Bishop, Investec Bank Limited’s chief economist on how South Africans have it better off.

you

said

u o Y id sa ets e w t st e t b s a e l h f t er the o e som you ov f o tion ned by eeks. c e l A se mentio four w as @TraderPetri: “You hear that? That loud storm-wind-like noise? That’s the sound of money leaving South Africa...”

Trader Petri – Just a lover of financial markets... Cape Town, South Africa @Ryk van Niekerk: “Zuma: At policy level we have brought about certainty in the mining sector. Nationalisation is off the table… #SONA” Ryk van Niekerk – Editor of Moneyweb.

Proud South African. Johannesburg @mayaonmoney: “#FNB advert is encouraging people to take a personal loan for Valentine’s Day. Now that is counter revolutionary!”

Maya Fisher French – Personal finance columnist focusing on information that actually matters South Africa @GTalevi: “To put it into perspective, this new ruckus has just cost R6.87 billion - the value wiped off Amplats’ market cap.”

Giulietta Talevi – Business broadcaster.

SENS stalker. Occasionally apoplectic.

Interested. Johannesburg

@ronderby: “Would the UK economy be doing better inside the Eurozone or outside?

A possible triple dip recession for the first time since the twenties.”

Ron Derby – Business Day Markets Editor, Columnist Johannesburg @LmariB: “#BHP share price gets hit as workers at its Colombian mine threaten to strike. SA is not the only country with inequality and labour issues.”

Mari Blumenthal – General economics and markets reporter @Sake_24. Loves fiction, fashion and finance and writes about most things that includes index in the title. Johannesburg @RussLamberti: “#TransUnion Q1 2013 SA Consumer Credit Index shows consumer credit health is deteriorating. This is a leading indicator, so take note.”

Russell Lamberti – Economist, FreedomLover. Figuring out the world one cappuccino at a time. Joburg @hiltontarrant : “@Shoprite CEO Whitey Basson says R1.1bn lost in mineworker wages

due to strikes in second half of 2012. R280m in lost sales.”

Hilton Tarrant – Radio anchor and financial journalist at Moneyweb. Nationwide on the SAfm Market Update at 6pm weekdays. Obsessed about business, mobile, tech, telecoms. Joburg @AdrianSaville: “Jeremy Grantham’s updated evidence on economic growth and investment returns. Fast growth does not equal high returns.”

Adrian Saville – CIO and founder @ Cannon Asset Managers. GIBS Visiting Professor; economics, finance and strategy; passionate South African, dedicated husband and dad. Ninja.

MarcHasenfuss: “Private education firm Curro getting quite a scolding from the market after trading update. ‘Must try harder’ appears to be the assessment.”

Marc Hasenfuss – Financial journo, whose real passions are Henry Miller, Frank Zappa and watching his kids destroy things. Kommetjie

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And now for something

completely different

Investing in a

million-dollar signature While the outlook on the world economy looks subdued, investors are scouring the market in order to find good returns. Those open to new ideas and fortunate to have access to collectables are finding value in rare autographs.

P

aul Fraser of Paul Fraser Collectables says that the beauty of rare autographs lies in the fact that there are various types of autographs, signed by people from vastly different walks of life. There are currently around three million serious autograph collectors around the world.

The majority of signers whose autographs are highly valued and sought after are no longer alive and their limited availability creates demand and drives up their value.

“Autographs are a booming area for collectors, thanks to increasing demand for unique signatures, especially among those who are aware of the investment potential but are constrained by budgetary issues. Rare autographs can still be found at the more affordable end of the collectibles sector,” says Fraser’s website.

When considering a particular autograph for investment, it is helpful to ask one simple question: will people still talk about them in 50 years’ time? Here are five of the best and highly valued autographs today.

Neil Armstrong Neil Armstrong is highly respected by aeronautic enthusiasts and as a worldrenowned figure has one of the most valuable autographs of living celebrities to date. The autographs of the first man to set foot on the moon has soared in value of late, up from £550 to £5 950 (R7 380 to R79 850) between 2000 and 2011, according to the PFC40 Autograph Index – an increase of 24.17 per cent each year. What makes Armstrong’s signature so valuable is that he stopped signing in 1994, making his autographs even rarer with buyers fighting over a small, finite number of specimens.

Muhammad Ali According to experts, Muhammad Ali has the most undervalued autograph around.

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You can pick up an Ali autograph today for just £1 000 (R13 420) – a miniscule investment for arguably the greatest sportsman of the last century. However, when the legendary boxer is no longer around to sign, his signature will definitely rise in value far faster than its current annual rate of increase.

The Beatles No band endures like the Beatles, and the available options for autograph buyers are numerous. Photographs signed by all four members rose by 14.3 per cent each year to over £24 000 (R320 000) between 2000 and 2011. Each band member’s autograph has its own worth, but for value-minded investors, Ringo Starr is the way to go. His is the fastest-growing autograph of the band, up 25.16 per cent in 12 months and currently valued at just over £995 (R13 000).

Rare autographs can still be found at the more affordable end of the collectibles sector.

John F Kennedy The market for John F Kennedy’s signature has been rising steadily of late. As the 50th anniversary of his assassination approaches, on 22 November, the value of his signature is set to leap into a new price bracket altogether, as widespread media coverage stirs the emotions of wealthy baby-boomer collectors and brings new buyers into the market. An autograph of Kennedy is currently valued at £7 500 (R104 481), but is likely to increase rapidly leading up to the anniversary and exceed the current rate of increase of 12.4 per cent per annum.

Princess Diana Signed photographs of Princess Diana rose in value by 19.60 per cent a year between 2000 and 2011. This is not surprising as anyone who witnessed the outpouring of emotion from the public following her death in 1997 can attest. She continues to command huge public interest, as seen by the May 2011 sale of a slice of cake from Charles and Diana’s wedding, which fetched a world record $2 752 (R25 337) at PFC Auctions.

When a famous person passes away, a boost in media interest usually has a positive impact on their collectibles. Yet some figures are so famous, so important in history, that their autographs rise in value year after year, even though they are still alive.

One such example is the South African legend and political stalwart, Nelson Mandela. A signed black and white photograph of a young Nelson Mandela, taken by Jorgen Schadeberg in 1952, was recently sold in South Africa for just under R72 000. The sale underlines the fact that Nelson Mandela’s autograph is still the most valuable of living celebrities and should give local investors a new means to diversify their investments.