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Being responsible in a changing investment landscape
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Getting responsible in a changing investment world
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daring investors to care
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Choosing an asset management company that grabs your fancy
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Gold: an increasingly lacklustre investment?
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Exchange traded products industry review: Second quarter 2014
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Retirement funds drive towards comprehensive social security
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Compelling reasons to move to index funds
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momentum round table: global and local fixed-income marketS
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Profile: Linda Sherlock, head of advisory, Alexander Forbes Financial Services
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From
the editor Stock markets hate uncertainty. It makes the traders, analysts and investors jittery. At worst, uncertainty leads to fear, resulting in irrational decisions, like selling a sector of assets in a portfolio at a low point, when holding out for a while would have seen impressive gains. The best protection against uncertainty is portfolio diversification. Of course, the importance of diversity gets rammed down our throats by every investment professional to the point that we start to gag. And overcautious investors can over-diversify, where every asset class in a portfolio is offset or hedged against another and the portfolio goes nowhere. But now could be a sensible time to diversify, and this issue is packed with articles on what asset or where to diversify, often with controversial viewpoints. For starters, Allan Gray’s Jeanette Marais spells out the advantages, and possible disadvantages, of using model portfolios to improve the efficiency of handling a large number of clients invested in a wide range of different funds. Lisa Segal, MD for of GinsGlobal Index Funds in this part of the world, provides an excellent piece on the US economy, which has such a profound impact on the economy and investments in South Africa. One point highlighted where we are going desperately wrong. The US is recovering jobs lost in the downturn, slowly, with an official unemployment rate of 6.3 per cent, though Segal points out it could be 14.5 per cent unofficially. Still, contrast that to South Africa where close to half the population is officially unemployed. Unions and business need to take a long hard look at themselves. To round off such expert commentary from two women, a third joins the fold, Sunél Veldtman, who tells us that women have a different view on financial advice than men, and how to talk to them. I urge male advisers to read this. Marc Hasenfuss writes his usual outstanding feature on how to select the right fund manager. As always, Marc provides concrete examples on who might buy which share: great tips for investment in asset managers, as with Coronation, who have been an investor’s dream. Contrast this feature with Morningstar’s David O’Leary, who offers expert, and unusual, advice on picking winning funds. The end of the column is looming and there are so many good articles I don’t have space to mention. But don’t miss REZCO’s Rob Spanjaard’s controversial look at gold as an investment. Besides being illuminating, it deflates some sacred gold cows. And read the Momentum Asset Management round-up of the last roundtable convergence of great minds. It’s a series of presentations that will continue. Hope they make it to the sub-tropics of Durban sometime soon. Until next time, diversifyingly yours,
Shaun Harris
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www.investsa.co.za Editor Shaun Harris | investsa@comms.co.za Publisher Andy Mark Managing editor Nicky Mark Content editor & editorial enquiries Vivienne Fouché | vivienne@comms.co.za Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Layout and design Mariska Le Roux Editorial head office Ground floor Manhattan Towers Esplanade Road Century City 7441 Phone: 021-555 3577 Fax: 086 6183906
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investsa, published by COSA Media, a division of COSA Communications (Pty) Ltd.
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Getting
By Shaun Harris
By Marc Hasenfuss
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responsible in a changing investment world In a perfect world, investing is about making money. It should be an amoral decision, regardless of what the investment target, usually a company, does, unless it is something terrible and illegal like drug or human trafficking.
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ut the world is not perfect, so investment decisions include other considerations. Apart from the obvious factors like investment intentions and the investment time horizon, a growing relatively new factor is socially responsible investing (SRI). Here’s where the perfect world ideal becomes more complicated: just as amoral investment decisions might rule in a perfect world, so too would perfect SRI principles. Neither does, so there has to be some sort of balance between investing to make money and investing in a socially responsible way. The issue is further complicated because there are so many definitions of SRI, many subtly changing the meaning. Mergence Investment Managers, the boutique investment house that specialises in the SRI offshoot, impact investing, defines SRI as ‘a combination of investors’ financial objectives with their concerns about social, environmental, ethical and corporate governance issues’. SRI takes into account both the investors’ values and investment’s impact on society.’ This seems a paradoxical overlap, trying to combine
amoral money decisions and moral social concerns.
screen out companies involved in activities that go against the Muslim faith.
Perhaps it is best to stick with the simplest definition of SRI, found on website Wikipedia, which is ‘any investment strategy which seeks to consider both financial return and social good’. To understand SRI it’s also useful to look at where the concept came from and theorise where it might be going.
Secondly, are ‘sinful companies’ necessarily the opposite of socially responsible companies? The answer is complex. In South Africa, according to Wesley’s definition, SABMiller would be a sinful investment because it makes alcohol.
The history is old and once again, Wikipedia is instructive. It tells us the origin may date back to 1758, when the Quaker Philadelphia Yearly Meeting prohibited its members from participating in the slave trade. The history of SRI goes back to one of the founders of the Methodist Church, John Wesley, who told investors to avoid ‘sinful companies’ like those making or selling guns, liquor and tobacco. This early history raises two points that are still part of SRI today. Firstly, the origins of SRI and many of its applications today are religiously motivated. Religion is still a tier of SRI, as with the Islamic funds and investments that will
However, on its products and advertisements, SABMiller warns that its goods cannot be sold to people under the age of 18 and warns of the dangers of drinking and driving. So can this really be considered a bad or sinful company? Similarly with gaming companies. Sun International will include a name and phone number with advertisements that the public may contact should they feel they are addicted to, or have a problem with, gambling. Is this then a sinful company? While the early history of SRI was religiously motivated, politics took over in the modern era. In the 1960s while the Vietnam War was raging, companies connected to the conflict were the targets of SRI investors, like Dow Chemical, which made the deadly fire substance, napalm.
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And before SRI arrived in South Africa, foreign investors were using it against the country. During the apartheid era, SRI investors disinvested from companies doing business with South Africa, and those actions are credited with playing an important role in ending apartheid.
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The formal introduction of SRI in South Africa was the drafting of the Code for Responsible Investing in South Africa (CRISA). Against this backdrop, the JSE Socially Responsible Investment Index was launched in May 2004. The index, made up of companies listed on the JSE and defined according to several criteria, is reviewed annually. The 2013 index contains 70 companies, with
the best performers (listed alphabetically) being: Anglo American Platinum, Illovo Sugar, Nedbank, Standard Bank Group, Steinhoff International and Vodacom. These, along with the rest of the companies in the index, offer investors a fair idea of the companies to invest in if they are interested in SRI. SRI has become increasingly important. It’s a growing trend in South Africa that is progressively entering investment strategies and decisions, and even the way many asset managers operate.
Cadiz Asset Management and Futuregrowth, part of Old Mutual Investment Group SA (OMIGSA), are regarded as the pioneers of SRI in South Africa. Cadiz focuses on managing unlisted, high social impact investments. The company is a signatory to the United Nations Principles of Responsible Investing and also a founding member of CRISA. Cadiz has won several awards for SRI. Futuregrowth is one of a number of asset managers under the OMIGSA umbrella that offers SRI funds. “We consider SRI to be a fundamental component of our broader commitment to national economic transformation,” it says. Many of the SRI investment managers tend to concentrate on one particular SRI theme. For Mergence, it is infrastructure funding, although it also looks at education and renewable energy. “Infrastructure projects can no longer be funded by traditional debt alone,” says Mergence portfolio manager, Mark van Wyk. He goes on to say that governments can and do play their part through infrastructure bonds, “but the vehicles are not necessarily ideal.” That is very true in South Africa, where government development of infrastructure and funding for infrastructure has fallen far short of all the talk in parliament. Elaborate plans for infrastructure development and the billions of Rands allegedly behind it fail to appear, except in insufficient dribs and drabs, putting strain on companies involved in infrastructure development and even putting some out of business. In the end, as is often the case both in South Africa and abroad, getting infrastructure sorted out will depend on the private sector.
“Mergence’s impact funds have been designed to be aligned with South Africa’s infrastructural and growth needs, seeking to address structural issues in areas ranging from housing, education, income disparity and unemployment to energy shortages,” Van Wyk says. This is precisely the sort of action serious SRI asset managers should be taking. Another company worth mentioning is PSG, though its area of concern is education. A lot is done through the distance-learning organisation, Impak, in which PSG holds a controlling interest, but there are others. In an article on the BDlive website fellow INVESTSA writer Marc Hasenfuss writes that PSG also has a stake in private school venture Curro Holdings, an investment worth about R3.3-billion now compared to R300-million in February 2011. That clearly shows that SRI investments can also offer an excellent return as well as the future development of sustainable causes in the country. Most South African asset managers today are involved in SRI investments and projects. At the risk of leaving out names, Investec Asset Management supports Tusk, a charity endorsed by the royal family in Britain that protects endangered
animal species and promotes sustainable development and education amongst the rural communities who live alongside the wildlife. Sanlam Investment Management is also big on SRI in a number of areas, as is Discovery Invest, which says, “The investment world is changing with investment managers and investors becoming increasingly aware of the social impact of their investment decisions.” Discovery also warns companies not taking SRI seriously. “Companies focused on short-term profits alone are increasingly being marginalised by investors who are voting with their conscience.” But how sustainable will SRI prove to be in South Africa? Well, it will be here as long as the wind blows and the sun shines to power free alternative energy, as just one example. Another example comes from Paul Gilding in his book The Great Disruption. He writes: “When you try to create infinite growth on a finite planet… either the planet gets bigger or the economy stops growing.” There’s only one possible answer in that quote, and in a developing country like South Africa we all know what happens when the economy stops growing.
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Daring investors to care
By Vivienne Fouché
Do you have an addictive personality? Perhaps you are a smoker, in which case you know what your habit is doing to your lungs. Alternatively, perhaps your body is intolerant to alcohol, making you uncomfortable when you drive past giant liquor advertising billboards. And then there’s gambling, the third of the infamous trio in the ‘sin businesses’.
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he point is that many people have personal reasons to dislike one or all of these industries and would, consequently, abhor investing in them, despite their potential ability to generate investment outperformance. This is as outlined in our March 2014 issue by Marc Hasenfuss, who clarified in his ‘Saints and Sinners’ article that ‘…even in times of economic stress… these businesses tend to see their bottom lines markedly less ravaged than other companies.’ So it is easy to see how this ‘unholy’ trio represents just one area where socially
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responsible investors would not want to venture. However, socially responsible investing (SRI) works within a wider framework and isn’t only about avoidance. As the world’s governments and people try to tackle such overwhelming problems like pollution, global warming and poverty, to name a few, there is a growing awareness of trying to give back, including when investing. Piet van der Merwe, ESG research analyst at Momentum Asset Management, says the choices available for a sustainable future are not easy ones. “Take energy, for example. There is not a single industry in the world which is not dependent on some form of
carbon technology. Some ‘green’ products are still in a developmental phase and involve unintended consequences in some instances. For example, wind power is green in the non-carbon sense, but killed approximately 573 000 birds and 888 000 bats in the US in 2012 (Wildlife Society Bulletin, March 2013). “Manufacturing batteries to supply electric cars can also be detrimental to the environment, as in many countries the electricity required to re-charge the batteries is generated by coalfired power stations. The asset management industry can help humanity’s response to these problems, for example by directing
• In community investing, investors’ capital is directed to those communities which are under-served by more traditional financial lending institutions. This includes giving these communities access to investment capital and income as well as providing community services like healthcare, housing, education and child care. South Africa is ripe for community investing (Shaun Harris’s preceding article outlines some great examples of this form of investing in South Africa today). Citadel philanthropy specialist, Alan Wellburn, says that according to World Bank data, South Africa is one of the most unequal societies in the world, with a massive concentration of wealth in the hands of relatively few individuals. Sylvester Kgatla, head of product development at Absa Investments, says the increasing environmental and social pressures driven by scarcity of food, water and energy, access to natural resources, climate change, human rights and labour practices are a concern for business as well as governments. “The impact of poor corporate governance practices on shareholder value, exacerbated by the recent global financial crisis, has elevated issues such as transparency, corruption, board structure, shareholder rights, business ethics, risk management and executive compensation to the top of the investor agenda. Therefore, as the influencers of how savings and investment monies are allocated to capital seekers such as private firms, government and community initiatives, it has become an expectation for money managers to invest responsibly.”
funds away from polluters, or engaging with the management of those companies on more sustainable business practices. Venture capital firms could also play a key role in helping inventors who are developing new, environmentally-friendly products.” According to www.forbes.com, socially responsible investing can be expressed in three ways: • Environmental, Social and Governance (ESG) investing advocates investing in companies and governments that the investor believes match their values of importance. These include the environment, consumer protection, religious beliefs, employees’ rights and human rights in general. • Shareholder advocacy means that socially responsible investors proactively influence corporate decisions that could otherwise have a large detrimental impact on society.
Van der Merwe clarifies that for most asset managers, environmental, social and governance awareness is tied to risk management, especially over the longer term. He says many South African asset managers integrate ESG thinking into their investment processes, aided by voluntary compliance documents like the UN-supported Principles for Responsible Investment (PRI) and Code for Responsible Investing in South Africa (CRISA), as well as institutional client and retirement fund interest and pressure. “There are two broad strands of responsible investment thinking in the market. One is to integrate ESG considerations into long-only portfolios, and the second is to introduce dedicated ESG funds. We adopt the first approach at Momentum Asset Management, with stock selection forming part of the equity investment process and aimed at identifying companies in which we will carry large overweight or underweight positions. In determining these companies, we use a holistic, three-pillar approach, where we incorporate the valuation of the company, ESG and quality considerations and investment themes the company is exposed to.” Kgatla says SRI money managers generally use three methods when screening an investment: the Negative Screen, Positive Screen and
Restricted Screen. “Using negative screening, a fund manager consciously decides not to invest in companies that have involvement in certain activities, for example, liquor or gambling. Other SRI-conscious investment managers might apply positive screening by investing selectively only in companies or projects involved in activities that promote ‘green living’, such as wind or solar power. With a Restricted Screen, a manager might still allow a company with questionable activity into the fund if the negative effect is deemed to be minimal enough relative to the other activities of the company.” Whatever strategies the asset management industry chooses to pursue, there is a growing awareness of the planet’s resource depletion and the effect it is having on humanity. Increasingly, people care – and they are aided by the rise of communication technology that allows for instant ‘global village’ sharing with people around the world. The asset management industry, containing the custodians and managers of capital, is now becoming part of the solution. And arguably, against this global village backdrop, asset managers have no option but to be part of the solution. After all, tomorrow’s investors are today’s tech-savvy and socially aware teenagers.
Donor-advised funds Donor-advised funds, or collective foundation funds, fall along the same spectrum as socially responsible investing in the basic desire to give back. Citadel philanthropy specialist Alan Wellburn says philanthropy can play a critical role in addressing inequality in South Africa. “While giving is seen as an ad hoc activity, philanthropy is regarded as strategic, systemic and sustainable with a long-term view akin to investing. This approach tackles the cause of a problem, often necessitating personal involvement and typically formalised through a personal foundation or donor-advised fund, also known as collective foundation.” Wellburn says donor-advised funds are increasingly used internationally as a cost-effective way of institutionalising giving. “If a person does not have a large enough principal sum to make a philanthropic foundation viable, the option of a donor-advised fund is favourable. It offers the benefits of long-term sustainability that a private foundation would have but is easy to establish. Donor-advised funds are increasingly becoming globally popular because they offer the advantages of formalised giving, but come with less administrative costs.”
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Alternative investments
The asset consulting model: why ignoring liability is a liability Much like your company’s balance sheet has an asset and a liability side, a retirement savings plan needs to consider both sides of its financial strength too. The investment framework within the retirement savings landscape needs to place greater emphasis on the liability side.
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he shift to defined contribution has led to pension fund trustees oversimplifying their approach to managing the retirement goals of their members, partly due to the nature of the legislative framework. Trustees have no fiduciary duty to a fund member once they leave and provident funds have led to the vast majority of retirees cashing in their full benefit. The consequence has been a shift in focus to the absolute value of the retirement savings pot, rather than a proper consideration of how market and demographic forces have altered the liability side of the retirement equation. This is something the proposed regulatory changes will address. In the last decade, retirees have faced a significant increase in the cost of retirement provision due to the introduction of inflation targeting which reduces the real yield curve (the cost of buying inflation-adjusted monthly pensions in future) and how long retirees are likely to live (how many pension payments need to be provided for). Many trustees and advisers remain oblivious to the fact that few South African fund members are probably worse off following the significant equity bull run. These problems were highlighted in the National Treasury Costs paper and media articles. In addition to this, we need asset consultants to change the way they advise trustees and advisers to build portfolios for their clients. We need a better understanding of the cost of providing pensions, as well as better alignment with the mandates given to asset managers to deliver
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on these goals. Too much emphasis is placed on selecting the correct manager and giving them a broad multi-asset class mandate, while ignoring the cost of buying pensions. Asset managers simply try to maximise nominal asset levels in the short term because their performance is measured over three months. Their idea of a no-risk asset is cash, when it should be a long-dated inflation-linker. The other school of asset consultants construct a multitude of mandates but never consider their aggregation and delivery relative to the liability side of the balance sheet. It is much easier to blame asset managers for nondelivery at this micro level rather than take personal accountability for poor portfolio construction at macro level. Much is written about selecting a suitable benchmark that reflects the underlying investment opportunity set. Too often we consider a fixed income portfolio relative to the All Bond Index (ALBI), not reflecting the level of credit positions which normally outperform (until there is a credit event). By doing this, we fail to adequately reward managers for demonstrating true skill, or understand the inherent risks in the underlying portfolio. A similar problem exists in the multi-asset class portfolios where managers overweight the riskier, possibly higher returning assets to outperform their targets. South Africa’s competitive culture drives this behaviour. We like to feel we are beating a benchmark, which sets the expectation. Tougher benchmarks do not automatically
imply we should adopt passive investment, otherwise after fees you would underperform your benchmark. These weaker, beatable benchmarks have led us to compare performance not to the stated mandate and its benchmark, but to our peers. This contributes to a significant amount of herding by asset managers who are too aware of what competitors are doing and not on what underlying fund members should achieve. Demanding upper quartile performance also leads to most of the industry being disappointed. We need consultants and advisers to design defined contribution portfolios based on the underlying liabilities they must deliver on, and trustees need to hold these advisers responsible for this delivery. Asset managers must be accountable for delivery on their mandates only, with benchmarks they are only likely to beat on the balance of probabilities – and which trustees accept are challenging.
Rowan Burger, head of alternative products, Momentum
Allan Gray
Model portfolios:
Jeanette Marais, director: distribution and client service, Allan Gray
are they right for your practice?
I
f you have a practice with a large number of clients invested in an extensive selection of funds, it can be very difficult to keep track of each client’s portfolio and underlying funds. You may want to consider using model portfolios. Create scalability using model portfolios The concept of model portfolios is very simple. By allowing you to group similar clients into defined strategies, model portfolios help you to create scalability across your client base. Instead of worrying about each client’s portfolio, you worry about the grouping and the model for each grouping; this means you manage portfolios rather than individual fund allocations. Administration is easier because if you decide to make a change to a model, you give one bulk instruction to the platform and the entire grouping of clients is realigned to the change. Furthermore, reporting and disclosure are less burdensome. Because the models are yours, you can tailor them to suit your client base and your practice.
helping you to manage your models according to the risk profiles of your clients. D.I.Ms can assist with manager selection and portfolio construction. They can assist with asset allocation and then monitor and manage your models on an ongoing basis, giving you feedback and making changes where required. Different D.I.Ms have quite different propositions, so think carefully before you choose one. What kind of business and people would you like to partner with? What skills would add the most value? It is also important to think about your value proposition, what your core skills are, and what you want to outsource.
group some into model portfolios, but continue offering others a bespoke service. Or, if you think your practice works just fine, and administration and client portfolios are manageable, think twice before fixing something that may not necessarily be broken. What are the alternatives?
Are models right for you?
Other options are available to help you manage your clients’ portfolios more efficiently. You could think about using asset manager solution funds or white-labelled broker funds. When deciding what works best for you, you need to consider how tied-in you will be and the cost and tax implications for your clients.
Of course, model portfolios are not for everyone. If you have a reasonably small practice with high net worth clients receiving customised advice, then using model portfolios may not be practical. If you have a mix of clients, you may want to
The key take-out is to periodically take stock of your practice to assess if you are working in the most effective way. Models are simply another way to create efficiency, and to buy you more time to spend with your clients.
Few
Bespoke
Many
Standardised
Nr of clients
Type of portfolio
Using a discretionary investment manager To use model portfolios you need to have a discretionary mandate that allows you to transact on behalf of your clients, and for this you need a Category II FAIS license. Category I advisers interested in using models will need to partner with a discretionary investment manager (D.I.M) with a Cat II license. Over and above their transactional capabilities, D.I.Ms take on a host of fiduciary responsibilities, which reduces the compliance burden on your practice. A D.I.M becomes part of your investment committee – you can decide to what degree –
Small
No
Large
Yes
Degree of outsourcing
Model portfolio
Allan Gray recently looked at 1 000 of their largest advisers who use their investment platform and discovered, not surprisingly, that the more clients an adviser has, the more funds they end up having to manage. For every 10 extra clients an adviser adds to his/her practice, an extra fund is added to look after. With increasing regulatory and administrative pressures facing advisers, Allan Gray has added model portfolio functionality to its platform to allow advisers to create efficiency and scalability in their businesses.
This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services short lists third party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the short list of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.
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Choosing an
asset management company that grabs your fancy By Marc Hasenfuss
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Judging by the plethora of unit trust funds available to the public, the number of asset management companies in South Africa must have at least quadrupled over the last decade.
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urrently, there are more unit trust funds available to investors than there are shares listed on the JSE – a situation that might raise a few questions around just how competitive the asset management segment has become. Despite the abundance of asset management companies, ranging from long established businesses linked to banks or assurance companies and stand-alone stalwarts to specialised asset managers and small investment boutiques, the JSE has over the last three decades never happily accommodated a swathe of fund management companies. There was a time in the late nineties and early 2000s when there were more than a handful of fund management contenders. But so many of these listings were short-lived, and in this regard readers may remember companies like Tradek, Equinox, Appleton, Escher/M-Cubed, Magnum Global Funds, Viking Investment and Asset Management, Decillion and African Harvest. Feisty BJM lasted a while longer, but also scurried off the JSE after a buy-out. While the list of ‘dearly departeds’ from the JSE is long, and the returns earned by the respective shareholders short, it is ironic that one of the most rewarding shares on the
JSE in the last ten years has been an asset management company, Coronation Fund Managers.
firms listed on the JSE has been rather woeful in terms of returns to shareholders.
The Coronation story is quite incredible. Investors who bought into Coronation after its listing in 2003 would have paid anything between 260c to 380c for the share. Today the share price is close to R100, making Coronation – with a market capitalisation of close to R34 billion – a ten bagger three times over.
Strange, though, because asset management businesses should, technically speaking, be a viable investment. The fund management business model does not require large doses of capital to maintain the operating infrastructure, and should be able to earn a decent margin on its services once critical mass is achieved in the amount of assets under management or administration.
The company has close to R500 billion in assets under management and generated close to R1 billion in net income in the half-year to end March. The recently declared interim dividend of 275c/share matches the price of the company’s share price during parts of 2003. In fact, Coronation has a pleasant headache in having to fret about where on the JSE and other bourses it can deploy the steady streams of investor funds that keep flowing in. None of the handful of asset managers listed on the JSE can claim returns that are quite as impressive as Coronation. In fact, barring the steady Peregrine, which was listed in the late nineties, and just-listed PSG Konsult, which was an in-demand unlisted share in the last four years, the sprinkling of asset management
If the underlying investment performance is sound, then a fund management company should also have no trouble retaining client funds – remembering, of course, that moving funds from one fund manager to another is somewhat prohibitive given the cost of switching (not to mention the arduous FICA requirements). But attaining critical mass and achieving consistent investment performance for clients is not easy. And the smaller asset managers that do manage commendable performances don’t always have the resources to capitalise on successes – unlike default investment brands like Coronation, Allan Gray, Old Mutual, Sanlam or Investec, which have large budgets for the marketing required to sustain their brands.
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Perhaps that is why the market remains slightly wary of even mid-sized asset management companies – like Cadiz and Prescient. Those investors looking for asset management alternatives might well rather opt for hybrid financial services companies like Sasfin or the soon-to-be-listed Alexander Forbes. Interestingly, there are a couple of smaller niche contenders looking to secure sustained viability with customised offerings. Purple Capital, arguably, offers the most compelling model by combining a self-service trading platform (GT247), private broking (GT Private Broking) with asset management services (Emperor Asset Management). Purple has endured some ups and downs in recent years, and probably needs time to settle into its revised operational model. Pretoria-based StratCorp looks less convincing, having accrued only a few hundred million in assets under management despite operating its Virtus asset management division for more than a handful of years. Performance in the Virtus flagship empowerment fund, which attracts mostly monthly debit order clients, took a big blow five years ago when it mobilised a large chunk of its clients’ funds to back meat company Best Cut (which subsequently failed and disappeared from the JSE). One of the big talking points in the asset management industry is whether newly listed PSG Konsult – controlled by the opportunistic PSG Group – will play a key role in consolidating the fund management sector.
by enhancing its reputation as a consistent provider of solid returns for clients, or whether the PSG Asset Management might look to bolting-on smaller (and like-minded) specialist asset management players.
Walton has not only initiated some niche acquisitions but also pulled aboard some of the prime movers behind Momentum Investment Consulting, which manages funds worth some R23 billion.
Konsult came to market without raising fresh capital, which might, at first glance, suggest the company has no acquisition ambitions.
For instance, would Konsult look at unloved mid-sized asset management operations like Cadiz or Prescient? Neither Cadiz nor Prescient are currently gazed at with any affection by the market. Cadiz’'s unconvincing operational performances are a worry, while Prescient’'s sudden about-turn on the asset management arm of Allied Irish Bank might have spooked a few punters.
While Efficient is still small fry, Walton is clearly very determined to turn the business into a real contender. The Financial Mail last year quoted Walton as saying he would be disappointed if Efficient’'s collective investment services business was not supporting assets under management of R35 billion in the next few years and had not increased the assets under administration tenfold at the end of 2014.
But that’s not true. Konsult – especially if it enjoys a warm market reception – could very easily raise capital with a shares for cash issue. Konsult is a hybrid that, aside from asset management, also holds broader wealth management and insurance services. Still, there can be no doubt that the asset management side could still be grown markedly, having R49 billion in assets under administration and less than R16 billion in assets under management. The big question is whether PSG Asset management, which appears to be building a strong following, would look to grow its brand
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Either way, Cadiz (with less than R30 billion funds under management) and Prescient (around R60 billion under management) would be sizeable deals for newly-listed Konsult to pursue. Another acquisitive asset management story worth watching is Efficient Group, which is now under the guidance of the respected former MMI executive, Robert Walton.
Naturally, the development that could shake up the JSE’s small asset management hub is another big listing to rival market leader Coronation. Noting that senior staff at Investec Asset Management have already been granted share incentives, how much longer before the parent company Investec, decides to list this influential asset management business separately?
Asset management
Gold: an increasingly lacklustre investment?
affected by their input costs. An increase in their input costs, in the form of an increase in labour costs and electricity costs, has a negative effect on their profits. Today, South African gold miners also have to go a lot deeper to get to the gold, and this has had a further negative effect on their costs. In addition, the government is not doing the mining industry any favours per se. Relationships between the government and the mining industry continue to be strained and are not contributing to creating an investor-friendly environment in the mining industry.
Whether or not to invest in gold is an enduring investment debate. In our view, gold as an investment class is losing its shine.
H
istorically, gold miners in South Africa were in a favourable position: South Africa was the biggest exporter of gold in the world. This is no longer the case. South African mines exported close to 1 000 metric tons of gold in 1970. Today, South Africa exports less than 200 metric tons of gold and is currently ranked only the sixth biggest exporter of gold in the world, after China, Australia, the United States, Russia and Peru. The fact that gold miners in South Africa now have to mine deeper and have substantial rising input costs has impacted negatively on the companies in the industry and will have long-term negative effects on their bottom lines. Gold has been a big momentum play for a
number of years, and many investors have been getting on to the ‘gold bandwagon' for this very reason. In short, investors have been buying gold because it has been going up. These same investors may become sellers due to gold prices having fallen. Traditionally, gold was used as a safe haven asset class but, in our opinion, this is not a valid reason to hold gold. While it is true that the gold price could not go to zero, it is also quite able to halve in value. In truth, it is not true that gold is a low-risk asset class. For example, the price of gold has slumped by 28 per cent last year. The large amount of gold held by investors above ground increases this instability. Because gold miners have no control of their selling price, their profit margins are heavily
We do not view gold as a hedge against inflation. In an environment with moderate inflation, gold does not act as an asset class of choice against rising prices. Historically, the correlation between the increase in inflation and the price of gold has not been substantial. In periods when there has been positive correlation, these were short-lived. The gold price increased from $274/oz in 2001 to $1900/oz in 2011, during a time of low inflation. If hyper-inflation such as that which occurred in Zimbabwe should happen, gold would hold some value. However, against a depreciating Rand, we do see gold as an effective hedge, as the price of gold is priced in US Dollars, offering South African investors an increase in their Rand returns should they hold this asset class. However, platinum and palladium would probably be better investments.
Rob Spanjaard, director, REZCO Asset Management
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Barometer
HOT
NOT
Consumer confidence rebounds
Vehicle says slow
The FNB/BER Consumer Confidence Index (CCI) rebounded from -6 points to +4 during the second quarter of 2014 – the highest level since the third quarter of 2011. This was led by a significant improvement of consumers’ ratings of their own financial prospects, with high income consumers in particular expecting their household finances to look up over the next 12 months.
Industry body NAAMSA reported that South African vehicle sales decreased by 2.3 per cent in June, from a 9.2 per cent decline in May, as sales of passenger vehicles declined for the ninth consecutive month. Exports of vehicles declined by 0.8 per cent yearon-year, as a 12.8 per cent drop in exports of commercial vehicles offset the 9.2 per cent rise in passenger vehicle exports.
SA leads as Africa’s best FDI performer According to the United Nations Conference on Trade and Development’s (Unctad) latest World Investment Report, South Africa was Africa’s best foreign direct investment (FDI) performer in 2013. FDI inflows to South Africa increased from US$4.5 billion in 2012 to a record-high of $8.1 billion in 2013, with investments in infrastructure being the main attraction. South Africa’s FDI’s outflows almost doubled, from $2.9 billion in 2012 to $5.6 billion in 2013, driven by investments in telecommunications, mining and retail.
Local hospitality sector set for growth A report by PricewaterhouseCoopers (PwC) titled South African Hospitality Outlook: 2014-2018 projected that the overall occupancy rate across South Africa will rise to an estimated 58.4 per cent by 2018 as a result of stay unit nights increasing at a faster rate than room supply. Total room revenue is expected to reach R28.7 billion, a 10.7 per cent compound annual increase over 2013.
s y a w e Sid 18 investsa
South Africa’s outlook downgraded Fitch Ratings agency downgraded South Africa’s outlook from stable to negative by downgrading the country’s gross domestic product growth forecasts from 2.8 per cent to 1.7 per cent in 2014 and from 3.5 per cent to 3 per cent in 2015. This was attributed to the ongoing labour unrest in the country, power constraints and sluggish economic growth. Standard & Poor’s (S&P) also downgraded the country’s credit rating by one notch.
US economy contracts The Bureau of Economic Analysis recently released its final estimate of real gross domestic product for the first quarter of 2014, which showed output in the US declining at an annual rate of 2.9 per cent. This figure is down from the previous growth rate estimates of -1 per cent and a growth of 0.1 per cent for the first quarter, and the fourth quarter 2013, when real GDP grew 2.6 per cent.
PMI rises, but lags behind the rest of the world The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI), an economic activity index based on a survey, rose to 46.6 index points in June, up from 44.3 in May. However, it remains below the 50 index point level which separates expansion from contraction. The PMI averaged 46.1 in the second quarter compared to the first quarter average of 50.6. The country’s PMI is also below international levels, with the flash manufacturing reading in the US rising to 57.5 index points – the highest level since May 2010.
Economic commentary
South Africa
running out of steam The South African recovery, according to the South African Reserve Bank (SARB), started in August 2009. South Africa’s economy usually lags behind the global cycle by a few months.
T
he local economy initially bounced back quickly, led by consumer spending, a strengthening Rand, a recovery in commodity prices and an accommodative fiscal policy. However, the government is trying to slow its spending growth to below two per cent per year in real terms and close the budget deficit. Failing to do so could result in another downgrade of our credit rating. The Rand strengthened between late 2009 and 2011, but has since lost 60 per cent against the US Dollar. The CPI has risen 27 per cent since August 2009. The CPI inflation rate initially fell sharply from 6.3 per cent to 3.1 per cent, then rose again and stabilised around five to six per cent since early 2011. Even the Rand’s relentless depreciation since August 2011 (from R6.80/US$ to around R10.70/ US$) has resulted in only a modest rise in inflation. The limited reaction of inflation to major currency weakness marks an important shift in our economy, and if it continues, implies that future interest rate cycles should be more muted than in the past. Consumers now face a squeeze Consumers enjoyed real disposable income growth rates above four per cent per year between 2010 and 2012. Public servants, in particular, received generous pay increases. However, wage growth is slowing and it is only those with jobs who benefited. While real GDP is 11 per cent higher than at the start of the current upswing phase, private sector employment is slightly lower. It has thus been a classic ‘jobless recovery’. Without more jobs, consumer spending cannot grow sustainably
and consumers are facing a relentless squeeze on their finances. Consumer sentiment was lower in the first quarter than at any time during the 2008-2009 recession, according to the FNB/BER survey. Apart from a boom in unsecured lending, typically to low-income households with little previous access to formal bank credit, credit growth in South Africa has been slow. However, South Africa has received about R330 billion in cumulative net inflows since August 2009, according to JSE data, of which R250 billion flowed into the bond market. These capital inflows have so far financed our current account deficit, effectively allowing South Africa to continue living beyond its means. Production growth has been disappointing Meanwhile, despite an initial recovery in commodity prices and a weaker Rand, mining output has moved sideways, but with fairly large swings from quarter to quarter. By the time the Association of Mineworkers and Construction Union (Amcu) strike in the platinum sector had ended, it had cost producers an estimated R24 billion in revenues and workers R10 billion in wages. Improved platinum production should help to accelerate local economic growth somewhat in the second half of 2014 and narrow the still-wide foreign trade deficit. Manufacturing production has risen about 12 per cent since the start of the recovery, held back initially by weak foreign demand and more recently by weak local demand. There are promising signs of exports picking up, but not enough to jump-start the economy yet.
Local equities performed well over the period, with the JSE All Share Index (including dividends) rising more than 70 per cent in real Rand terms since August 2009. The All Share Index is up only 11 per cent over three years in US dollar terms, but most of that performance has happened since February this year. Growth recession The underlying growth rate of the local economy has slowed to around two per cent. If growth remains persistently below our 3.5 per cent long-term potential with little to no job creation, it means the economy is trapped in a growth recession, even if it should escape a technical recession. Looking ahead, the SARB’s latest leading indicator was unchanged in April, and has been trending sideways since mid-2010. The leading indicator points to changes in economic activity six to nine months ahead, suggesting no significant improvement ahead, unless exports start accelerating.
Dave Mohr, chief investment strategist for Old Mutual Wealth
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The FPI
Professionals Convention moves the financial services industry forward
More than 1 000 delegates and exhibitors from the financial services industry gathered in June at the FPI Professionals Convention to discuss ways to advance the profession. 20 investsa
T
he event was sponsored by Discovery and chaired by 702 financial journalist, Bruce Whitfield. With delegates sometimes sitting on the floor at the back and the sides of the room, the term ‘full house’ was an apt description – and not because the space provided was limited but, instead, because this was such a popular event in the financial services industry calendar. The convention was themed ‘Growth through Innovation’ and was fittingly opened by former FNB CEO, Michael Jordaan, who is renowned for his role in innovation in the financial services sector. He advised the delegates to ‘recognise and reward innovators’ and his quote of the day from his
presentation was: “Innovation: allow people to experiment. Take risks. Make misteakes (sic).” After Jordaan’s presentation, Bruce Whitfield aptly commented that FNB was named the world’s most innovative bank while Michael Jordaan was CEO. Other local speakers included Toby Shapshak, technology commentator and editor of Stuff Magazine; Errol Meyer, who discussed incorporating tax planning into the financial planning practice; Sunél Veldtman, who gave valuable insight on women in financial planning (read more from her on this topic in our Practice Management section in this issue); Matthew Lester on trusts; Max Moyo on wealth creation and human transformation; and Helen Nicholson, director
Event
2014 FPI Financial Planner of the Year (left to right): Sankie Morata, FPI chairperson; runner-up Donovan Adams; winner Peter Hewett; Personal Finance editor Laura du Preez; second runner-up Bruce Fleming
Highlights from the convention via Twitter: • #FPIConvention 2014: sponsors include #Discovery, #StonehouseCapital, #STANLIB, #OldMutualWealth. • #FPIConvention. @MichaelJordaan don’t take yrself too seriously. Take considered risks. Surround yrself with great people. • #FPIConvention #HelenNicholson ‘creating your personal brand’ Are u a no-name brand? How would close associates describe u in 1 or 2 words? • #FPIConvention #SarahHarper We’ve pushed back death. Should we be altering #StatePensionAge in line with longevity? • #FPIConvention @brucebusiness to #SarahHarper: “Breaking news overnight: Aus suggestion to delay retirement age to 70.” • #FPIConvention #PeterHewett Without the regulatory bodies, the financial services industry would not have changed as much as it has. • #FPIConvention #AndrewBradley I’m fundamentally opposed to risk profiling. (Room claps!) My opinion: created for advisers not their clients! • #FPIConvention #AntonSwanepoel Provider must identify the risk profiling product/s appropriate to BALANCE client's risk profile, fin needs. • #FPIConvention @shapshak How to sell financial products in future to today's youth, who prefer technology comms to face to face interaction?
of The Networking Company. Nicholson’s presentation discussed how delegates could master the art of networking in their own ‘personal brand’. International speakers included Sarah Harper, Oxford Professor of Gerontology and director of the Oxford Institute of Population Ageing, as well as Hal Ratner, global head of research at Morningstar IM (Chicago). Professor Harper spoke on how client bases around the world are ageing, and provided insights on how to help clients as they age – very much a 21st Century issue that is increasingly taking centre stage. The workshops and panel discussion sessions gave delegates a chance to choose
their preferred topic of discussion to attend and included the following: risk profiling; regulatory updates; transition to a fee-based practice; dealing with regulatory change, and introducing and running mentorship programmes. Award winners • Peter Hewett, CFP®, founder of Efficient Advise practice, was awarded the 2014 FPI Financial Planner of the Year title. He was joined in the awards ceremony by finalists Donovan Adams, CFP®, a retirement specialist at Chartered Wealth Solutions and Bruce Fleming, CFP®, executive head private clients at Consolidated. • Alan McCulloch, CFP®, was awarded
the Harry Brews’ Award (previously Chairman’s Award). • Principal wealth manager of African interests, Gerald Mwandiambira, CFP®, was awarded the Media Award. • Jacques Hodsdon won the Top Student in the CFP® Professional Competency Examination Award. Following the convention, Godfrey Nti, CEO of the Financial Planning Institute (FPI) commented, “The objective of this event is two-fold: firstly we want to improve the level of professionalism and positively influence the quality of advice delivered by our professionals. Secondly, we use this opportunity to recognise and celebrate members who are advancing the profession, through our various awards.”
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Exchange traded products industry review: Second quarter 2014 The market capitalisation of all exchange traded funds (ETFs) and exchange traded notes (ETNs) listed on the JSE rose above R100 billion for the first time in the second quarter of this year. Industry Profile South African ETP Industry Issuer
Brands
Market Capitalisation (RM) ETFs ETNs
Total Market Capitalisation
No of products ETFs ETNs
NewFunds ABSA
NewWave
42 155.4
196.1
42 351.5
20 400.0*
20 400.0*
16
5
NewGold BNP Paribas
GURU
Sanlam
Satrix
Deutsche Bank
DBX Tracker
6 851.1
Standard Bank
-
4 326.1
Standard Liberty
Stanlib
3 595.6
Investec Capital
-
Rand Merchant Bank
-
Grindrod Bank
GTrax
Nedbank Capital
BettaBeta
Totals Source: JSE/etfSA.co.za/ProfileData * Securities in issue
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14 065.4
4
14 065.4
7
3 800.2*
10 651.3
5
3
1 477.5*
5 803.6
3
10
3 595.6
3
1 836.7*
1 836.7
3
253.4
1 629.1
3
517.4
517.4
5
294.9
294.9
2
101 145.5
44
1 375.7
73 181.6
27 963.9
2
27
etfsa.co.za
A
t the end of 2008, the total market capitalisation of South African listed ETPs was R16.4 billion, so the industry has expanded more than five times over the ensuing period to June 2014. This remarkable growth rate, albeit from a relatively low base, means that ETPs have now established the fastest growth rate for retail products in South Africa. There are now 10 companies issuing ETPs in the South African market. With the exception of Sanlam, with its Satrix brand, these issuers are all banks or investment banks. This follows the global norm, where asset managers focus on actively managed over-the-counter products and issue passive funds typically as unit trusts, whereas banks are more comfortable with the rules-based low margin businesses that encompass Exchange Traded Products. Absa is the dominant issuer in South Africa, both in AUM and number of products issued. It has had particularly good success with its commodity backed ETFs, starting with the well-established NewGold Gold bullion ETF. Platinum ETFs and Palladium ETFs have been listed in the past year. The NewPlats ETF now has a market capitalisation of R18.7 billion, all new capital raised in the past year. In April 2014, NewGold also issued a fully physically backed Palladium ETF, which raised R3.8 billion capital before 30 June 2014. Satrix, which used to be the dominant issuer in the South African market, has lost some market share in recent years, having not listed any new products since 2008. During the first six months of this year, it de-listed some R2 billion of its various Satrix ETFs, possibly indicating a large institutional investor reducing its exposure to the local equity market. Deutsche Bank, with its DBX Tracker range of both ETFs and ETNs, has benefited from growing awareness of its locally listed offshore tracker funds and is rapidly gaining market share. It listed a R1.3 billion investment in its existing ETFs during the first half of the year, and now has a total market cap of R10.6 billion. BNP Paribas, a new entrant in the South African market, launched four innovative ETNs, using its composite GURU smart beta tracking method to track the World, Asian, European and American equity markets. In total, BNP Paribas listed R20 billion of these notes on the JSE, but has not disclosed the actual level of investment in these ETNs by the local investment community. Grindrod Bank listed two new income ETFs in the second quarter – the Aristocrat Dividend ETF and the Low Volatility ETF. These products use smart beta indices developed by S&P as the index provider.
Summary table etfSA.co.za Monthly Performance Survey Best Performing Index Tracker Funds – 30 June 2014 (Total Return %)* Fund Name
Type
5 Years (per annum)
Satrix INDI 25
ETF
NewFunds eRAFI INDI 25
Fund Name
Type
3 Years (per annum)
30.59%
DBX Tracker MSCI USA
ETF
33.41%
ETF
25.01%
Satrix INDI 25
ETF
31.58%
DBX Tracker MSCI USA
ETF
24.93%
DBX Tracker MSCI World
ETF
28.49%
NewFunds eRAFI FINI 15
ETF
24.51%
DBX Tracker FTSE 100
ETF
26.55%
2 Years (per annum)
1 Year
DBX Tracker Eurostoxx 50
ETF
41.33%
NewFunds eRAFI RESI 20
ETF
39.16%
Satrix INDI 25
ETF
37.93%
Satrix RESI 10
ETF
38.71%
ETF
37.88%
ETN
37.13%
DBX Tracker MSCI USA
ETF
37.90%
DBX Tracker MSCI World
ETF
36.69%
DBX Tracker Eurostoxx 50 Standard Bank Palladium-Linker
6 Months Standard Bank Palladium-Linker NewFunds eRAFI RESI 20
3 Months
ETN
19.59%
Standard Bank Palladium-Linker
ETN
9.84%
ETF
14.80%
Satrix INDI 25
ETF
8.59%
NewFunds eRAFI FINI ETF 8.26% 15 Source: etfSA.co.za / Profile Media FundsData (30/06/2014) * Includes reinvestment of dividends Satrix RESI 10
ETF
13.71%
Standard Bank, having for some years concentrated on its commodity-linker ETNs, listed a family of physically-backed precious metals ETFs during the second quarter, raising over R4 billion in new capital for these products in less than three months. Investment performance – second quarter 2014 The summary table above shows the best performing index trackers, for both ETPs and unit trust index tracking products. Given the favourable conditions for growth strategies rather than pure value strategies in global equity markets, market capitalisation equity ETFs are, not surprisingly, the best performers for passive index tracking products available to the South African retail investor, particularly over periods of one to five years.
of exposure to global markets. They are not constrained by the asset swap capacity, tax clearance and exchange control requirements that add complexity, costs and scalability problems for competitive foreign access investments. The various DBX Tracker ETFs dominated the one- to three-year performance returns in the latest performance survey. The Standard Bank Palladium-Linker ETN, which invests in palladium futures contracts, is the best performing index tracker for three and six months and in the top four for 12 months. This good performance has probably been the reason for both Standard Bank and Absa Bank bringing out fully physically-backed Palladium ETFs in recent months.
In the domestic equity market, the Satrix INDI 25 ETF remains king. Continuous foreign and local investment flows into the large capitalisation industrial shares have made the industrial index the real benchmark for the South African market. The DBX (Deutsche Bank) Tracker ETFs, which provide direct access to the main international equity indices but trade in Rands as ‘inward investments’ on the JSE, are an ideal means
Mike Brown, managing director, etfSA.co.za
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Global economic commentary
The US economy:
almost out of winter?
backed securities market. At the heart of the ECB’s package is the refinancing scheme to spur business growth – the Euro 400 billion in cheap fixed-rate loans. Unlike earlier plans, it is directly linked to banks lending out more to credit-starved smaller businesses. Further plans are expected to be unveiled. The historic decision to cut interest rates below zero on the money banks deposit with the ECB should also finally help spur credit growth. Clearly, ECB President Draghi is also seeking to weaken the Euro relative to the US to ensure more exports from the Eurozone as well as to import more inflation, as the threat of deflation continues. Ultimately the ECB may be forced to unleash Quantitative Easing (QE) with sizeable purchases of government bonds. It is clear stocks have benefitted from the stronger economic data, which should support robust earnings growth throughout the rest of the year. The ECB provided further monetary easing with lower rates, along with the Bank of Japan, which continues with its very aggressive asset purchase programme. Liquidity from these two banks will help support global equity markets throughout the year, while the US Dollar is likely to strengthen due to a weaker Euro.
The number of new US jobs created last month slowed a bit after a big gain in April, but the brisk pace of hiring supports expectations of a spring revival in the economy.
T
he US created 217 000 non-farm jobs in May, and hiring has now topped 200 000 for four straight months. This is the first time this has happened in almost 15 years. The robust increase in hiring in May follows a slightly revised 282 000 gain in new jobs this year in April, 203 000 in March and 222 000 in February. The US has now recovered the 8.7 million jobs lost after the 2007-2009 downturn, but it took more than six years to surpass the nation’s
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prior peak of 138.25 million workers. Not since the Great Depression in the 1930s has it taken so long to recover all the jobs lost from a recession. The unemployment rate held steady at 6.3 per cent, although this masks a far higher rate of under-employment. There is still a considerable amount of slack in the economy. As of May, 23.5 million Americans either want a job, or want to work full-time but can’t because of the weak economy. This ‘army of the unemployed’ is down nearly five million from the peak of 30.4 million four years ago, but it’s up 7.5 million from the pre-recession level of 16 million. That means the ‘real’ unemployment rate is about 14.5 per cent, compared with a low of around 10 per cent just before the recession hit. For the Federal Reserve, the slack in the economy is the most important number in the May jobs report. It means the Fed will keep interest rates extremely low for a long time as wannabe workers slowly return to work. In early June the European Central Bank (ECB) cut its key policy rates and indicated it was preparing for purchases in the asset-
US equity markets during June hit all-time highs. US sectors such as financials and real estate remain top performers for the past few months. US equity markets are up over 22 per cent year on year, slightly beating out the Global Developed market benchmark (MSCI World) which returned approximately 17 per cent. The Dow is expected to hit the 17 000 level during the US summer while the S&P 500 is likely to break through the 2000 level this year too. Emerging markets as an overall group remain out of favour although India, South Africa and Mexico have posted recent highs too.
Lisa Segall, MD Southern Africa and Mauritius, GinsGlobal Index Funds
Industry associations
Retirement funds drive towards comprehensive social security 26th IRFA Annual Conference Our economy is faced with a unique challenge that requires far-reaching strategies for a sustainable social security and retirement infrastructure. We must take account of economic cycles, position ourselves for the long term and ensure that we have a system that balances opportunities, savings and protection. A successful retirement reform should take into account income inequality, poverty and policies related to the labour market, pension and insurance schemes, and social assistance to ensure sustainable retirement incomes. In this vein, the intention of this year’s IRFA Annual Conference, one of the largest events in the local retirement fund calendar, is to allow a platform to demonstrate current retirement reform processes relating to investment returns, administrative and transition costs, institutional and administrative capacity, and transparency. Held annually in August, this year at the Durban International Convention Centre, the conference allows government leaders, trustees, asset managers, fund administrators, retirement fund members and pension lawyers to debate issues affecting the implementation of a comprehensive social security system in South Africa. Under the theme ‘Lighting the future towards a comprehensive social security,’ the conference will showcase pressing issues relating to the implementation of National Treasury retirement reform policies that come into effect on 1 March 2015, and provide insight on how South Africa will be moving towards creating tomorrow’s legacy in comprehensive social security.
The conference programme will include the following: • Promoting social and economic equality through social upliftment and development. • Retirement reform: Understanding changes introduced by the Taxation Laws General Amendment Act 2013, which will have an impact on pension funds. • Evolving trustees’ roles and fiduciary duties to act with care and skills beyond pension reform. • Treating Customers Fairly (TCF) and the Twin-Peaks Regulatory Model. • Legal update: legislative and policy changes. • Panel discussions on the implementation of a comprehensive social security system and good governance. • Breakaway sessions to explore various topics pertaining to investment strategies and regulations and pension fund issues unforeseen by the Regulator. • Whether it is desirable or viable for the board to delegate section 37C duties to another person or committee. • Exploring the personal liability of directors for non-compliance with section 37A – is there a solution for employers in financial difficulty? • Understanding the implications of a new tax dispensation from 1 March 2015. • Understanding the effectiveness of the court divorce orders and PFA determinations. The panel discussions and break-away sessions allow delegates the opportunity to discuss such topics as legal issues, investments and savings, the PFA’s report, governance, trustees’ roles and responsibilities and international comparative policies and standardisation. Historically, the IRFA Conference has attracted more than 1 600 delegates. The industry has contributed extensively to the amendment of the existing legislation and
Retirem e funds nt
there exists growing pressure for the industry to be compliant. The IRFA Conference is an excellent platform for stakeholders to discuss issues affecting the retirement industry and listen to the views and position of the government regulatory bodies such as the National Treasury, the FSB and SARS.
Zamani Letjane, president of The Institute of Retirement Funds Africa (IRFA)
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Investment strategy
Compelling reasons to move to
index funds
We have seen a significant rise in index funds over the past forty years and many pension funds have moved partially or exclusively to passive investing, although many funds do continue to invest in the hope of market-beating returns – despite the low odds of success.
W
ith reference to an industryrelated article in The Economist, ‘Will invest for food’, we look at some key insights raised that caught our attention. Despite their massive cost advantage, index funds still only represent 11 per cent of the global industry’s assets under management. Two things have held them back: • Distribution: the brokers who sell funds to investors have had little incentive to sell cheap ones. The higher a fund’s fees, the greater the incentive to sell it. • A belief that investors can do better than the index by picking a hot fund: money for old hope. Some funds will indeed beat the index, whether by luck or skill. It is easy to identify those funds with hindsight, but hard to do so in advance. The index represents the performance of the average investor before costs. The higher the costs, the greater the odds that a fund will do worse than the market. Thankfully the industry is changing. Employers that run defined contribution (DC) schemes tend to use trackers as an obvious way to show they are protecting their employees’ interests. Might a market dominated by trackers be more prone to bubbles, as investors pile into the biggest stocks regardless of their value? Not really. As the dotcom bubble showed, active managers themselves are prone to chase trends. Governments should ensure that financial advisers are paid, not by product providers, but by clients. More countries should follow the UK’s example and stop the use of commissions.
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In a world of slower growth, low inflation and Treasury-bond yields of 2.5 to 3.0 per cent, future investment returns are likely to be low. This is all the more reason for them not to be eroded by the fees of an industry with such a lacklustre performance. Even great investors think that low-cost tracker funds make sense. In his latest letter to Berkshire Hathaway shareholders, Warren Buffett describes what should happen to his personal portfolio after his death. “My advice to the trustee could not be more simple: put 10 per cent of the cash in shortterm government bonds and 90 per cent in a very low-cost S&P 500 index fund.” Investors may also believe, despite legally-required caveats, that past fund performance is a guide to future riches. They want the best fund, not an average one (which an index tracker is likely to be). This gives active managers a great marketing advantage: hope.
then they began to compare returns with those of other managers or the market. Later, with the help of academics, they realised that fund managers might beat the index by taking more risk; so they started to use risk-adjusted measures. Good advice is certainly worth something: many American investors in pension plans have devoted a big portion of their portfolios to cash (a low long-term return) or to their employer’s shares (too risky). The ability to avoid such mistakes is worth a once-off fee, but an investor should not pay 1 per cent to 1.5 per cent per year to an adviser to pick investment funds. Nobody has yet shown that they can correctly and consistently time markets.
A good proportion of managers will beat the index in a given period, whether through their own skill or simple luck. However, it is hard to see how investors can identify managers like Mr Buffett in advance. Indeed, if such paragons could be easily identified upfront, they would attract all the available funds, driving the hopeless managers out of business. Institutional investors, too, have gradually become more sophisticated about identifying how fund managers generate returns. A hundred years ago they regarded all returns as evidence of a manager’s skill,
Steven Nathan, 10X Investments CEO
Investment
Escaping a
stagflation First-quarter negative growth has led to the big recession debate, but the real challenge is that the South African economy has been caught in a stagflation trap.
S
trap
tagflation is a term originating in the 1970s that applies when countries struggle simultaneously with persistently high inflation and stagnation.
The inflation rate stubbornly hugged the six per cent upper limit of the target band over the past three years, while economic growth slowed to a below-par 1.9 per cent in 2013 – and might not even reach that level for 2014. The post-2009 recession economic rebound had growth at 3.1 per cent in 2010 and inflation at 4.3 per cent. In 2013, inflation was 5.9 per cent and growth 1.9 per cent. The gap between inflation and growth will widen in 2014. Inflation and growth can be considered macroeconomic risk-reward measures. A healthy economy is one that grows consistently higher than inflation – something not achieved in South Africa since 1970. However, the growth rate rose above the inflation rate for the three years from 2004 to 2006, as a combination of better fiscal and monetary policies helped to shift the risk-reward ratio into a more favourable position. The recent slowdown comes with additional headwinds. The interest-rate cycle is in a trough, while normally slowdowns occur at the peak of the cycle. The current account deficit has also been widening and is at record levels. Normally, widening current account deficits are associated with booms. In addition, countercyclical spending by the National Treasury has left government finances in tatters, with multiple credit-rating downgrades constricting fiscal flexibility. The twin deficits on the current account and budget have parachuted South Africa into the ‘Fragile Five’ group of countries, a description which has Treasury and South African Reserve Bank
officials spitting blood. This is compounded by a third deficit – a household deficit – that has resulted in a battle against high costs, especially from administered prices. The triple deficit means the growth drivers are weak. Normally, slow growth can be remedied by cutting interest rates, expanding government expenditure and allowing credit growth to boost demand. None of these options are now available. High inflation means interest rates must be increased as the economy slows. The government has to cut back, and so do households. The credit-based, consumptionled growth model has reached a dead end. Weak growth, along with the current account deficit, places pressure on the Rand, which raises costs. This is the stagflation trap: weak economic growth facing headwinds, with strong upward inflationary pressure.
mobilised is investment – but not to create dead capital that many of South Africa’s lossmaking prestige projects, such as World Cup stadiums, the Gautrain, GFIPs and Medupi, have delivered. Well-allocated capital must produce returns that generate additional capital that extends the value chains. This means investment must primarily focus on the wealth-producing sectors of the economy. To fund this, the savings rate must be raised to close out the massive macroeconomic mismatch of a 19 per cent investment rate against a 14 per cent savings rate. Taxes on capital and investment viability have to go. The National Development Plan seeks to achieve a 30 per cent investment rate, which must be backed by a similar savings rate.
Labour unrest is an additional headwind for the economy, but the stagflation conditions that result in a drop in living standards provide fertile grounds for extremists to exploit. Escaping the stagflation trap will require a period of possibly painful adjustment. However, the experience of the 1970s showed stagflation can persist and even deteriorate further. The only remaining growth driver that can be
Chris Hart, chief strategist, Investment Solutions
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the roundtable convergence of great minds
Key speakers at the event Conrad Wood BCom (Economics), CFA Head of Fixed-income Strategies at Momentum Asset Management Conrad co-manages the Momentum Money Market Fund, the Momentum Enhanced Yield Fund, the Momentum Maximum Income Fund, the Momentum Diversified Yield Fund, the Momentum Inflation-linked Bond Fund and the Momentum Bond Fund and was appointed as head of fixed income at Momentum Asset Management in late 2007. His team currently supervises close to R70 billion in fixed-income assets.
Jason Hall BCom Hons (Financial Management) Head of credit at Momentum Asset Management Jason is head of credit in the fixedincome team at Momentum Asset Management and is responsible for structuring their credit research process, originating new assets and co-managing specialist credit portfolios (including the Momentum Income Plus Fund).
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Two more exclusive Momentum Asset Management roundtable discussions were held in Brooklyn (Pretoria) and Century City (Cape Town) on 2 and 3 July 2014 respectively. The topic centred on global and local fixed-income markets, which are facing significant uncertainty in terms of growth, inflation, policy maker actions and the resultant interest rate outlook. Global yields, after being adjusted for inflation, are languishing at low levels as central banks continue to distort markets with non-conventional policy interventions (bond purchases). The future risk of policy normalisation and the resultant poor outlook for bonds is in contrast to equities, which are still hitting highs, despite tepid growth. The questions around these market conditions are myriad. Have central banks orchestrated a solution, with gradual policy normalisation in sight? Or is the debt just being moved around, with no real plan in place to correct the abnormal capital flow in the world’s economy? If so, how will this ultimately affect the domestic fixed-income market? Against such an uncertain backdrop, Conrad Wood discussed the outlook for fixed-income investing. With the South African Reserve Bank (SARB) subject to the whims of the developed world, the Rand (and by extension local interest rates) is likely to remain volatile as central banks consider how to manage their quantitative easing programmes. The outlook for interest rates poses a real investment challenge as the SARB has no real sovereignty (monetary policy) over interest rates: what happens here is ultimately controlled by the US Federal Reserve and its actions. In addition, a rising domestic inflation profile further compounds the uncertainty (inflation is a bond's worst enemy: the higher it stays, the worse it gets for the fixed-income market). Wood commented that we are in unprecedented territory. “Global fixed-income markets are ‘abnormal’ and driven by policy maker manipulation, liquidity and the search
Momentum Asset Management
for yield. To contextualise the absurdity of the backdrop, Europe has negative real rates all the way out to 15 years, while the US is barely positive. Fixed-income investors have rarely had to think about negative long-dated rates for such extended periods of time. While the situation has now normalised somewhat in South Africa with bond yields sharply higher, the main theme today is that rates still remain fairly unpredictable.” Wood added that fixed-income investments have experienced massive drawdowns during times when global policy threatens to normalise (June 2013 and January 2014) and, in addition, are now also faced with a sharply deteriorating domestic backdrop. “Correlations are behaving strangely, which complicates portfolio construction, and both cash and inflation are tough benchmarks to beat.”
Global and local fixed-income markets for liquidity, corporate clients are now starting to look to us for their capital flows.” Hall also spoke at some length about the Momentum Income Plus Fund, a high-yielding fund with return drivers derived from credit income (yield). “The fund tracks a STeFI plus three per cent after fees return and is ideal for more risk-averse fixed-income investors as they are not exposed to the drawdowns associated with a volatile or uncertain interest rate outlook.” Comments from the delegates reflected positively on the interactive nature of the presentation, as well as the advantages of having access to both speakers and the other delegates in a small and intimate venue. The expertise of both speakers was strongly acknowledged and the event positively received.
Momentum Diversified Yield Fund This fund is a low to medium risk, actively managed fund that tactically takes asset allocation views across a broad spectrum of fixed-income asset classes, both locally and offshore. Key • • • • • • • • • • •
facts: Benchmark: STeFI + 2 per cent (after fees) Peer group: SA – Multi-Asset - Income Fund managers: Conrad Wood and Richard Klotnick Fund size: R276 million Annual management fee: 1 per cent plus VAT TER: 1.18 per cent Modified duration limit: All Bond Index Minimum credit quality: F2/BBAnnualised volatility: <2.5 per cent Offshore: Up to 25 per cent offshore and 5 per cent in Africa (10 per cent unhedged) Risk level: Low to moderate
The question then becomes: how do fixedincome investors avoid drawdowns as interest rates go up?
•
Given the uncertain domestic and global outlook, diversification becomes key within the fixed-income market. Credit as part of a fixed-income portfolio is often effective in such an environment as it offers both diversity and stability due to its relatively low correlation with traditional interest ratesensitive assets.
This fund seeks to generate active return above its cash benchmark by assuming credit, term and liquidity risk. The fund is actively managed through the cycle, increasing sensitivity to credit spreads when valuations are attractive and reducing risk when spreads look expensive.
Momentum Income Plus Fund
Left: Conrad Wood, Head of Fixed-income Strategies at Momentum Asset Management. Right: Allan Lewis, Senior Financial Planner, Momentum
Jason Hall then discussed the changing parameters of credit. Due to the regulatory requirements of Basel III, which is aimed at strengthening bank capital requirements and increasing liquidity, it is becoming more difficult for banks to lend money. There are those asset managers who have argued that the whole structure of the fixed-income market will change profoundly as a result. Hall clarified: “As a no-doubt unintended result of Basel III, we have found ourselves, in some situations, taking on the traditional lending role of banks. Where before asset managers were reliant on investment banks
Inception date: 2 February 2004
Key • • • • • • • • •
Some of the delegates shortly before the presentation began
• •
facts: Benchmark: STeFI + 3 per cent (after fees) Peer group: SA – Multi-Asset - Income Fund managers: Jason Hall and Richard Klotnick Fund size: R2.7 billion Annual management fee: 1 per cent plus VAT TER: 1.16 per cent Maximum credit spread duration: Five years Annualised volatility: <3 per cent Offshore: Up to 25 per cent offshore and 5 per cent in Africa Risk level: Low to moderate Inception date: 1 July 2005
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Picking
winning funds: three steps to help improve your odds Picking winning funds in advance is difficult. There is no sure thing in the investment world, only odds. Here are three often overlooked aspects of manager research that can help tilt the odds further in your favour. 30 investsa
Morningstar
Stewardship
Financial incentives
Taking a stringent look at how well a firm treats its clients should be a big part of anyone’s decision to buy a particular unit trust. Since unit trusts are often meant as longterm investments, it makes sense to partner with firms that are likely to continue making decisions in your best interest long after you’ve signed the original purchase documents. Ask yourself whether the firm seems more interested in stewardship or salesmanship.
Another important consideration when selecting a manager is how they are financially incentivised. Fund companies often boast that they are employee-owned. More important, and often less transparent, is whether the employees are investors in the firm’s funds. As a fund investor, I care about how well the firm’s funds perform; less about how well the business performs.
Morningstar research shows that good stewards typically offer investors a better experience. In the US, formal stewardship grades (A through F) are assigned to funds and fund companies and funds that receive higher stewardship grades tend to survive longer. Between 2004 and 2010, of all the funds receiving an A grade, 99 per cent of them were still around at the end of the period, while 34 per cent of all funds receiving a grade of F had been closed or merged. Furthermore, good stewards often perform better. A study in 2009 by researchers at Cornell and Binghamton Universities found that US funds receiving an A or B stewardship grade performed 1.6 percentage points better annually relative to funds earning Ds and Fs.
Past performance As previously outlined in our February 2014 issue, instead of focusing only on the level of the fund’s historic returns, we should also pay attention to the variability of those returns. The field of behavioural finance has documented how fear and greed clouds our better judgment. We often buy funds after huge
The US is the only country where fund managers must disclose their co-investment information. Our research on US funds shows a strong
Star Rating
correlation between a fund’s star rating (a measure of its historical performance), manager tenure and levels of co-investment. In short, the more money a manager has invested in a fund, the longer they stick around and the better the fund performs.
Manager Tenure (Years)
Manager Investment
5
6.2
$300,061
4
6.3
$250,890
3
5.4
$161,620
2
4.6
$124,810
1
3.8
$110,991
spikes in performance (greed) and sell funds after periods of large drawdowns (fear). This US example shows how a fund with a 10-year annualised return of 15 per cent can yet deliver a terrible realised return to the investor. An investor return places more weight on periods where a fund has more money invested in it, and less weight on periods where fewer Rands are invested. This approach gives us a return that an investor is more likely to have experienced while invested in the fund. Fund A returns 34.9 per cent in 1998 and 120 per cent in 1999. However, the fund’s asset
base is just $5.3 million at the end of 1997 and $9.9 million at the end of 1998. By 1999 year-end, the fund’s asset base is $72.4 million, just as the fund’s performance is peaking. The fund eventually reaches $118 million in AUM as performance starts dropping off. The fund experiences double-digit losses from 2000 to 2002 with more people than ever before invested in it. Investors then run after the fund, suffer massive losses, and most miss the fund’s rebound between 2003 and 2006. When added up, the fund’s reported 15 per cent annualised return translates into a 1.46 per cent annualised loss for the average investor.
David O’Leary, CFA, MBA, director of fund research, South Africa, Morningstar South Africa
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Linda
Sherlock Head of advisory, Alexander Forbes Financial Services
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Profile
What does your role as head of advisory entail? My role as head of advisory looks primarily at the individual client. Within our business we advise, service, support and nurture individual clients and families in their personal financial planning and investment planning. In serving our clients, we begin with objective-based planning through an advice led process. This includes areas of advisory that consult to clients both as new and existing clients, operations and administration in support for our clients’ plans, fiduciary services business, business development, finance, best practice and compliance. In looking to ‘secure your financial well-being,’ we believe in a relationship with clients and their families that involves not only looking at the most immediate needs of the financial plan, but the long-term objectives of the client with annual or bi-annual checkpoints in each client’s personal plan. We know that ‘life happens’ along the way and so the need to review objectives and outcomes is the most crucial part of the plan. What is it about your job that most excites you as you come to work every day? The fact that what we do makes a difference in people’s lives. From financial education programmes, investment planning through to working with a family who have lost someone, everything we do makes a difference in their lives. What do you regard as your greatest business success to date? Personally, it is when I pause for a minute to look at the achievements of our advisory business over the last few years: new business, client satisfaction and client retention and more recently this year, the implementation of our Ready Set Retire initiative in partnership with Personal Finance. In this initiative, we have spearheaded a call to action with both pre-retirees and retirees alike, based on three streams of education through a nationwide annual conference, the creation of a Retirement Club that meets four times a year, and the concurrent implementation of our Ready Set Retire web community. The entire initiative is centred on empowerment through the three streams, a significant shift away from the way our industry has tackled this previously. And what do you regard as your greatest personal success to date? This is a difficult one to answer, as I think our lives are filled with different amazing moments that continue each and every day and each one of them is a success – they never end but build and build. Some of these moments include when I go home each day and watch
the really fantastic young people my children are, and when I remember that at the age of 36, I started doing my CFP® and had to bring my brain back into studying after an eon of not doing so. I also really appreciate being able to make a difference to someone every day, even if it is in the smallest possible way. Your advice to retirement fund members in these interesting investment times? Maintain your current course and speed. Make sure you have a financial plan, stick to it, seek advice on your plan at least once a year and don’t make emotional decisions when it comes to your financial planning or investments. Seek guidance, educate yourself as much as possible on financial matters, and make use of the tools and support available to you. Moreover, stick to your plan. If you had R100 000 to invest (excluding through Investment Solutions products), what would you do with it? The best way to answer that question is with a question: what is my goal with this R100 000? Depending on whether I have a short-term goal (one to three years) or a longer-term goal (five to seven years) or a long-term goal (seven plus years) would inform what I chose to invest in. Furthermore, I am assuming my bond and high interest debt was all settled, and I would then purchase a unit trust portfolio that will best meet my goal. I would get advice on the make-up of the portfolio of unit trusts, and I would inform myself of the costs involved, the risk associated with the unit trusts I have selected (both in the contexts of, have I taken on too much risk and have I taken on enough risk to reach my goal). In line with this, I would want to understand whether I should be looking at passive or active management strategies in my selection, and whom I select to advise me, not only for the implementation but for the longer-term reviewing of this investment. Here I would look to a financial planner who carries the CFP® designation. How do you strike a balance between your personal life and your work schedule? With difficulty. I have to remind myself, and be reminded, that I must have balance. I do have some basic rules that I stick to: when on holiday be on holiday, don’t pretend to be on holiday and work on your laptop/iPad. I do work long hours so when at home no email, weekends belong to the family and I book out one afternoon a week to leave the office by 5.30. At home, I put myself 100 per cent into being there, and I find that this can only be done if you mentally and physically disengage from all modern technology so that you are truly in the moment.
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Working towards a retirement Probably the biggest problem with retirement planning is that, until we reach the age of about 45 to 50, it seems so far away. By Vivienne FouchĂŠ
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Retirement investing
W
hen we are young, after all, we feel quite invincible – for most people, these are their ‘superhero’ years. Why should someone in their twenties feel the need to save for the time they are old? At this point in their lives, they cannot even comprehend what it must feel like to be old. And yet, most people, if they don’t fall prey to a life-threatening disease or fatal accident, do get old – and the clock moves much faster than our 20-year-old selves could ever have imagined. Some day our superheroes will get old and grey – and when they are, what will their retirement years be like? Numerous sources tell us that most working people will not retire comfortably. Only about 10 per cent of the population – or even less – are deemed to be able to reach this happy Nirvana. South Africa’s retirement funding future projections of those working today – like most around the world – are in crisis. The life stage approach Johan Gouws, head: Absa Multi Management, outlines why the use of a life stage approach when saving for retirement is desirable for most retirement fund members, especially when built into a default option. “During the active work years, the main investment objective should be that of wealth creation, requiring a more aggressiveinvestment strategy. However, given the 30- to 40-year time horizon involved, an investor can afford to take on the necessary investment risk required to achieve returns above inflation. A spread across different asset classes will also contribute towards avoiding the potential loss of capital. “As the individual moves closer to retirement, the amount of risk that can be assumed becomes less as the timeframe towards retirement becomes shorter and the ability to afford any capital losses is reduced. Many investors, however, become too conservative with their investment at retirement, even though they will typically still have 20 to 25 years to invest after entering retirement.” Calling on business and the government Daniel Stronach, MD of Investec Investment Management Services, says that as early as 2004, the National Treasury had raised concerns that too many South Africans were reaching retirement age without having accumulated enough savings to maintain their lifestyle after retirement. “Today, the situation
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experience where the introduction of Personal Pension Plans triggered economic growth and the creation of many jobs,” he says. Daniel Acres, CEO Prescient Life, adds, “Retirement reform has presented an opportunity to ensure that members’ investments are appropriately structured over the course of their working careers and into retirement. Sensible life stage models and annuity defaults have the potential to create significant value for members.” So how can your average working individual achieve a ‘superhero’s’ retirement? Jann Krynauw, fixed income manager and institutional distribution at REZCO Asset Management, says advisers should tell their clients, “Start early. It is also key for retirement fund members and individual clients to understand the power of compounding interest. Saving is about discipline and for some the only way to save is to make it compulsory. Compulsory preservation will, for example, address the issues around accessing and spending retirement savings when an employee leaves an employer.”
has deteriorated even further. More than half of our pensioners are experiencing a shortfall between the income received from their postretirement product and their monthly expenses. “The poor financial position that many retirees face prompted the National Treasury to initiate a process of retirement reform and legislative changes that seek to help individuals achieve their retirement savings goals.” The Treasury has implemented a series of Retirement Reform discussion papers and opened them to the industry for comment. And those big businesses in the retirement industry have started taking up the challenge – many of them, in fact, some time back, even before the Retirement Reform discussion papers were released.
help them to achieve financial health, both today and in the future.’ The complicated landscape of retirement reform Steven Nathan, chief executive of 10X Investments, advises that index-tracking protects the investor from making emotional decisions based on past performance or current market trends. He adds that investors will receive superior investment returns (after fees) with less risk using index-tracking funds. “Together with low-investment fees, this means a return of as much as 60 per cent more over an investment period of forty years,” he says.
For example, in 2013, Alexander Forbes Financial Services released its first Benefits Barometer, an exhaustive overview of the state of the retirement funds industry in South Africa today, inviting further engagement from other industry players. The Benefits Barometer 2013 found that the fragmentation of employee benefits design as a whole, including retirement fund arrangements, affected employee benefits as part of the fabric of the wider social protection system.
Stronach (a proponent of the active management school of thought) says, “Paying fees is a reality, but there is scope to avoid some costs. One of the aims of retirement reform is to ensure that retirement funding arrangements are cost-efficient. Many smallto medium-sized retirement funds battle to provide value for money and the focus on costs will likely lead to further consolidation in the pension fund industry. This should create numerous opportunities for investment platforms and advisers that are able to adapt their businesses to provide a service to this area of the market”.
With the recent release of the Benefits Barometer 2014, Alexander Forbes further extended its invitation for engagement, asking for additional input from all employee benefits stakeholders, namely the government, employers, the financial services industry and unions and trustees. One of the concerns coming through is the need to ‘engage with members’ entire journey and
Mark Thompson, CEO of Southern Charter, says South Africa needs to implement retirement reform so that it is suited to the model, infrastructure and capabilities of the South African financial services industry. “South Africa needs an African solution to an African retirement problem. A developed first-world financial model does not fit our world. Our experience is more aligned to the Chilean
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Nathan says that to begin saving for retirement, investors need to clearly quantify their goals, preferably with the help of a qualified financial planner. “An investor needs to understand how big a pot of money needs to be set aside to ensure a comfortable retirement. A good place to start is to work towards a minimum replacement of 60 per cent of their final salary, or around 10 times their current annual salary.” Stronach adds, “Financial advisers can play a crucial role in helping investors to formulate a retirement savings goal. As a guideline, many industry professionals recommend that individuals should be saving 15 per cent of their monthly income in a balanced fund for a period of 40 years to achieve an income replacement ratio of just 70 per cent. However, while most retirement fund members’ contributions are found wanting, the lack of preservation is an area of even greater concern.”
Steven Nathan’s five questions that investors should ask themselves when planning for retirement:
1. How much do I need to save for my retirement? 2. How do the investment fees impact on my retirement returns? 3. Have I made the right choice? 4. Is my retirement investment product simple and transparent? 5. Is my retirement fund manager under-performing the market?
Practice management
Financial planning
for women
Why should you bother and should there be a distinction? A financial planner once told me that it was unprofitable to pursue female clients: “They are hard work and as soon as you have built a good relationship with them, they get married and run to their husband’s financial adviser, abdicating responsibility for their money. Or, even worse, they stop working to become moms.” I sometimes wonder how deeply entrenched this outdated and generalised view still is in our industry. Fast-forward to 2014 and women are a target market that financial planners overlook at their peril. 1. Women are rising in the ranks – think of the governor of the Federal Reserve in the USA, the head of the International Monetary fund, and the presidents of Germany and Brazil as a few examples. Women are now top earners and successful entrepreneurs. 2. In the next few decades, the biggest transfer of wealth in the history of the world will occur. Most of this wealth will be transferred to women because, generally speaking, women outlive men. Many studies have shown that up to 80 per cent of women fire their husband’s financial adviser once he has passed away – clearly a big risk to advisers who do not engage with the family. 3. Divorce is increasing, splitting the wealth of families and transferring substantial capital into the hands of women. Through my workshops for women, I have first-hand experience dealing with the disconnection and sometimes antagonism
that many women feel towards the financial services industry. I believe we need to ‘pursue’ women in our industry. Talking their language Women talk about financial success in terms of goals, not in terms of the biggest or the best. They fear they will run out of money. Talking about the best fund manager or highest returns leaves them cold. Talking about how far they have come in meeting their goals, for themselves and their families, reinforces confidence and helps them stick with their plan. Women are generally more risk averse than men are and so, as financial advisers, we need to address their appetites for risk in relation to their need to take risk. This also adds to the fact that they tend to live much longer than men. Connecting with women Women like to connect and learn in groups. I have found that creating forums where women can connect and learn has been very successful not only in helping women, but also gaining new clients. Connecting with the wife is sometimes the best way of getting the husband to commit to a financial plan. The modern woman is also pressured for time. She has a career (even motherhood is a full time career!) and remains responsible for her home and wider family on a daily basis. We need to make it easier for her to do business with us – perhaps connecting with us in her own time through social media, for example.
Planning for women The most significant financial event in the lives of many women is probably motherhood, which is a financial watershed: few women maintain their earnings capacity after motherhood for many different reasons. This leaves women dependent and vulnerable if they were to lose their partners through divorce or death. Many women are single mothers. In a nutshell Young women should be encouraged to start saving early – a relatively small monthly saving from early on can secure a comfortable retirement and future financial security before one’s mid-thirties. Women need to save more than men do because they live longer. Women should be encouraged to work longer and continue to save later. It is not uncommon for even high-earning women to sacrifice their careers in some form to care for their extended family. It is our responsibility to help them plan around this, and point out the consequences of their choices.
Sunél Veldtman, CFP® CFA®, CEO of Foundation Family Wealth, author of Manage your Money, Live your Dream
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Retirement reform
Retirement reform should boost
South Africa’s savings culture
T
he latest proposals for the reform of the country’s retirement fund industry are generally quite positive for individuals and are to be welcomed, since they should eventually result in lower costs, greater simplicity and bigger tax savings for many participants, therefore eventually improving South Africa’s savings culture. There are three main aspects to the government’s proposals: • Harmonisation and simplification of existing retirement fund rules. • Annuitisation and preservation of retirement fund savings. • Streamlining retirement fund default options. South Africa currently has over 30 000 regulated retirement funds (including pension, provident and preservation funds and retirement annuities). These come with a variety of rules for entry, for investing over the years and for exit, creating a high level of complexity. The government aims to reduce the number and type of funds available, while harmonising and simplifying their rules. Ultimately we may end up with only one major type of ‘government-approved’ retirement vehicle, with uniform rules of entry and exit. Such simplification would make the administration of the approved retirement vehicles much easier and, therefore, arguably cheaper for both companies and individuals. The government has already made some progress towards harmonisation. New regulations effective from March 2015 will introduce a uniform tax deductibility limit for all retirement fund contributions of 27.5 per cent of taxable income, subject to an annual ceiling of R350 000. In addition, since the new deductibility limit is almost double the existing limit of 15 per cent for retirement annuities, there will be a greater potential benefit for individuals contributing towards retirement.
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Alongside this ‘approved’ retirement fund vehicle, the government is also proposing a separate new tax-incentivised savings account, into which any taxpayer could contribute. Although contributions would be made from after-tax money, an individual would be able to contribute R30 000 a year up to a lifetime maximum of R500 000 (adjusted over time with inflation), and all income earned from this vehicle would be tax-free. Capital gains within the account would also be exempt. This may make it even more attractive than the standard approved retirement vehicle for many people. The second aspect of the reform, focusing on annuitisation and preservation, aims to encourage people not to take cash out of their retirement savings. Currently, this is allowed when leaving a company, while retirees can take a cash lump sum from their total retirement savings at retirement, depending on the vehicle. Studies have shown that many people do opt for cash pay-outs and that this cash, to their eventual detriment, is not used for their retirement. To prevent this, the government is proposing that a person be obliged to transfer all their retirement savings to a preservation fund when leaving a company, while retirees would be obliged to sign up for some form of annuity using a large portion of their retirement savings.This proposal could become effective sometime in 2015 or 2016, but would not apply to people aged 55 or over at that time. The third aspect involves simplifying and streamlining the number and types of investment options retirement fund members
have to choose from. Retirement fund trustees will need to be well-informed about the many options. They will need to choose the most appropriate investment solution as a default for their members, while also limiting the number of options to keep costs low. Members who don’t want to use the default option would have to actively opt out, which would likely involve choosing a more expensive option. Overall, the proposed reforms should help South Africans start improving their savings. While some may be unhappy about a limited choice in their approved retirement vehicles, they may be able to choose other options at an extra cost. It is important to note that higher cost does not necessarily mean that the opt-out option is wrong, provided that higher cost comes with greater flexibility and a more appropriate investment mix for that member. However, for the average person with little knowledge of retirement investments, the proposals are certainly positive.
John Kinsley, MD of Prudential Portfolio Managers Unit Trusts
Regulatory development
Creating the
regulatory
‘invisible hand’
With the plethora of regulatory reform in the financial services industry, a lot of attention is being focused on the issue of whether new regulation will have the desired outcome.
H
owever, we also need to ask if enough is being done to create a sufficiently open playing field that would allow the market to function and compete more naturally. In my view, regulation has a key role to play in creating enabling mechanisms for the financial services industry to compete. Adam Smith, known as ‘the father of economics’, described this in his economic theory as the ‘invisible hand’ of the market, where equilibrium is maintained through market forces. In concept, this would require the regulator to set a combination of rules and principles which are enabling and sustainable. So the pertinent question to ask is whether or not sufficient attention is being paid to the long term when setting policy direction. To help demonstrate my point, I would like to draw your attention to two key areas affecting the local investment environment. Retirement fund reform
largest platforms in the country each have over R100 billion in assets under management. Group RAs can leverage off the substantial asset base of investment platforms. This means investors can potentially benefit from a cost perspective. Aside from the benefits of scale, group RAs also provide industry-leading transparency, disclosure and choice. Retail distribution review My second regulatory example where natural competition should be encouraged, is with regards to the retail distribution review (RDR), specifically in relation to independent financial advisers. The risk is that independent advisers are being unnecessarily restricted, effectively driving more advisers to the tied advisory area. I am a strong advocate of independent advice as I believe that there is better conflictfree alignment with investor interest. It is my understanding that the regulator recognises the importance of this balance.
My first example is retirement fund reform, specifically with regards to group retirement annuities (RAs) and umbrella schemes. The regulator has recognised that umbrella funds will be a significant part of retirement benefits going forward. Yet they have not acknowledged that group RAs – even in the infancy stages – can create natural competition for umbrella funds to ensure that the latter do not display some of the negative symptoms that could come from being unchallenged.
I have been encouraged by the regulator’s actions in some other areas, proving it is entirely possible to create enabling mechanisms that promote competition. For example, the regulator should be credited for keeping the balance between living annuities and life annuities. In the past, the government and various parties tended to protect the life annuity industry and effectively pushed out the living annuity industry. However, more recently they have managed to ensure that there is a greater natural balance between the two areas.
The umbrella fund market in South Africa has approximately R150 billion in assets. The four
Across all pieces of legislation it should effectively ensure that the different players
in the financial services industry, be it life companies, unit trust companies or banks, are able to offer investors access to products with consistent principles. This ensures that investors’ decision-making processes are also supported by disclosure of the highest standards. There are certain areas where more intrusive legislation may be required. Regulators could use a more risk-based approach, making the degree of intervention proportional to unfavourable client outcomes, for example, using the feedback from the relevant regulatory ombudsman or the rating of the industry with regards to Treating Customers Fairly compliance. That would effectively limit the need for continuous market intervention and hence lead to a better use of scarce resources. This can only be achieved if this is an explicit goal of regulation. Ultimately we should aim to build a system that is self-evolutionary, rather than revolutionary.
Sangeeth Sewnath, deputy MD, Investec Asset Management
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NEWS JSE equity market data available on finance The Johannesburg Stock Exchange (JSE) has partnered with Google Finance to offer clients and investors JSE equity price data via Google Finance. Google Finance allows the public to get financial information from 35 stock exchanges worldwide. JSE equity market data is now available to both local and global clients as well as investors, enabling them to track the market activity of their shares on the JSE. All equity listed instruments on the JSE are provided with a 15-minute delay.
PSG Balanced Fund performs over 15 years The PSG Balanced Fund, the PSG Asset Management fund with the longest track record, has provided its investors with a hefty return of 15.68 per cent per year Paul Bosman since inception in June 1999 – nearly 15 years ago. This is no less than 5.03 per cent per year more than its benchmark of inflation plus 5 per cent. Considering that the FTSE/JSE All Share Index gave investors a total return of 18.28 per cent over this period at significantly higher volatility, this demonstrates the benefits of using a multi-asset mandate correctly. Paul Bosman, PSG Balanced Fund manager, says the company is focused on executing an investment process that has been developed and refined over many years. “We know
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that by following a disciplined process, which is generally contrarian in nature, we can continue to achieve our objective of exceptional risk-adjusted returns over time.” The PSG Balanced Fund is ideal for investors who prefer the fund manager to make the asset allocation decisions and aim to build wealth within a moderate risk investment. Bosman says the fund requires a significant exposure to equities, typically 55 per cent to 75 per cent. They place their focus on valuations. “When we value an asset (be it an equity, a bond or any other security) we look at its prevailing value relative to long-term trends as well as relative to other assets within the same asset class and across asset classes. Every individual investment opportunity is also valuated on merit.”
Ana Forssman, Director of Market Data at the JSE, says they are excited to offer their clients and potential investors an additional platform to get exposure to the JSE equity market, via Google Finance. “Technology and accessibility to information is a critical enabler for exchanges and with more and more people accessing market data online, it made sense for the JSE to be more broadly available. It’s a great development that Google Finance will facilitate this exposure to a comprehensive audience within South Africa and globally,” says Forssman.
New range of equity funds from Sanlam Investments
Standard Bank and Liberty Corporate launch Employee Protect Useful news to small business owners – Standard Bank and Liberty Corporate have announced the launch of Employee Protect, a new product that provides a cost-effective employee benefits solutions to South Africa’s small businesses (SMME), with no medical underwriting requirement. The government has identified SMME growth as key to our country’s overall economic growth. A first of its kind by a South African bank, Employee Protect is a simple, low-cost, administration solution that
enables employers to provide a formalised employee proposition for its staff members. Employee Protect is aimed at small businesses with an annual turnover of less than R10 million and a minimum of five staff members. This is an entry-level employee benefits solution offering death, occupational disability and family funeral benefits to meet the needs of small businesses seeking to provide cost-effective benefits for their employees, which are, of course, an integral part of an employer’s value proposition. Tiaan Kotzé, executive: corporate distribution at Liberty Corporate, says the product has a dual positive impact in that it provides protection from unforeseen financial obligations for both employees and employers.
RECM expands team on the back of solid 11-year track record Cape Town based Global Value Fund Manager RECM has announced the appointment of Doug Thomson to head up its business development and marketing.
Doug Thomson
“Doug has 18 years of investment experience, which spans the full spectrum of global and domestic traditional assets as well as private equity, credit and hedge funds,” says Jan van Niekerk, RECM CEO. Doug was previously head of client
Sanlam Investments has recently launched a new range of funds designed to help investors manage the risk of investing in equities. The funds are particularly appropriate for pensioners who cannot afford stock market ups and downs. The Sanlam P2strategies Funds have been successfully offered internationally and are expected to have a strong uptake in South Africa too. The Sanlam P2strategies Funds help investors remain invested and avoid value destroying behaviours such as buying high and selling low. P2strategies’ belief is that even as investors become risk averse as they approach retirement, many need to remain invested in the stock market to help fund their desired lifestyle in retirement. Increased equity exposure does not necessarily mean they need to take on increased risk. By utilising P2strategies Funds, investors can access a solution that seeks to capture growth when markets rise and defend against losses when markets fall. Remaining invested is especially important for investors when they begin to take withdrawals.
service at Brait and head of institutional business development at Investec Asset Management. Since its inception in 2003, RECM has successfully navigated both local and global financial markets for its clients – adhering to the value investment philosophy throughout. This has seen the firm delivering solid investment results over full market cycles to its investors, drawn to RECM for their focus on growing capital in real terms whilst protecting against the risk of permanent capital loss.
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Products
Glacier by Sanlam launches new retirement income product Glacier has recently launched the Investment-Linked Lifetime Income Plan. The solution, the first of its kind in South Africa, combines features of both a guaranteed life annuity and an investment-linked living annuity (ILLA), thereby balancing the client’s need for market exposure with the need for retirement income that lasts a lifetime. Jaco-Chris Koorts, product manager at Glacier by Sanlam, says the InvestmentLinked Lifetime Income Plan removes the concern of outliving income, without sacrificing investment choice.
Johannesburg Stock Exchange launches new services for listed companies The Johannesburg Stock Exchange (JSE) announced new services to its listed companies and other issuers. The range of services will help companies identify Michelle Joubert prospective investors, build their profile and communicate with existing investors and the market. Michelle Joubert, head of investor relations, says the new services include hosting company investor meetings at the exchange, seminars on regulatory changes and integrated reporting, improving investor and media relations skills and updating Listing’s Requirements knowledge. “The global focus on corporate governance and transparency means that many listed companies are asking to up their skills in these areas. For that reason, the exchange is working with sector experts to provide the services that companies need.”
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The services are also aimed at unlisted businesses seeking to list, with a particular focus on companies from elsewhere in the world that are considering listing on the South African exchange. The aim of the new service is to help listed companies promote their businesses in South Africa and abroad. “Our discussions with international investors indicate that they are interested in JSE-listed stocks as well as building their exposure to the African continent. We hope to facilitate this by providing platforms for our listed companies to build their profile and engage more effectively with prospective investors and analysts,” says Joubert. Foreign investors are already active on the JSE, accounting for approximately 25 per cent of trading activity on the equity market. While international outreach is important, much focus will also be given to connecting companies with South Africa’s well-established institutional investment community.
“It achieves this by guaranteeing clients a fixed number of retirement income units per year, the value of which have the potential to grow in accordance with the performance of the investment options selected.” The number of retirement income units is determined by the initial capital amount, the client’s age and gender, whether or not the client has chosen a single or joint-life option and whether or not a guaranteed income payment term has been selected. The value of each retirement income unit will start at R1 and thereafter will move in line with the performance of the client’s underlying investment portfolio, less fees.
The world
AUSTRALIA, BRAZIL, NIGERIA, JAPAN, CHINA, SOUTH AFRICA
Australia’s property being snapped up by foreign investors
Nigerian companies limited by South Africa’s red tape
to grow above its potential rate as exports increase and domestic demand remains firm.
Australia’s highest level of foreign investment is in the buying or building of houses in Victoria, Australia by foreigners. The biggest real estate investors are as follows: China with $5.9 billion, followed by Canada with $4.9 billion and Singapore with $2 billion. The Victoria community has raised concern over the property approvals by the Foreign Investment Review Board, as this increased competition for property and land has pushed up property prices and made it more difficult for Australians to buy a home. Foreign investors are encouraged to purchase real estate in line with a policy that encourages the growth of new housing stock as well as selling their property within three months of leaving Australia.
According to Nigeria-South Africa Chamber of Commerce’s Chamber Director, Osayaba Giwa-Osagie, regulatory restrictions on equity ownership and moving money in South Africa were limiting the number of Nigerian companies investing in South Africa. Information recorded by the chamber showed there are more South African companies investing in Nigeria than Nigerian companies investing here. This is due to the restrictions of black economic empowerment (BEE) laws on the percentage of equity that should be given to South Africans. South Africa’s BEE laws have been criticised by Nigerian billionaire businessman, Aliko Dangote, saying they are an obstacle for other African states who want to invest in this country and are a discouragement of intra-continental trade.
Chinese corporate bonds entice investors
Brazil in bad state under Rousseff’s rule According to Brazil’s President, Dilma Rousseff, there is no room in Brazil’s budget for additional tax cuts even as Latin America’s biggest economy continues to slow ahead of this year’s national elections in October. Rousseff says the federal government has reached its limit and the administration has already implemented ‘deep’ tax cuts. Brazil has experienced its worst economic performance in over two decades under Rousseff’s rule than during any other presidency. This, coupled with rising living costs and the country overspending on the World Cup budget, has decreased Rousseff’s support ahead of the general elections.
Foreign investors are being enticed to buy Chinese debt as it produces a high return, which has grown from 1.1 per cent points in 2013 to 1.2 per cent points this year. According to data provider, Dealogic, the buying of Chinese Corporate Bonds has helped Chinese companies issue $41 billion worth of Dollar-denominated bonds to overseas investors to date, which is three-quarters of last year’'s total. The higher returns in Asia compared to the lower returns in developed markets have made the buying of Chinese corporate bonds increasingly attractive to international investors, as most corporate bonds in the region yield 0.5 per cent to 1.3 per cent points higher than those in the U.S.A.
Japan’s economy sees fastest growth since 2011
South Africa’s economy shrinks
Japan’s economy grew 6.7 per cent in the first quarter, which is 1.2 per cent higher than predicted, and is the fastest pace of growth since July-September 2011, where Japan’s GDP was on -0.5 per cent. For the first time in 44 years, Japan has seen more foreign visitors spending money in Japan than the Japanese have spent while travelling abroad. This has seen positive growth for Japanese companies in the retail and tourism industry. The Bank of Japan’s Deputy Governor, Kikuo Iwata, says he expects growth for the Japanese economy to become a trend and that it will continue
The first three months of 2014 saw South Africa’s economy shrink by 0.6 per cent compared to 2013, where it grew by 0.7 per cent. The main contributors to the decrease in economic activity were the mining and quarrying industries as well as the manufacturing industries. Finance, real estate, business services, retail, motor trade, catering, accommodation, and the communications industries were all positive contributors to the economy. South Africa’s GDP is estimated at R874 billion for quarter one of 2014, which is R2 billion less than the previous quarter.
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They said
A collection of insights from industry leaders over the last month
North American asset and wealth management leader for Boston Consulting Group, Brent Beardsley, comments that in order to maintain market-leading positions, wealth managers need to make use of technological applications because younger investors are using these methods to manage their money. Research, however, indicates that firms are not keeping up with client demands. “Rather than quibble about whether the economy will endure its second recession in five years, it’s more salient to recognise that the economy has grown at a depressed 2.6 per cent for almost three years, and the recovery since the 2008/2009 slump has been feebler than the emerging markets average.” Chief economist at Standard Bank, Goolam Ballim, comments that even if South Africa should experience a second recession, a bigger emphasis should be placed on identifying obvious growth drivers that can assist the country to a sustained recovery.
“The retail savings pool is growing a lot faster than the institutional asset base, as corporate pension funds shrink, and unit trusts are now making their way into the pension fund market as a convenient way to offer members a choice in a defined contribution environment.” Managing director of Investec Asset Management SA, Thabo Khojane, comments that more and more consumers are cashing in their unit trusts and he predicts that in the long-term future, the unit trust industry looks strong and will become ever more important. “The trick is to realise that while we cannot control the external economic climate, investors can control their personal economy through sound financial planning.” Regional head of advice of Citadel Investment Services, John Kennedy, comments that although South Africa’s economy is at risk of entering a technical recession in the second quarter, investors with solid financial plans should not panic
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or make reckless decisions, since it is normal for an economy to go through both negative and positive periods owing to its cyclical nature. “Despite the bleak economic picture, the South African stock market has hit record highs. The market returned over 20 per cent in 2013 and almost 10 per cent so far this year. In fact, it recently broke through the psychological 50 000 level for the first time in history.” Investment analyst at PPS Investments, Luigi Marinus, comments that although credit ratings agency Standard & Poor’s has downgraded South African government bonds, the country’s stock market does not seem to be following suit. “As individuals have started using other full-featured applications for other purposes, they’ve grown to expect that level of sophistication from everyone, including from their 1/8 wealth management 3/8 providers.”
“Weak real GDP growth and the likelihood of an interest-rate increase will exert pressure on asset quality and constrain corporate business development, while the banks’ large domestic government exposure links banks’ credit profiles to the South African government.” Vice president and senior analyst at Moody’s Corporation, Nondas Nicolaides, comments that South African banks are expected to bear the brunt of the pressure from the country’s current subdued economic growth. “When regulation establishes high barriers to entry in an industry that protects excess returns into the future, this can be good for investors however. Even though we don’t like excessive regulation, a sustainable competitive advantage is one of the things we look for when identifying quality businesses in which to invest.” Senior analyst at RECM, Linda Eedes, comments that increased regulation tends to reduce competition, which is bad for consumers, but benefits established businesses by making it harder for competitors to enter their industry.
You said
A selection of some of the best tweets as mentioned by you over the last four weeks.
@ReformedBroker: “Total Wall Street compensation in 2007 was $137 billion! They’re all doing fine, in case you were wondering. All of them.” Downtown Josh Brown – chairman of the Twitter Federal Reserve, author of the forthcoming book Clash of the Financial Pundits.
@stiglitzian: “The reason the stock market is high, in part, is that interest rates are low, wages are low & the emerging markets are still growing [fast].” Joseph Stiglitz – dedicated to @ JosephEStiglitz, Nobel laureate in economics & ‘champion of the poor in the corridors of power.’
@commodityirl: “Emotional Intelligence more important than IQ when Trading or investing
#Psychology, Know your own mind and risk tolerance level.” Peter Whelan – commodities & equities specialist, published writer, broadcasting, food analyst, strategist, motivational speaker, law & economics, sport, travel, people.
@StockTwits: “It’s been 54 trading days since the S&P500 last saw a 1% move. The longest such streak in 19 years” StockTwits – we created the $ prefix for stocks (e.g. $MSFT). Follow @StockTwits and go to http://stocktwits.com for real-time ideas and stock conversations.
@jackschwager: “Impulsive trades can be dangerous. Trades cited as their most painful by the Market Wizards were usually impulsive ones”
Jack Schwager – author of Market Wizard series and Schwager on Futures series.
@pkedrosky: “If you've been predicting a market correction for months, saying “I told you so” today just makes you look like a dork.” Paul Kedrosky – dad, investor & lapsed golf course maintenance guy. Previously enigmatic.
@aaronvalue: “The one thing that’s certain is that people will always pay lots of money at least to feel less uncertain.’ David Rock – Your Brain At Work” Aaron Edelheit – combine Frank Sinatra, a love of Judaism, the CEO of The American Home Real Estate Company in one with multiple personalities and you get yours truly.
@FinanceTrends: “2 types of selling rules (O’Neil): Defensive: selling stock to cut losses. Offensive: selling to lock in gains.” David Shvartsman – founder/ editor of Finance Trends. A trader’s view of the stock market and emerging financial trends.
@realDonaldTrump: “Be a yardstick of quality. Some people aren’t used to an environment where excellence is expected.” – Steve Jobs’ Donald J. Trump – the official Twitter profile for Donald Trump.
@Jhbtrader: “In China we trust, if not the data but their ability to procreate and to consume.” JhbTrader.
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And now for something completely different
Investing in the next
Pablo Picasso The worth in discovery and investing in emerging artists
I
nvesting in art isn’t a new concept and pieces by artists such as Picasso and Warhol can provide a phenomenal return on investment and more liquidity than traditional stock market speculations. However, these are often hard to come by and usually have a hefty price tag. A more achievable way of entering into this market is by investing in emerging artists who are on the way up in the art world. Buying emerging art is the equivalent of investing in frontier market equities and so can carry the highest risk, but at the same time can also provide investors with the highest profit. Collecting contemporary and modern art from emerging artists is relatively cheap, so the initial amounts invested do not always need to be high. Before buying art, it is imperative that new investors take their time to understand the market. Visiting a broad range of galleries and reading up on modern and contemporary art will expose you to the different mediums artists are working in. Art isn’t just about paintings any more – mixed media, photography, sculpture and installations are all popular investment vehicles. Art is an investment you have to live with, so you have to make sure that the work suits your personality and taste. Your investment goal when doing this is to select an artist who displays commitment, originality and longevity – all are key factors contributing to the career of a successful artist. 46 investsa
Many artists create art that is admired and welcomed into homes and places of business, but the value of this art will not appreciate much – if any – over time if it is not unique. If the work of an artist looks as if it could have been painted by a famous artist, it is derivative. Derivative art can be decorative, but it is not art worth investing in. History is littered with the works of artists who were popular in their own time, but never lasted beyond that. Look for someone whose artwork has an individual look and feel. There is a huge difference between being influenced by Van Gogh, Picasso or Warhol and being an imitator of one of these great artists.
Edward Granger, USA Based in New York City, Granger’s background in architecture is evident in his compositions. Drawing from the Fauvist movement, his use of bold colours and geometric lines immediately make his work stand out. His work focuses on observing how humans perceive and interact with nature. Inspired by George Seurat, Sol Lewitt, and Pia Fries, Granger’s approach seems to be a balance between harmony and tension within structurally informed compositions.
Amolo Omolo, South Africa Kenyan-born Lorraine Amollo Ambole, known within the art community as Amolo Omolo, is a PhD student at Stellenbosch University in Cape Town, a wife, mother and an avid painter. Influenced by a background in design, Omolo’s work is already beginning to garner international attention. Mainly using acrylic on canvas, her compositions infuse a feeling of passion and sensuous rhythms.
Don’t be influenced by authorities if it goes against your own gut instincts. Gallery owners, dealers, critics and curators have been mistaken many times as to which artist is worth collecting. It is important to remember that at one time Picasso, Van Gogh and Dali were all considered emerging artists, and many warned against investing in their art. Pissarro has been considered the father of Impressionism and modern art. Without Pissarro’s ideas there might not have been a Cézanne, Monet, Renoir, Van Gogh, Picasso, or even Warhol. Pissarro influenced other artists and this makes his work important and valuable. The same principle applies for identifying great emerging artists. So, if you can find a ‘contemporary Pissarro’ – buy their art!
Dan Rees, Germany Dan Rees is a Welsh artist, a photographer, sculptor and painter. He was born in Swansea and relocated to Germany in 2005. There, he attended Städelschule, from which he graduated in 2009. Rees has exhibited group and solo internationally. In 2013, Complex magazine numbered him among their ‘25 artists to watch in 2013.’
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FROM A LOCAL TO A GLOBAL INVESTOR HOW DANIEL JACOBS* INVESTED IN ADVENTURE
“I’ve always dreamed of one day travelling the world. But it wasn’t something that would happen overnight and so I began planning for it. I decided to diversify my portfolio by investing offshore. I put away a lump sum of R50 000 and contributed R1 500 a month to the Old Mutual Global Equity Fund. Ten years later my investment has grown to R739 254 (that’s a 16.3% return a year). I’m now travelling the world, seeing the places I’ve always wanted to see.” GREAT THINGS HAPPEN TOMORROW WHEN YOU START INVESTING TODAY Make Old Mutual Investment Group your investment partner today. Contact your Old Mutual Financial Adviser or Broker, call 0860 INVEST (468378) or visit www.omut.co.za/myglobaltravel
Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium- to long-term investments. Past performance is no indication of future growth. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. Premium increased in line with inflation at 6%. Distribution reinvested. *Based on average customer experience but actual investment returns.
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