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Flying high The how, what and why of investments by the super-rich
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18 CONTENTS 06
High net worth individuals: THE how, WHAT AND WHY OF INVESTMENTS BY THE SUPER-RICH
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Fast moving consumer goods
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In pursuit of quality
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Africa – an alternative?
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Preparing for RDR – the biggest change in a financial services generation
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The IRFA focuses on the trust in trustees
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Morningstar: South African equities stumble in Q3
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the editor It’s not often that new regulations come out that should, once implemented, benefit both retail investors and independent financial advisors (IFAs). This time, it seems, the Financial Services Board, often maligned for its seemingly senseless regulations, has hit the nail on the head. Its paper, entitled Retail Distribution Review (RDR), contains proposals that should prove to be of great benefit to investors and IFAs who don’t depend on nefarious up-front and other commissions to earn their livelihood. The FSB paper came out mid-November, inviting comment. It has been well received by the leading asset managers for its proposals, which include an end to many commission structures and restrictions on penalties for products like retirement annuities. “The document contains far-reaching proposals which will have a significant positive impact on South African consumers and end-investors,” says Jaco van Tonder, sales director at Investec Asset Management. Most notable proposals are: • A complete ban of product commissions on all savings products in exchange for advice fees that the customer agrees to. This is a point InvestSA has long argued for. Commissions are an easy and, for the client, exacting form of payment. Fees are a far more professional approach – and IFAs are, or should aspire to be, professionals. • More stringent rules around surrender or termination penalties on financial services products. • Restrictions on up-front commissions for most life insurance products. Again, InvestSA has also long argued against these nocuous commissions, and IFAs should too. • Banning the industry practice of paying rebates between fund managers, investment platforms and financial advisers. This last proposal would remove a particularly odious practice, basically expensive advertising, from the industry. Any IFAs still receiving rebates should hang their heads in shame. Van Tonder notes that the proposals should help to end ‘churning’ – when a client’s portfolio is constantly switched from one product to another so that the provider can earn extra money. “As a long-standing supporter of IFAs, we are also pleased with the regulator’s appropriate recognition of the importance of independent financial advice and their efforts to create a healthy and vibrant IFA market for the benefit of consumers,” Van Tonder says. Other asset managers, like Jeanette Marais of Allan Gray, have also welcomed the proposals. So it looks like, for once, we can say, ‘Three cheers for the FSB’. The end of the year is typically a time for reflection. Much of that reflection is on money. Which means your job, home expenses, education costs etc. Maybe save yourself the bother this time around. If you have spare money, use it on a good holiday, or buy something you’ve always wanted, for yourself. There’s much more to life than working and money. Like having fun.
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 Tower Esplanade Road Century City 7441 Phone: 021 555 3577 Fax: 086 6183906
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High net worth individuals:
The how, what and why of investments by the
By Shaun Harris
Almost by definition, high net worth individuals are difficult clients for financial advisers and asset managers. Not because they are difficult by nature, but rather that they are demanding and, being financially literate, they will question advice. That’s one of the reasons why they are super wealthy.
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which include all the major asset classes targeting specific return targets,” says Dave Mohr, chief investment strategist with Old Mutual Wealth. In a supplement in the Financial Mail, Mohr says Old Mutual Wealth ensures its strategies always remain optimally allocated.
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ypically, a high net worth individual will use a number of financial advisers and asset managers. They want a second and third opinion. They are also very aware of costs, another reason for their wealth. They will probably not use advisers tied to a bank or other financial institution. They want independent advice, and for this reason will seek out independent financial advisers. Woe betide the adviser who tries to charge a high net worth individual commission. That will lead to a quick exit through the door. However, they are prepared to pay top fees for sound advice, just like they would pay a doctor or lawyer. And despite being financially literate they do seek advice. “They are not shy to get appropriate advice to steer their investment decisions,” says Shane Tremeer, a director at Sanlam Private Investments. “The ultra-wealthy are multiadvised and multi-banked and – especially in the 60-plus age group – focus on wealth preservation and sensible portfolio diversification rather than taking chances with complex financial structures,” he adds. Generally, the global definition of a high net worth individual is a person with at least US $1 million to invest, which means the $1 million is totally discretionary money, excluding other assets like property. In South Africa that means a high net worth individual must have at least R10-million to invest. That’s how Tremeer defines them: “People with R10 million and change in investible capital.” He says there are around 48 000 investors
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and the number is growing, “who sport their high net worth individual stripes at wealth and private clients managers countrywide.” But definitions vary. For instance, Price Metrix says a high net worth individual is a client with a net worth of at least US $2 million, but that would not be cash and would include assets like property, expensive cars, private planes and yachts. In South Africa, however, R10 million seems the starting level for a high net worth individual. These super rich are classed as ‘global citizens’. They could probably live anywhere in the world, but live in South Africa because it’s where they want to be. Many, however, will also own one or more properties abroad. They have to take a global view on their investments. This means that, when it comes to equities, a large part of a high net worth individual’s investment portfolio will be in shares in foreign or global companies. One of the large private client firms, Douglas Investments, manages portfolios locally and offshore for its exclusive group of private clients which it says are “well known to the management team”. Clive Douglas says the local portfolios are managed on the broking platform of Standard Financial Markets, which provides clients with an independent custodian of their portfolios. The offshore shares are selected with HSBC Private Bank in Zurich, Switzerland, which is where many high net worth individuals will also have a separate bank account. The global nature of these clients and the exacting standards they expect means that service providers have to continually adjust investment strategies and the products they offer. “We design strategic asset allocations
Old Mutual Wealth has also designed a randdenominated, offshore investment vehicle – issued by Old Mutual Isle of Man – that it says provides private clients with a single, taxefficient structure. In addition, the company offers fiduciary services for clients who want to leave a legacy and ensure continuity of their wealth. Edge Capital says it changes its products to keep up with the needs of high net worth individuals. “We create innovative financial solutions by constantly adapting our products to the evolving investment environment, always keeping in mind that the preservation of wealth is as important as its creation,” it says. On the above point, Tremeer says high net worth individuals are not ‘financial cowboys’ who pursue high-risk investment strategies at any cost. “In reality, they are cautious individuals who squirrel away their wealth in risk-appropriate investments that match their life stages,” he says. And apart from equities, what else do high net worth individuals invest in? Not necessarily expensive cars and boats. Even the properties they own tend to be fairly modest in relation to the amount of money they have. “An interesting trend is that the ultra-rich are investing in agricultural properties such as wine, game and crop farms. We have also witnessed an uptick in art as an investment category,” Tremeer says. Hereford Group says it also changes its products to suit the changing investment needs of high net worth individuals. “Our industry has continually grown and changed over the last few years. To keep us ahead of the pace, Hereford Financial Services made a choice to make change a constant within our operation, consistently revising and refining the way we do business.” The firm also provides personal financial planning for its clients.
It’s not only private clients who use multiple investment planners and asset managers. Edge Capital says it doesn’t believe that the entire complement of intellectual capital or expertise can exist within any one organisation. “In pursuit of our investment goals, Edge selects individual managers who have the skills and ability to provide the building blocks for viable, sustainable and world-class investment solutions.” High net worth individuals have made their money in many different ways, often a business or even a legacy. However, one of the most common assets that high net worth individuals start out with is property. This often leads to conflict with an adviser or asset manager, who points out to the client that they are probably over-exposed to property and should diversify into equities. Some super-rich seem to have doubts about equities. A number of advisers and asset managers will tell of how a rich client demands that all the equities in a portfolio be sold when there has been a market downturn. The adviser will try to explain that the downturn is temporary and that over the longer term the equities will regain and increase in value, but the client will have none of that and demands that they be sold. This has been evident since the start of the global financial crisis at the end of 2008, which has made some wealthy investors suspicious of equities.
But tough as the job can be, advisers want high net worth individual clients. The question then is how to win their trust and keep them. Obviously good advice that results in positive investment returns is part of the answer, but the other important factor is establishing a relationship with the client.
business is no longer about selling products but about being able to understand clients and help them grow and preserve their wealth. “Our focus is not on sales targets but on relationships,” he says. But financial advisers must be careful not to be too intrusive in the relationship. High net worth individual clients will ask for advice when they need it, and some might enjoy regular visits from the adviser. Don’t, however, waste their time with unnecessary visits and reports. Time, after all, is money.
Douglas Investments says its management style is relationship-based, and it works closely with clients to establish their objectives, risk profiles and needs. Andrew Bradley, CEO of Old Mutual Wealth, says the
The required standard of professionalism A professional is known by four hallmarks: Education, Examination, Experience and Ethical Behaviour. Since 2011, FISA has offered an annual examination that allows the successful candidate to apply for the Fiduciary Practitioner of SA (FPSA®) designation. Furthermore, our education partner, the Unversity of the Free State, is introducing a programme in fiduciary practice from 2015. FISA has a strong Code of Ethics, as well as a Continuing Professional Development programme. Our strong reputation has led to: • Increased awarenes of fiduciary matters in the media • Clients demanding to deal only with FISA members • The authorities consulting us on industry issues • Members experiencing a promotion of their interests
ESTATE PLANNING | TRUSTS | WILLS | ESTATES | BENEFICIARY FUNDS
www.fidsa.org.za
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Fast moving
By Marc Hasenfuss
The JSE’s many FMCG counters – that’s ‘fast moving consumer goods’ for the uninitiated – seem to be either at an intriguing juncture… or a delicate juncture.
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t’s clearly not the best of times for the purveyors of low margin high volume brands. Competitive pressures are mounting with multi-nationals increasingly pushing into South Africa (and indeed Africa). To make matters worse, the local economy is soft, and perhaps at risk of turning completely soppy. The extent to which consumers are under pressure is evident in the recent results from retail stalwarts, packaging companies, logistics specialists and consumer brand giants. That said, there is at least a geographic hedge for FMCG companies to counter the brittle trading conditions locally. A thrust into more vibrant African markets – despite the risks of over-paying for profitably established market positions – is offering much-needed growth opportunities. Of course, one does need to ask whether the rather alarming outbreak of the dread disease, Ebola, in West Africa will staunch enthusiasm by South African companies for pushing further into African markets. The answer remains to be seen.
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Africa aside, the local FMCG segment may well be ripe for consolidation if weak trading conditions trigger merger and acquisition activity aimed at extracting efficiencies from larger economies of scale. Quite a lot of moving and shaking has already happened, and the smart money is betting there will be more corporate manoeuvres in the next 18 to 24 months. The next big moves will be fascinating to gauge, and it could be rewarding in the longer term if investors find sweet spots for mergers and acquisitions. Perhaps key to exploring such possibilities is exactly where in the FMCG chain an investor should be positioned. Currently the manufacturers of FMCG – ignoring for a moment the providers of cellular services providers – are battling high energy costs, higher labour costs and sometimes higher input costs at a time when consumer demand might at best be described as iffy.
It’s clearly not easy to make a profitable buck. Yet the market seems to have mixed views around longer term prospects for these counters. For instance, the JSE’s mainstay consumer brands conglomerates – Tiger Brands, AVI and Pioneer Food Group – are all much closer to their 12-month highs than their respective 12-month lows. So is consumer electronics distributor Nu-World, and dairy products group Clover. But the share prices for other large food distribution counters like Oceana, Tongaat, RCL Foods and Illovo are close to 12-month lows. Perhaps a scenario where the market perceives certain FMGC counters as well reinforced against hard times and others somewhat more vulnerable certainly seems conducive to corporate action – whether the more vulnerable players look to shore up their corporate defences with new assets, or whether the strong feed on the weaker players.
On the food and consumer brands side Remgro-controlled RCL Foods (which swallowed Foodcorp) and Brait-controlled Premier Group have made clear their intentions to bulk up. But one perhaps also needs to delve into the significance of PSG-controlled investment company Zeder increasing its effective stake in Pioneer Foods (by taking out Agri Voedsel minority shareholders) and the recent listing of food brands conglomerate Rhodes Food Group (RFG). With Zeder now confirmed as the most influential shareholder in Pioneer Foods, the chances of the company adding to its brands basket must increase markedly. Of course, having RCL Foods, Premier and Pioneer all chasing local consumer brand assets locally, Africa could see a bun-fight that might lead to vendors’ pricing expectations rising to levels that render potential deal-making unviable. RFG ranks as one of the smaller consumer goods listings, and its appetite for acquisitions is not yet apparent. But quite honestly, the
company – which is well diversified in its food basket – is small enough (and reasonably priced enough) to become a takeover target for one of the bigger consumer brands conglomerates.
One bit of corporate action that has largely gone unnoticed in the beverages space is the merger between JSE-listed Bowler Metcalf’s soft drink subsidiary Quality Beverages (the maker of Jive), and ShoreLine (the maker of Coo-ee).
Arguably the biggest shake-up on the JSE could come from beer giant SABMiller, which remains prone to persistent rumours of a pending takeover by Anheuser-Busch InBev. Keen market watchers will know that almost every year SABMiller is subject to such talk. Perhaps a more realistic development is SABMiller making a decision around its major shareholding in Distell, the Stellenbosch-based liquor group that owns top selling bands like Klipdrift, Nederburg, Fleur du Cap, Savanna, Hunters Dry and Amarula.
The merger – to form a R1 billion a year sales enterprise called SoftBev – should extract efficiencies, especially in the competitive Gauteng market where both companies were scratching for market shares.
The billion dollar question is whether SABMiller – in its efforts to re-focus on its core beer business – will sell out of Distell (which represents a smidgeon of its market capitalisation), or whether the brewer might want to build a niche presence in spirits, wine and (especially) cider. Almost certainly, there would be a willing buyer for SABMiller’s 29 per cent stake in Distell in the form of investment conglomerate, Remgro, already the largest shareholder in the business. Staying with the liquor industry, it may also be worth watching unlisted KWV – now part of JSE-listed Niveus Investments – to see if steadier profit flows from its core wine and brandy business inspire corporate action that will lessen operational reliance on products of the grape.
Should the new look entity churn fizzy profits, it may attract some longing glances from larger FMCG counters like Pioneer Foods and Clover – both of which have niche soft-drink bottling and fruit juice operations. Outside the perishable side of FMCG, the JSE is left with a paucity of listings. Nu-World is the remaining dedicated supplier of consumer and household electronics after acquisitive conglomerate Bidvest bought out Amalgamated Appliances. But there are currently moves afoot to split industrial conglomerate Seardel into media assets and industrial assets. Proposals envisage the industrial assets being housed under Deneb Investments, which would include the old Seartec business (which distributes the Sharp office automation and house electronics brands) as well as toy wholesaler, Prima Toys. Whether having FMCG-aligned companies like Seartec and Prima housed with mostly old industrial concerns that focus on textiles (for various applications) as the optimum structure remains to be seen (remembering that both Seartec and Prima were at one stage separately listed). But – remembering that the adventurous and determined HCI is the major shareholder at Deneb – it certainly would not be unreasonable to expect the newly spun-off company to broaden the customer offering of both its FMCG businesses. A real outsider to watch in 2015 will be the recently listed Sacoven, which takes the guise of a special purpose acquisition company (or SPAC. This means Sacoven has listed without any operational assets or investments, but has been given grace by the JSE to seek out new opportunities. The business bears close monitoring since its prime mover is Vivian Imerman – who, in the nineties, headed food and fruit conglomerate Del Monte Royal Foods. Sacoven, which also has a listing in London, has indicated it will target deals with an enterprise value of between £200 million and £500 million in areas that could include consumer goods in Africa. Considering Imerman’s profitable experiences in the food sector and subsequently the international liquor industry, the odds must be narrow on the chances of Sacoven pulling off an acquisition in the local FMCG market. investsa
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In pursuit of
quality
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Asset management
While investors may be tempted to try and time the market, this is, in our view, largely a futile exercise. We believe a more prudent investment approach is to look for opportunities while trying to avoid risks, so that portfolios are well positioned whenever a turning point comes.
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nvesting in quality stocks – both in our local and international portfolios – forms an integral part of our approach to weathering different market conditions and building real wealth for investors over the long term. In defining quality, we favour companies that don't rely heavily on central bank policies or economic momentum to produce returns. In this way, we avoid exposure to stocks that are very sensitive to market volatility. We also invest in companies with pricing power that generates attractive margins. They typically have low levels of debt and provide substantial returns on invested capital, while still being able to return large amounts of cash to investors. These businesses have the ability to compound shareholder wealth over the long term. Furthermore, quality companies tend to have dominant intangible assets such as strong brands, patents, licences, copyrights and distribution networks, which create a strong competitive advantage. But the allure of a premium brand is not a sufficient condition for investment. Financial literature is littered with investors who have paid too much for what they thought were good quality businesses and then they turned out to be pretty average or poor. Our research process focuses on identifying companies that display the best combination of high quality, sustainable growth, above average yield and compelling valuations. We apply these criteria across different geographies.
Quality companies tend to outperform through a full market cycle. They can offer meaningful returns when times are good in the broader equity market, but more importantly, their defensive nature means they often have smaller losses than the broader equity market during a downturn. Even if the share prices of quality companies weaken, their earnings and dividend performance usually ensure that investors still receive a cash return during periods of market underperformance.
are reticent to invest in some of the more capital-intensive parts of the market and are not interested in highly leveraged companies. Hence, we are avoiding most financials, mining companies and utilities.
Quality stocks may be vulnerable to lagging share prices during the late stages of a bull market cycle. During this phase of the market, high-beta stocks (shares with a high degree of sensitivity to movements in the broader equity market) typically outperform. Even though earnings may be pedestrian, stocks that are heavily exposed to economic momentum and sentiment tend to do well.
The performance of the Investec Opportunity and Cautious Managed Funds have benefited from their offshore holdings, which beat global markets by a wide margin last month. Locally, South African stocks still look rich in general, but the portfolios remain balanced, broad, and have multiple opportunities, despite being defensive.
We have material exposure to consumer staples, and we also see some attractive opportunities in the technology area. These are companies with good business models we believe the market has mispriced.
Markets have been driven by expectations and sentiment, and many of the traditional fundamental valuation rules no longer seem to apply. We have become more cautious about those areas that have already seen a very strong run and are subsequently avoiding stocks heavily exposed to economic momentum and market sentiment. However, there are global quality companies we believe the market has mispriced. This provides an opportunity to buy good businesses with a favourable earnings profile and a sound balance sheet at a discount to the broader global equity market (MSCI Word Index). In the Investec Global Franchise Fund, we
Clyde Rossouw, portfolio manager, Investec Asset Management
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Alternative investments
Africa
an alternative? All investors worth their salt know that they should not put all their eggs in one basket, which is why alternative investments have such an important role to play in portfolios.
Fund managers are increasingly looking at the broader African markets, ex South Africa, where a young demographic, growing middle class and attractive GDP growth prospects make it seem one of the most attractive investment destinations in the world right now from a global, top-down perspective.
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he 2008 market crash demonstrated to investors that things can go badly wrong in mainstream assets classes like equities and bonds, and that some of their time would be well spent in looking for diversified and alternative sources of income to help their portfolios withstand financial fallout.
With the South African economy expected to crank out lacklustre growth numbers in the short to medium term, and its stock market hitting a tough patch after a multi-year rise, it may be an opportune time for investors here to consider looking north of Beitbridge to the multiple countries and economies that make up this vast continent.
What are alternative investments? They can include anything that is not stocks, bonds or cash – ranging from property to art, and even wine or a stamp collection.
True, market volatility makes investing in Africa seem like a risky business. In October, for example, the two biggest bourses ex South Africa took a severe beating. Nigeria’s All Share index tumbled 8.88 per cent while Egypt’s EGX 30 shed 7.09 per cent.
In the world of more formal asset management via the capital markets, other alternative investments include hedge funds, private equity, managed futures or commodities that offer diversification and a low correlation to traditional asset classes. Alternative assets are premised on a different way of looking at certain markets and geographies. Yet even a portfolio that has diversified into dissimilar instruments can suffer if it is limited by geography. Portfolio managers in any asset class will battle if they are working in an environment where the broader outlook is constrained by negative factors such as limited GDP growth prospects or political and economic issues. Perhaps then, an alternative asset worth considering is one that adopts a truly different approach to a truly different market place? 14 investsa
Long-only allocations to the African marketplace certainly come with unpredictability, but much of it is to the upside. As at 31 October, the EGX 30 had increased an impressive 34.39 per cent year to date, having gained 24.17 per cent in 2013. Although Nigeria’s All Share was down 9.14 per cent for the year at the end of October, it gained 47.19 per cent in 2013 on top of a 35.5 per cent return in 2012. African stock markets in general lack the sophistication of developed markets, of which South Africa is one, which offer instruments and tools to enable managers to implement alternative strategies and approaches in varying market conditions. However, there are ways to take an alternative approach to Africa. Private equity is one – with
long-term investors taking a multi-year view on accessing specific opportunities they feel will come to fruition over time. Taking a more liquid approach via the capital markets offers investors an exciting and relatively untapped opportunity set across multiple high-growth economies. This can be done both on the ground in Africa and via Africa-focused companies and instruments listed on bigger global exchanges. Investors would do well to look for managers who have a different perspective on the Africa opportunity set and look to express it in alternative ways. Aside from long-only buy-andhold managers investing in Africa, there are fund managers who use tactical approaches as well as derivatives and cash to deliver returns, with the aim of protecting capital while tapping into the upside. This is just one example of an alternative approach in an alternative geography, which investors could – or should – consider for a variety of reasons.
Paul Robinson, analyst, Laurium Capital
Barometer
HOT
NOT
Business confidence remains low
Business confidence remains at an undesirably low level according to the September 2014 SA Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI). Such low confidence levels were last observed in early 2000. The September 2014 BCI (89.2) was 2.2 points below the September 2013 level of 91.4. While four of the seven physical activity sub-indices were positive month-on-month compared to three in August 2014, none of the six financial sub-indices of the BCI was positive.
SA’s GDP forecast cut
SA economy expected to double South Africa’s economy has quadrupled since 2000 and is expected to grow to $2 trillion by 2018, up from $362 billion in 2000. This is according to an EY report which revealed that if challenges like corruption and poor infrastructure can be overcome, the country is expected to join Nigeria in the top 20 global economies in the next decade. The Business Day reports that the move from about 30th biggest now would place South Africa, and Nigeria, in the bracket of the economies of Turkey and the Netherlands, and larger than most European economies.
Six-year high for US home sales The United States housing recovery remains on course with the sales of new US single-family homes reaching their highest level in more than six years in August. Reporting a second straight monthly gain, new home sales increased 18 per cent to a seasonally adjusted annual rate of 504 000 units – the highest level since May 2008.
SME owners remain resilient The 2014 second quarter Business Partners Limited SME Index (BPLSI), which measures attitudes and confidence levels among local small and medium enterprise (SME) owners, reported that business owners across various industries expressed average confidence levels of 75 per cent that their business would grow in the next 12 months, an increase of two per cent when compared to both the first quarter of 2014 and the second quarter in 2013.
s y a w e Sid
In the International Monetary Fund (IMF) latest World Economic Outlook report, South Africa’s economic growth outlook for 2014 was cut from 1.7 per cent in July to 1.4 per cent. It also revised the country’s projection for 2015 to 2.3 per cent, down from 2.7 per cent. This marks the fourth consecutive time this year that the IMF has cut the country’s economic growth outlook.
Manufacturing and mining output shrinks Data released by Statistics SA revealed that manufacturing and mining output contracted in August when compared to August 2013. Mining output decreased by 10.1 per cent year-onyear, largely due to a fall in the production of platinum group metals, while manufacturing production fell by 1.2 per cent.
Africa growth forecast to rise but could be hampered by Ebola The World Bank Africa Pulse report stated that Africa is forecast to remain on the world’s three fastest-growing regions and that regional growth is projected to increase to 5.2 per cent in 2015, up from the projected 4.6 per cent for 2014. However, Ebola could hamper growth, according to a World Bank study of the likely economic impact of Ebola.
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Economic commentary
A cautionary time for investors Heading towards the end of 2014, we have not been surprised to see a more cautious mood in international markets after buoyant returns across most assets in the first eight months of the year.
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lowing growth across much of the globe (with the exceptions of the United States and United Kingdom) had finally begun to weigh on investor sentiment, as had expensive valuations in some markets and the approach of higher interest rates in the US. Some volatility was to be expected, and is likely to continue, as the world weighs the start of tighter monetary policy in the US: for the past six years, easy money has helped underpin asset price gains and the gradual economic and financial recovery following the global financial crisis. The environment in South Africa has also deteriorated to a certain extent in light of lower GDP growth expectations for this year and next, as well as falling commodity prices and the weaker rand. Consumers are also faced with stubbornly high inflation. Along with other emerging markets, local equities trimmed much of the gains made earlier this year. However, some of these headwinds are partly offset by ongoing low interest rates (on an historic basis) and lower oil and other commodity prices, all of which should boost the consumer, although the latter will act as a drag on export earnings. Although the global recovery has proved to be slower than expected this year, what remains clear is that, going into 2015, central banks and governments around the world are committed to maintaining policies to boost growth. The major economies of Europe, Japan and China will continue with easy monetary policies, while the broader expansion in the US gathers pace and acts as an engine for 16 investsa
global growth. It’s important to remember than exports account for only 13.5 per cent of US GDP, making it less vulnerable to a global slowdown than is generally imagined (although US companies are more exposed to lower global earnings). The US Federal Reserve has also signalled that it will proceed with caution: it is possible that it may delay hiking interest rates amid a low global growth environment.
While South African bonds are vulnerable to rising interest rates both locally and overseas, yields on long-dated government bonds around 8.5 to 9.0 per cent offer good value over the medium term, sufficient reward for the risk. We also prefer long-dated corporate bonds, which offer even better yields over their government counterparts, at slightly higher risk.
We at Prudential continue to believe in a ‘lower for longer’ interest rate scenario in the US and South Africa, given slower growth and the absence of an inflationary threat globally. This makes equity our preferred asset class. Listed property is also attractive, for its solid distribution growth prospects and earnings underpinned by rental contracts, which generally escalate with inflation – it compares favourably with long-dated bonds.
So while investing conditions in 2015 are likely to be more testing than previously expected, it is important to take a longterm view and not panic when market corrections happen. By selling after prices fall, losses are locked in.
A look at current equity market valuations shows that global equities are preferable to local equities: the MSCI World Index is trading below its long-term fair value, with both the forward price-to-earnings ratio and the price-to-book ratio below their long-term averages.
Rather, it is best to ride out the weaker conditions in the knowledge that, as history has shown, over time asset prices rise again as the economy recovers. Dips always create opportunities for investors to take advantage of, and there will be many such opportunities in 2015.
Meanwhile, the FTSE/JSE All Share Index, with a price-to-book ratio of around 2.3, is expensive by historic measures – about 20 per cent more expensive than global equities. We also prefer developed markets to emerging markets which, although offering even better value, generally present higher risks from slowing growth, falling commodity prices, credit bubbles and negative demographic trends.
David Knee, head of fixed income, Prudential Investment Managers
Events
Preparing for RDR
The biggest change in a financial services generation By Vivienne Fouché
Compli-Serve recently held events around the country on the Retail Distribution Review (RDR). The overriding premise was that RDR represents the biggest change to financial services regulations since the introduction of FAIS.
T
hose in the industry are aware that it will impact on all companies in the financial services industry but that those involved in delivering financial advice will be most affected. Compli-Serve argues that it is important to understand the RDR processes because RDR could present the making or breaking of a financial advice firm. The speakers were Richard Rattue, MD of Compli-Serve, and Brian Foster, a UK-qualified certified financial planner who experienced RDR in the UK and now coaches and consults to South African advisers. The discussions centred on the implications of RDR, its possible outcomes and guidance on how to not just survive, but thrive, when RDR comes to pass. Rattue commented, “We are seeing a complete change in the mindshift of the financial services landscape. Independent financial advisers help the public and as such, financial planners must survive. While regulatory change can be regarded as a major threat to many intermediaries, in our view, RDR represents the biggest opportunity of a generation. We see it as the opportunity for a ‘win-win-win’ for the client, the financial planning business and the regulatory.”
Foster added, “As financial planners, we don’t deal with people’s money; we deal with people’s lives. You could say that the Treating Customers Fairly initiative is the curtain-raiser and that RDR is the main event.” At the conference, delegates were given four main guidelines for embracing RDR. Create an excellent client proposition Understand your client proposition clearly, and have clarity on why it is worth paying for. An excellent proposition will also be essential to differentiate your practice under an RDR regime. It will be expected that you present yourself as being qualified, trustworthy and honest. Also remember that all companies will be fee-based in the future. Engage your clients in a way that suits them Some clients want face to face advice, and some don’t. Some want to discuss matters with their adviser online, while others see no value in receiving advice and want to ‘go direct’. Others again may be content with a product conversation while some clients will require coaching and comprehensive financial planning going hand in hand.
Therefore, understanding your clients’ approach preference means you can respond appropriately and get the most effective results for all. Change your sales process to an advice process To change your sales process to being an advice process instead, you need to know your client intimately. It’s critical to set out their lifestyle goals and aspirations and help them to achieve these – realistically, of course. It is imperative to ask the right questions to get to the heart of what your clients really want, and then offer tailor-made solutions. It’s also non-negotiable that you undertake your own due diligence on your recommendations. Focus on business profitability In contrast to a product sales environment, where increasing turnover is incentivised, most advice firms have historically never measured profitability. Advice firms need to clarify the costs of sale, and they need to know how much the business needs to generate to make a profit. investsa
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Global economic commentary
Weakness of global economy
shackles South Africa’s export performance Problems in the Eurozone At the IMF meeting in Washington in October, concern was expressed over developments in the Eurozone. In particular, the sharp fall in manufacturing production in Germany had shocked the markets. The weakness of the Eurozone economy is generating fears of deflation, which is making it particularly difficult for the troublesome peripheral southern European countries to pull out of recession. This is resurrecting pressure on the euro, which some would argue needs to fall to parity with the dollar in order for Europe’s structural problems to be neutralised. At the same time, there is concern that the countries in the Eurozone are not singing in unison and that some measures recommended to address the problem, such as embarking on quantitative easing in the unified region, are being resisted by the Germans.
fewer companies are investing here, which is generating a process of ever declining sustainable economic growth.
Factors impacting positively on the current account deficit
The large magnitude of the current account deficit renders the rand vulnerable to depreciation. However, notwithstanding the fairly steep real depreciation in its value over the past three years, the country has not been able to regain export competitiveness. Instead, a proliferation of strikes, significant increases in wages, electricity, water and other such costs have neutralised many of the benefits of currency depreciation.
From a positive perspective, the recent decrease in the price of oil is likely to provide some benefit in terms of reduced import costs. Direct crude oil imports amount to some R140 billion and, indirectly, a further R60 billion worth of imports are devoted to oil-related products. Therefore, other things equal, the 20 per cent-plus decline in international oil prices could save the country up to R40 billion in foreign exchange, or more than 1 per cent of GDP in terms of the country’s deficit.
Vulnerability of South African exports
In addition, the absence of security in electricity generation and supply has itself led to declining confidence in the industrial sector. Other structural impediments include the lack of capacity, tensions in industrial relations, the lack of versatility of business activity due to higher levels of business concentration, and the low levels of entrepreneurial activity.
The softness of the Eurozone economy, in turn, is generating substantial concerns relating to the ability of commodity exporters, such as South Africa, to withstand declining activity in key export markets. Not only is the European economic outlook a problem, but also that of China, which is similarly showing signs of losing momentum in its economy. Given South Africa’s large current account deficit (which widened from -4.5 per cent of GDP in the first quarter, to -6.2 per cent of GDP in the second quarter, this is of particular concern, and raises the question of where South Africa can derive its growth.
In other words, in the face of the less than satisfactory global economic scenario, South Africa has to address structural adjustments in its economy to facilitate an increase in exports. Calls have been made for years now for the government to divert its spending away from additional employment and wages in the public service, towards vital infrastructural investment spending. The reality, however, is that the government seems to be politically hamstrung in being able to implement such infrastructural investment programmes without increasing the public debt-to-GDP ratio of the economy further.
Locally, exports are lagging behind the rest of the world, and the sustainable economic growth rate has fallen from around four per cent a few years ago to no more than 2.5 per cent presently. As a consequence,
It is conceivable that even a slight miss of deficit targets might be accompanied by further downgrades in the country’s credit rating, with the associated increase in the economy’s interest rate structure.
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We should also not underestimate the benefit of the improving growth in the economies of sub-Saharan Africa and the increased export opportunities these are offering to South African companies. Exports into the rest of Africa now account for more than 30 per cent of total exports and 50 per cent of manufactured goods exports. This ratio is set to increase further based on the continuous growth momentum in subSaharan Africa.
Ilse Fieldgate, senior economist, Econometrix
Industry associations
The IRFA focuses on
the trust in trustees
A
nswering the call of many speakers at the 2014 annual conference of the Institute of Retirement Funds Africa (IRFA), the IRFA has completed a national trustee development and education programme. It was first launched in May this year, with a second phase completed in October 2014. Topics covered included governance, asset manager selection, PF130 circulars and the National Treasury’s proposed reform on pension funds. We take a look at the key insights from the development sessions.
dealing with conflicts of interest and ensuring that a structural conflict of interest is managed well. Other places trustees can go to for training
The current most important area of development for trustees Currently, the most important area of development is for trustees to understand their onerous fiduciary responsibilities and to understand that they are ultimately responsible and liable for what happens in the fund. This is notwithstanding the appointment of service providers and advisers to assist and guide them in the execution of their duties. It is also critical to understand new legislation and the impact on their funds. Retirement Reform discussion documents issued by the National Treasury note that the lower the level of expertise represented on the board, the greater will be the dependence of trustees on consultants and service providers. In my view, when trustees can develop a culture of compliance justification and independence, they will be on the right road to manage, direct and control the business of the fund, as required by the Pension Funds Act 24 of 1956 as amended.
of a retirement fund; not complying with fund rules and legislative changes; not knowing what is in the interest of members of the fund; and not knowing and appreciating that they are jointly and severally liable as fund trustees. Advice for trustees Be clear as to the various retirement reform initiatives of the National Treasury and its objectives. Have a clear understanding of which parts of the reform process have been reduced to legislation (in the Financial Services General Laws Amendment Act, 2013 and the Taxation Laws Amendment Act, 2013 and which parts are still in the discussion and consultative phases.
The greatest risks facing trustees
After understanding the legal requirements, be very clear how the legislation is to be implemented and the effect the legislation will have on the rules and administrative processes within the fund, and the operations of the sponsoring employer.
I believe this is based largely upon a lack of knowledge. By this I mean not knowing what the sophisticated legislation expects of trustees
Trustees should also be aggressive in monitoring service providers and should observe good governance, particularly in
The regulator has developed an online modular trustee training course with the objective of providing a very basic starting point. The regulator, in consultation with industry, is in the process of developing standards for accredited trustee training. The IRFA will be providing input on these. There are a few trustee training service providers, and the intention of the standards produced by the regulator is to standardise the contents of the training providers. Principles will provide further training annually for members of the IRFA and other trustee groups. What did attendees respond to most during the training? The most engaged presentations were around Section 37C, and the distribution of death benefits, because trustees need to apply their minds in distributing the approved benefits. The other area was the essence of an investment strategy, and setting up their own strategy.
Herme Slabber, training consultant, Principles FC
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Investment
Paying
yourself Chris Hart’s end-of-year advice for both financial planners and their clients.
W
hen we reflect back on the year and cast a thought on how we have done, what comes to mind? We have worked harder than ever before. The demands of work are escalating. We may even have enjoyed a promotion, which has brought extra responsibility and stress. Essentially we work for money – it’s necessary for us to be able to function and thrive in our society. So where did our money go? For most of the year, we worked hard but the reward was not for ourselves. We worked to meet the demands of the government and to pay debt obligations. In 2014, ‘tax freedom’ day was 22 May, which was the latest ever in South Africa. Tax freedom day is calculated on the demands of the government on the fruits of our labour and the proportion of the year that we essentially stop working for the government, and the income we earn starts to become ours. In South Africa, the tax is a true burden. In most other countries, the government ‘returns’ some of the taxes in the form of schools, healthcare and policing that can be used. In South Africa, these services still have to be provided for out of after-tax money. To provide some semblance of a decent education for our children, education will be the third biggest expense for most people in
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the higher Living Standard Measure (LSM) brackets. The second biggest expense that must be dealt with is our debt obligations: the bond and car payments that keep on coming almost as relentlessly as the taxman, with personal income tax coming in as the largest expense in our budgets. This is why the end of the year brings some relief to the treadmill. For those who receive an annual bonus, this is a great time of the year: the time we can go on holiday and go shopping to buy things. The bonus helps us to pay ourselves, and it is sometimes the only time we can pay ourselves for our efforts. Which is why it is important to be able to enjoy ourselves as fully as possible. We save money to go on holiday. Not go on holiday to save money.
The short-term transactional noise just dominates our finances. We seldom stop and pay attention to the strategic nature of financial planning over the long-term. The short-term noise drowns out the need to do long-term financial planning. And in any case, December is the month for holidays, not for financial planning. Right? My financial planner is also on holiday. It’s important to remember that getting rid of car and house debt through a sustained and disciplined financial plan is the best we can do for ourselves. That way, we stop working for the bank and start to pay ourselves more. Unfortunately, we will always be working for SARS up until our demise. SARS will even be there as well.
While being able to use the money we earn to enjoy ourselves is important, this is also a time when we should pay attention to financial planning. The bonus comes with a sting – January – the longest month of the year. We only get paid on the 45 th of January – yet major expenses like school fees need to be paid by the 15 th. And then there are the car and bond payments. Oh yes, there are also the annual expenses such as the timeshare levies we forgot about that just appear suddenly when the bank account is at its most depleted. December and January are our feast and famine months – the short-term.
Chris Hart, chief strategist, Investment Solutions
Investment strategy
Strategies for rising rates There is value to be found in a high-interest rate environment if investors can control their emotions and let their fund managers do the heavy lifting.
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ising interest rates have a way of prompting a certain amount of market anxiety. The repo rate has increased by 75 basis points since February, and it seems likely that we are faced with a rising trend. This trend is an unwinding of the historically low interestrate regime implemented globally by central banks in response to the global financial crisis. But in South Africa, one of the key factors is, of course, rising inflation. This is not ideal, because the economy is still sluggish. However, inflation is surprisingly well contained globally, which is good news. If we are entering a new interest rate cycle, is this necessarily a bad thing for investors? Institutional investors in the pension fund space should not be unduly perturbed. Markets and investors got their first taste of rising interest rates last year, when bond yields reacted sharply to comments by the US Federal Reserve around a pull-back in quantitative easing. An investor’s primary concern is to ensure that their portfolio is adequately diversified and aligned to their return objective. The main thing is to ignore market ‘noise’ and keep an eye on long-term investment goals. A well thought-out retirement plan and sensible investment strategy will be able to absorb different interest rate trends. Retirement investors will face many different
interest cycles over their investing horizon. That is not the end of the story, however, because fund managers tasked with managing multi-asset retirement portfolios to a particular mandate can have a different perspective, particularly if they are active managers. In this case, they would want to pay particular attention to bonds because when interest rates rise, bond prices fall. Bonds in perspective Bonds are still a vital part of a diversified portfolio because of the greater level of stability they provide. Even when bonds produce negative returns, the effect is not nearly as painful or bloody as an equities fall-out.
annum returns we have experienced over the past 10 years. Fund managers are no longer restricted to investing in nominal government-issue bonds – the market offers more variety in the form of corporate credit and inflation-linked bonds. Although all bonds move in much the same direction when changes arise, it is possible to weight a bond portfolio to favour instruments with different characteristics, providing the manager has a flexible mandate. The most important factor remains for an investor to ensure that they have selected the most appropriate strategic allocation to match their required return objective.
There are two other factors that can work in an investor’s favour: there are many different bond instruments and issuers that fund managers can work with to boost returns and, while a spike in bond yields may hurt short-term investors, a gradual parallel shift upwards in the yield curve will eventually benefit long-term investors through improved coupons. However, in a general sense, bond return expectations should be scaled back because the long-term real return expectations of bonds are likely to be significantly lower than 3.4 per cent per
Colin Nefdt, senior investment consultant, Old Mutual Corporate Consultants
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SA equities
stumble in
Q3 T
he third quarter was a mixed bag for global markets as investors grappled with both positive and negative news from around the globe. South African equities stumbled with the FTSE/ JSE All Share Index (ALSI) losing just over two per cent as output from the mining and manufacturing sectors contracted, and domestic economic growth continued to shrink. However, year to date, the benchmark index is still up 9.4 per cent. US employment figures announced during the quarter were encouraging as unemployment fell to 5.9 per cent in September; the first time below six per cent since July 2008. Bonds rallied on a pledge by the European Central Bank to provide
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Morningstar
Q3 2014
Yearto-Date
1 Year (annualised)
3 Year (annualised)
5 Year (annualised)
10 Year (annualised)
South African RE General
7.0
13.0
14.9
19.1
17.4
19.8
Regional EQ General
6.5
11.8
24.0
25.1
14.2
10.2
Global IB Short Term
4.4
5.9
12.1
10.6
7.8
6.3
Global MA Low Equity
4.0
7.6
14.3
16.4
11.2
9.2
Global EQ General
3.5
9.6
21.5
27.2
17.1
11.4
Global IB Variable Term
3.1
7.7
12.8
13.1
10.7
9.5
Global MA High Equity
3.1
8.3
17.6
24.3
16.2
11.3
Global MA Flexible
2.8
8.3
18.2
22.1
14.3
10.4
Regional IB Short Term
2.0
2.8
8.9
10.9
7.2
6.5
Wwide MA Flexible
2.0
7.4
15.4
20.3
14.6
13.9
Global RE General
1.9
16.3
20.1
24.1
18.8
11.2
South African IB Variable Term
1.8
5.5
6.0
8.3
9.1
8.7
South African MA Low Equity
1.0
5.8
9.1
11.5
9.9
10.2
South African IB Money Market
1.0
3.7
5.0
5.2
5.7
7.3
South African IB Short Term
0.9
3.9
5.3
5.9
6.5
7.6
Global MA Medium Equity
0.9
4.0
13.6
18.1
11.9
9.5
South African MA Medium Equity
0.7
6.7
11.0
14.3
11.8
12.3
South African MA High Equity
0.2
6.8
11.7
15.4
12.4
13.6
South African MA Flexible
0.1
6.5
11.5
16.1
13.0
14.7
South African EQ Industrial
0.0
9.9
17.4
27.6
22.2
21.9
South African EQ General
- 1.4
8.3
13.9
18.8
15.2
17.1
South African EQ Financial
- 1.8
11.7
19.9
25.2
18.4
18.1
South African EQ Mid/Small Cap
- 2.0
4.8
9.3
20.0
16.6
17.3
South African EQ Large Cap
- 3.2
7.5
13.0
20.5
16.2
17.9
South African EQ Resources
- 5.1
7.8
8.6
4.7
6.5
14.3
Name
further stimulus for the struggling economies across the region. Markets were also boosted by signs that the US Federal Reserve may delay raising interest rates. This good news was offset by weaker growth coming out of Europe, Japan and China, which hurt commodity prices globally. In addition, continued geopolitical tensions in Ukraine and the Middle East weighed on markets and the energy sector. This resulted in local currency total returns of 1.1 per cent for the S&P 500, -0.9 per cent for the FTSE 100 and 0.9 per cent for the MSCI World. Meanwhile, gold was off 7.5 per cent and oil fell 15 per cent during the quarter. Losses in the South African equity market
drove all ASISA domestic equity categories to the bottom of the charts with losses ranging from -0.01 per cent to -5.1 per cent. The best performer among the domestic equity categories was the Industrials Equity category while the worst performer was the Resources Equity category. The best-performing category for the quarter was the South African Equity Real Estate General with a seven per cent gain. This was followed by the Regional Equity General and the Global Interest Bearing Short Term categories with 6.5 per cent and 4.4 per cent returns respectively. Generally speaking, the offshore categories were bolstered by the continued weakening of the rand versus the US dollar.
David O’Leary, CFA, MBA, director of fund research, South Africa, Morningstar South Africa
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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 R84 billion in fixed-income assets.
Bulent Badsha BCom Fixed-income strategist at Momentum Asset Management Bulent was appointed fixed-income strategist at Momentum Asset Management in May 2014 and brings with him expert insights into the fixedincome market. He was the recipient of the Financial Mail Analyst of the Year Award for fixed-interest securities (2009) and JSE Spire Award for best general fixed-income analyst (2008, 2009 and 2010) and best quantitative analyst (2010).
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The final leg in the series of Momentum Asset Management’s roundtable discussions was held in November, featuring Conrad Wood, head of Fixed-income Strategies at Momentum Asset Management, and Bulent Badsha, fixed-income strategist at Momentum Asset Management. The conversation centered on the themes that prevailed during 2014 in fixed income and the risk/return profiles of the Momentum Diversified Yield Fund and Momentum Income Plus Fund. Bulent opened the discussion by reminding delegates that the US Treasury bond market is the epicenter of global fixed income, being the deepest, most liquid bond market in the world. He commented, “Since 2008, government bonds have benefitted from their safe-haven status. South African government bonds and US Treasuries performed exceptionally well during the global financial crisis and the ensuing economic malaise. However, the good days in government bonds got the first hint of their demise in May 2013 when Ben Bernanke hinted that the US quantitative easing programme was to be tapered. The resultant ‘taper tantrum’ took fixedincome managers the world over by surprise.” Bulent highlighted that the year-end Bloomberg consensus forecast for bonds at the beginning of 2014 was for US bonds to increase by another 50 basis points. Instead, they have declined by 70 basis points over the course of the year. He continued, “Bringing it back home, local bonds reflected a similar situation to the US bonds story. Our bonds rallied tremendously in early 2013 to multi-decade low yields. This was driven mainly by the strength of US Treasury bonds and demand for emerging market assets. However, South African bonds were also subsequently affected by the ‘taper tantrum’ and investors were left seething at the tail end of the biggest bull market for fixed income we’ve ever seen.” Conrad echoed Bulent when he commented, “2013 ended up being terrible for bonds, while 2014 has seen completely the opposite. It is unprecedented for markets to be faced with interest rates at zero in the developed world. We are navigating a very uncertain economic and
Momentum Asset Management
financial landscape, and there is a lot going on that no one has had to deal with before. “When we look at factors such as the decline of Europe and the rise of super-powers in the East, it is clear that there are many structural changes afoot in the global economy. The countervailing winds of change that have battered the fixedincome market recently have tested many a process for managing fixed-income portfolios.” Bulent continued, “South African Government bonds have performed very well this year after a shaky start and very poor outlook. This is best highlighted by the benchmark R186 bond. In retrospect, the best buying opportunities in local bonds during 2014 included the ‘surprise’ January South African Reserve bank (SARB) Monetary Policy Committee (MPC) interest rate hike (the first hike since June 2008), concern over emerging market (EM) assets and the ‘Fragile Five’ economies, the South African national election, the June S&P sovereign rating downgrade, the September Federal Open Market Committee (FOMC) meeting and South Africa’s Medium Term Budget Policy Statement (MTBPS). All these incidents highlighted opportunities where the market became too bearish relative to fundamentals. “We currently see local bond yields as fairly valued to slightly expensive from a valuation perspective. Forecasting economic variables, or worse still, asset class performance, is inherently a futile exercise. Our strategic valuation approach
The outlook for fixed income does not rely on timing and forecasting abilities. Instead, it focuses on a through-the-cycle approach, which looks to add value over the long term, akin to the value of a compass in uncharted territory.” Using the compass analogy, Bulent clarified the relationship between inflation and real returns to guide a bond investor’s thinking on finding fair value. Conrad added, “You can’t fight a new regime with old regime thinking. We think this makes us a more prudent manager in this environment. The constant left field events on and off for the past five years have made this the most hated bull market ever for both bonds and equities. We have been open to assets that are sensitive to rates and have taken a balanced view of the risks. We believe that our funds have done relatively well. “The market hasn’t been helped by the perceived uncertainty of US policy makers. I like the analogy that the US Federal Reserve (Fed) has taken off in a plane that they now have no idea how to land, but they have become very good at refueling in mid-air! Now we see that the Eurozone and Japan are also learning how to refuel in midair.” He concluded, “We in South Africa are tied to the Fed for all intents and purposes. Their data dependency makes it a difficult environment for markets for some time to come.”
Momentum Diversified Yield Fund This fund is a low to medium risk, activelymanaged 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% (after fees) • Peer group: SA – Multi-Asset – Income • Fund managers: Conrad Wood and Richard Klotnick • Fund size: R243 million • Annual management fee: 1% plus VAT • TER: 1.18% • Modified duration limit: All Bond Index • Maximum credit quality: F2/BB• Annualised volatility: <2.5% • Offshore: Up to 25% offshore and 5% in Africa (10% un-hedged) • Risk level: Low to moderate • Inception date: 2 February 2004
Momentum Income Plus Fund 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. Key facts
• Benchmark: STEFI + 3% (after fees) • Peer group: SA – Multi-Asset - Income • Fund managers: Jason Hall and Richard Klotnick • Fund size: R2.56 billion • Annual management fee: 1% plus VAT • TER: 1.16% • Maximum credit spread duration: Five years • Annualised volatility: <3% • Offshore: Up to 25% offshore and 5% in Africa (with currency typically hedged back into ZAR) • Risk level: Low to moderate • Inception date: 1 July 2005
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Adv Sankie Morata
CFP ®
National head of legal risk and compliance at Nedgroup Trust
What would you describe as your major challenges? I would say that some of my major challenges, which are also the ones I enjoy the most, involve identifying and managing legal risks and ensuring that, as a business, we comply with and adhere to all the relevant legislation.
What is it about your job that most excites you as you come to work every day? I am excited at the ability of our organisation to maintain a balance between our employees, shareholders and consumers. I derive enormous satisfaction when a problem has been resolved ,and we can see that the consumer is happy. I also enjoy implementing the relevant legislation in the business and ensuring that our actions and measures in looking after the consumers’ needs are addressed by our effective and timeous application of the law. My goal is to improve customer experience and enable the business, through optimisation and innovation, to be an exciting place to work. The friendships and relationships I have built within my working environment inspire me to want to do and learn more.
What do you regard as your greatest business success to date? The ability to treat the customer fairly is paramount to a business’s success. This refers to adhering to and achieving the outcomes of the Treating Customer Fairly Act in all our engagements. I am also proud of how we help our consumers work towards achieving peace of mind by creating and preserving wealth and helping them to create a legacy. The legal risk and compliance team enables the business to be a partner and an enabler of holistic solutions to clients. This includes estate planning, wills services , estate and trust administration and other related services. Doing what is right, never goes out of style. My leadership achievements include being the national head of legal, risk and compliance at Nedgroup Trust, the chairman of the board of the Financial Planning Institute of South Africa and the chairman of the developing countries for the Financial Planning Standards Board, based in Denver in the United States.
…and your greatest personal success to date? I embarked on a journey to summit Mount Kilimanjaro, and I achieved
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this on 19 December 2013. This was a personal and spiritual journey for me which I will never forget. During this journey of five days and six nights, I worked on the values of patience, appreciation, empathy, kindness, fairness and love. The journey gave me an understanding that taking on a challenge gives us insight into who we become on the path to reaching our goals. I also learned that it does not matter how physically and mentally fit you are, but rather that God has the power to carry you over that mountain. This does not only apply to physical mountains, but also challenges in my work, family, leadership roles and any other challenge that I might experience. For every setback, challenge or dark moment, the sun will rise.
If you had R100 000 to invest (excluding through Nedgroup products), what would you do with it? I would revisit my investment risk profile and my personal financial plan, and invest accordingly, with the intention to grow the money for the long term. This would include investing in equities and money market instruments of my choice that meet my risk profile. I would also donate a portion of the money to my adopted charity, Tswellang Special School – a school for children with severe physical challenges situated in Mangaung, Bloemfontein. They always need wheelchairs. I would also specifically donate another portion to assist a financially needy child on the journey towards his or her tertiary education. I already sponsor a matric student who sadly lost both his parents. I will help him enrol at university next year and help pay for his tuition fees. It is important to share what you have with the needy in order to empower and create a platform where they can stand on their own through their education.
How do you strike a balance between your personal life and your work schedule? Time management is key to living a balanced life. I always make time for family, quiet time for myself and then my work. I also appreciate and value every minute I have – I believe that I must spend it wisely, as if I won’t have it again tomorrow. I enjoy hiking, camping and mountain climbing as this helps me to get in contact with nature. I always try and make time to rest, re-energise and refuel. Activity needs to be balanced with recovery.
Profile
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Practice management
Ten retirement challenges
to discuss with your clients
This article, with wealthy retirees in mind, outlines ten challenges we are currently discussing with our clients.
1
Longer life expectancy
At the age of 65, couples in the United States can expect one partner to live for at least another 30 years. The two most important issues around your clients’ life expectancy are whether they will have enough money to last for their lifetime, and on their quality of life. Women tend to live longer than men by approximately five years. Consequently, they are more likely to end up single, bearing the brunt of poor financial planning and deficient saving.
2
Withdrawal rate
Some of the most important discussions we have with our clients are about withdrawal rates. They can be changed, based on personal needs, within safe limits. One of the best policies is simply to delay withdrawal as long as possible. The life of your clients’ capital can be significantly extended by delaying withdrawal for an extra two or three years.
3
Spending strategy
During early retirement, most retirees aspire to do the things they have never had time or money to do. However, poor health is an unpredictable and disabling factor. Our experience shows that retirees generally spend less with age, despite medical costs rising. Ill health increasingly prevents retirees from spending. In some cases, retirees are prepared to sacrifice lifestyle for experiences that matter.
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Risk and return
Nowadays, upon retirement, capital needs to last around three decades, requiring a far riskier portfolio to beat inflation and provide sufficient income. More than half of retirement portfolios should still consist of equities (global or local) to achieve this objective. One of our most important tasks is to educate our clients about the necessity of risk during retirement,
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and then coach them through periods of volatility to stick with their strategy.
5
Children
We have had many conversations with clients about helping their children financially. While capital is often available, the long-term consequences of financial assistance are seldom examined. In most cases, the numbers reveal a significant reduction in the possibility of a retiree’s capital lasting a lifetime. The estate planning and tax consequences of helping children should also be considered – we find that they seldom are.
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Estate planning
Here, there is often a juggle to find a balance between practicality and tax planning. Conversations around estate planning change in retirement – they shift to focus on legacy and fairness. It is important to work through the practical implications of one’s estate plan. We also talk to our clients about how they would like to be remembered, and what contribution they would like to make to society before and after their death.
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Healthcare costs
Frequently, retirees have to make difficult choices about the affordability of treatments, which could potentially extend their lives or improve their quality of life. In addition, increasingly, medical aids do not fully cover dental work, glasses or hearing aids. Medical aid and healthcare can be more expensive than initially envisioned.
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Retirement homes and frail care
The timing of when to move into a retirement home is complex. Healthy retirees want to postpone this decision, but by the time the need for extra care is evident, availability and
choice becomes problematic: retirement homes are scarce. Families also need to bear in mind that specialised care such as caring for terminal cancer patients may involve extra costs.
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Control and independence
One of the most difficult transitions for retirees is moving from independence (and control) to dependence (and loss of control). The struggle for control sometimes takes place at the death of a patriarchal provider. This is often the first time the wife is able to take control of her life and finances. Statistics in the US reveal that most women switch financial advisers.
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Enjoying retirement
The transition from a busy life with meaning to a life of leisure is difficult. Community involvement, pursuing new and old passions, building and deepening friendships, and focusing on mental and physical health all contribute to experiencing a happy retirement.
Sunél Veldtman, CFP®, CFA®, CEO of Foundation Family, author of Manage your Money, Live your Dream
Regulatory development
New bank rules bring equity-like risks to fixed income securities Basel III has changed the regulatory environment governing banks and this warrants very close attention by investors.
T
he implementation period for several Basel III requirements that were incorporated into the regulations began on 1 January 2013. It includes transitional arrangements that will be phased in until 1 January 2019. Basel III requires banks to match term liabilities with term assets and to hold a higher absolute level of capital. Furthermore, Basel III requires that bondholders share in the losses of a bank should it need to be recapitalised in times of stress. These new types of loss-absorbing instruments are commonly known as ‘new style’ tier 2 bonds. They are subordinated to senior bonds and now include potential write-off provisions, meaning that investors are now effectively exposed to equity-like risk in a bond under certain scenarios The loss-absorbing requirements will not only pertain to the new bonds but will also in time to preference shareholders. Solutions regarding preference shares will be pursued to arrive at a solution that is fair to investors and that meets the Basel III write off-requirements.
Preference shares and ‘old style’ tier 2 bonds, which do not meet the Basel III requirements, are to be phased out evenly over 10 years, with effect from 1 January 2013, in accordance with the transition rules. Banks will naturally replace these bonds and will, in time, have to restructure their preference shares, given their capital inefficiency. The terms and conditions of the new bonds require, at the option of the South African Reserve Bank (SARB), that they are either written off or converted into the most subordinated form of equity upon the occurrence of a trigger event. The trigger event would be declared by the SARB, unless legislation is in place that requires the bond to be written off at the trigger event or requires the bond to fully absorb losses before tax-payers and ordinary depositors are exposed to loss. The recovery and resolution framework of South African banks has yet to be drafted, and at this stage the requirements for a trigger event remain unclear.
As the industry has seen with the recapitalisation of African Bank, senior bondholders were required to take a 10 per cent haircut on their bonds. It is clear that the SARB, in line with international principles of recovery and resolution frameworks, has placed losses onto bondholders. Investors in these new bonds are exposed to equity-like risk and are, therefore, required to be compensated. However, it appears that investors have not drilled down into all the new terms, considering that some of these new bonds have been issued at irrationally low levels, in some cases only 50bps above senior money market assets with equivalent term. At Prescient Investment Management, we adopt a conservative credit process, balancing yield versus risk. With uncertainty around the recovery and resolution framework, which has yet to be legislated, and a lack of clarity on the trigger point, investors should be wary of taking on equity-like risk in a fixed income security.
Ryan van Breda, fixed income analyst, Prescient Investment Management
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Retirement annuities
Retirement annuities a
powerful weapon in financial planning
A retirement annuity (RA) is a more effective retirement planning and savings vehicle than ever before.
T
wo major changes announced in the 2012 National Budget made the RA a more powerful tool than in the past. The first was the introduction of a 15 per cent withholding tax on dividends, and the second an increase in Capital Gains Tax (CGT) from 25 per cent to 33.3 per cent. The modern RA and the Linked Retirement Annuity (LRA) are both critical in helping your clients to meet their retirement savings goals. There are two reasons for this. First, the 10 per cent secondary tax on companies (STC) was replaced by a 15 per cent withholding tax instead of the 10 per cent many experts expected. And secondly, the inclusion rate for CGT increased from 25 per cent of an individual’s capital gains to 33.3 per cent, pushing the effective tax rate from 10 per cent to 13.33 per cent. Those relying on unit trusts or share investments to flesh out their long-term savings plan will be taxed on their dividends at a rate of 15 per cent, resulting in far lower returns. And taxpayers who switch investments into lower or higher risk assets run the risk of triggering CGT events at the higher inclusion rate of 33.3 per cent. When you consider the existing exemption of tax on interest, you appreciate how powerful the RA is. Reducing tax The law allows 15 per cent of a client’s taxable income to be placed into retirement products like pension funds and RAs, thus lowering their tax base.
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From March 2015 everyone will be able to deduct 27.5 per cent on the greater of their remuneration or taxable income (excluding annuities or retirement lump sums) for their contributions, irrespective of whether they are members of a pension, provident or RA fund. The effect of this is that self-employed individuals will be able to make deductible contributions and formally employed individuals may make further deductible contributions if earning an income from sources other than remuneration. Annual deductions will be limited to R350 000 per annum. For tax years 2014 and 2015 the 15 per cent of non-retirement incomes has no cap on the amount they can claim as a tax deduction and is beneficial to high income earners who do not contribute to any formal pension fund. Flexibility
The magic of compounding RAs incur no tax deductions either at the commencement of the investment or during the life of the investment. There is no tax on interest, dividends or capital gains either. Provided these ‘savings’ are re-invested in the RA, compounding does the rest. Extending tax benefit Another advantage is that RAs and LLAs are free from estate duty. RAs are an instrument that clients are obliged to leave ‘untouched’ until age 55, thus creating a great opportunity for long-term relationships between adviser and client. Given the current budget scenarios, an RA becomes a win-win solution for both client and adviser. It creates far greater retirement wealth over the longer term.
Modern RAs allow for switches between equities, bonds, cash and unit trusts or any appropriate asset class. Clients can also take profits if the opportunity presents. This gives flexibility to manage their investments over the long term without worrying about tax implications. Switching, profit-taking and income generation (in an RA) is tax-free. The compounding benefit of a like-for-like investment in an RA versus unit trust is enormous over 20 years. Clients earn 15 per cent more on dividends, up to 40 per cent more on interest and property income and as much as 13.33 per cent more on capital gains.
Bongani Mageba, STANLIB Retail MD
Never too soon to
start
Retirement investing
Once your clients have embarked upon their plan for retirement investing, here are some time-tested suggestions to help ensure that they reach their goal of a secure retirement. Monitor progress: Check overall progress regularly towards retirement goal. Ask questions such as: • Have their needs changed? • Have their personal circumstances changed in such a way that it impacts on their plan? • Has their ability to tolerate volatility and other investment risks changed? • Have market conditions altered in a way that could impact on their plan? • Has their plan performed poorly? Offer the following advice:
Financial advisers play an important role in the holistic financial planning processes.
T
hey need to take into consideration investor interests as well the need to develop and grow the industry. A wellinformed and fully aware investor base is important for an economy like South Africa, as it fosters financial stability with expectations aligned with market realities.
The following rules of thumb will help your clients get on the right track when it comes to retirement planning. Invest whatever they can: It does not matter if they think they don’t have enough money to invest. Making regular monthly contributions, however small, often works well in the long run.
Never too soon to start Most people in their 20s and even 30s feel they are too young to bother about retirement and its implications. However, the sooner your clients begin setting aside money for their retirement investments, the better off they will be. Consider Joe and Anusha who both plan to retire at the age of 60. Let us assume their investment accounts each earns 15 per cent annually. The example below illustrates the cost of delaying. • Joe starts investing at the age of 25. He invests R10 000 each year for 10 years and then stops contributing. • Anusha starts investing at the age of 35 and then invests R10 000 each year for 25 years. What happens when Joe and Anusha reach the age of 60? • Joe’s investment of R100 000 has grown to R7.69 million. • Anusha’s investment of R250 000 has grown to only R2.46 million.
Develop a plan: Starting early with whatever amount investors can afford should get them off on the right foot. But ensure that they develop an overall investment plan. Guide them through the process. Cover the basics: Your clients need a thorough understanding of volatility and inflation – the latter being probably the biggest risk that retirement investors face. Financial planners need to make investors understand that the markets tend to be volatile, and discipline is key. Diversify: To protect retirement savings against inflation, investors should maintain a diversified investment portfolio consisting of securities across asset classes. Asset allocation: When your clients are starting out, their investment strategy should be weighted in favour of growth. As they approach retirement, reduce the overall volatility of their portfolio.
Don’t change asset allocation unnecessarily. Stay the course: Even if your clients think they are ahead of schedule in achieving their retirement plan, advise them to stay the course and continue investing. Expect years with losses: We know that no one can predict consistently when a market drop will happen, or whether it will be a slight dip or a prolonged decline. Think in terms of the overall portfolio: The reason for holding a variety of assets is that the gains from one investment may help offset shortterm losses in another. Don’t spend investments before retiring: Advise your clients to refrain from making early withdrawals since it will derail their carefully drawn-up plan, and they will have a hard time replacing the lost retirement savings later.
Jo-Anne Bailey, sales director and country manager for Africa, Franklin Templeton Investments
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NEWS
PSG Konsult records strong set of results Independent financial services provider PSG Konsult has reported strong financial results for the six months to August 2014, with the implementation of the group’s growth strategy for its underlying divisions already gaining momentum. This follows PSG Konsult’s successful JSE listing in June this year and a listing on the Namibian Stock Exchange in July. Recurring headline earnings increased by 36 per cent to R147.3 million for the period under review, while the recurring headline earnings per share increased by 32 per cent to 11.7 cents. Funds under management increased by 39 per cent to
R129 billion and funds under administration by 33 per cent to R266 billion. An interim dividend of 4.0 cents was declared. Francois Gouws, PSG Konsult CEO, said the group was particularly pleased with top line revenue growth of 26 per cent against the corresponding period last year, a specific area of management focus.
This will remain a strategic focus in the year ahead, along with maintaining profit margins whilst controlling and managing business risks within the group’s risk appetite framework. PSG Wealth remained a key revenue driver and increased headline earnings by 33 per cent to R93.9 million in the period under review.
principal. Nick joins from LGV Capital in London where he was an investment director. Marsh graduated from Oxford University with an MEng, Economics and Management and has built up more than 13 years’ experience in private equity and strategy consulting, having worked in a wide range of sectors and industries.
Nick Marsh
Investec Asset Management strengthens private equity business team Investec Asset Management has announced the appointment of Nick Marsh as associate
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Prior to LGV Capital, he was a manager at Bain & Company where he worked in London and South Africa. Marsh said he was excited to join the team at Investec Asset Management. “I believe the African continent offers very attractive opportunities for private equity investment and I look forward to being a part of the team at Investec Asset Management as they continue to capitalise on their strong position.”
Carol Axten
New CEO for wealth management firm WellsFaber Cape Town based wealth management firm, WellsFaber, has announced the appointment of Carol Axten as CEO. Axten
Metrofile expands to Zambia through majority acquisition JSE-listed Metrofile Holdings Limited has increased its African footprint through the acquisition of 60 per cent of Zambian records management company FlexiFile Limited. According to Mark McGowan, chief financial officer of Metrofile Holdings Limited, the acquisition supports the company’s African growth strategy. “As part of the Group strategy, Metrofile has
been looking for opportunities to acquire existing business in African countries, rather than going with the green fields approach for a number of reasons. “Firstly, it is quicker to acquire an existing business than to build a new business from scratch, meaning the time to market is faster. Secondly, by working with local partner we are able to leverage their experience and networks.”
“Exceptional client service is a term often referred to in this industry, but it is a key competence that has afforded me success and has ensured a loyal client base. It is these levels of exceptional service that I intend to foster and grow within WellsFaber.”
Following the acquisition, the service range will expand to include the full range provided by Metrofile Records Management including: active records management; image processing that involves converting physical records into digital images; data protection and storage; data backup.
Finance (NCPF), replacing Frank Berkeley, who took early retirement in August 2014. Robin has more than 25 years’ experience in commercial property and has played a key role as a senior member of the Nedbank Corporate Property Finance business, serving in a variety of senior roles in risk management within the division. Prior to his appointment, he was head of risk NCPF, a position he has occupied since 2003.
joins WellsFaber from boutique portfolio management firm, Definitive Capital, where she has spent the past four and a half years, and was previously employed by Citadel and Standard Private Bank. Axten’s appointment will strengthen WellsFaber’s wealth management capabilities. “I am extremely excited to be part of such a reputable wealth management business that has built its expertise over the past 27 years,” said Axten.
The FlexiFile business previously offered only the archiving and storage of documents, in addition to a small amount of scanning.
Robin Lockhart-Ross
Nedbank appoints new corporate property finance head Nedbank has announced the appointment of Robin Lockhart-Ross as the new managing executive of Nedbank Corporate Property
In addition to his responsibilities at Property Finance, Robin was the chairman of Bond Choice (Pty) Ltd and a non-executive director in investee companies of Nedbank. He is the chairman of the board of governors of Kearsney College and a member of the Income Tax Special Court at SARS. Robin obtained his BCom (cum laude) at the University of Natal in 1978, and holds further qualifications in a Higher Diploma in Accounting, BCom Hons (Tax) and MAcc (Tax).
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Products
10X Investments launches living annuity product in SA Although most people look forward to retirement, many risk depleting their saved capital too fast, by paying high fees and choosing inappropriate portfolios. To help retirees increase the longevity of their Tracy Jensen retirement fund savings, 10X Investments has launched a new living annuity product. Tracy Jensen, product architect at 10X Investments (10X), says that while retirement fund members are, to some extent, protected from high fees and poor portfolio choices, this protection tends to fall away in retirement. “Those who are formally employed often have access to a pension or provident fund selected by their employer and overseen by a management committee or board of trustees. These parties look after their interests and shield them from complicated decisions.” Jensen says that the 10X living annuity will extend retirees’ sustainable retirement income by up to 31 years, by investing their money in an appropriate portfolio and charging low fees. The standard industry living annuity invests
individuals in a medium equity portfolio and, on average, charges high fees. National Treasury research shows that living annuities have only 39 per cent invested in equities, which equates to a medium equity balanced portfolio. The average charge is high, at around 2.85 per cent per annum (including VAT) of the investment balance. This comprises an investment management fee of approximately 1.5 per cent, an administration or platform fee of around 0.25 per cent, advice at 0.75 per cent and VAT of 0.35 per cent. 10X’s maximum fee is only 0.86 per cent pa (including VAT), which adds up to 24 years of retirement income relative to the industry average fee of 2.85 per cent pa (including VAT). Jensen says that investors in the 10X living annuity can choose between the low, medium or high equity portfolio. “Although high equity investments are often associated with more risk, the reality is that investors who owned a high equity portfolio prior to the financial crisis of 2008 and had drawn a regular monthly income would still have more money today than if they had been in a medium equity portfolio over the same period. This challenges the conventional thinking that it is safer to invest in a lower equity portfolio when drawing an income.”
Momentum Asset Management fund receives Fitch ratings accolade Global ratings agency Fitch Ratings has assigned the Momentum Money Market Fund an ‘AA+(zaf)’ National Fund Credit Rating (NFCR) and a ‘V1(zaf)’ National Fund Volatility Rating (NFVR). This rating is in line with the highest money market fund rating in South Africa and the fund is managed by Momentum Asset Management. As at 3 October 2014, the fund held assets under management worth approximately R9.8 billion. It invests in fixed and floatingrate money market instruments, including negotiable certificates of deposit, promissory notes, fixed deposits issued primarily by the
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major South African and foreign banks with local operations and corporate issuers. According to Fitch, the ‘AA+(zaf)’ rating is driven by the fund’s high credit quality, as reflected by its strong weighted average rating factor. The ‘V1(zaf)’ rating is driven by the fund’s low exposure to interest rate risk and spread risk, as reflected in its short maturity profile. The Momentum Money Market Fund is managed by Conrad Wood and Richard Klotnick, both of whom have extensive experience and tenure. Importantly, the weighted average credit quality of the fund is
Years until a drop in income 49
(High Equity & 0.86% Fee)
Fee Advantage
+24
The 10X Advantage
+7
Medium to High Equity
18 (Medium Equity & 2.85% Fee)
Years until a drop in income 49
(High Equity & 0.86% Fee)
Graphs from 10X research illustrate the impact of fees and investment portfolios
high, which also reflects the short maturities of the fund’s assets. Fitch’s review of historic portfolio holdings indicates that the fund has been stable over time, maintaining high credit quality. The fund primarily invests in issuers rated in the ‘F1+(zaf)’/’AA(zaf)’ rating category; however, it can also hold securities in the ‘BBB(zaf)’ rating category. In Fitch’s opinion, the fund is moderately concentrated due to its large single issuer and largest five issuer exposure(s) exceeding the guidelines for ‘moderate concentration’ discussed in Fitch’s rating criteria. However, the fund is less concentrated than rated peers, primarily due to its relatively greater exposure to corporate issuers.
The world
CHINA, GREECE, GERMANY, SOUTH AFRICA, ISRAEL, ITALY
New lending regulations assist consumers in China For the first time since the 2008 financial crisis, mortgage rates and down payment levels have decreased in China. In an effort to improve the country’s real estate sector and in turn its economy, lending regulations have been eased to help consumers purchase residential property. According to Ma Jun, chief economist at the People’s Bank of China, the sluggish property market is the biggest risk to China’s economy.
0.7 per cent and the CAC in Paris dropped by 0.2 per cent. Germany is Europe’s biggest economy and it has now shrunk by 0.2 per cent in the second quarter. Another contraction in the third quarter would technically put the country into recession. However, the German government, central banks and market professionals believe that Germany will recover from this decline in the final two quarters of 2014. Investors welcome new governor of the South African Reserve Bank
Greece moves away from recession Greece, which has had a major negative impact on the Eurozone after six years of economic distress, appears to be heading towards an upswing next year – albeit from a very low base, as the Greek economy and its people are still struggling with pension and pay cuts and great debt. Greece’s Deputy Finance Minister, Christos Staikouras, says that the country “axed a quarter of its economy,” but is now “turning in growth of 2.9 per cent.” Even though there are still economic pains, predictions are for the economy to rise above its current state. The country has just enjoyed a very successful tourism season. …while German industrial decrease raises recession concerns According to regular data compiled by the economy’s ministry, Germany experienced a colossal four per cent decrease in overall industrial output in August as a result of a 5.7 per cent fall in factory orders. The harsh decline in the country’s industrial production sector shook the European stock markets, with Frankfurt’s benchmark DAX declining by
The October announcement of Lesetja Kganyago as the next SA Reserve Bank governor has been well received by the markets. Taking up the reins from his role as one of the Reserve Bank’s two deputy governors on 9 November 2014, Kganyago seems set to continue in Gill Marcus’s footsteps in terms of policy, and is expected to continue with the Monetary Policy Committee’s gradually tightening cycle. When the announcement was made, the rand strengthened to R11.26 to the dollar, which investors saw as a good sign. Global economy still on a go-slow Federal Reserve policymakers say the American economy faces potential risks due to a strong dollar and slow global growth. According to minutes published from the Federal Open Market Committee (FOMC) held in September, forecasts for future growth in the US are expected to slow down if economic growth results are weaker than anticipated. Investors speculated that caution over the economic outlook would lead the Fed to keep interest rates near zero for longer.
Concerns were also raised that the persistent shortfall of economic growth and inflation in the Eurozone could lead to a further appreciation of the dollar and have adverse effects on the US external sector. After the FOMC event, Fed chairperson Janet Yellen said that inflation remained below the Fed’s goal. In early October, the International Monetary Fund (IMF) cut its outlook for global growth next year to 3.8 per cent from a July forecast of 4 per cent. New policies to boost Israel’s economy Israel will set policies in place to fully or partially privatise state-owned organisations, in order to improve the national economy and to fight corruption. Israeli Prime Minister, Benjamin Netanyahu, says that ‘reform’ will “increase the state’s income and enable greater transparency in government companies”. A few organisations, including the country’s electricity cooperation, aviation, trains, water, mail and natural gas industries, will still, however, have majority government control. Trade between Italy and South Africa to increase After speculation that Russia and South Africa will be doing more business together in the future, Italy has made it clear that it would like to up its trade levels with South Africa. Currently, Italy is only investing around $800 million (R9 billion) in the country, which is minimal compared to trade deals between South Africa and Germany, on $12 billion a year. Investors in Italy are especially attracted to South Africa’s high-quality infrastructure, resources and telecommunications, which will prompt interest in more investments for the future.
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They said
A collection of insights from industry leaders over the last month
the assets that we manage accounts for almost one-third of GDP, so we have huge influence.” Chief investment officer of Public Investment Corporation (PIC), Dan Matjila, plans to improve returns by investing to reinvigorate the flagging economy of South Africa. “Investors are looking for growth in their portfolios. The markets where investors are finding growth has pushed them into Africa.” Chief executive for FirstRand, Boshoff Grobler, states that the company plans to raise approximately $500 m (R5.5 billion) from Swiss private banks and other investors for a property fund focused on the African continent. “A bubble is where something has grown year on year at very high rates over a number of years, such as unsecured lending, which grew at 20 to 30 per cent each year for three years.” Financial services analyst at Ernst & Young, Graham Thompson, argues that neither vehicle finance nor credit card bad debt was a bubble in the making.
“More than six years after the start of the financial crisis, the global economy continues to rely heavily on accommodative monetary policies in advanced economies, but the impact has been too limited and uneven.” Financial counsellor and director of the Monetary and Capital Markets Department for the International Monetary Fund (IMF), José Vinals, comments following the organisation’s announcement that advanced economies still hold too much debt, and that too much money was still going into financial risk that posed challenges to global financial stability. “The proposed retirement reforms seek to simplify and improve the tax deductions that are currently available to fund members in respect of their fund contributions, as well as align the way in which retirement benefits are accessed from provident and pension funds.”
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Head of Old Mutual Corporate Consultants at Old Mutual Corporate, Hugh Hacking, comments following the National Treasury’s indications that certain of the government’s proposed retirement reforms that were due to be implemented as at 1 March 2015 are to be delayed. “It’s disappointing, as it would have helped Bidvest grow its banking unit and provide capital to Grindrod to continue to invest in its infrastructure business. Grindrod has made a lot of money from the bank and will continue to do so.” Analyst for Renaissance Capital Holdings, Roy Mutooni, comments after Bidvest and Grindrod issued a voluntary joint announcement saying Bidvest’s proposed acquisition of Grindrod Bank had failed. “If we invest wisely with South Africa Inc, we should be able to pull this economy out of this 2.5 per cent or 3 per cent. The size of
“As we move on from the financial crisis, private equity firms are back doing what they do for a living, which is investing. The private equity market quietened down significantly during the downturn but is now picking up,” Corporate partner and head of Middle East and North Africa for global law firm Freshfields Bruckhaus Deringer, Pervez Akhtar, comments following the release of research conducted which found that South Africa is not seeing the benefits of investment in the continent as investors are looking beyond South Africa for growth in new markets. “South Africa has a lot of potential, but this is, unfortunately, completely mismanaged.” Senior investment manager for emergingmarkets debt at Aberdeen Asset Management in London, Max Wolman, comments following an analysis of the South African economy, which found that despite the economy’s sluggish nature, the country offers attractive stock picks from a corporate sector whose earnings have outpaced GDP growth.
You said
A selection of some of the best tweets as mentioned by you over the last four weeks.
@devinshutte: “Only 2 US banks in 2008 and African Bank ever caused money market funds to lose capital.” Devin Shutte – Half broker, half human, all heart. CEO of Regenesys Investments.
@SureKamhunga: “The IMF revises downwards its global economy forecast, warns world may never return to pace of expansion seen before the financial crisis.” Sure Kamhunga - Financial Journalist, Public and Media Relations Practitioner. Mentor. Avid Reader. Inspired.
@MebFaber: “The very simple reason US small caps are underperforming the S&P by 10 percentage points this year: valuation.” Meb Faber – Founder & CIO Cambria Funds & The Idea
Farm. Author Shareholder Yield, Ivy Portfolio, Global Value & Papers.
@nickbilton: “That’s it folks. Apple Pay will replace your credit card, iPhone 6 will replace your small iPhone & the Apple Watch will replace your wrist.” Nick Bilton – Columnist, The New York Times. Author of the NYT Best Seller, Hatching Twitter.
@mattyglesias: “And I would have gotten away with it too, if it weren't for you meddling central bankers! – every investor whose bets haven’t paid off.” Matt Yglesias – Executive Editor at Vox.
@jmackin2: “Just FYI, S&P 500 has not fallen this much in 3
weeks since June 2012. Not hugely meaningful, mind.” James Mackintosh – Investment Editor at the Financial Times. I write the daily Short View column and present a daily video on markets. Views mine – all mine. RT not endorsement.
@jasonzweigwsj: “US stocks and crude oil both down 1.8% today. Two questions: Which decline matters more to the real economy? Which will get more attention?” Jason Zweig – I’m an investing columnist for The Wall Street Journal. Links & RTs are not endorsements & should never be regarded as investment advice.
@silvermanglenn: “Markets correcting sharply. More than ‘about time’. Is this the top though?? Risks are high, but only time will tell. Caution is advised!”
Glenn Silverman – Chief Investment Officer at Investment Solutions and co-author of Half Way There.
@MoneyReformPL: “Money is the barometer of a society’s virtue. It must therefore serve the #society and not to enslave.” MoneyReformPL – Non-profit organisation for monetary reform and promote new economic thinking. Money must cease to be a product.
@Forbes: “44% of respondents to a recent survey said they thought good financial advice would cost more than they could afford.” Forbes – Official Twitter account of http://Forbes.com, homepage for the world’s business leaders.
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And now for something completely different
Turning rags to
riches U
A fashion-forward approach to investing
pcycling, also known as reusing, second-hand clothing and accessories has always been seen as a fashionable way of reinventing a look. Many fashionistas, however, may be unaware that the rarer and older these items become, the more value they can potentially hold. Many dealers may use the term ‘vintage’, or ‘historical’ when trying to sell expensive items of clothing. Caution needs to be taken, however, as vintage clothing dates and quality variations can leave you out of pocket if you don’t know what to look out for. Generally speaking, vintage refers to items that are at least 30 years old. Serious fashion investors have also turned their prospects to cast-offs from celebrities and production houses that have sold off various items worn by Hollywood A-listers. Considered the most expensive movie prop ever to be sold, the William Travilla white halter neck dress worn by Marilyn Monroe in The Seven
Year Itch sold at auction for $4.6 million dollars. This was closely followed by Audrey Hepburn’s iconic Ascot Dress worn in My Fair Lady for $4.5 million. Investors in fashion should not forget about fashion accessories either. When looking at handbags to invest in, the bag that holds the most value is the Hermès Birkin. On numerous occasions, these bags have outstripped all of their competitors on the bidding block – such as a red crocodile Birkin encrusted with gold and diamonds that was sold in 2011 for $203 000. There are a few golden rules when investing in fashion. Make sure you do your research and know what you are buying – the last thing you want to do is spend a fortune on a fake. Provenance is key, so boxes, receipts and certificates of authenticity will only add to the value and credibility of the item. Lastly, protect your investment. Don’t let the sun or moths de-value them. Wrapping an item in acid-free tissue paper and storing it in a cool, dry and dark room can increase its longevity.
Dressed to impress 1
Red Hot Fantasy lingerie set $15 million Launched at the opening of the Victoria’s Secret store on Broadway in 2002, the Red Hot Fantasy lingerie set is considered the most expensive lingerie item in the world. Modelled by Brazilian supermodel Gisele Bundchen, the set consists of a brassiere and matching briefs. The Red Hot Fantasy set is made of the finest red satin, which is covered with an array of hand-cut gemstones. The bra alone has over 1 300 stones, including 300 carats-worth of dazzling Thai rubies surrounded by diamonds.
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2
Marilyn Monroe’s ‘Happy Birthday Mr President’ Dress - $1.26 million
Marilyn Monroe is considered one of the most unforgettable actresses and Hollywood icons of all time. Among other great moments onscreen, she will also be remembered for her sultry rendition of ‘Happy Birthday’ sung to then-American President, John F Kennedy, on 19 May 1962.It’s rumoured that the blonde bombshell was sown into her flesh-coloured, curve-hugging dress, which was encrusted with 2 500 jewels. This dress was put up for auction in 1999 by the widow of the actress’s acting coach, Lee Strasberg, and was sold to Manhattan-based collectible company, Gotta Have It!
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But when investing, they probably don’t know that after average set-up costs and advice fees, most investment companies will only invest 97 cents of every Rand. Which means that they’re giving away some of their money, before it’s even invested. But, we don’t charge those fees, at all, unless we’ve first made your clients a return of at least 13% per annum, after tax. Which means that we won’t make money until we first grow your clients’ money. Now that’s something worth knowing. Contact 0860 456 789 or visit mypaycheck.co.za to see how you can help your clients make the most of their investment.
The Advantage of Knowing
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ADVICE I INVESTMENTS I WEALTH
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 performance. 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. *Performance as at 30 September 2014. Since inception 1994.
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