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the editor It’s probably just habit but many of us see the New Year as the time to modify investment portfolios. It’s as good a time as any, at least to assess your portfolio, look at its performance over the previous year, and make any changes if necessary. If your portfolio is working and offers the diversification and returns you need it’s probably best to leave it alone. But investment markets change and your portfolio might have to be adjusted. There could be some changes and surprises in 2014. The ‘new normal’ has just become the normal. I don’t think I can remember what the old normal was anymore. This issue is packed with investment advice to help investors thinking about making changes to portfolios. Retirement annuities remain one of the most frequently used vehicles for saving for retirement. Are they the best products? A number of articles point out the benefits of RAs. Chief among these are the tax benefits, which Hugo Malherbe of PPS Investments points out can outperform a 100 per cent equity fund. Asset allocation is the prime driver of investment performance so it’s important to get it right. Articles look at offshore equity returns and fixed interest investments. Herman van Papendorp of Momentum Asset Management offers a controversial view on tactical asset allocation, saying more active asset allocation is needed and that the traditional buy-and-hold strategy could entrench low returns. Leon Campher, CEO of ASISA, highlights the record inflows into unit trust funds and says the multi asset category is the most popular with investors. It makes sense; let a professional do the important asset allocation for you. But with more than 1 000 funds available, how does an investor choose the right fund? Jeanette Marais of Allan Gray offers some sound advice on using independent fund ratings to select the most appropriate fund. Investors might consider some alternative investments for their portfolio. Albrecht Gantz, head of RisCura Analytics, points out something I found surprising: while most global hedge funds lost value with the global financial crash, hedge funds in South Africa did not. That underlines the important role hedge funds can play in limiting the downside in an investment portfolio. Another alternative investment worth looking at is unlisted shares. Marc Hasenfuss analyses these over-the-counter shares which often trade at a fraction of the rating of their listed counterparts. He examines five unlisted counters he considers worth investing in. There’s much more to get your New Year off to a good start. I hope it’s a happy investment year for all of you.

Shaun Harris 4

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

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Copyright COSA Communications Pty (Ltd) 2013-2014, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.

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POLITIC DANCING IN THE POLITICAL WORLD Political risk seldom featured among investment considerations five years ago.

By Shaun Harris 6

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AL RISK N

ow the term often tops the list for investors looking at a particular country or region. But the world has also changed a lot in five years: the Arab Spring, violent protests against austerity measures in many countries in Europe, terror attacks in parts of Africa and Asia. Political risk, it seems, will be an important consideration for some time to come. Investors had better learn all they can about it. Perhaps the first lesson in political risk is that it’s often surprising, cropping up at a time and place least expected. The US is the latest example. With the debt ceiling and potential debt default crises only delayed not resolved, the US, for all its fine qualities of recovering economic growth and rising public spending, could present the greatest political risk to investors at present. “A default on US debt was temporarily avoided but the US will find itself in a similar position early next year,” notes Nedbank Capital Strategic Research. As it was, the crisis caused by one-upmanship between Republicans and Democrats brought a shutdown of federal government and a potential

threat, should there have been a debt default, to global finance.

continent, regarded as an emerging market. Each country must be assessed individually.

A US debt default was unlikely – the rest of the world, with countries like China and Japan owning much of the US debt in treasury or T-bills – would not have let it happen. But just the threat was enough to rattle investment markets around the world. In terms of the temporary fix finally agreed to in the White House, the US Government has funds until 15 January. If agreement on the debt ceiling and borrowing powers are not agreed upon, there could be another shut-down.

Africa provides good examples of this. Political risk in Africa causes degrees of unease and caution, write co-authors Jacqueline Muna Musiitwa and Camille Astier in Legal Week, “However it is often uninformed and without due cause.”

That this should happen in what is probably the largest investment market in the world has shaken investors. And here’s another lesson for local investors. The stereotypical view of political risk is that it’s highest in the more extreme countries in emerging markets. Not so, as the US is showing right now. Emerging markets are generally perceived as higher in political risk. Many countries in emerging markets may be. But investors have to note that the level of political risk applies to countries, not the whole region, or

As an example they quote from the World Bank Doing Business survey for 2013, which says investor protection is higher in South Africa, Mauritius, Rwanda, Sierre Leone, Tunisia, Botswana, Ghana, Mozambique, Burundi, the Seychelles, Nigeria, Madagascar and Angola, then in France. The McKinsey Global Institute Africa report says, “Today the rate of return on foreign investments in Africa is higher than in any other developing region.” Local investors tend to look at developed markets when making offshore investments. But conditions are no longer so rosy in many of these developed countries. The risk might be higher in emerging markets but, through careful selection, they should form part of an investment portfolio. investsa

When considering a country, developed or emerging, for investment potential, one of the best courses for an investor is to get to know the country very well – first hand if possible. Spending some time in and moving around a country will give investors a good feel for its potential.

Others are more in favour of emerging markets. For the retail investor, a fully diversified portfolio should include investments in both developed and emerging countries; as long as the investor takes the time to understand the political risk in the countries invested in.

If that’s not possible in practical terms, get in touch with an investment expert, a fund manager or stockbroker who lives in the country. The investment nuances of a country cannot be fully understood from reading reports. They have to be learnt on the ground.

How is a developed market like Europe rated in terms of political risk compared to the huge emerging market that is Africa? A decade or so ago political risk might have been regarded as low in Europe, at least in Western Europe. But the political risk gap between Europe and Africa is narrowing.

This is affirmed by global risk consulting company Pasco. “While the risk of doing business in Africa remains higher than in the developed world, the potential for greater returns justifies the risks. Companies can nonetheless safeguard themselves against some of the risks by taking the necessary steps to understand the political, economic and security situations on the ground and the implications for their investments.”

A report by Deutsche Bank on political risk in Europe notes that there are slow signs of improvement in many European countries. But it goes on to say that political risk is rising in some countries, especially Spain, Italy and Portugal. All these countries have seen violent protests in the streets against measures by governments to try and repair or refund near defunct economies. That should be enough to put investors off, unless they take a more contrarian view and look at buying into companies that have been down rated due to the political strife.

With levels of political risk changing in many countries, understanding this political risk applies as much to developed countries as developing nations. Institutional investors have different points of views. For example, Nedbank Capital Strategic Research says it prefers “developed markets over developing markets on better risk/ reward criteria, longer term channels and trend lines likely to provide support”.

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Deutsche Bank was also a little wary of Germany before the elections last September, but those were without incident or surprises and Angela Merkel continues to make Germany the most stable and economically prosperous country in Europe. The same is not true of Greece, the first

country in Europe to collapse under the global financial crises. It defaulted on its debt and remains effectively a bankrupt country. What about South Africa? How do outside investors view the country in terms of political risk? With general elections coming up, the effect of strikes slowing economic growth and ongoing incidents of corruption in government, not very favourably at present. That could have far-reaching negative consequences for the country. Foreign investment inflows, which over the previous few years have been quite strong, are important, not least as outflows tend to weaken the Rand exchange rate. Rian le Roux, chief economist at the Old Mutual Investment Group (SA), says recent sales by foreign investors of South African shares and bonds are likely to dent total foreign investments figures. He was speaking when the country’s combined investment portfolio stood at about R41 billion in October. Le Roux expected ongoing foreign investment sales to leave the figure far short of the R85 billion in 2012. He also said that South Africa was viewed as the weakest of the “fragile five” emerging markets, the others being Indonesia, Brazil, Turkey and India. So it looks like we are not in a good place now, and it’s likely to remain that way until after the elections. When that’s over, it’s hoped that rare quality, common sense, will come back and kickstart the country again.

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Y ou can learn something from the world’s best musicians. When they step on stage, they tune out everything. Their technical crew, the rowdy lads in the back, the screaming girls in the front and their manager standing off stage, wringing his hands wondering if they really sound that good live. They have absolute focus and it’s the kind of focus you need when planning for your retirement. It pays to tune out all distractions and focus on a single goal. And the goal should be starting as soon as possible. B e c a u s e t h e more time your money has to grow, the more peace of mind you’ll have when you eventually stop working. Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

Allan Gray Proprietary Limited is an authorised financial services provider. investsa

Asset allocation

Intelligent investing:

looking for low cost, efficient investment solutions The evolution of retirement investment products in an era of pending change and reform within the industry is said to be signalling a significant shift towards new technologies, investment products and philosophies.

e Wet van der Spuy, divisional director of product for Liberty Corporate, points out that the South African investment industry has seen a substantial evolution of retirement fund investment strategies and capabilities over the past 50 years, ranging from guaranteed funds in the 1960s and culminating with the arrival of passive investments. However, he argues that in the modern financial and business world, the traditional active balanced mandate in which most retirement funds have invested is now outdated and in urgent need of revision. Today’s imperatives, he insists, are cost and simplicity in the design of investment products. “In addition, we believe that traditional insurance products with guarantees are becoming obsolete. Many of these product components still offer value, but the explicit capital guarantees tend to be very complex and expensive.”

The chart below indicates the negative impact on a client’s maturity value due to unnecessary one per cent per annum guarantee charges, resulting in a -21 per cent reduction over a 40-year period. Van der Spuy notes that a key focus of National Treasury’s proposals to reform current retirement funding structures in SA is a move towards greater transparency, improved governance and lower cost. “As a result, trustees should consider new investment

approaches that combine a variety of investment strategies, including passive investing.” He says that, according to international estimates, up to 60 per cent of retirement funds use passive investments to gain exposure to their desired asset classes. They then make use of selected, nicheactive fund managers to add value to the investment strategy. This strategy has a number of advantages. “Passive investments are considerably less costly to manage and regularly provide better net growth after active manager fees. It requires less trustee governance and needs no specialist knowledge to continuously select the appropriate active managers. It also removes the risk of single manager underperformance and offers efficient building blocks for a sustainable long-term investment strategy.” With retirement industry reform in the offing, Van der Spuy believes that the market is looking for simplicity and portability. Liberty terms this “intelligent investing” – low cost, efficient investment solutions, in which the underlying role of asset managers and the advice they give to clients also need to be re-examined. “The manner in which many of these investment solutions are being positioned in the market needs to be rethought,” he says. “The aim of the intelligent investing philosophy is for properly

balanced, long-term growth, with inflation-plus returns, but short-term volatility. That is still the ultimate goal for any retirement investor.” He says that the average person would probably be looking at a return of inflation plus five per cent over a working lifetime. Determining a strategy to manage this, calls for aggressive strategic asset allocation – which means a high weighting towards equity – but subsidised with asset classes within a property or private equity infrastructure that is not solely dependent on the equity market. Says Van der Spuy: “Research shows that strategic and tactical asset allocation decisions are the biggest determinant in the variability of a fund’s returns, not stock selection and choice of manager. It is estimated that more than 80 per cent of returns are generated by the asset class calls that a retirement fund makes, with the remainder allocated to the fund manager. This would ideally be overlaid with a risk management strategy that also focuses strongly on tactical asset allocation.” Other components would include the smoothing of returns on a monthly basis to policyholders to make their profile of returns less volatile in the short term, while still protecting long-term growth. The increasing levels of governance required of trustees make it onerous to understand and apply investment capabilities appropriately when selecting asset managers or making asset allocation calls. “However, with a single flexible product that meets multiple needs, trustees no longer need to identify different components and conduct due diligence on a variety of investment products and managers,” concludes Van der Spuy.

De Wet van der Spuy, Divisional Director of Product for Liberty Corporate

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investsa 11

Asset allocation

Tactical asset allocation: the way to enhance returns post-quantitative easing

n our view, the combination of events preceding, causing and following the global financial crisis (GFC) has altered the absolute and relative return prospects from the different asset classes that typically constitute the main building blocks of a balanced investment portfolio, at least in the medium term. Firstly, the deleveraging forces let loose on the global economy in the aftermath of the GFC and the resultant global policy responses are likely to ensure low absolute returns from the main asset classes in the coming years. It is not inconceivable to us that a global balanced portfolio of equities, bonds and cash could produce meagre, low single-digit nominal returns and potentially negative real returns in the coming years. â&#x20AC;˘ Equity returns should be constrained by lower profit and dividend growth on the back of below-trend growth in the global economy as deleveraging forces remain evident and monetary and fiscal tightening measures are gradually implemented. For example, assuming that US equity market valuations are currently close to equilibrium levels (hence implying little re-rating potential), we estimate total US equity returns in the next few years as the sum of 4.25 per cent nominal GDP growth (a proxy for profit growth) and a 2.3 per cent dividend yield. â&#x20AC;˘ From the current starting point of historically low developed market (DM) government bond yields, nominal bond returns may be constrained to low singledigit returns by potential capital losses in coming years as the policy environment normalises, with real returns negative in some periods. â&#x20AC;˘ With the current zero interest rate policy from many DM central banks sure to remain in place for the next couple of years and rates expected to be raised only very gradually thereafter, negative real cash returns are likely for the foreseeable future.

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Secondly, there will probably be a bigger dispersion of asset returns in a postquantitative easing (QE) environment. Recall that the US Federal Reserve (Fed) aimed, with its QE programme, to create widespread asset inflation to support consumer spending through a positive wealth effect. In this regard, figure 1 shows that the Fed was indeed very successful in supporting, for instance, the asset allocation subset of DM and emerging market (EM) equity and bond prices over the past five years, with positive returns generated by all these asset classes over the period and asset class returns mostly positively correlated. However, in 2013, these asset class returns started diverging as the Fed stated

its intention to initiate the end of the QE programme as a first step in the policy normalisation process once improving US housing and labour market conditions allow. While the latter improvement in US economic activity should be a supportive fundamental factor for US equity market returns, policy normalisation, in contrast, has negative return implications for DM and EM bonds, as well as EM equities, from both relative return and global capital flow perspectives. Furthermore, with the volatilities of the different asset classes also expected to change more frequently in a post-QE environment (already evident from rising bond return volatilities in figure 2), the shifting risk-adjusted return profiles of individual asset

Figure1: DM and EM bond and equity return indices (Oct 2008 = 100)

Source: Bloomberg, Factset Source: Bloomberg,

Factset

classes will have to be monitored closely to ensure that these reflect appropriate risk budgeting in the asset allocation process. Consequently, we think it will be necessary to pursue a more active (tactical) asset allocation (AA) strategy in the ensuing years to enhance portfolio returns. A traditional â&#x20AC;&#x2DC;buy and holdâ&#x20AC;&#x2122; long-term strategic AA strategy is a sure way of entrenching low returns for investors in coming years. We will thus continuously strive to exploit the evolving major discrepancies between the macroeconomic drivers and valuation levels of different global asset classes in order to augment investor returns through tactical AA decisions in a global balanced portfolio.

Figure 2: DM and EM bond and equity return volatilities

Source: Bloomberg, Factset

Herman van Papendorp, Head of Macro Research at Momentum Asset Management investsa 13

Asset allocation

Low rates to keep fixed interest investments out of favour

ith the global economy still struggling to fully recover from the 2008 global financial crisis, interest rates are likely to stay low (compared to history) for longer both globally and in South Africa in 2014. This means that real returns from cash and fixed interest investments should remain unattractive relative to other asset classes like equities and listed property, and investors will need to accept some higher risk in their portfolios to achieve their desired real returns, according to David Knee, head of fixed income at Prudential. “Although the current consensus is for tapering of the US quantitative easing programme to start during the first quarter of 2014, which will push rates higher in the rest of the world as well, we expect the upturn in the interest rate cycle to be a gradual and moderate one. This is largely due to the lingering effects of the Great Recession and global financial crisis,” Knee explains. He points out that in the US, the Federal Reserve now expects long-term GDP growth at 2.2 per cent to 2.5 per cent, down from three per cent in the 1990s, and nearly 50 million Americans (16 per cent) are living in poverty, compared to 12.1 per cent in 2007. Across the 17-country Eurozone, unemployment sits at 12 per cent. Recovery has been the slowest since World War II. Financial institutions are constrained by stricter capital controls; the unwinding of government debt and financial reform are dragging on due to political sensitivities; and attitudes toward lending, borrowing and investing have become more conservative. Says Knee: “Although emerging markets have helped support global growth, here, too, the pace of that growth has slowed under the influence of our increasingly interconnected economies. Even China is not likely to return to double-digit growth any time soon, if ever (Goldman Sachs forecasts average annual GDP growth of 5.7 per cent through 2020, 14

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market moves, as the high yields available on bonds 10 years and longer – at above eight per cent – compensate for the risk over time. Of course, there could be some short-term capital losses in bonds during the transition to a rising rate cycle as markets tend to overreact, but our answer to this is to buy into weakness and not panic.”

while the World Bank sees China’s GDP averaging around seven per cent through 2030). Therefore it’s foreseeable that it will still be several years before key economies like the US, UK and Europe, and the world economy, recover to more historically normal levels of growth, inflation and interest rates.” What does this mean for South African investors? Knee believes that equities will continue to produce the highest returns compared to other asset classes, with offshore equities favoured over local equities. “As of late 2013, offshore equities are generally cheaper than our local market and equity risk premiums are in line with or above their historic levels. Also, in the US the mild acceleration in growth expected along with rising interest rates should lead to improved corporate earnings growth. “In South Africa, equities have outperformed other emerging markets in 2013, making them slightly expensive (compared to longterm fair value) trading at a forward P/E ratio of 14 times. This does make them somewhat vulnerable should there be a sharp change in global risk appetite.” Knee notes that Prudential still expects equities to outperform other local asset classes in terms of real returns. As for bonds, longer-dated securities are likely to fare better than shorter-dated paper as interest rates rise. “Research shows that in monetary tightening phases, countries with steep yield curves such as South Africa’s should be somewhat protected from sharply negative

As a result, returns from shorter-dated investments like cash, money market funds and even shorter duration bond funds may struggle to beat inflation in 2014. Despite longer maturity bonds being priced more fairly, it will remain difficult to find real yields of over three per cent from bond funds. As a result, investors considering these lowerrisk solutions may rather have to take on somewhat higher risk to get solid real returns, which could mean higher allocations to equity and listed property. “Investors may be facing 2014 with some trepidation given the sluggish local and international conditions, combined with the prospect of slowly rising interest rates, but I’m relatively sanguine about returns over the medium term. Central banks will continue to support growth if necessary, both in SA and abroad, helping bolster asset prices. While some short-term turbulence is inevitable, investors should look through this and be willing to accept greater risk in order to attain real returns of five per cent or more.”

David Knee, Head of Fixed Income at Prudential Portfolio Managers

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JUN 01 SEPT 01 DEC 01 MAR 02 JUN 02 SEP 02 DEC 02 MAR 03 JUN 03 SEP 03 DEC 03 MAR 04 JUN 04 SEP 04 DEC 04 MAR 05 JUN 05 SEP 05 DEC 05 MAR 06 JUN 06 SEP 06 DEC 06 MAR 07 JUN 07 SEP 07 DEC 07 MAR 08 JUN 08 SEP 08 DEC 08 MAR 09 JUN 09 SEP 09 DEC 09 MAR 10 JUN 10 SEP 10 DEC 10 MAR 11 JUN 11 SEP 11 DEC 11 MAR 12 JUNE 12 SEP 12 DEC 12 MAR 13 JUN 13 SEP 13

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Prudential Portfolio Managers (South Africa) Pty Ltd [PPM SA] is an authorised discretionary financial services provider.Collective Investment Schemes (Unit Trusts) are generally medium to long term investments. The investment portfolios are market-linked and no guarantees are given. Market fluctuations, changes in rates of exchange or taxation and market trading costs may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.

investsa 15

Asset allocation

Offshore equity returns are more attractive on a four-year view Putting things in perspective The US 10-year Treasury yield has been declining for the past 30 years. This is indicative of a reduction in the global cost of capital and has had large implications on markets’ returns for 30 years. For most market participants, their entire career has been characterised by this trend. To them this is normal. In truth, this is only one-half of a longer 60-year cycle, which appears to be reversing, with yields set to expand again. Secondly, we looked at the recent 10-year real compound annual growth rate (CAGR) of the primary asset classes in SA, both relative to their history and relative to their US equivalents. US bond returns in real terms averaged around four per cent per annum in the past 10 years, in line with their long run average, while SA bonds delivered over five per cent per annum (in Rand) against their long run average (53 years) of 1.3 per cent. SA bonds have had an excellent decade. SA equity has also had a very strong decade, returning in excess of 12 per cent per annum real (in Rand), well above its long-time average of nine per cent per annum. In comparison, the US equity over 10 years returned in the region of five per cent CAGR, below the 20-year average of six per cent. Similarly for cash, in South Africa, this asset class delivered a 2.6 per cent CAGR over the recent decade, against its long run average of 1.1 per cent. So as SA emerges from a ‘good’ 10 years of returns on all three major asset classes, the opposite is true for the US. This informs the starting point for our analysis. The macroeconomic backdrop In the US, we expect the GDP growth rate to climb up to three per cent within four years. With the economy slowly improving, the FED should start tapering its quantitative easing programme in 2014, with the FED funds rate of 3.25 per cent in year four of our forecast. The Euro area is expected to trend slightly higher over the four-year period, while Japanese quantitative easing is predicted to continue. In contrast, the emerging markets GDP growth rates are expected to grow at 5.25 per cent pa, which is weaker than historical figures but still supportive of global 16

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SUMMARY OF FOUR-YEAR INTERNAL RATES OF RETURN (ANNUALISED)

ASSET CLASS

BASE

BASE (real returns)

US Equity

15.1% (10.1% US$)

8.1% US$

US Bonds

5.5% (0.5% US$)

-1.5% US$

SA Equity

9.8%

SA Bonds

7.3%

1.5%

SA Property

9.3%

3.5%

SA Cash

7.5%

1.7%

Source: STANLIB These point estimates are an indication only. We do not expect each asset class to return exactly this forecast percentage over the four-year period. More important are the relative returns between the asset classes, rather than the absolute point estimates. Our models indicate that US equity should provide the best returns over the medium term, followed by SA equities and SA listed property. US bonds are set to offer the least value, in line with our assumption of increasing yields. growth. The combined result is for the world growth to continue recovering but at a below trend trajectory. Domestically, we forecast a slowly improving GDP growth rate to 3.2 per cent at the end of the four-year forecast period, with infrastructure spending gaining traction and the recovering global environment assisting our GDP through increased exports. We expect monetary policy to remain on hold to 2015, while consumer inflation is to remain controlled but trend towards the upper end of the three to six per cent band. The budget and current account deficits are set to remain, with tax hikes expected, to close the fiscal gap.

Risks to this view Of course, as with any forecasts, there are associated risks. The assumptions set out above might not fully play out, which would affect the final outcome. The timing of the emergence of these forecasts is also an uncertainty. Among others, some key risks to these forecasts are that the SA Rand does not depreciate at our assumed rate of five per cent per annum, the US economic and consumer recovery is not as robust as we believe and, finally, that our SA GDP assumption proves too optimistic.

Our resultant forecasts We calculated our market forecasts based on the above macro trends forecasts and using a primary valuation methodology of trailing multiples. We compared the primary results with an outcome of an economic risk rating method to ensure sensibility of forecasts. Our return forecasts for the fouryear period, annualised, therefore are:

Vaughan Henkel, Investment Strategist and Olga Cukrowska, Technical Marketing Manager

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investsa 19

Unlisted and still unloved By Marc Hasenfuss

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When high net worth individuals – in other words those able to afford taking a risk or three – peruse the various asset classes, it’s not often they are accosted by the small band of unlisted shares trading in SA.

But the attractive value proposition in unlisted shares was borne out of this predicament. Without sufficient demand for unlisted scrip companies that were asset rich, with strong cash flows and capable of eking out regular dividends traded at bargain basement prices. Astute investors would nibble quietly (and patiently) at these stocks. Perhaps the most famous example would be of retail tycoon Christo Wiese buying up an influential stake in unlisted liquor group KWV in the late nineties at prices that hugely discounted the underlying value (which, by the way, in those days included a sizeable stake in listed liquor group Distell). Later Stellenbosch-based investment boutique PSG – which ironically bought Wiese’s holding in KWV (and churned great value out of it) – started taking selected tilts at unlisted counters. PSG specifically targeted old agricultural cooperatives and soon had collected enough unlisted investments to justify the formation of a specialist agri-business offshoot called Zeder. It now holds rewarding unlisted investments in companies like fruit marketing and logistics specialist Capespan, farming community retailer Kaap Agri, Agri-Voedsel (the effective holding company for Pioneer Foods) and Overberg Agri. Currently there are a number of top-notch unlisted companies that investors can peruse and easily trade in via in-house OTC trading platforms. There are a number of considerations to weigh up before committing funds to unlisted investments.

et’s be frank, unlisted shares carry some awful connotations. There are still perceptions of a lack of liquidity, lack of transparency, corporate governance and investor interaction. Their perceptions are, to be brutally, honest, well founded. For many years unlisted shares have opted to trade quietly beneath the radar on OTC (over the counter) platforms – sometimes curtailing enthusiasm for even the most determined investor by upholding restrictions limiting maximum shareholdings to five or 10 per cent. Such matters precluded institutional investors from dabbling in unlisted stocks, and without the influential wealth managers showing an interest there was little ‘market making’ in many shares.

The key consideration is whether there is sufficient liquidity in the unlisted share. An investor does not want to be left holding stock that is not easily tradeable or might have to be dangled at much discounted price in order to attract buyers. Detailed trading volumes should be available on the website of the unlisted company in question. Another issue to weigh up is whether the company is committed to transparency. In other words does it release interims, final results and the audited annual report timeously? Are corporate actions clearly communicated? The test really is whether the company is following basically the same corporate procedures as a listed company. A third consideration – premised on the fact that most unlisted share ratings are less demanding than those of listed peers – is whether there is a reasonable chance the company will list its shares on the JSE in the foreseeable future?

For instance, a perennially profitable food services company may trade at modest earnings of a multiple of seven times, when its listed peers are accorded ratings of 15 or 16 times. That means a listing, which hopefully would bring those influential institutional investors on board, could unlock substantial value. While there are a number of listed investment trusts on the JSE that invest mainly in unlisted counters, INVESTSA reckons the following five unlisted shares are worth investigating directly:

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Being controlled by a listed company means there’s no fretting that results are released timeously and in sufficient detail.

could produce spirited profits under improved trading conditions. There is also speculation that Niveus might initiate corporate action to broaden the brands offering – something that could hopefully be a game changer and perhaps lead to KWV realising some of its underlying value by selling off legacy assets like its valuable art collection or iconic properties. PSG Konsult Shares in this wealth management conglomerate are very easily traded on a vibrant OTC platform. There is a relatively small window of opportunity to acquire unlisted stock as PSG Konsult’s new CEO Francois Gouws has hinted at a possible JSE listing late next year. The big question is whether PSG Konsult intends making a flurry of small acquisitions to bulk the business up ahead of the listing; or whether there are plans to make one big acquisition, which might require an issue of a pile of unlisted scrip ahead of the listing. If a listing is delayed, investors have the comfort of holding stock in a business that is capable of generating solid earnings and paying out a steady stream of dividends.

KWV This Paarl-based liquor company is controlled by HCI-aligned Niveus Investments. Being controlled by a listed company means there’s no fretting that results are released timeously and in sufficient detail. The attraction at KWV is the huge discount which the share price (currently bobbing between 800c and 900c) offers on what is largely regarded as a conservative tangible net asset value of around 1800c/share. The hitch is that KWV is suffering a bit of an operational hangover in its core wine and brandy segments and much depends on a recent thrust into the ready-to-drink category. The business, however, is leaner than it has ever been; and there’s every chance the company

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Kaap Agri This retailer to the farming community has been (rightly) dubbed the Boere Massmart after recently profitably diversifying its core trading format. While vibrant retailing co-op Agrimark remains the heart of the offering, Kaap Agri has moved successfully into petrol stations, liquor stores, hardware, DIY and convenience stores. Other notable achievements in recent years include a marked increase in cash sales and an ability to revamp acquired outlets quickly and costeffectively into more viable trading centres. Kaap Agri trades on a single digit earnings multiple that is nowhere near the headier ratings reserved for its listed peers (some of which are not nearly as profitable). A JSE listing could dramatically enhance the rating on this unlisted share. Assupol This life assurance provider to the burgeoning civil service sector is a recent addition to the OTC market. The business plies a narrow but viable niche that still has plenty of upside, especially in terms of Assupol broadening its product offering. The company has most of its shares tied up with an international investment company, Investec, a women’s empowerment venture and management. But patient investors should be able to pick up decent parcels of shares, which can be bought at an earnings multiple of around five to six times. There is no rush for Assupol to list, but gut feeling is that the early birds will be well rewarded here.

Senwes There’s a very good reason shipping and logistics giant Grindrod bought a meaningful stake in this agri-business. In short, Klerksdorp-based Senwes is a quality operator across numerous agricultural spheres and has the potential to play it big in African markets. The share trades at a rather derisory earnings multiple considering the sound operational track record of the past 10 years. Considering the popularity of an agri-counter like Zeder in the last two years (and a paucity of agribusiness opportunities on the JSE), there’s absolutely no doubt investors would scurry after Senwes should it choose to float onto the JSE. Of course, that’s assuming a clearly enamoured Grindrod does not push to buy out the whole shebang.

Allan Gray

Assisting better long-term decisions with

Jeanette Marais, Director of Distribution and Client Service at Allan Gray

Fund ratings add an extra layer of assurance in the decision-making process and go some way to assisting investors and their advisers to make the right long-term choices.

ver the last 10 years, the unit trust industry in South Africa has enjoyed substantial growth both in assets under management and in the number of funds available. At the end of June 2003, the industry managed R192 billion in assets and had a total of 475 funds. By the end of June this year, investors could choose from a staggering total of 1 021 funds and assets under management totalled R1 506 billion. To put this into context, our stock market consists only of some 460 shares. How are investors and advisers supposed to make sense of this vast universe of funds? Fund selection is one of the toughest decisions Past performance is easy to research but it is no guarantee of future performance. Remember that while performance is often an indicator of investment management skill, it is historic skill and almost always also includes an element of good or bad luck. Short-term good performance by a fund has even been shown in some studies to be a predictor of future short-term underperformance and vice versa. The dilemma is that past performance is the one piece of very readily accessible comparable information, so investors are often tempted to use it as their sole judging

independent fund ratings criterion. The best predictors of future performance are harder to analyse because they involve qualitative judgements, and they are harder to access because they require insight into what happens inside a fund managerâ&#x20AC;&#x2122;s investment office. For example, it is very important to spend time checking whether or not a fund manager has a clear, well-defined investment philosophy and process, with the right people on board to implement these, and whether or not they follow their process and philosophy with discipline when making investment decisions. These factors are logical indicators of future performance and they are therefore factors that investors should research, judge and compare between funds. But they are hard to get to for one fund. Moreover, how is the average investor to undertake such a due diligence on the 1 021 funds available in South Africa, let alone the many thousands available in the world? Independent, qualitative ratings shed some extra light on fund choices Of course, most investors and advisers do not have the time, appetite or access to information to thoroughly research all funds or fund managers. To get around this problem, it helps to consult independent fund ratings. These are readily available internationally; in fact, in countries such as Australia, a fund cannot be listed on a retail platform, nor made available through a superannuation (retirement) fund, without an independent rating. Benefits of fund ratings Evaluating and comparing investment options takes time and brainpower. This is true for all aspects of the investment process. Fund managers spend much of their time on

rigorous research of companies to include in their portfolios. It makes sense for investors to apply the same kind of rigour when researching potential funds for investment. Investment decisions of any nature may be compromised when decisions are not backed up by thorough research. Fund ratings, performed by an independent party, should give investors and their advisers some comfort that their investment decisions are based on a properly researched process. Fund ratings add an extra layer of assurance in the decision-making process and go some way to assisting investors and their advisers to make the right long-term choices.

Allan Gray adds independent fund ratings to its platforms Allan Gray recently engaged independent ratings agency Fundhouse to rate the funds on its local and offshore platforms. Fundhouse is an independent, owner-managed financial services group, with a global research team and an extensive evidence-gathering process. It applies a bespoke, qualitative approach to fund ratings. The team analyses each fund manager, looking at the business and shareholders, the investment edge and process, the experience of the team, their decision-making skills and past investment actions. They gather detailed evidence by engaging in face-to-face interviews with investment teams and conducting due diligences. Analysts collate as much information as possible to ensure that the evidence is relevant to future outcomes and not based on past returns. At the end of this process a rating is assigned to each fund.

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisersâ&#x20AC;&#x2122; practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services short lists third party suppliers based on market research to provide support in identified areas that would support an IFAâ&#x20AC;&#x2122;s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the short list of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.

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Alternative investments

South African listed property:

outlook for 2014 Given the higher levels of volatility in South Africaâ&#x20AC;&#x2122;s listed property sector during 2013, investors are understandably cautious about the outlook for 2014.

ne major headwind facing the sector is the prospect of rising bond yields. The US Federal Reserve is expected to reduce the size of its bond purchase programme during 2014, which will result in higher yields on US treasury bonds and place upward pressure on South African bond yields, as well as the yields on other interest rate sensitive asset classes like listed property. Although some of that downside risk is already in the price, further price declines should be expected if the US Federal Reserve aggressively withdraws stimulus during the course of 2014. However, given the moderate recovery in the US labour market and a more subdued outlook for the US housing market, the Fed is expected to withdraw stimulus slowly in 2014. If this is the case, South Africaâ&#x20AC;&#x2122;s listed property sector should post price gains during the year, as strong distribution growth will offset the negative effect of higher bond yields. The sector is expected to deliver distribution growth of between seven and eight per cent in 2014, with a similar level forecast for 2015. This level of growth is impressive given 24

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the weak economic backdrop. Vacancy rates are expected to reduce modestly, although investors will need to keep a watchful eye on companies with large office exposure. Over the course of the next 18 months, the supply of new office space is expected to outstrip demand, resulting in higher vacancies and lower market rentals. Industrial and retail rentals are expected to grow in line with inflation, despite the slowdown in economic activity anticipated next year. Domestic retailer expansion and the prospect of further foreign entrants into our market support a positive outlook for retail landlords, despite the moderation in consumer spending. The listed property sector is dominated by high-quality shopping centres, which supports the view that distributions will grow above inflation over the medium term. Also contributing to the higher levels of distribution growth is the ongoing reduction in borrowing costs, as South Africaâ&#x20AC;&#x2122;s listed property companies take advantage of the lower rates on offer in the debt capital markets. With official interest rates expected to stay lower for longer, expect the average cost of debt in the sector to reduce again next year as maturing debt is refinanced at lower interest rates. A number of listed property companies are now seeing more value in direct property markets outside South Africa. Investors should not be surprised if their exposure to global property markets increases next year, as South African listed property companies continue to expand their global footprint. Both Growthpoint Properties and Redefine Properties have substantial offshore businesses that will continue to grow in 2014, while the Resilient group

of companies is expected to grow its investments in eastern Europe through New Europe Property Investments. The listings boom of the past three years has in all likelihood run its course, given the higher yields on offer in the sector. A number of smaller listed property companies are now trading at levels below their net asset value, making them prime targets for larger listed property companies trading on premiums to net asset value. Once consolidation of the listed property sector starts, expect the smaller listed property companies to outperform their larger counterparts as investors start pricing in takeover premiums. The sector is currently trading on a oneyear forward yield of 7.3 per cent, which is attractive relative to the domestic bond market. Although the short-term outlook for listed property is less certain, given the expected increase in bond yields next year, the combination of a high initial income yield and inflation-beating distribution growth should produce total returns of approximately 15 per cent per annum over the medium and long term.

Ian Anderson, Chief Investment Officer: Grindrod Asset Management

Alternative investments

Hedge funds – local is

he top three reasons for investing in hedge funds are typically diversification, composite portfolio strategy enhancement and decreased volatility. However, these all proved challenging for global hedge funds when the financial crisis hit. Globally, hedge funds lost value right along with other asset classes. But not in South Africa. Unlike some global hedge funds, South African managers take a more thoughtful approach to investing, aiming by and large to capture a little bit less of the upside performance of the market, but protecting much more on the market downside. How have they fared? Table 1 shows a range of descriptive statistics over the six-year period since January 2007 for various market indices compared to the HNA SA Fund of Funds Composite and the HNA SA SingleManager Composite indices: (see table 1) What the first table shows is that SA hedge funds fared very well. Over the last six years, the funds have performed as well

as the various market indices, but at a much lower volatility and risk profile than the market. Looking at the percentage of positive return months compared to negative return months over the period, hedge funds dramatically outperformed equities. The Fund of Funds composite index produced positive returns 83 per cent of the time and negative returns 17 per cent of the time, while the Single-Manager composite index produced positive returns 97 per cent of the time, and negative returns only three per cent of the time. The significance of using hedge fund strategies in a portfolio is highlighted by focusing on two important periods, namely the crash or bear period, from March 2008 to February 2009 and the subsequent recovery since March 2009. During the crash over the 12-month period from March 2008 to February 2009, the ALSI lost a staggering 37.59 per cent, while the Fund of Funds composite index produced a positive return of 1.19 per

Table 1

FTSE/JSE All Share Index

SWIX

All Bond Index

HNASA Fund of Funds Composite*

HNA SA SingleManager Composite**

Annualised returns

9.8%

11.8%

9.8%

9.2%

10.7%

Volatility

17.4%

16.2%

6.9%

3.1%

1.6%

% positive return months

60%

65%

69%

83%

97%

% negative return months

40%

35%

31%

17%

cent, and the Single-Manager composite index returned a satisfying 9.26 per cent, providing capital protection when investors needed it most. The case for including hedge funds to your asset allocation mix to complement your composite portfolio is clear, looking at the second table. This shows the return performance since the beginning of the bear period, February 2008 until end of August 2013. Table 2 shows that while the equity market indices bull run since March 2009 has been impressive, it had to claw back lost performance during the preceding bear period first. Since the start of the bear period (February 2008) until the end of December 2012, all these indices (both market and hedge funds indices) have produced similar performances, but at varying degrees of risk and volatility levels. The South African hedge fund investor experience over the past six years should be clear. During a bull run, the equity market should, and did, outperform the hedge fund indices; but during a bear period, the hedge fund indices protected investors from the significant capital loss experienced by equity market indices. The trick to investing in hedge funds is to approach them not as a separate asset class, but to think of hedge funds as an enhanced strategy that you should take in addition to your equity and bond investments.

*HedgeNews Africa South African Fund of Funds Composite **HedgeNews Africa Single-Manager Composite

Table 2

FTSE/JSE All Share Index

SWIX

All Bond Index

HNA SA Fund of Funds Composite

HNA SA SingleManager Composite

81.93%

91.91%

63.40%

57.87%

73.64%

Albrecht Gantz, Head of RisCura Analytics

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A flicker of

hope

Having spent the last five years recovering, we see glimmers of hope on the economic horizon, but it’s not yet time to break out the bubbly. A turning point Ever since the financial crisis of 2008, the world’s advanced economies have struggled to return to their pre-crisis performances. Having spent the last five years recovering, we see glimmers of hope on the economic horizon, but it’s not yet time to break out the bubbly. The lid on advanced economy growth remains firmly in place: while they have all embraced some form of stimulation, none has addressed the structural issues beleaguering them. By contrast, emerging economies are generally in good shape although economic growth within them may vary widely by region. The structural drivers which have shaped emerging

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country performance over the past two decades remain in place and we expect to see robust and inclusive growth in these economies accompanied by social and economic mobility. Given that the advanced economies now account for a little under half of world GDP, this should translate into global growth of some 3.0 per cent to 3.5 per cent in 2014. South Africa looks set to achieve economic growth in line with this, but with downside risk. In 2014, we face several headwinds: a general election which may create market anxiety; ongoing frustration over inadequate infrastructure capacity; and a hangover from the 2013 wage settlements. In addition,

administered price inflation could shave up to one per cent off SA’s economic growth rate, so a level of 2.5 per cent is possibly in store for us. On the positive side, tailwinds will come from accelerated implementation of infrastructure projects and SA companies making some headway in finding and benefiting from regional business opportunities.

Asset management

Geography is key to determining equity market returns In this environment, the prospect of a ‘rising tide to lift all boats’ is no longer applicable and investors need to be aware of the specifics of geography and underlying fundamentals when making investment decisions. Some global markets are priced for perfection on demanding multiples, partly a result of easy money as well as the rise in risk-on appetite. Other regions, where investors have become cautious, are demonstrating keen pricing. Here, the standout regions are Western and Eastern Europe. In Western Europe, although economies remain weak, companies are profiting from their global exposure. For example, Germanbased BMW, priced on depressed European multiples, is likely to achieve record sales in 2014 with surging growth led by new vehicle demand in the southeast Asian economies. Investor anxiety towards Western Europe is misplaced and attractive opportunities await investors who seek them out. Investor disinterest is also plaguing Eastern Europe, fuelled by concerns around sluggish trade with their western neighbours dragging regional growth lower. While this is a threat, we think that concerns are overdone – especially given the rising competitiveness demonstrated by emerging Eastern European companies. The importance of company fundamentals is no truer than in South Africa. In the two decades that I have been in the money management business, I have never experienced such levels of irrationality in valuations as I see now. Although there are SA companies which are expected to perform really well, the issue is the value being placed on them. For two years, I have watched as they have moved from being expensive to being outrageously expensive. There is a great irony to be observed here. There seems to be a firm appetite for chasing winners, led by the presumption that as prices of these ‘loved’ companies go up, investment risk falls. Sadly, with history as a guide, the opposite is true. As prices and valuation multiples rise, risk rises, too. Cannon Asset Managers has always stressed the importance of not confusing a good company (which most of these are) with a good investment (which they are not). Because these are the large companies, they dominate the market cap of the JSE and result in the market, as a

The prospect of a ‘rising tide to lift all boats’ is no longer applicable and investors need to be aware of the specifics of geography and underlying fundamentals when making investment decisions. whole, being overvalued. That said, outside of the large cap firms there are a further 400 listed companies where we can find a rich basket of great businesses at good prices. By investing in these, and exercising the principles of discipline and patience, we can easily realise an excellent return. Let’s look at an example. If we take a company on a 10 times p:e ratio with earnings growing at 20 per cent per annum and paying a three per cent dividend yield (and there are many companies which look like this), without a rerating the business will provide an annualised return of 23 per cent – effectively tripling your capital every three years. Businesses like Pinnacle Technology Holdings, Trencor, Value Group, Sasfin Holdings and ELB Group are great examples of this. This is an excellent place to be, particularly if you take tax into account and where Cannon Asset Managers’ investments are focused. Bonds: it’s a case of sovereign versus corporate By far, the largest bond market is the advanced economy government bonds but I wouldn’t touch these with a bargepole. You are effectively buying debt from bankrupt governments and even the somewhat higher yields that have come about since the middle of 2013 do not come anywhere close to compensating adequately for the considerable capital risk involved. Clearly, there are some exceptions to this argument. By far, the strongest government balance sheets lie in the emerging countries and most of these are in sub-Saharan Africa and Southeast Asia. In looking for places to allocate capital to government bond markets, these are the regions on which to focus. The SA government bond market began 2013 richly priced. Although some of that value has been given up, it is not enough of a pullback

to make a convincing investment case. The domestic market is also complicated by the fact that SA runs a budget deficit which outstrips the country’s economic growth rate, which is not sustainable. Although the SA balance sheet remains reasonably strong, it is moving in the wrong direction. For this reason, our portfolios will remain shy of SA government bonds in 2014. By contrast, corporate bonds offer a better home for bond investors at present. Already strong corporate balance sheets are just getting better, supported by good cash flows and substantial earnings growth. The market is pricing corporate bonds irrationally at present, placing them on higher yields than the government bonds: the corporate sector is in much better shape than the government bond sector. It’s a myth that cash is a defensive asset class When it comes to cash, my view is unchanged from my long-term position. Cash is an uninviting asset class that often is viewed as being an important defensive investment. It is anything but. Once the interest received has been adjusted for tax and the cost of inflation has been deducted, there is no cash market of any size in any country where you face the prospect of a positive real return. Considered from a portfolio perspective, cash may result in lower capital volatility, but this comes at a price: a structural bias of weaker returns. In our current environment, investors need to focus their efforts on equities, commodities (because of healthy emerging market growth) and corporate bonds. Within these asset classes, they need to be mindful of geographies and industries, giving particular attention to prices and valuations.

Dr Adrian Saville, CIO of Cannon Asset Managers

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Barometer

HOT

NOT IMF revises its global growth economic forecast The International Monetary Fund has lowered global economic growth by 0.3 points to 2.9 per cent in 2013, and 3.6 per cent in 2014, a decrease of 0.2 points. The IMF reported the global economy will expand slower than expected this year due to a slowdown in activity in developing countries and poorly handled budget cuts in the US.

$2 billion investment into new SA mine The world’s second-biggest diamond producer, De Beers, began construction on a new underground mine in the Limpopo province, which is expected to start underground production in 2021. A US$2 billion investment will extend the life of the mine beyond 2040.

Business cycle indicator rises The South African Reserve Bank’s monthly leading business cycle indicator, which measures economic outlook, increased by 0.7 per cent month on month in August. This was attributed to a rise in share prices on the stock exchange and a higher number of approved residential building plans.

Government invests strongly in infrastructure

South Africa’s government bonds downgraded Moody’s Investors Service downgraded South Africa’s government bond rating in September by one notch to Baa1 from A3. Some of the key drivers for the downgrade include a decline in government’s institutional strength amid increased socio-economic stresses, challenges posed by a negative investment climate and increased concerns about the country’s future political stability.

Indian growth forecast cut The World Bank has lowered its Indian economic growth from 6.1 per cent to 4.7 per cent for the current fiscal year. This reduced forecast was attributed to negative business confidence and a sharp slowdown in the investment and manufacturing sectors.

Despite difficult global and domestic economic circumstances, the Industrial Development Corporation (IDC) made record high industrial funding disbursements in 2012/2013, with around R200 billion invested in energy, transport and other key infrastructure.

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SMEs positive but express doubt South African small and medium enterprises (SME) are optimistic about prospects for their business, according to the Sage Business Index Survey. The overall local index increased nearly 0.2 points to 65.80 out of 100 points. Local business owners were, however, less confident when it came to rating the economy as the rating fell from 43.03 last year to 39.92, a decrease of 3.11 points.

Chris Hart

Tax Chris Hart, Chief Strategist, Investment Solutions

he National Treasury has established a commission for the purpose of tax reform in South Africa. So far, it looks more like a commission to look for ways to raise additional taxes, especially with the fiscus coming under pressure with a stagnant economy. However, this is one area where the government can take bold steps to set South Africa on an economic path where resolution of the problems of poverty, unemployment and inequality could become more possible. Clearly, the current economic outcomes are not satisfactory and indicate policy failure over the past several years. The problems of poverty, unemployment and inequality are listed too glibly. The core problem is actually unemployment, from which there is a poverty and inequality consequence. So far, policy has concentrated on alleviating poverty and reducing inequality. This has been achieved through a highly redistributive fiscal process where the tax take is extremely progressive and the expenditure highly redistributive. Expenditure has largely been applied to rising social expenditure, grants, education and health. The National Health Insurance will further raise an already heavy tax burden. Lack of policy prioritisation means resolution of unemployment has taken a back seat.

reform and investment

Regardless of ideology or economic system, employment is created through investment, and all investment is funded through saving. No economic activity occurs without investment. Even debt is merely savings borrowed from the future. Foreign capital is just foreign savings. It stands to reason that South Africa needs a higher level of investment, which is currently around 19 per cent of GDP. The policy objective aims to get the investment rate up to 30 per cent of GDP, which empirical studies suggest is a key threshold to sustain a growth rate of more than six per cent. The macroeconomic mismatch is that the savings rate is only around 14 per cent to 15 per cent of GDP. Unsustainable distortions have already arisen, including a massive current account deficit and heavy dependence on foreign capital flows to balance the books. Monetary policy has set interest rates below the inflation rates and taxes further attack capital formation (saving). Essentially, policy has rendered savings unviable. Savers lose utility on their money. Policy needs to support saving by allowing upside and generating a gain in utility to do so. While inflation ravages the saver, additional harm is done through some key taxes. These include tax on interest earned; tax on dividends; capital gains tax; transfer duty on houses; and death duties. All these taxes reduce the viability of investments or extract capital from individuals for the Treasury, which then applies those taxes to consumption. South Africa is capital deficient and has a massive unemployment problem. These taxes are consequently highly inappropriate. It would be a different discussion if South Africa had an abundance of capital and full employment.

The inadvertent consequence of current tax policy is to severely penalise success and upside. In addition, policy needs to alleviate the massive tax burden the moment resources come into the hands of people. However, the tax structure is particularly aggressive once financial resources become personal property. For instance, the company tax rate is 28 per cent after all expenses are deducted. Personal tax rates are up to 40 per cent before any expenses are deducted. That presents a massive differential, which needs to be closed. The tax commission also needs to look at simplifying the tax system. Tax complexity is on the rise globally and simplification is an opportunity to offer a competitive advantage. Tax complexity is also highly problematic for less well-resourced South Africans wishing to enter the economy. Complexity merely keeps previously disadvantaged South Africans confined to the informal sector. Tax reform should seek to shift the tax burden away from saving and investment and onto consumption. Essentially, by saving and investing (thereby helping to resolve unemployment), individuals should be able to avoid tax but incur tax with consumption. There has to be a shift from the creditbased, consumption-led economic growth model to one that is savings-based and investment-driven. If not, South Africa will continue to splutter along with unsatisfactory economic outcomes. The politics of ‘take’ rather than ‘make’ will continue to dominate as a consequence, reducing the attractiveness of South Africa as an investment destination. investsa 29

Why does US quantitative easing matter for South African bonds? The US Federal Reserve has been providing monetary stimulus to the US and world economy since the onset of the financial crisis in September 2007.

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Economic commentary

ot only has this been the longest monetary easing cycle on record, but it is also the deepest and most unconventional. After cutting the Fed Funds rate to 0.25 per cent, the Federal Open Market Committee (FOMC) embarked on a new strategy known as quantitative easing.1 While this monetary stimulus has not led to economic growth rates returning to pre-crisis levels, there is little doubt that a more limited monetary response would have been too disastrous to contemplate. But quantitative easing was never meant to (and cannot) be a permanent feature and will be withdrawn gradually (tapered) as the economy recovers. Tapering will then be followed by conventional monetary policy tightening by raising the Fed Funds rate – probably only in 2015. The FOMC’s 18 September decision to maintain the pace of Treasury purchases caught the market by surprise and resulted in a strong rally in global bond markets. Ultimately, however, whether it is in its next meeting or only sometime next year, there can be little doubt that the FOMC will taper its asset purchases at some point, which will negatively affect bond prices. While the tapering of asset purchases is naturally negative for US Treasury yields through a reduction in demand, concerns about its effect on broader markets remain a key focus for many investors. Emerging markets (EM) have been major beneficiaries of quantitative easing, as low yields in the US pushed capital into higher yielding emerging markets. These increases in capital flows to EM have helped them finance ballooning trade and budget deficits, which ultimately supported domestic growth. A significant slowdown of capital inflows, or worse capital outflows, could severely affect economic growth in many emerging markets. Particularly vulnerable to the slowdown in capital flows are those countries that have large and unsustainable trade and budget deficits, which include South Africa. There are three channels through which the US Federal Reserve asset purchase tapering affects South African bond yields. First, US Treasury yields are treated as the global risk-free rate and, as such, form the base level to all bond yields, particularly to those

in emerging markets. Therefore, if asset purchase tapering results in a higher base rate (US Treasuries), as one would expect, then it automatically means higher local bond yields. Secondly, higher US Treasury yields mean that US investors (as well as investors from other countries) have less of a reason to look abroad to get a higher return on their capital, which results in a slowdown of capital flows from the US (and other countries). This means that for countries that have trade deficits, the cost of financing will increase and their currencies are likely to weaken. This weaker domestic currency in turn feeds inflation, making bond yields less attractive from a domestic point of view as the real return they offer gets eroded. Thirdly, and closely related to the first two channels of influence, is the risk associated with investing in countries that are highly dependent on capital inflows, which affect their ability to pay back their foreign currency denominate debt (sovereign risk). Many countries have financed their budget deficits (the shortfall of government revenue to expenditure) by issuing bonds denominated in a foreign currency (mainly US Dollars). This implies that as their currency depreciates, the amount of local currency which is required to repay its debt (and interest) increases, raising the risk to the foreign investor. The foreign investor, as a result of the increased risk, will demand a higher yield for any loan provided to the borrowing country. These three channels all act to increase the yield of domestic bonds. The first two channels are more relevant to South African bond yields, whereas the third channel is arguably negligible (in our view) as we have relatively low levels of foreign currencydenominated debt.

despite sluggish growth for the foreseeable future. The poor economic growth, however, is likely to limit the MPC’s willingness to hike rates despite the inflation rate remaining sticky around the upper level of the inflation target band of six per cent. Now that there is more certainty that the Reserve Bank’s next repo rate move will be higher, the issue becomes one of timing. Prospects of a higher repo rate are negative for fixed rate bonds.2 Given that longer dated bonds offer higher interest rates than money market assets, investors have to evaluate if the higher yield received from fixed rate bonds outweighs the risk of a probable price decline. For example, money market returns are likely to be around six per cent 3 over the next 12 months. On the other hand, 10-year SA government bonds are offering a yield of approximately 7.5 per cent, suggesting that (if the yield on the bond does not change), their 12-month return will be approximately 1.5 per cent higher than that of the money market. Investors need to assess whether the higher yield on the 10-year bond justifies the risk of its price declining to such an extent that it erodes more than 1.5 per cent of its value (the gap between the 7.5 per cent yield and the six per cent return on the money market). It is our view that this is a close call and investors might do well to avoid taking on too much of a price risk on their incomegenerating investment. 1. Quantitative easing took the form of asset purchases, whereby the Federal Reserve purchased US Treasuries and mortgage-backed securities, which helped keep yields low and inject funds back into the market. 2. Usually when the Reserve Bank increases the repo rate, bond yields rise as well. The price of a fixed rate bond declines when its yield rises, while the price of a floating rate bond is barely impacted because the coupon value is not fixed. 3. One can project the one year return with a high degree of certainty because it is agreed upfront.

Considering the likelihood of tapering, it is difficult to see the South African Reserve Bank’s MPC cutting interest rates any further

Jonathan Myerson, Head: Fixed Interest at Cadiz Asset Management

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Global economic commentary

Remember, remember,

September and October

lobal equity and bond markets rebounded in September and, by mid-October, a number of global equity markets began hitting all-time highs. In particular, the S&P 500 hit levels of 1754, while the Dow approached 15 500 levels and the FTSE hit the 6 700 range. Global equities as measured by the MSCI World index gained 5.0 per cent in September and for the year are up 17.3 per cent. US markets have led the pack gaining 19.7 per cent year to date, after gaining 3.3 per cent for the month. European equities are up 17.2 per cent for the year in US$ terms (MSCI EMU). The stronger Euro has helped power these returns as the Euro:US Dollar rate approaches 1.40 again. While the US Government shutdown led to some volatility early in October, once it became clear the US Congress would agree to raise the debt ceiling, global markets recovered strongly. The delayed Fed tapering helped boost markets throughout much of September. With the US Dollar clearly the world’s reserve currency, this has allowed the US to continue to borrow at record low rates. The Fed tapering is set to begin in earnest only in 2014 and to remain somewhat modest in the first half of the year. This is partially due to the politically sensitive handover from Bernanke to Yellen in early 2014. Yellen will be the first Democrat to hold the chairmanship in almost three decades since Volker tamed inflation. More concerning for Fed watchers are the weak September job figures of just 148 000 reported in the US – well below the 207 000 net new job gains posted for the first quarter 32

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and the average 182 000 job gains seen in the second quarter. While the unemployment rate has dropped to 7.2 per cent from the prior month’s level of 7.3 per cent, this is almost entirely due to fewer job seekers in the US. Increasingly many Americans are giving up looking for work which has pushed the percentage of employed Americans to its lowest levels in decades (slightly above 60 per cent). Despite this, the US economy continues to lead the rest of the developed world out of its deep malaise since the 2008 crisis. The economic outlook for developed markets has been slightly downgraded by the IMF to around 2.5 per cent for 2013, but is expected to accelerate in 2014 to above three per cent. Good news for global equity and bond markets is that global inflation trends remain largely benign due to mostly a sideways trend in oil prices predicted throughout 2014. Over the past month, emerging markets have staged a healthy rally off their earlier year lows. At close to 9.5 times estimated 12-month earnings (PE ratio), valuations across emerging markets are relatively low, although earnings revisions have been negative. An eventual rise in US yields due to the tapering by the Fed will likely put further pressure on depreciating emerging market currencies that harbour both a large current account deficit and fiscal deficits. New economic growth figures in China and Latin America point to a steady rebound in activity which should boost prospects for large cap stocks comprising the MSCI Emerging Markets Index. Recent European economic data shows encouraging GDP gains in the UK and Germany. The recent German election result will likely empower Merkel (it is hoped) to play

a more activist role in Europe; specifically helping policymakers come to agreements on a centralised banking supervisory system and deposit insurance regime. The Japanese rally that stalled in August rebounded in September – with the MSCI Japan gaining 8.4 per cent. For 2013, the Japan market is now up an impressive 41.1 per cent in Yen terms or 23.3 per cent in US Dollars. So-called Abenomics is delivering long overdue structural reforms including boosting inflation to around two per cent. The implementation of a long overdue consumption tax will also boost Japan’s fiscal standing. Rates across the UK, Europe and emerging markets are unlikely to rise due to weak economic growth. The British Pound has shown considerable strength which is a worrying sign for the Bank of England. With little worry of inflation, it seems lower interest rates will remain with the leading world economies, well into 2014.

Anthony Ginsberg Director, GinsGlobal Index Funds

Industry associations

Local collective investment schemes continue to draw record net inflows

eleasing the quarterly statistics for the local collective investment schemes (CIS) industry, which reported assets under management of R1.43 trillion at the end of September 2013, Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), says the industry attracted net inflows of R57 billion during the third quarter of this year. “These are the second highest net inflows ever after the record-breaking R63 billion achieved in the third quarter of last year. This brings to R194 billion the net inflows for the 12 months ended September 2013.” The CIS industry now offers investors a choice of 1 025 funds. Where are investors placing their money? Campher says the South African multi asset category remains the most popular with investors. This category attracted net inflows of R35 billion during the third quarter this year. Over the 12 months to the end of September 2013, investors committed a total of R110 billion to SA multi asset funds. “Never before has a single fund category claimed net inflows of this magnitude,” comments Campher. Second on the popularity ranking was the SA interest bearing category, which saw net inflows of R41 billion over the same 12-month period (R9.6 billion for the third quarter), followed by SA money market funds with R27 billion (R6 billion for the third quarter). The SA multi asset category now holds 44 per cent of industry assets (excluding worldwide, global and regional sectors). Campher explains that funds in the SA multi asset category have become a firm favourite with investors because they make it easy for investors to achieve diversification across asset classes within one fund.

Intermediaries contributed 27 per cent of new inflows. Linked investment services providers generated 24 per cent of sales and 21 per cent of sales was received from institutional investors like pension and provident funds. diversification, human nature dictates that investors will still chase returns. As a result, the SA multi asset high ewquity funds were in vogue with investors during the third quarter, attracting net inflows of R16 billion. The JSE has been reaching new record highs during the third quarter and the SA multi asset high equity sector has been one of the top performing local sectors over the past year, achieving a return of 19 per cent for the 12 months ended September 2013. Ironically, says Campher, the SA multi asset low equity funds were most popular with investors until the third quarter. “For me the good news is that investors are no longer chasing returns by investing all their money in specialist funds as they did a few years ago. If they have to opt for the flavour of the day, at least they are now doing it within a fund range that is diversified and where the asset mix is managed by expert fund managers.” Campher says it is important for investors to understand that funds in the multi asset category are designed to reduce volatility through diversification. For this reason, these funds cannot be expected to outperform pure equity funds or specialist equity funds when markets are strong. He adds, however, that you can and should expect a multi asset fund to outperform inflation and cash over the long term. These funds should also outperform equity funds during bear markets, explains Campher.

Timing the markets

Who invested?

Campher says while investors are increasingly opting for multi asset funds because they recognise the benefits of

Campher says the bulk of the inflows in the 12 months to the end of September 2013 came directly from investors (28 per cent).

Offshore focus Locally registered foreign funds held assets under management of R196 billion at the end of September 2013, compared to R180 billion at the end of June 2013. Foreign currency unit trust funds are denominated in currencies such as the Dollar, Pound, Euro and Yen and are offered by foreign unit trust companies. These funds can be actively marketed to South African investors only if they are registered with the Financial Services Board. Local investors wanting to invest in these funds must comply with Reserve Bank regulations and will be using their foreign capital allowance. There are currently 303 foreign currency denominated funds on sale in South Africa. Over the past 12 months, in Rand terms, the JSE All Share Index (ALSI) was the worst performing index when compared against the S&P500 and FTSE100. The ALSI (Total Return) returned 21 per cent, the FTSE100 (TR) 39.5 per cent, and the SP500 (TR) 46.4 per cent.

Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA)

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Head To Head Insights on investing for income

Managing Director of BlackRock and the lead product specialist for the Global Equity team

James

Why has dividend investing become so much more popular? Prior to the global financial crisis, dividend investing was seen as an old-fashioned way of investing. However, dividend-paying equities have become an increasingly popular source of income and have fared well in these times of turbulence and slow economic growth. Indeed, during periods of low growth, returns come almost exclusively from dividend yield and dividend growth. This diversification is especially important given how much correlation there is currently in financial markets, with many asset prices moving in tandem. We believe that the focus should always be on high quality dividends. This approach to investing is a reliable way to capture long-term value in equity markets, while achieving sustainable and reliable income. Hasn’t the popularity of dividend investing made these stocks more expensive? That may be true for some of the highestyielding stocks. Many of these have been overbought and are quite expensive now. However, we’re not focused on the highest dividends. We’re looking for quality companies with a proven ability to maintain and grow their dividends. Why is it not enough to focus on yield? When building a portfolio of dividend-paying companies, many investors make the mistake of focusing exclusively on the stocks with the current highest yields. However, a very high yield may signify that a company is distressed and may not actually be able to pay its dividend going forward. While an aboveaverage yield is an important component of total return, we believe dividend growth

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Lamont

– a company’s ability to consistently raise its dividends – is even more powerful over the long term, through the compounding of growth on growth and the positive signal it sends to the investment community, which tends to support the stocks’ price.

are lower but stable, and Asia (ex-Japan) where yields are high but the market has an above-average volatility.

What about the issue of increased volatility?

These are resilient companies that can consistently and sustainably pay and raise their dividends regardless of the macro backdrop; have exposure to growth areas of the market including emerging markets; have predictable revenue streams; and have some visibility on their future prospects. Furthermore, we look for companies with pricing power, as this means they can pass through the inflationary pressures to their customers and maintain solid margins. Due to the stable nature of these companies, volatility should be reduced compared to traditional equities.

The past few years have delivered some of the worst market volatility in history. Worryingly, data suggests the period of low volatility we had all grown used to, known as the Great Moderation, could be the anomaly. The most recent period of heightened volatility may actually be more the ‘norm.’ In practice, this means we should all expect the business cycles to be shorter and sharper going forward. Combined with the ongoing political and economic uncertainty, investors need to be prepared and their portfolios positioned for the possibility of continued high levels of volatility. The good news is that, in our experience, it is possible to invest in such a way that produces an equity portfolio with much less volatility, typically 20 to 30 per cent, than broader equities. Why should South African dividend investors diversify globally? Although investing globally involves certain risks, it also offers the benefits of enhanced diversification and higher yields when compared with a portfolio that is focused on only one country. While diversification does not ensure a profit, it has been shown to smooth the ride. Global flexibility allows investors to capitalise on regional dividend opportunities; from Europe where yields are high but often in cyclical sectors that may see cuts in recessions, to the US where dividend yields

What does BlackRock consider a high quality dividend stock?

Isn’t equity investing all about taking more risk for more return? Some conventional finance theory has suggested that in order to earn greater returns, you must accept greater risk. However, our research turns this relationship on its head because, over the long term, we’ve found the lower-volatility stocks (higher quality companies) have produced better riskadjusted returns than higher-volatility stocks (lower-quality companies). This finding is gaining wider acceptance among academics and industry peers, with the consensus explanation focusing on investor psychology and limits to arbitrage. A further benefit to investing in high-quality companies is the resulting minimisation of the volatility drag – in other words, the stocks of high-quality companies fall less than their lower-quality counterparts during general market downturns. This means they don’t have as much loss to recoup before breaking even.

Managing Director, Atlantic Asset Management

M u r r ay A n d e r s o n

Why has dividend investing become so much more popular? When examining this question from an income investor’s perspective, we can appreciate that clients will need to consider the tax that they are paying on their sources of income and will hence try to reduce the tax payable where and when possible through every legitimate means available. One way of doing this is to earn a dividend income, which isn’t entirely free of tax but is not taxable as such in the hands of investors. It is more efficient when considering that interest income, with a relatively small exemption, is entirely taxable at what would be effectively marginal rates of tax. So firstly, it is about tax efficiency. The second important consideration is when we look at the empirical evidence of what effect reinvesting dividends over time does to overall portfolio return, and it becomes evident that a large portion of the growth in an equity income portfolio is derived by compounding the dividends that accrue over time. The second issue is actually about compounding and about dividend growth. Hasn’t the popularity of dividend investing made these stocks more expensive? We haven’t looked at the effect of this isolated from other factors; but from a dividend yield perspective, there are still many stocks which offer attractive dividend payouts, especially relative to ultra-low interest rates. We can argue that there is a demand effect implicitly already reflected in high dividend yield stocks. The question would always be: what will change in the future such that demand would not be there? Why is it not enough to focus on yield? When buying any stocks, not just high dividend yield ones, you have to be able to live with

day-to-day volatility. Only if you have the ability to ignore the volatility – and here we especially refer to downside risk – can you consider pure dividend yield investing to be a suitable part of your portfolio. Further to that, the next factor to focus on is not just whether a stock currently has a high dividend yield, but whether that dividend stream is growing. Sometimes stocks are priced cheaply relative to their current dividend for a reason. It may be that the market has already realised that the company in question is about to see profits plunge, or there is significant uncertainty and hence its price has fallen dramatically. It is cheap for a reason. What about the issue of increased volatility? The short answer here is that volatility in equity markets is something that investors need to be comfortable with. Again, it is the prospect for continued growth in dividends that should leave investors feeling more comfortable with increased volatility. Ultimately, equity volatility will affect all shares, not just those with high dividend yields. Shares with good dividend histories will leave investors with the comforting thought that they will earn these dividends regardless of market conditions (barring a market or economic crash when companies may need to revise or pass on a dividend in order to protect the business). Why should South African dividend investors diversify globally? This would be sage advice since if investors can access shares in foreign markets (more typically developed markets), they will find a larger opportunity set, i.e. a broader range of shares to consider which will earn income from a broad, often global market.

The natural diversification and hard currency benefits of this strategy would also have benefit over time. What does Atlantic consider a high quality dividend stock? Factors to consider in making a high quality dividend stock would be dividend yield in excess of cash returns; highly liquid and tradable stock, transparency of earnings; clear and sustainable business model; track record of profit and dividend growth; and good corporate governance compliance. Isn’t equity investing all about taking more risk for more return? The pay-off profile of any investment in financial assets will show that when an investor is prepared to add risk to their portfolio, they must be compensated for this additional risk by way of return. Considering that cash in the bank would currently earn and investor two to four per cent, depending on which bank uses, with little to no risk, they would expect to earn significantly higher than this for an investment in the equity market. However, that additional return will come with increased volatility, yet over time with a well-diversified, high quality equity portfolio investors will be rewarded. The investment horizon always counts; patience and the conviction of their investment strategy will reward them and there are more than enough famous investment ‘super stars’ which provide suitable evidence of this.

Equity volatility will affect all shares, not just those with high dividend yields.

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Don’t invest in an RA merely

for the tax benefits

ebruary is the start of what has become known as RA season, but what is this all about and why February? The reason is that the tax year ends on 28 February and this is an opportunity for people to assess their income, in particular commission and variable income workers, and to determine how much they can contribute to a retirement annuity in order to get the maximum tax deduction.

and determine if they have utilised the full deduction. If they have not, they can then make an ad hoc lump sum contribution in order to fully utilise the tax deduction.

A word of caution I would like to give the advice that I give to all my tax clients: never enter into a transaction purely for tax purposes. This might sound strange coming from a tax practitioner. However, let’s assume that the taxpayer is in the 40 per cent bracket. He earns R100 and needs to pay R40

It is in February when taxpayers can assess their non-retirement funding income

in taxes, leaving him R60 to invest. After some tax structuring, he decides to buy a more expensive car allowing a bigger tax deduction for his travel allowance. His taxable income reduces from R100 to R20. So now instead of R40 in tax, he pays R8 and saves R32. However, in order to do this he had to increase his expenditure, meaning that there is now only R12 to invest. Therefore tax planning comes only at the end of a process, where it is a differentiator once other considerations and needs have been met.

Have a plan

Retirement Percentage

Fixed

315 001 630 001

315 000 630 000 945 000

0% 18% of amount above R315 000 27% of amount above R630 000

0 0 56 700

945 001

Plus

36% of amount above R945 000

141 740

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If you do not have a financial plan in place, the first step before making a decision to place additional money into an RA is to have a financial plan drafted. I would recommend using the services of a CERTIFIED FINANCIAL PLANNER® professional for this. Part of your financial plan would be a retirement plan and will allow you to assess whether an additional contribution to a RA is the best alternative, taking into account your personal goals, circumstances and tax status.

Industry associations Assumptions: • Contribution R12 000 per year (constant) • Return 8% p.a. • Tax rate 40% • Interest exemption and costs ignored • Return fully taxable

The tax consequences Contributions The first tax benefit that is discussed is that a contribution to a retirement annuity is tax deductible. Currently the deduction is the maximum of: • R1 750 • R3 500 – deduction claimed for a pension fund contribution • Fifteen per cent of non-retirement funding income. Many people assume that non-retirement funding income is income that is not used in calculating a contribution to a pension or provident fund; this would include interest, rental income and the income on the IRP5 that is identified as NRFI. This is only partly right, but you must first deduct exemptions and deductions (other than the medical and donations deduction) before arriving at NRFI. This deduction has not changed for many years. However it is set to change with effect from 1 march 2015 if the proposals in the Tax Laws Amendment Bill are implemented. The proposed change will do away with the different deductions for pension funds and retirement annuity funds and introduce an overall deduction of 27.5%, across pension, provident (yes a deduction for provident funds is being introduced) and retirement annuity funds. There will also be a monetary cap of R350,000 per annum. The other change with regards to this deduction is the deduction will no longer be based on NRFI, but on the greater of remuneration and taxable income.

over to subsequent years where you could contribute less than the limit. If by the time you retire and the full deduction has not been utilised, then the unused deduction can be used against the lump sum. If the lump sum is not sufficient to fully utilise the unused deduction, then it can be offset against the income from the annuity with effect from March 2014. During investment The second tax advantage of selecting a retirement annuity over another investment vehicle is the fact that the growth within a retirement annuity is tax free. This means that all else being equal the after-tax return on a retirement annuity will be better than an endowment or direct investment in a unit trust (see graph). At retirement At retirement an RA member may take up to one-third in cash, the balance is used to purchase an annuity which will pay an income for life. Both the lump sum and the annuity will be included in the taxpayers’ gross income. The taxation is as follows: • Lump sum The lump sum taken is not taxed as income but is taxed in accordance with a separate tax table as follows: (see table) Remember that the tax table is a cumulative table, and considers both withdrawals and retirement benefits. If a taxpayer has taken withdrawals of R945 000 during their working career, they will be taxed at 36 per cent from R1 of the retirement benefit.

What if I contribute more than the limit? If you contribute more than the limit allowed in a particular year, you do not lose the deduction. The unclaimed amount will roll

• Annuity income Quite simply, the annuity is taxed as income, just like a salary. The only benefit is that at age 65 there is a secondary rebate and at age 75.

At death

For taxpayers who have passed away after January 2009, lump sums from retirement annuity funds are no longer included in the estate for estate duty purposes. This, coupled with the fact that the maximum age for RA membership was taken away, has allowed the RA to be used in estate planning to save on estate duty. In terms of the plan, an elderly taxpayer with R10 000 000 in a dutiable estate would contribute a portion, say R5 000 000 to an RA. This would have the effect of reducing the dutiable estate to R5 000 000, saving R1 000 000 intestate duty. It is unlikely that the entire contribution deduction will be used by the time the taxpayer passes away, so the beneficiaries will get most, if not all, of the money tax free. There are, however, risks with this approach. If the taxpayer lives longer than expected and needs the money or uses up the contribution deduction, income tax will be payable at potential 36 per cent which is greater than the 20 per cent estate duty saved. Careful planning is therefore required before a scheme like this is implemented. An RA clearly provides some tax benefits. However, you should not invest in a RA merely for the tax benefits. An RA is a financial product solution that can work well, but only if the investor has a well laid out financial plan.

David Kop, CFP®, Senior Manager: Policy and Research at the Financial Planning Institute investsa 37

Investment strategy

In it for the long haul To excel in cycling, as in investing, requires discipline in training, extreme mental toughness and plenty of perseverance

nje Images: Zoon Cro

oth benefit from goal setting and rely on teamwork. When it comes to winning, a consistent approach delivers rewards in both pursuits, particularly if applied through periods of adversity. The Bridge Cape Pioneer Trek is rated as one of the country’s toughest races. It’s a gruelling seven-day mountain-bike stage race that starts and ends at Oudtshoorn and covers 550 kilometres of the Great Karoo and Klein Karoo, crossing two mountain ranges. Stage two is particularly challenging, ending at the summit of the Swartberg Pass after a final 12-kilometre stretch that climbs 1 100 metres. Waylon Woolcock and Erik Kleinhans (Team RECM) won the Open Men’s category, while Ariane Kleinhans and Annika Langvad (Team RECM Davinci) won the Open Women’s category of the 2013 race that took place in the last week of October. Teamwork and strategy played an important part in RECM Davinci’s complete dominance of the women’s race. Similarly, we regard teamwork and the consistent application of a sound investment strategy as important components of investing. In the men’s category, the Asrin Cycling and the Scott Factory Racing teams each won three stages of the race. The RECM Men’s team didn’t win a single stage. In fact, the best finish the team achieved was a creditable second position on Stage one. However, consistency underpinned the team’s success with their lowest placing being fourth position in Stages two and six. While the other four teams in the top five each finished ahead of the RECM team in at least three of the stages, all of them also finished outside the top five on at least one occasion. Team RECM’s consistency was rewarded with the yellow jersey (for the non38

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cyclists – that means the overall race leader at the time) after Stage four, which they held to the end of the race.

lead, so we really had to make sure we kept them in our sights and kept our risk of crashing or mechanicals as low as possible.”

Investment lessons from a cycle race

Our investment philosophy is that it’s much more rewarding over time to focus on preventing a disastrous loss than on aiming to shoot the lights out. A loss of capital is often impossible to recoup through future performance. We build a margin of safety into the assessment of all of our investments and take a careful approach to minimise the risk of capital loss.

There are a number of analogies that can be drawn from this performance that applies equally to investing. 1. Don’t try to predict the future – be prepared for every eventuality An investment process should not rely on forecasts or market expectations – we just don’t believe that it’s possible to see into the future. Time and again the events that have shaken the market have come from completely unexpected quarters. We take a bottom-up approach of looking for good quality assets trading far below their intrinsic value. It’s emotionally much harder than following the prognostications of some market soothsayer, but we believe it’s well worth the effort. 2. Focus on the long term Long-term real returns come from the consistent compounding of reliable short-term gains over time. Team RECM kept their eye on their overall goal, resisting the urge to chase stage wins and one-day glory. A sound investment process is founded on a similarly long-term, conservative and disciplined approach to evaluating, investing and exiting investment opportunities.

Different paths to the same result In the same way that the two RECM cycling teams used different strategies to win their respective categories, there are undoubtedly different ways to generate investment returns. An effective investment team adopts an investment strategy that is most suitable to their ‘investment DNA’, an approach that is consistently and carefully applied with diligence and patience. We believe that the way to deliver the best long-term real returns for clients is through an approach that is consistently and carefully applied with diligence and patience.

3. Be aware of the downside At the end of the race, Kleinhans spoke about their careful approach. “We knew some teams were going to go hard for the stage win and that Philip and Matthys [of Scott Factory Racing] wanted to attack our overall

Jan van Niekerk, CEO RECM

Morningstar

Bonds,

be gone (part 2)

his is a continuation of the discussion I started in last month’s column about Bill Bernstein’s book, Deep Risk: How History Informs Portfolio Design. It is his third in his Investing for Adults series. Bernstein’s premise is that investment adults are those who outgrow the stage of fussing over market movements. For assets that they intend to own for several decades, adults pay little attention to the shallow risk of investment volatility. They focus instead on avoiding the deep risk of permanent damages. For investment adults, the key lesson is more stocks, less bonds. Per Bernstein’s analysis, there are four deep risks that may strike: 1) hyperinflation; 2) severe deflation; 3) government confiscation; and 4) devastation or war. In last month’s article I discussed the first and most common of these risks, hyperinflation. In two of the three remaining deep risks, government confiscation and devastation/ war, Bernstein argues bonds offer no advantages of over stocks. They are not worse, to be sure, but they are also not superior. In Russia 1917, Cuba 1958, Italy 1944 or Germany 1945, it was not good to be in either asset. High-quality bonds do offer a significant advantage over stocks during the fourth of Bernstein’s deep risks (or ‘Four Horsemen of Financial Disaster’, as he likes to put it), severe deflation. This situation was suggested in 2008, when US Treasury bonds appreciated in price even as US stocks plunged, as the market forecast a possible depression. That depression didn’t arrive and stocks quickly rebounded; but when

a depression did occur, 80 years ago, the stock recovery was far slower to arrive. Highquality bonds came in very handy. Even there, though, bonds were only a temporary help. Stocks were not permanently impaired. Adopting a 30-year perspective, it's questionable whether the US Great Depression was a deep risk at all or merely the largest and longest of shallow risks. It’s also unclear how much investors need to protect against deflation. As Bernstein points out, there have been few examples of deflation post World War II. Moreover, in the most infamous case of Japan, the true driver of the stock market decline was not lower corporate profits due to deflation’s effects, but rather the shrinkage of historically high stock-price multiples.

term market volatility and I’m almost sure that stocks will outgain bonds over the next two or three decades. So, why not go heavy on stocks? One thing that I could use – along with perhaps many readers of this column – is greater international exposure. As with most people, I began my investment career buying domestic securities, and I haven't changed that habit. While I’m optimistic about US prospects (I am American) and think that the chance of US assets being permanently damaged by government confiscation or devastation or war is very low, my portfolio nevertheless would benefit from spreading its geographic wings. Almost certainly, my next trade will be away from home.

In short, the investor concerned about deep risk rather than shallow risk has little need for bonds, aside from the inflation-adjusted variety. Such an investor will own mostly stocks, with a large amount of overseas exposure as deep risks are often countryspecific. (Bernstein recommends a value tilt to the stock portfolio, which he argues is helpful during inflationary regimes.) The portfolio will also contain commodities, in particular gold bullion stored overseas, in combating the government confiscation and devastation/war scenarios. Foreign real estate could also be used for that purpose. You won’t hear any quarrels here. In my personal portfolio, I follow the basics of Bernstein’s recommendations, and for the same reasons. My long-term holdings are 90 per cent stocks. I don't require liquidity with those assets. I’m not worried about short-

John Rekenthaler, Vice President of Research, Morningstar investsa

Paul Stewart Head of Asset Management at Grindrod Asset Management You have been in the financial services industry for nearly 20 years. How do you set yourself apart from other industry experts? In a world that’s increasingly employing complexity to answer simple questions, the ability to be consistent is key. My philosophy is simply to order my thoughts and actions around consistency and repeatability. If you are consistent, colleagues and clients know what to expect. You can continually apply the same formula to help make decisions in times of stress and market dislocations. Managing the wealth of people or organisations requires clarity of mind and a simple, repeatable decision-making framework. What risks do you anticipate 2014 will bring for the investment community? I do not believe the risks in 2014 will differ to the risks of yesterday and today. Globally, the level of yields on cash, bonds, listed property and equities remains abnormally low. Investors in two of the largest traditional asset classes, namely cash and bonds, will probably not achieve inflation-beating (real) returns looking forward for the next few years. Consequently, investors need to consider moving up the risk spectrum. Those invested in listed property and equity have delivered very good returns over the last three to four years. But valuations are looking stretched in these asset classes. Ultimately the world needs more normal levels for yields, but this implies a period of readjustment and heralds great uncertainty. Risk is created by uncertainty. Some key unknowns that will become more certain during 2014 and that will drive

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the performance of the mainstream asset classes are: • When will the US monetary and fiscal authorities start withdrawing support from the economy? To what extent will this put upward pressure on world sovereign bond yields? • What rates of growth and inflation will be observed in the US in 2014? • What progress will be achieved in the recapitalisation and deleveraging of the Eurozone banking system and how well can key European bond markets like France, Spain and Italy retain market access? • Can China maintain its ‘not too hot, not too cold’ growth path without mounting structural stresses becoming an impediment? • How well will the 2014 South African political elections run and will market friendly policies and more flexible labour policies be implemented to stem the capital outflow. What is your investment strategy and how do you plan to tackle the challenges that 2014 has to offer? The best and most certain way to manage long-term money is to buy assets that offer attractive yields, i.e. which pay regular quarterly income and allow the income to compound forward, which drives capital returns in time. Being a smaller firm, we are able to identify and buy good quality equity and listed property shares for our clients. These shares are paying attractive dividends and we expect their dividend growth rates to be above inflation for at least the next three years. We believe this strategy, which we call Payers and Growers, will continue to deliver

inflation-beating returns over the next five years, as it has for many years already, even if there is volatility. What would be your suggestions for investors in the year ahead? Stay calm and don’t chase the lure of big capital gains. Rather find a fund manager to help identify good quality assets that offer attractive yields and let dividend growth do the heavy lifting for you. Unfortunately, this is not a get-rich-quick scheme and it takes time and patience before you can begin enjoying the inflation-beating benefits of compounding. How do you wind down from the pressures of your position? I’m lucky enough to live in Hout Bay and I love spending time with the family on the beach. I am a keen road and trail runner and this clears the mind and allows me to relax. I also play golf several times a month to keep me humble. Finally, if you had R100 000 to invest, where would you put it? As a long-term investor, I would commit to a minimum term of five years. I would thus invest in the Grindrod Equity Income Growth Fund. This diversified portfolio of equity and listed property presently offers a gross yield of nearly five per cent and the forecast distribution growth rates are around 14 per cent per annum for the next three years. This gives great comfort that the portfolio will easily beat inflation over the full term, which is my primary investment objective.

Profile

Those invested in listed property and equity have delivered very good returns over the last three to four years.

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Practice management

Rating asset managers qualitative then quantitative

hen we rate asset managers we have a strong preference for qualitative evidence. This is not to say that we completely ignore past fund returns and risk statistics (quants). Rather, it’s that we must first establish whether the past returns are a legitimate representation of the current team and approach. Then we can evaluate the track record, once it’s validated.

So, do teams and businesses change? Let’s take a look at value investors. This is a class of investors which request its clients take a longterm view because they may underperform for a substantial period before their investment thesis delivers. From such a group, we would expect the highest levels of team and business stability. We considered SA managers who classify themselves as value, and noted that only four out of 11 have had no meaningful changes to either the team or the business ownership and structure. That means that the track records of seven out of 11 funds need to be viewed with significant scepticism, especially those with team changes. The point we are making is that even with long-term investors, things change. The past is not that reliable: people move and businesses change ownership. Another challenge with a pure track recordbased assessment is whether fund managers' performance does persist. Can you choose today’s winner based solely on their past returns? In an attempt to answer this, we considered the actual returns of the SA general equity sector through time. If a fund outperformed over the previous five years, the odds it outperformed over the next one, three, five and 10 years ranged from 11 per cent to 18 per cent. These are not great odds. Your odds are less than one in five of selecting a winner across all time frames, based purely on past results. We can look at this data in many other ways too and it all points to the same problem: past performance is an incomplete guide. For 42

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example, if we go back to September 2008 and ask: of the funds that were quartile one and quartile two on five-year rolling performance, how many managed to stay in either the first or second quartile five years later? The answer is 50 per cent. Put another way: there are 50 per cent odds that a fund ranked quartile one or two, five years ago, would remain in quartile one or two, five years later. Half the funds that were above average became below average. The odds are the same as a coin toss. Consider the qualitative aspects that would make the track record more reliable (applicable to the current team and business). Which SA equity funds, over the past five–10 years have had the following: • Continuity of fund managers and team? • Very little change to their business structure? • Very little change to their core focus (their products)? • The same investment approach?

Prudential Equity has averaged quartile one on a five-year rolling basis versus its peers between October 2008 and September 2013. There were only eight general equity funds that averaged quartile one over that period and the persistency of these funds is notable. As a general rule, these funds have been consistently managed within the same business structure and are names you would generally associate with team and business stability. Past performance in its raw form is a very poor predictor of future investment success. It is both a poor predictor of future out performance as well as a poor guide to peer relative success. However, where the fund manager has seen very little change to their business, team and process, their ability to repeat past results improves dramatically. This is why we spend our time on those factors that point towards consistency in the business and the team before we acknowledge any past results.

Who would you come up with: Coronation, Foord, Investec Value Fund, Allan Gray, certain Nedgroup funds? The list is not that long; these four questions set the bar really high. So how do managers who rate highly on qualitative/consistency aspects fare in practice? To provide an indication, we considered the average quartile of fund performance on a five-year rolling basis since September 2008, for each SA general equity fund that has a five-year history. For example,

Rory Maguire, Founder of Fundhouse

Regulatory developments

Investment management fees

ational Treasury has released draft papers on pension fund reform dealing with a range of issues. The last and most eagerly awaited paper, released in July 2013, dealt with costs in the retirement industry. One key element is the asset management fee. Active asset managers are typically rewarded by two types of fees. Fixed fees which are typically charged as a percentage of assets under management; and performance fees which reward managers for performance in excess of a predefined benchmark. Our rough estimate of the retirement fund industry is that over 80 per cent of assets are managed on a basis that has both fixed and performance fee components with 19 per cent having only fixed fees and less than one per cent of assets managed on a performance fee-only basis. Ninety-nine per cent of retirement funds assets are therefore paying fixed fees of some sort to their investment managers, which are almost exclusively based on a percentage of assets under management. Fixed fees are determined by a number of factors: The asset class or type of mandate Investment managers typically charge higher fees for mandates or asset classes that target higher returns as they require greater skill to manage, or where the opportunity set of securities to research and invest in is greater. You should therefore expect to pay higher fees for management of equities than for management of bonds or cash. Similarly a more aggressive equity portfolio typically costs more than a conservative equity portfolio and global equities with a universe of 16 000 shares to research and choose from costs more than local equities where the universe is roughly only 200 liquid investible shares. In cases where managers are asked to run balanced mandates where asset allocation is also required, or capital protection strategies are employed, fees may also be higher. Whether they are in combination with performance-based fees Typically one would expect to pay a lower fixed fee if the investment manager has the ability to earn additional performance fees. Manager capacity and past performance Asset managers with limited capacity to manage assets on behalf of clients or those

with very successful track records typically charge higher fees â&#x20AC;&#x201C; a simple supply/ demand equation. Size of mandate Clients with larger asset sizes can negotiate lower fixed fee percentages. Most asset managers will offer a sliding fee scale. This means that fees for lower asset values will attract a higher percentage, and as assets grow, this percentage decreases (even although the Rand value of fees paid increases). The question has correctly been asked as to why this is the case. The argument has been made that for the same mandate, where an investment manager charges 1.0 per cent of assets as a fixed fee, why should a client with R1 billion pay the manager R10 million per annum to manage the mandate, whereas a client with R100 million pays only R1 million? Surely the manager does the same amount of work for both? The answer lies in looking at some of the key elements of the costs a manager incurs in managing a mandate and what these costs are linked to. Four main drivers of an assets managerâ&#x20AC;&#x2122;s cost of managing a mandate are linked to assets. These include:

3. Many asset managers outsource portions of their administrative and back office functions to other providers. These providers charge asset managers typically on a percentage of assets basis. Fixed fees have gradually been moving lower over time. This is most noticeable in cash and low risk mandates, and to an extent, even in more core-type mandates in equities and bonds. At the same time, we have seen many niche types of mandates coming to the market attracting higher fixed fees. Examples include high yield corporate bond funds, emerging market funds and some of the alternative asset classes such as hedge funds and infrastructure. The fixed fee component is just one element in an overall investment management fee arrangement, and therefore should not be viewed in isolation. Advisers and investors should consider how they interact with other fee components, and look holistically at the total level of fees paid to the investment manager in the context of the desired investment outcome. We have no doubt that the entire fee value chain will come under increasing scrutiny in the future. This can only be good for investors, and asset managers and multi-managers will need to be able to strongly defend the integrity and basis upon which fees are charged.

1. Professional indemnity insurance, this is the insurance that a manager takes in order to insure against them making mistakes. Managers require larger insurance cover as their asset size increases. This drives up their insurance premiums directly with the assets they manage. 2. Regulatory capital is a requirement to ensure that a manager has sufficient financial stability to remain in business and safeguard clientâ&#x20AC;&#x2122;s assets. Regulatory capital is directly linked to the size of assets and the expense base in the asset management firm.

Steve Price, Chief Operating Officer, Investment Solutions investsa 43

RA season

Planning opportunities: retirement and living annuities in estate planning

92-year-old woman has a share portfolio of R8 million. Like many of us, leaving a legacy is extremely important to her and will include some form of asset transfer to her nearest and dearest when she dies. Retirement annuities Her financial planner advises her to invest R5 million in a retirement annuity. Is this sound advice? Retirement annuities (RA) no longer have maximum entry or exit ages. Further, due to the tax treatment of RA contributions and, depending on the investor’s tax liability, the R5 million would devolve to her heirs without any tax or duty being paid. Why is this? Contributions to RAs qualify for a tax break, currently up to 15 per cent of non-retirement funding income can be deducted. Where an investor has no taxable income because they only receive dividend income, there is no tax break. The value of contributions made to RAs which have not qualified for a tax break are carried forward until the benefit is paid on retirement or death. The investor’s beneficiaries will receive the full R5 million tax and estate duty free, there may be some tax payable on the value of the benefit over R5 million due to investment growth. With the estate duty rebate of R3.5 million and estate duty at 20 per cent for the balance above

R3.5 million, using an RA could save the investor’s estate R300 000. But the potential tax benefits do not stop there. Assets housed in RAs are exempt from capital gains and dividends tax. Living annuities

Points to remember Living annuities (LA) are a popular option for many retirees due to the flexibility they provide. As with RAs there are some tax and estate duty advantages. Both RA and LA benefits paid on death are excluded from the investor’s estate. LA assets are also exempt from capital gains and dividends tax. Depending on investment time horizons, the reduced tax liabilities could be a substantial benefit for both LA and RA investors in terms of investment growth.

Beneficiaries paid from LAs and RAs have the following options: (see table) Important information about payments to heirs Death benefits paid from an RA are governed by section 37C of the Pension Funds Act. As a result the death benefit is distributed in terms of this law and not your will. However, where beneficiaries are also dependants as defined in the law, it is unlikely that the board of management will deviate from the investor’s wishes as shown in a nomination of beneficiary form. Death benefits paid from an LA are governed by the Long-term Insurance

Explanation

Cash lump sum and annuity

Combination of part cash part annuity allowed. Lump sum and income portion taxed as shown below.

Cash lump sum

Benefit taxed at the tax table applicable to death benefit from a retirement fund. Where there were contributions that did not receive a tax break, the value will be added to the tax-free portion.

Annuity

Annuity taxed as income at the beneficiary’s marginal tax rate. Where there were contributions that did not receive a tax break, this can be offset against future income tax liabilities (here it is important that the annuity product provider is made aware of any tax-free benefits).

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Using a tax incentivised investment vehicle has the benefit of lowering the investor’s income tax liability. Further, assets housed in RAs or LAs are exempt from tax, all of the investment returns are retained, allowing compounding from a higher base. This should ultimately lead to higher investment values. Estate duty exemption means that there could be a 20 per cent estate duty saving for larger estates.

Beneficiary payments

Option

Act and as a result will be paid per the nomination of beneficiary form.

Understanding the impact of taxes and duties on an estate is an important part of estate and investment planning. All investors should consider whether using an RA or LA in their estate planning is to the benefit of their heirs. An understanding of a wide range of planning opportunities should be the goal of all investors, their advisers and product suppliers. Finding and providing solutions that take full advantage of lawful ways to reduce tax liabilities is positive for all investors. The time for these planning advantages may be running out; proposed changes to the tax laws mooted to be introduced in 2015 will set a limit on the tax benefits for RAs.

Wayne van Rensburg

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RA season

Increasing efforts to boost household s g n i v a s

Pieter Koekemoer, Head of Personal Investments, Coronation Fund Managers

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y the start of the 2016 tax year on 1 March 2015, National Treasury intends to introduce a discretionary, tax-incentivised individual savings account (ISA). Given governmentâ&#x20AC;&#x2122;s concerns about the low level of household savings in South Africa, it hopes that the ISA will be a more visible and attractive incentive with which to promote and encourage individuals to increase their discretionary, non-retirement funding savings. While incentives for non-retirement savings currently exist in the form of the tax-free

interest and capital gains allowances, government does not believe that this has been effective in promoting savings among especially middle-income taxpayers. In addition, it appreciates that individuals require savings to fill their short- to medium term consumption needs. To date, the regulatory framework has inadvertently allowed individuals to use their retirement savings for such needs. However, as the mandatory preservation of retirement funds gets phased in from 2016, individualsâ&#x20AC;&#x2122; retirement savings will no longer be available for short- and medium-term consumption

needs. With this in mind, government has proposed a tax-incentivised ISA with which individuals can increase their after-tax rate of return on short- and medium-term savings. The proposed savings vehicle is based on the UK’s very successful ISA programme, introduced in 1999. Assets saved by means of an ISA have since grown to £443 billion, of which roughly 50 per cent is invested in cash and 50 per cent in long-term funds. If we consider the size of the UK mutual fund industry of £900 billion, 24 per cent of the industry assets are therefore held through ISAs. The programme has achieved a penetration rate in the UK adult population of close to 50 per cent, with 24 million account holders and 14 to 15 million contributors per year. How will the savings account work? Individuals will be able to save up to R30 000 per year into this savings account, with a lifetime limit of R500 000. While these limits are not explicitly indexed, the intention is to increase annually with inflation. All gains within the account will be exempt from income, dividend and capital gains tax, and there will be no withdrawal limits or

minimum holding periods. However, once you have reached your lifetime limit, you will not be able to contribute any more. Government has introduced these limits to ensure that the wealthy do not benefit excessively from the incentives on offer. In an attempt to create a strong call to action to save regularly, there will be no carry-forward of the annual allowance. Government’s intent is that from the date of introduction in 2015, the existing general interest rate exemption and capital gains tax exemption will remain at current nominal levels, but will not be inflation adjusted in future. How will this savings account look? The current proposal is for the vehicle to have two accounts: one for cash and one for market-linked investments. Our proposal from a collective investment schemes (CIS) perspective, is that there is no need for two separate accounts and that the structure could follow the CIS or platform-wrapper model (similar to a retirement annuity linked to a portfolio of unit trusts), or flagged account system (where a client can elect to have the first

R30 000 of their unit trust investment in a given year to be flagged as their ISA component). While there remain a number of details that need to be ironed out during the consultation phase with industry, we fully support government’s efforts to reduce the financial vulnerability of households, especially those with lower incomes, and believe that a more targeted tax incentive will help improve our savings culture. We also believe that this will be a very attractive complementary vehicle for investors in retirement annuities who wish to address their short and long-term savings needs in a tax-efficient manner.

Advert

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RA season

Saving for retirement:

does the RA trump all?

he retirement annuity (RA) offers you a very attractive tax benefit: A portion of your total annual RA contribution may be claimed back from the taxman.

RA contributions for the tax year ending February 2014 are tax deductible for the greater of 15 per cent of non-retirement funding income (income not already being used for individual or company contributions to a pension or provident fund), R3 500 less pension fund contributions or R1 750 (certain specific exclusions by the South African Revenue Service [SARS] may also apply). This unique feature has positioned the RA as the retirement savings vehicle of choice for most investors. However, due to the limitations placed by Regulation 28 of the Pension Funds Act (which restricts the equity allocation of an RA portfolio to a maximum of 75 per cent), some investors feel that an unrestricted investment may allow for greater savings at the point of retirement. Based on the fact that pure equity investments have historically outperformed mixed asset class investments over the long term, these investors argue that the additional returns generated from an equity investment may be significant enough to offset the tax benefits an RA offers. So what is the preferred course of action if you have a lump sum to put towards your retirement: an ad hoc investment into an RA or into a unit trust that invests 100 per cent in equities? Let’s consider a 40-year-old investor who plans to retire at 65 and has R20 000 available to invest. All else being equal, if a pure equity portfolio outperforms a high-

equity, Regulation 28-compliant portfolio by 2.5 per cent per annum, but our investor reinvests all tax-deductible RA contributions back into their RA portfolio, the value of the R20 000 upon retirement (after accounting for inflation) is set out below. We’ve reflected the potential outcomes for three different scenarios: an investment into an RA which will be tax deductible; an investment into an RA which will not be tax deductible (as the investor has already contributed her maximum tax deductible amount for the year); and a direct investment into an equity unit trust. The different investment outcomes result due to several factors. Firstly, had this contribution been able to boost the amount our investor was able to reclaim from tax, they would have had access to additional investment capital which would have provided the potential to generate greater savings. Secondly, an RA provides a number of additional tax benefits, as all returns are exempt from income tax, capital gains tax (CGT) and dividend withholding tax (DWT). Had they invested in an equity portfolio, our investor would have been subject to DWT at 15 per cent on all dividends received, as well as to CGT when switching between different unit trusts. However, they would also have generated higher nominal returns. This illustrates that should you have an additional amount available to invest, a contribution to your RA is likely to be favourable – provided that you reinvest all money claimed back from SARS into your RA portfolio (and have not yet reached your maximum tax deductible contribution). It is further likely that the value proposition most RA

investors are able to access will be enhanced even more, as National Treasury has indicated its intention to allow for potentially greater tax deductions from the 2013/2014 tax year.

Our investor earns an annual salary of R550 000, which is likely to rise with inflation. Typically, they will review their investment portfolio annually and make changes to the selection of underlying unit trusts once a year to ensure they stays on track to target the objectives.This causes capital gains to be realised in full each yearend. The annual capital gains tax (CGT) exclusion threshold has been excluded from the calculation. We’ve based our calculation on an annual market (pure equity) return of 10.5 per cent. A dividend component of 50 per cent has been assumed to split tax implications on returns evenly between dividend withholding tax of 15 per cent and CGT. We’ve assumed an annual return of eight per cent from an RA portfolio with a 75 per cent equity allocation (the maximum allowed by Regulation 28 of the Pension Funds Act). Tax tables have been adjusted for annual inflation. Inflation has been reckoned at six per cent per annum and ongoing administration and advice fees of 0.5 per cent per annum respectively apply across both portfolios.

Value of lump sum investment upon retirement in real terms*:

Investment into RA (tax deductible)

Investment into RA (not tax deductible)

Investment into equity portfolio

R33 684

R24 852

R28 173

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Hugo Malherbe, Product Specialist: PPS Investments

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NEWS Redefine internatonal listed on the JSE Redefine International (JSE: RPL) completed its inward listing on the JSE’s main board. The listing follows a group restructuring to facilitate South African direct investment in Redefine International. Redefine International is currently listed on the main market of the London Stock Exchange, while its South African holding company, Redefine Properties International (RIN), is listed on the main board of the JSE.

Oasis crescent property fund performance impresses The Oasis Crescent Property Fund provided a total shareholder return of 9.7 per cent over the last 12 months, following an average of 11.5 per cent annual total shareholder return since inception. The total intrinsic value return, which is calculated based on movements in the net asset value (NAV) as opposed to market price movements, is 14.9 per cent for the last 12 months, while the average since inception is 12.4 per cent per year. These rates of return are far in excess of the annual rate of inflation, which has averaged 6.4 per cent since the fund’s inception. According to Adam Ebrahim, chief executive office of the Oasis Group, one of the competitive advantages of the Oasis Crescent Property Fund is the allocation to global assets and the high quality of the global portfolio. “It is well balanced in terms of geographic and sectoral exposure and is positioned to benefit from secular demand drivers and superior balance sheets. This diversification has been a key feature of management’s ability to deliver a consistent return through the market cycles. Global property income yields remain attractive relative to bond and cash yields and the global property component of the portfolio continues to take advantage of these opportunities,” says Ebrahim. Ebrahim states that the portfolio is thoroughly diversified, with holdings in quality offshore property instruments and a robust domestic portfolio of direct property assets. Additionally, the fund has built up cash reserves to take advantage of investment opportunities in the future. “We therefore believe that investors in the fund will continue to benefit from a consistent rate of return, outperforming the rate of inflation and growing their real wealth, at relatively low risk levels.” 50

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The company received approval from the South African Reserve Bank for a secondary listing on the JSE in July 2013, subject to certain conditions. Redefine Properties International linked units traded on the JSE for the last day on Friday, 25 October 2013. Michael Watters, Group CEO of Redefine International, says that they believe the inward listing on the JSE will unlock investor value. “By improving the liquidity and tradability of Redefine International, reducing fee costs by eliminating duplication, it significantly enhances the group’s ability to raise capital and makes the benefits of an investment in Redefine International more accessible to South African investors.” The fund’s investment portfolio is valued over £1 billion and comprises real estate assets across the UK, Europe and Australia. Zeona Jacobs, director of issuer and investor relations at the JSE, said that it welcomes the move to allow Redefine International to list directly on the JSE. “We hope that this new ownership structure will make investment in Redefine International more accessible to South African investors through a fully fungible share,” concludes Jacobs.

Absa’s corporate and investment banking division named top overall bank The Corporate and Investment Banking division of Absa Bank Ltd has been ranked top overall bank in the Risk South Africa Rankings 2013 survey for the fourth consecutive year.

asset managers in South Africa. Participants were asked to vote for their top dealers in categories in which they had traded over the past year.

Absa also retained it first position ranking from last year for FX products (overall) as well as repurchase agreements, forward rate agreements, FX options (US Dollar/Rand), FX swaps (US Dollar/Rand), and exchange traded funds. The bank improved from second to first in FX forwards (US Dollar/Rand) and credit default swaps. The rankings are based on votes from dealers, brokers, corporates and

Stephen van Coller, chief executive of the division, stated that helping their clients achieve their goals in the right way is paramount to their client-centric, fully local and fully global proposition. “Being recognised as the top overall bank for the fourth consecutive year is not only an unprecedented achievement, but a reflection of the relevance of our approach.”

Gary Smith

Trevor O'Callaghan

The recently launched advice-led wealth management business, Old Mutual Wealth, has bolstered its position by appointing a team of experienced senior private client portfolio managers and client liaison officers to its Private Client Securities division. This division – one of the key capabilities within Old Mutual Wealth – specialises in personalised investment management for private clients, offering local and global portfolio management, and investment advice. The newly appointed team of portfolio managers includes Gary Smith, Trevor O’Callaghan and Jacques Theron. The business has also appointed two new client liaison officers; Bronwen de Klerk and Susan Buys. All will be responsible for offering personalised and tailored investment implementation solutions. Chris Potgieter, head of Old Mutual Wealth’s Private Client Securities, says that they are following a rigorous process to find strong individuals who can add value to their team, their proposition and

Jacques Theron to their clients. “I am convinced the appointment of these high calibre individuals will greatly support Old Mutual Wealth in offering an enhanced experience to our clients. They have over 30 years’ collective private client investment experience. They also have a passion for investing and personal excellence in serving clients, characteristics we hold in high esteem.” The appointments, effective 1 October 2013, will support the business in achieving its vision of becoming South Africa’s most trusted partner in assisting South Africans achieving lasting financial freedom and wellbeing. “Bringing this team on board further enables Old Mutual Wealth to cater for all clients’ wealth management needs, which includes advice, fund management, estate planning, tax, fiduciary and risk, among other,; creating a robust financial planning process, building capabilities to implement the advice given by financial planners and bringing together a strong investment team,” concludes Potgieter.

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Products

Sanlam iTrade launches CDF online trading Sanlam iTrade has launched Contracts for Difference (CFD) on its online trading platform. The offering allows investors to short and gear shares and, unlike with most other CFD providers in SA, investors can trade in the actual share price on the JSE rather than paying quoted doubles. Gerhard Lampen, head of Sanlam iTrade, explains that a CFD is an unlisted instrument that is an agreement between a buyer and a seller to exchange the difference in value of a particular underlying asset (like a share) for the period between when the contract is opened and when it is closed. “The difference in value is determined by reference to the underlying asset.” To assist clients in limiting potential losses associated with gearing their investment funds in volatile market conditions, Sanlam iTrade’s new online CFD trading platform will provide them with the ability to place stop-loss orders. “Stop-loss techniques and predetermined exit strategies are an integral part of CFD trading, and we have built these into our online offering.” Lampen says brokers often quote doubles on CFDs based on the price on the JSE. This can sometimes hide the actual costs a client pays. “With Sanlam iTrade all the costs are displayed separately, making it fully transparent. Our clients pay the exact JSE price for a CFD with no CFD quotes.” CFDs will be traded on the same Iress trading platform Sanlam iTrade currently uses for trading JSE instruments. “You don’t have to learn a new system. All you do is select the account you wish to trade on. You can also trade CFDs using an iPhone and iPad application,” Lampen concludes.

Liberty’s Evolve hits the R3 billion mark Liberty’s innovative Evolve product range, which provides a pay-on-delivery model, has significantly exceeded expectations by attracting R3 billion in investments since launch just one year ago. According to David Lloyd, managing director of Liberty Investments, this success is as a result of Liberty’s fresh approach to investing, and genuinely putting the investor first. What sets the product apart and proved incredibly popular with investors is the product’s simple client promise. If your investment does not achieve a target return of 14 per cent per annum; then you do not pay for any of the upfront investment costs, including initial advice fees and set-up expenses. Liberty will pay the advice fees and absorb the set-up costs itself. Lloyd says that advice fees and charges to cover the costs of setting up an investment have always been levied, irrespective of whether or not the investment ultimately delivers. But with the Liberty Evolve range, this is not the case. “Instead of paying for upfront costs, investors agree to share the growth of their investment for the first three years, but only if we can earn them 14 per cent and they only share the growth above this.” The R3 billion mark surpassed Liberty’s internal expectations in the first year of launch. In fact, within the first four months, Evolve customers had invested more than R1 billion. “Through our knowledge and experience, we are constantly looking at better ways to design or enhance our products to suit our customers’ needs, while staying ahead of our competitors. Evolve is a good example of this.” Lloyd explains that only with Evolve can customers partially invest for as little as 0.5 per cent forever; compared to the industry average, in excess of two per cent per year. “While on the surface this difference may seem insignificant, in saving for retirement, it all adds up. Twenty years on, an investor, who is paying two per cent a year on their fees, could end up with up to 35 per cent less of their total investment.” Investors will only pay more than 0.5 per cent if the total return of the JSE’s Top 40 shares is more than 14 per cent a year in the first three years only. This success of Evolve signals that South Africans are ready for this pay-on-delivery investing model. “Our internal research shows the needs of investors in South Africa are expanding relative to the changing market dynamics. Investors are looking for an offering to meet their growing demands and have realised that the convenience of having a pay-on-delivery option, which previously wasn’t a consideration, is invaluable. The adoption of a pay-on-delivery offering continues to gain momentum – with a significant increase of investors buying into this offering,” adds Lloyd.

investsa

The world

SWITZERLAND, ANGOLA, GREECE, SOUTH AFRICA, GERMANY, EAST-ASIA, CHINA, RUSSIA, FRANCE

Swiss regulator investigates banks over foreign exchange deals Switzerland’s financial regulator, the Swiss Financial Market Supervisory Authority (FINMA), is investigating various Swiss financial institutions as a result of allegations of foreign exchange fraud. This follows an investigation by Bloomberg, which found dealers sharing information and using client orders to move rates. Angola to impose 10 per cent levy on oil firm tax Angola, Africa’s largest oil producer after Nigeria, has imposed consumption tax on petroleum companies raising costs as much as 10 per cent, according to government documents. The law will require companies to follow strict tax schedule laws for all services and suppliers. Gilberto Luther, director of the reform project, says that the government’s tax reform branch plans to simplify and modernise codes while at the same time boosting revenue. Greece forecasts it will emerge from recession in 2014 Greek Vice Finance Minister Christos Staikouras forecasts that the struggling economy will completely emerge from its sixyear long recession in 2014. The prediction was made by the Greek Government in the first draft of its 2014 budget, which foresees 0.6 per cent growth, showing strengths in the trade and manufacturing industries. “We foresee the end of recession in 2014,” Staikouras said. Companies told to invest in the DRC South African Trade and Industry Deputy Minister, Elizabeth Thabete is openly encouraging South African companies to

invest in the Democratic Republic of Congo. Speaking at the fifth Investment and Trade Initiative (ITI) in Congo, she said that there is great room to increase investments and grow the volume of two-way trade, and to create more diversified exports between South Africa and the Congo.

impact of an over-depreciated Rand needs to be found. “Our aspiration is to reach 2.7 per cent,” Pravin Gordhan told an investment conference.

German businesses starting to see profits

George Osborne, UK treasury chief, has announced plans to make London the main business hub for Chinese financial business overseas. London-based investors will embark on an €8 billion pilot scheme, which will allow them to apply for a licence to use the Chinese currency to invest directly in Chinese shares and bonds. Until recently, they have had to direct their investments via Hong Kong.

The German economy is on the path to recovery amid an increase in business confidence shown by recent economic data. Strong domestic demand and steady growth in GDP is at its highest level since April 2013, according to statistics released by the Institute for Economic Research at the University of Munich (IFO). Economist Ben May says that although growth is steady, it will remain slow. World Bank cuts East-Asia growth forecast The World Bank has shaved its growth expectations from 7.8 per cent to 7.1 per cent for 2013 for the East-Asia region. A slowdown in China’s growth prompted the international lending institute to end the prospect of any new US financial stimulus. China’s economy is expected to grow by 7.5 per cent, which is lower than the 8.3 per cent prediction made in April this year, which was due to lower commodity prices. South Africa to miss expected growth target of 2.7 per cent According to South African Finance Minister Pravin Gordhan, the Rand will no longer be overvalued; however, he says that an export versus inflation balance is needed. Gordhan adds that the currency has overcome the overvalued status it had a few years ago but a balance between the benefits to exporters and the inflationary

Chinese trading eased by new UK rules

Russian company Alrosa lures investors Russia is struggling to ramp up an asset sale programme aimed at balancing the budget and attracting investment to its financial markets, the cheapest among emerging market peers. In an effort to attract investors in a share sale to the value of 280 billion Roubles ($8.7 billion), Russian diamond company, Alrosa, has pledged to pay at least 35 per cent of its profits as dividends. France eager to invest in SA industries South African companies are showing interest in France after the European nation invested 94 million in renewable energy, consumer products, automotive and infrastructure industries. This is according to President Jacob Zuma who says that South African companies are looking forward to increasing their exports into the French market. Zuma says that both countries are working from a strong base and that the visit would increase trade. investsa 53

Events

South Africa’s problems

not insurmountable

out of 148 countries for the quality of its maths and science education. “This is worrying,” said Leon. “SA is at its lowest level of savings in about 30 years and we won’t fix this with a poor education system.” Masilela said that when it comes to job creation, the ideal is for the state to govern and regulate and allow the private sector to create jobs. Companies, especially smaller companies, are needed to create jobs, but they need an enabling environment. The first role of business is to make money and pay taxes. Government needs to create the playing field and the right environment. “However, where markets fail, government has to intervene,” he said. “The financial services industry is an example. It has much regulation, and yet it has led the economy over the last 20 years. The regulation has provided a degree of certainty. Investors tend to pull back where there is no certainty and so we need this balance.” Above: The panel

National Development Plan (NDP)

Right: Michael Lalor, Lerato Mbele, Elias Masilela, Tony Leon

lacier by Sanlam and Time magazine held the third of their discussion forums, The Insiders, at The Table Bay Hotel in Cape Town recently. Tony Leon, former leader of the DA; Elias Masilela, CEO of the Public Investment Corporation (PIC); and EY director, Michael Lalor, debated the challenges and opportunities currently facing investors in South Africa. Some of the more pressing challenges facing us include labour unrest, unemployment at 25 per cent, low growth, a rising fiscal deficit and unbridled spending and corruption. To the outside world, the perception may well be that South Africa is falling apart. The inside view from the panel, though, was more optimistic.

we’re not in the middle of a crisis, if we continue to progress at the slow and steady rate of the past 20 years, we won’t address the problems currently facing us. Infrastructure spending South Africa has a R1 trillion allocation to infrastructure spending over the next few years, but we have yet to see the results of this spend. According to Leon, we spend more than we earn and we need to look at how we spend what we have. “The public sector wage bill has increased greatly over the last few years. We’re spending on consumption rather than investment. We’ve underspent by 22 per cent on infrastructure over the last few years,” he said.

Should we be worried? Education and employment According to Lalor, the average South African is fundamentally better off than 20 years ago. He maintains that South Africa’s debt position is not as bad as it’s made out to be and that we’ve seen slow and steady progress over the last 20 years, with an average growth rate of three per cent over the period. However, he reiterated that while 54

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Leon stated that there are currently around three million young South Africans who are not working, studying or in any form of training. Six per cent of SA’s GDP is spent on education – this represents one of the highest spends on education globally. Yet, in a recent survey, South Africa ranked last

The panel agreed that the NDP is an ambitious document, but that implementation is key. No plan is ever perfect and, if we wait for the perfect plan, nothing will ever get done. To start implementing, the panel agreed that the NDP needs to be broken down into bite-sized chunks and results communicated to the public. Masilela added that the NDP is fundamentally about a change from short-term to long-term planning and thinking around issues. Foreign investment and investor sentiment According to Lalor, investors are generally not losing confidence in South Africa. “In certain sectors perhaps, but in general investment into SA and Africa is growing,” he said. “By looking at where our comparative advantages lie, we’ll get an indication of where we need to be creating jobs.” On the question of credit rating downgrades, Lalor felt that the agencies tend to focus too much attention on the short term. As an open economy, we are exposed to the rest of the world and the economy worldwide is struggling. He touched on the issue of corruption, stating that it was a massive problem across our society. The overall sentiment was for South Africans not to sit on the sidelines, but rather to be active participants in the country’s future. Masilela summed up this sentiment by saying, “Don’t ask what government can do; ask what we can do.”

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They said

A collection of insights from industry leaders over the last month

comments that although China’s economy might be slowing, its demand for Africa’s commodities will continue, offering significant opportunities to banks operating on the continent. “The economy is so dependent on consumption and with retail sales hovering around these levels, there is little scope for gross domestic product to gain meaningful traction.” ETM Analytics economist, Jana le Roux, commenting on retail trade sales rising much more than expected in August, confounding experts’ predictions of a rise of just more than one per cent.

“Now that Regulation 28 of the Pension Fund Act explicitly allows an allocation of up to 10 per cent to hedge funds, a wider range of corporate pension funds is considering an allocation to them, but they are often looking at [testing the waters] with small allocations of four per cent of asset, or even two per cent.” Director of Edge Investments, Michael Kirsten, commenting on the fact that the best way for investors to raise money in hedge funds is to get allocations from mega-pension funds such as those of the mines, Eskom, Telkom and Transnet. “The increased return of money to shareholders in the past few months shows a vote of no confidence in South Africa’s economy. Companies are finding less avenues to invest money. The only real interpretation I can put on it is that companies feel that shareholders can probably do more with the money than they can by reinvesting in the companies.” Investment analyst at Absa Investments, Chris Gilmour, commenting post the Investment Quarterly briefing held by the company. 56

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“The trouble is that most investors in equity funds have already made the decision to invest in equities and do not want us to second-guess them.” CEO of RE:CM, Jan van Niekerk, commenting on the company’s choice to rename its Flexible Equity fund the Equity Fund, which will have a minimum allocation of 90 per cent to equities. “A retirement annuity is an ideal retirement savings vehicle as investment growth within the retirement annuity will be higher than within comparable discretionary investments.” PSG Wealth legal technical adviser, Annemie Nieman, discussing how a retirement annuity provides individuals with complete control over their retirement savings, and that the savings vehicle is not based on employment. “You are talking about the second-biggest economy in the world going from a 10 per cent growth rate to a seven per cent growth rate. It is still growing at an unbelievable rate.” Standard Bank CEO, David Munro,

“We are at the bottom of the interest rate cycle. Tapering would be negative for the bond market. Demand for floating-rate instruments rather than fixed-rate instruments should be greater.” Cadiz money manager, Bronwyn Blood, discussing why South African corporate bonds with variable-rate coupons are best to protect investors against interest rates that will only increase. “Investors seem to be thinking there is going to be a resolution. Our market is not pricing in any bad news.” Chief investment officer at Gryphon Asset Management, Abri du Plessis, comments on the growth of stocks on the JSE during the US political stand-off over budget and debt talks. “Our aspiration to reach 2.7 per cent this year is not going to be reached, but we are not below two per cent at this point in time.” Finance Minister Pravin Gordhan commenting on South Africa’s economic growth predictions at an investment conference in London. “Strikes have influenced production in the mining sector and have made investors cautious.” World Bank lead economist for Africa, Punam Chuhan-Pole, discussing how South Africa’s labour relations environment is holding back economic growth and says that in order for the country to attract foreign investors, it needs to be less rigid.

You said

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

@MarkMobius: “The US political impasse could incentivise some investors to diversify outside the US and into emerging markets.” Mark Mobius ‫ –‏‬Investment Adventures in Emerging Markets.

@SureKamhunga: “The company that Koos Bekker has built: Naspers is now South Africa’s most valuable company based on its share price performance.” Sure Kamhunga ‫ –‏‬PR practitioner, financial journalist, mentor, avid reader, aspiring poet. Favour is my birthright.

@RussLamberti: “People want low prices AND low real interest rates. Life doesn’t work like that.” Russel Lamberti – Economist, Freedom-Lover. Figuring out the world one cappuccino at a time. ETM Analytics | Co-founder Mises Institute South Africa.

@WilhelmHertzog: “SA managed to miss the boat in the 2007 commodity bubble. Hopefully we do better with today’s trophy hunting/ game bubble.” Wilhelm Hertzog ‫ –‏‬Full-time value investor and father. Part-time golfer, wakeboarder, snowboarder, motocross rider, fly-fisherman and petrolhead.

@fiatcurrency: “Creditworthiness is like virginity,” Buffett said. “It can be preserved, but not restored very easily.” fiatcurrency

@ShaunleRoux: “Is anyone asking themselves why all the IPOs are property stocks? I think we have seen this movie before: construction 07, tech 97.” Shaun le Roux ‫ –‏‬Market watcher, equity fund manager, Cape Town. Tweeting in my own capacity.

@MichalBodi: “When emotions and noise win, the investor loses. Not today, not tomorrow but in the long run. Investing requires focus patience & discipline.” Michael Bodi – Sydney based financial coach | Financial advice advocate | Educator | Money Behaviour Counsellor | Thinker | Passionate about life.

@FinanceTrends: “‘The way to make money in a bubble is not by shorting it, but by participating in a controlled risk way.’ – Colm O’Shea, via J Schwager.’” David Shvartsman – Founder/ Editor of the blog, Finance Trends Matter. A trader's view of global markets and trends. Follow the money.

@chrishartZA: “JSE record close. Party continues. Liquidity-

driven, momentum market, not grounded on fundamentals. Market expensive. But the Bull dominates.” Chris Hart ‫ –‏‬Strategist at Investment Solutions and renowned Gold bull.

@Lesiba_Mothata: “SA’s financial architecture comes on top. A few countries have a long way to go in catching up. #proudly South African.” Lesiba Mothata – Head of Market and Economic Research at Investment Solutions.

‫@‏‬LMariB: “Come on Americans, just make a deal. Rock, paper, scissors. Flip a coin. Somebody please give in.” Mari Blumenthal – General economics and markets reporter @Sake_24. Loves fiction, fashion and finance and writes about most things that includes index in the title. investsa 57

And now for something completely different

Uncovering the investment potential of

prehistoric fossils Sue: Tyrannosaurus rex – $8.3 million

hanks to Jurassic Park, Godzilla and many other motion pictures which brought dinosaurs to life, investors too can see their prehistoric investment flourish if they are fortunate to own the fossilised remains of an ancient species. The global market for fossil investments has been growing rapidly in recent years. According to the Wall Street Journal, the price of some fossils has increased tenfold in the past decade. As with any other collectable, supply and rarity is a major factor in determining the value of an object and it is no different when it comes to investing in fossils. It is no secret that there is a natural limit to the world’s supply of fossils, especially good quality, rare specimens and the odds of finding new fossils gradually decreases as fewer excavation sites are discovered. Thus, their limited supply means that their value is set to increase and reap profitable returns. Trading and exporting of fossils is also becoming more difficult as tighter regulatory controls are exercised in some countries. This ultimately makes the ownership of any prehistoric fossil very rare, and even more valuable. However, every fossil in the world is completely unique, thus virtually guaranteeing the value and interest in fossils by other collectors. In addition, it strikes a chord with investors due to its straightforward and low-maintenance nature. Moreover, just like paintings, fossils also make brilliant functional pieces of art.

investsa

commons.wikimedia.org

More than 20 years ago, Peter Larson of the Black Hills Institute of Geological Research and his team discovered and excavated the largest and most complete tyrannosaurus rex specimen ever found. Sue, the name given to the dinosaur after the woman who first spotted its fossils, was sold at a public auction for $8.36 million by Sotheby’s in 1997. It is still the most valuable fossil ever sold. The fossil is now on display at the Field Museum in Chicago.

Samson: Tyrannosaurus rex – $5 million

www.oregonlive.com

www.livescience.com

A rare 66-million-year old T.rex fossil, Samson, was sold by Bonhams to an anonymous bidder for $5 million in 2009. It was excavated from a private ranch near Buffalo over 15 years ago and measured nearly 12 metres in length. The scientific preparation of Samson’s skull was completed by the Carnegie Museum of Natural History, Pittsburgh, Pennsylvania and is regarded as one of the finest and most complete T.rex skulls in existence.

Montana Duelling Dinosaurs – estimated $9 to $10 million In 2006, the remains of a 68-millionyear-old tyrannosaurus and triceratops, perfectly preserved in a mortal combat, were discovered accidently by a ranch owner in Montana, United States. The chance discovery was excavated by fossil hunter Clayton Phipps and reveals that both died from wounds inflicted by one another. The fossil has been so well preserved that some of the meat-eating tyrannosaurus' razor-sharp teeth were found lodged in the triceratops’ skull. Scientists believe an earthquake occurred shortly after their deaths and that debris covered the bodies, thus preserving their ill-fated battle for millions of years. It is estimated to be sold for a record $9 to $10 million by Bonhams when it goes on auction soon.

1THREAD_5652_LAN

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*Coronation Top 20, Balanced Plus, Capital Plus and Strategic Income Funds 1st Quartile over 5 years and 10 years in their respective ASISA fund categories to 31 October 2013. Source: Morningstar. Coronation Asset Management (Pty) Ltd is an authorised ďŹ nancial services provider. Unit trusts are generally medium to long-term investments. The value of units may go up as well as down. Past performance is not necessarily an indication of the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Fund valuations take place at approximately 15H00 each business day and forward pricing is used. Performance is measured on NAV prices with income distribution reinvested & quoted after deduction of all costs incurred within the fund. Coronation is a full member of the Association for Savings & Investment SA. Trust is EarnedTM.