INVESTSA Magazine February 2015 by COSA Media

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Is this the year the markets party ends? Game-changing new regulations: what you need to know investsa

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R37,50 | February 2015

Is this the year the markets party ends? Game-changing new regulations:

CONTENTS 06

Whither 2015? Wither, indeed…

New rules will prevent commission payments ruling the roost

Sub-Saharan Africa catches the eye of global private equity investors

Working on your business in an RDR world

2014 IN REVIEW: THE ECONOMICS AND POLITICS THAT AFFECTED SOUTH AFRICA’S INVESTMENT LANDSCAPE

Exchange Traded Products: 2014 overview

Taking tax-free savings into account for a client’s financial plan

SA unit trusts experience more subdued returns in 2014

Manage your practice post-RDR

Profile – Sbu Gule, Global Chairman, Norton Rose Fulbright

The Retail Distribution Review – a boost for improving investment outcomes for clients

News

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14 investsa

From

the editor One thing that concerns me, and a lot of more knowledgeable market commentators as well, is why stock market prices continue to go up when the fundamentals say they should be going down. And it’s not only on the JSE but many overseas bourses as well. Another point of concern that always arises at this time of year – or rather the few weeks at the end of the previous year – is that it’s the time many investors traditionally take a serious look at their investment portfolios and make changes. That it’s done at this time of year is quite understandable. For most investors, the year-end holidays are probably the only time they have when pressing business issues can be pushed aside and they can spend some time looking at their portfolios, do some reading and research, and make changes. But it’s a bad time to make changes. Firstly, because markets at the year-end are not really a true reflection of what’s going on. Markets are closed for a few days, and that distorts prices, as does the lack of liquidity, which dries up and exerts a further distorting influence on share prices. Finally, it’s not a good time to make portfolio changes because investors seem to feel that this is what should be done at year end, whether necessary or not. Often the best thing to do is sit on your hands and do nothing at all. But getting back to the hard to explain rising prices. In South Africa, the market keeps hitting new highs amid dismal economic growth, negative foreign investor perceptions, the circus that parliament has become with open fracases and an absent president, and the gloom we must all endure thanks to Eskom. Globally it’s not much better. Wars all over the place and probably new ones to come this year, stuttering economic growth in Europe, even Germany, and declining commodity prices. A market correction, probably severe, must come some time, maybe even later this year. If so, that will be the time to make portfolio changes. We look at many issues, new and emerging regulations chief among them. Many of the full consequences of these regulations will only be played out in the months ahead. You will read more on this vital subject in future issues as well. And despite Eskom, loud Malema, missing Zuma and the low rand, things are actually not that bad. Lower oil prices should be good for consumers, inflation seems to be coming down, which should mean interest rate increases will be slower, and the market has recently had more new listings, with more to come in the future. One good thing about 2014 is that we survived it, making us more experienced and hardy investors for 2015. To the year ahead!

Shaun Harris

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Copyright COSA Communications Pty (Ltd) 2015, 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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Whither 2015?

By Marc Hasenfuss

Wither, indeed… “...at some point the bar will close and the merrymaking grind to a halt...”

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There is probably – at this delicate juncture on global markets – nothing more frightening than contemplating the investment year ahead… except for having to make a call on the possible direction of the JSE. Well, that’s the unenviable task that I have for this article, and without digressing anymore let’s delve right in.

s things stand on the global investment stage, various central banks are doing their level best to stimulate investment and economic activity by inducing liquidity in markets – a ploy that, unfortunately, cannot continue forever. The surfeit of cheap money has spurred activity in financial markets, but experts reckon the US Federal Reserve could soon start the winding down of its bond purchases. That means as bonds mature, the additional liquidity will be removed from the financial system. Although there have been more buyers than sellers of shares since, for the best part of five years, the

pattern could easily reverse – even if other central banks move to prop up their economies. This means the bar – for want of a better analogy – is still open, drinks are being poured by several attentive barmen and there’s not too much fretting at this point by the patrons that the shout of ‘last round’ will be bellowed out. But at some point the bar will close and the merrymaking grind to a halt. The closing of the bar tab has two outcomes. Exuberant investors can sober up with nothing more than a rather nasty hangover to nurse… or they risk grabbing their keys and driving off in an intoxicated state looking for a new party.

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The latter scenario obviously needs to be avoided, because as we know drunk drivers can crash and cause serious damage. Locally, we would be foolish to think we are in any way insulated from global investment risks. In fact, we have our own set of unique circumstances to ponder morbidly.

At the time of writing, the JSE was enduring a rather volatile period – and with the All Share Index (ALSI) quite liable to give up 2.5 per cent on one day and regain 3 per cent the very next. The exaggerated daily movements – flitting between exuberance and despondency in 24

Earnings multiples:

hours – on the JSE might well reflect investor uncertainty around overall value. One needs to remember that for the past three years, investment commentators have warned that the JSE was due a correction. Yet the market momentum has been stubbornly upward – albeit led by ‘international’ JSE listings like Naspers, Richemont, Old Mutual, Aspen and British American Tobacco. If we are to be ‘scientific’ about the market valuation then it’s probably prudent to examine the average earnings multiple on the JSE – which, although increasingly maligned, at least offers some historical context to prevailing market conditions. The average earnings multiple on the JSE is veering close to 20 times when the longer term average is probably closer to 13 or 14 times. Investors have traditionally considered a 12 times earnings multiple to be an undemanding or fair rating for a well-established stock with solid (rather than spectacular) prospects. Remembering that an earnings multiple (or price:earnings ratio) should, technically speaking, reflect investors’ perceptions of a listed company’s past earnings performances and likely future earnings targets.

Naspers (96 times)

Aspen (40 times)

SABMiller (26 times)

Famous Brands (24 times)

Taken as a whole, it would seem the investors are expecting JSE companies to push ahead with strong earnings growth in 2015. That might suggest that demanding historical earnings multiples are, in fact, far more modest as measured on a forward earnings multiple basis. That would certainly hold water were it not for the reality of a local economy hamstrung by development policy indecision, labour strife, a weak – and weakening – rand against major currencies, more competition from efficient foreign entities across the manufacturing spectrum as well as the high cost of what increasingly appears to be unreliable electricity supply.

Shoprite (24 times)

Glencore (23 times)

Medi-Clinic (22 times)

Tiger Brands (21.5 times)

Of course, what must be considered is that the heavyweight companies that make up a large chunk of the ALSI are globally inclined counters or are earning a good chunk of their keep from fast-growing African markets. New media giant Naspers – with massive exposure to the Chinese internet market – trades on an earnings multiple of 96, while pharmaceuticals giant Aspen – with a sizeable international presence – trades on a 40 times earnings multiple.

Richemont (21 times)

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British American Tobacco (20 times)

Woolworths (20 times)

Other international stalwarts – British American Tobacco (20 times), luxury brands conglomerate Richemont (21 times), commodity conglomerate Glencore (23 times) and beer giant SABMiller (26 times) – all command earnings multiples well above the prevailing ALSI average. So do companies with meaningful exposure to niche global markets and fast growing African economies – cross-border retailers Woolworths (20 times) and Shoprite (24 times) as well as private hospitals group Medi-Clinic (22 times), fast

foods specialist Famous Brands (24 times) and consumer brands giant Tiger Brands (21.5 times). If we cast our gaze to traditional South African stocks – particularly those labour intensive manufacturing entities – then another picture entirely emerges. Perennially profitable contenders are seemingly marked down because of perceived vulnerabilities in the local economy. Industrial supplies/services businesses Invicta, Howden, ELB Group and Hudaco have enviable profit records over the long term, yet are accorded modest earnings ratings of 15 times, 8.7 times, 10 times and 11 times respectively. Aluminium products specialist Hulamin trades on a modest 9 times earnings multiple, lowcost airline Comair roughly 7.5 times and diversified industrial conglomerate KAP rates a 13 times earnings multiple – this despite gutsy profit performances of late. Building supplies are equally maligned in the ratings stakes despite strong performances even in lean times. Afrimat trades on a 14 times earnings multiple and DAWN is rated at 14 times. But the desultory ratings on some wellestablished smaller counters really highlight how fragile our economy is perceived to be – most notably building supplies specialists Masonite (just 6 times earnings) and KayDav (7 times), packaging and engineering group Winhold (3.5 times), computer maker Mustek (8 times) and industrial services group Eqstra (6 times). Gold shares are the lowest they have been since anyone can remember, sentiment for platinum stocks has been badly tarnished and sentiment for commodity counters has generally turned a little brittle. With a global/local investment duality increasingly apparent on the JSE, it looks like

next year will offer investors a most difficult choice. Do they continue to ignore warnings of an imminent market correction by paying a premium price for big international stocks listed on the JSE in the hope that the defiant upward momentum extends? Or do they look for local value, sifting through the more modestly priced shares in companies that need to overcome some serious economic challenges in South Africa? To be honest, it’s a bit of a Hobson’s choice. There’s the prospect of over-paying for a hedge against the local economy by buying expensive globally-aligned shares on the JSE. When a share is trading at an earnings multiple of 25 to 30 times, the pace of growth needed to justify such a rating is

break-neck. And there can be no strategic slip-ups by management. Or there’s the case of getting more than you bargained for by buying supposedly cheap shares that might have their future potential affected by factors that are largely beyond management’s control. A company can slim down its operating base to the leanest and meanest structure imaginable, but if economic policy set by the government undermines rand strength, induces more labour tension or compromises investment flows then growth simply won’t materialise. It may sound like a cop-out, but perhaps 2015 is the year in which it might well be prudent to stay ready for action and ‘keep a serious amount of powder dry’?

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New rules will prevent commission payments ruling the roost But all the new regulations are proving a heavy burden for financial advisers. By Shaun Harris

obody really likes rules and regulations. We have to live with them, but we don’t like them. Many individuals and corporates will tell you that they prefer the self-regulation model, and it is the favoured route, except that self-regulation often leaves itself open to exploitation and bias. So we get state and official body regulations, and never before in recent history have so many new and pending regulations come through in the financial services industry. It’s partly in response to the global financial crisis that started at the end of 2008, with the authorities trying to ensure protection and a fairer deal for retail investors. Many of these new and pending regulations also have a profound effect on financial advisers, but if anything good can be said about them it’s that many of the new regulations offer positive opportunities for

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advisers and often for asset managers and other product providers as well. Speaking about a year ago, Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA), said 2014 would be a year which saw regulations as the ‘over-arching challenge’ for intermediaries. But he also noted that while regulations like the often amended Financial Advisory and Intermediary Services Act (FAIS) had “forever changed the financial services landscape”, it was positive because it encouraged professionalism among advice givers and extended “farreaching protections to financial services consumers”.

Van Pletzen identified “three game changers” in the new regulations: the restructuring of the macro-framework for financial regulation, like the National Treasury’s introduction of the twin peaks model of financial regulation; the Retail Distribution Review (RDR), one of the most important aspects of which is proposals on remuneration for financial advisers; and the Treating Customers Fairly review.

The same point was spelled out by Michael Blain at the Altrisk FIA Power Roundtable last March. “Upfront commissions often lead to poor advice, where advisers went after commission and did not necessarily consider the best interests of their clients,” he said. Proposals in the RDR document should go a long way towards ending concerns like this and probably ruling out nearly all forms of commission-based payment.

Last November our own Vivienne Fouché reported on the PPS Financial Services Journalist Training Seminar, at which Jonathan Dixon of the Financial Services Board (FSB) described the RDR as “Treating Customers Fairly in action. A commission-based approach is not ideal and can encourage mis-selling,” he said.

Blain also spoke about the increasing sector regulations for financial advisers. “A prolonged period of uncertainty over regulatory change has led some product providers with big cheque books to buy distribution channels, causing inherent conflicts that are not being disclosed.”

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But is the financial landscape becoming over-regulated? It depends on who you ask. Many of the regulators will say no, and that, if anything, more regulations are needed to protect investors.

But is the financial landscape becoming over-regulated? It depends on who you ask. Many of the regulators will say no, and that, if anything, more regulations are needed to protect investors. Product providers and some financial advisers, on the other hand, will say yes, pointing out that the plethora of new regulations is driving up costs to meet compliance and taking up much valuable time that should rather be spent on giving advice. One sector that is arguably over-regulated is the banks. But banks are a special case, at the forefront and often determining the level of consumer spending. And even all the regulations in place were not enough to stop the collapse of African Bank Investments Ltd (Abil), an event that financially hurt many shareholders and investors. So more regulations in the banking sector could be expected. But the cost of compliance is threatening the business of small and one-person advice firms. They will point to what happened in the UK a few years ago when regulations similar to the RDR proposals were introduced. Something like 70 per cent of the small advisers went out of business. It’s not something we want to see happening in South Africa, especially when the industry is trying hard to introduce new, black financial advisers to the system. Many regulations are aimed at retirement reform. Alan Wood, head of institutional business at Investment Solutions, says it’s

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clear that the government embraces the merits of compulsory preservation and annuitisation (that is, converting part or all of the money in a retirement plan to a stream of regular income payments), and is serious about ensuring that savers get good value for their money from the system. “It has, hopefully, been learnt from the recent redrafting of Regulation 28 of the Pension Funds Act that the real challenge lies in implementing such reforms,” he says. Many of the National Treasury’s retirement reform proposals have financial advisers worried, fearing that issues like compulsory retirement fund membership and compulsory preservation may be detrimental to their business. However, Richard Carter, head of product development at Allan Gray, says there are opportunities for financial advisers in the reforms. For example, he says compulsory membership doesn’t rule out the need for retirement planning. “In practice, clients need more than just product advice; they need a solid financial plan, encouragement and help in addressing the gaps preventing them from achieving their goals.” New regulations will also have a significant effect on hedge funds in South Africa, speeding up the growth of what is already the fastest growing asset class in South Africa. Regulation of these funds has been something of a misnomer: it’s commonly

perceived that hedge funds are not regulated, which is the case at present, but hedge fund managers have to be regulated under the FAIS Act. That means that South African hedge funds are indirectly regulated through their fund managers. The plan now, which is likely to come into effect later this year, is for hedge funds to be regulated in terms of the existing regulations for unit trust funds. One consequence of this will be to open a new class of hedge funds accessible to retail investors. Up to now, retail investors have largely been confined to investing in hedge fund fund-of-funds, as the minimum investment limits for a single hedge fund are high. With investor interest in hedge funds growing, their regulation should lead to increased inflows, as happened in the US and Europe when similar regulations were introduced. Ultimately the new RDR proposals will affect retirement planning, and there is much South Africa can learn from other countries that have managed reform through new regulations. An important factor will be bringing down the costs of retirement fund membership in South Africa, which are currently amongst the highest in the world. Selwyn Jehoma, who drafted South Africa’s original social security fund proposals, says Canada is a good example of the balance between individual defined contributions and a defined benefit component. The UK should also be looked at for the difference between savings, private retirement and social security, making it one of the cheapest systems in the world. Australia also has a well-regulated retirement system, Jehoma says, where employees have to invest 9.5 per cent of their salary into a designated super fund. But the model that would probably work best in South Africa is from another developing nation – Chile. Back in 1980, Chile converted a state-run pension system into a compulsory one that is privately operated. “Compulsory membership is not new, and the Australian/Chilean experience has demonstrated that, if properly implemented, a compulsory system can work well,” says Wood. There are many still-to-be-seen possible tax consequences of the new regulations, but the biggest will be the change in the tax treatment of retirement funds. From March this year pension, provident and retirement annuity funds will be taxed the same way. Contributions to these funds are capped at 27.5 per cent of retirement income up to R350 000 annually.

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Sub-Saharan

Africa catches the eye of global private equity investors By Vivienne Fouché Africa is experiencing GDP growth rates that are among the highest in the world. As a result, the continent has caught the attention of some of the world’s biggest private equity funds and investors. Steve Costabile, MD and global head of Private Funds Group, PineBridge Investments, New York, notes that the African private equity industry is gradually growing from its infancy, with fund-raising in the region increasing by 136 per cent in 2013 to US$3.3 billion from US$1.4 billion a year earlier.1 A recent Emerging Markets Private Equity Association (EMPEA) report reveals that sub-Saharan Africa is considered the most attractive emerging market for general partner investment for the first time in the survey’s nine-year history. Costabile also believes that private equity is expected to play a key role in further economic development in Africa over the coming decade. Discussing his preferred investment roots in the African region, Costabile says, “Overall, on a relative value assessment, we are looking at sub-Saharan Africa, including South Africa, as our broad-based focus. It currently seems like a stronger proposition than having a detailed portfolio in North Africa. Within the subSaharan African region, we have targeted a sub-set of countries to execute our strategies. “In East Africa, we are focused in Kenya; in West Africa, we are based in Ghana and Nigeria, and in southern Africa we are focused in South Africa. These countries, together with some of their neighbours, are the cornerstones and constitute the pillar to executing our strategies.” Steve Costabile, managing director and global head of Private Funds Group, PineBridge Investments

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According to Costabile, private equity will play a key role in further economic development in sub-Saharan Africa over the coming decade. “This is a natural evolution in these markets since the capital markets in this region

Alternative investments

have taken various steps forward. Another driving force is the demand push from global institutional investors. We are seeing two major global trends: the search for yield and the search for growth. In South Africa, the specific impact is the search for growth. “In the early 2000s, we saw private equity investment in China, India, Brazil and a little in Russia. Those emerging markets, broadly speaking, have disappointed institutional investors, who are still looking for growth. We’re now seeing a private equity push into Latin America, Mexico and sub-Saharan Africa, with South Africa having been on the private equity radar for the past 20 years,” he says, adding that global institutional investors are becoming more open-minded about sub-Saharan Africa; that they have had to, as have global conglomerates, because they need to think about where they are going next. Costabile believes that the outlook for the South African and sub-Saharan African private equity industry is generally positive, and that in the short to medium term, investors will see the growth they are looking for. “A key factor will be whether the institutional frameworks are strong enough to handle the inflow of capital. We are just starting this curve in sub-Saharan Africa, but we will be able to learn from hiccups seen previously in other emerging markets. There is a need to balance optimism and wariness. When an investment opportunity becomes self-evident to everyone, you have missed about 60 per cent of the move, so there is a need to be aware now of private equity opportunities in sub-Saharan Africa,” he says. When discussing why private equity investors from across the globe are currently seeing so much opportunity in sub-Saharan Africa, Costabile answers that this goes back to seeking opportunities and growth. From a macroeconomic perspective, private equity’s current percentage of sub-Saharan African economies is very small, yet some

900 million people in the region aspire to improve their lives and achieve middle class status. This brings the need for firms to acquire growth and is a good runway for expansion – there are many indigenous opportunities for those willing to think a bit outside the box. These opportunities have also matured to accept more capital: for example, PineBridge Investments has been in Nairobi for over a decade. The financial services industry is one of the attractive sectors in the region: “It’s vitally important, as you need the proper framework and financing as one of the building blocks for developing and improving infrastructure. Consumer-related businesses that are serving the aspirations of the population are also attractive, as are the manufacturing and agribusiness sectors,” says Costabile. There are similarities across emerging markets, including China, Brazil, Africa and Mexico, but each region also has its specific frictions, challenges and sensitivities. Private equity investors need a great deal of liquidity and transparency and they need to be comfortable that the rule of law is in place, for example regarding bankruptcy laws, the enforcement of contracts and regulators in general, explains Costabile. When operating in these markets, they are looking for the comfort that they can experience the protection of the law and continuity in how laws are applied. In essence, private equity in sub-Saharan Africa needs an even playing field through possible regime changes: ”I would say that the biggest concern is the potential turn-over of governments. At the same time, it is important to determine which issues are transitory and which are structural, and, in this context, how to deal with an issue. I think it is helpful to have been operating in these other emerging markets mentioned previously before moving into sub-Saharan Africa. You need to be aware of possible threats, but

you can’t be governed simply by reading the headlines.” For example, he explains that Nigeria is Africa’s largest economy and yet is currently operating on two-thirds of its capacity. The top third of the country is beset by problems including poor infrastructure, and it is also too dependent on oil. Despite this, private equity players anticipate a need to diversify the Nigerian economy, which will bring with it the need for foreign investments and diversification. “So we feel that you would rather be investing there now, when valuations are quite reasonable,” he adds. From a risk-reward perspective, private equity investors in emerging markets also understand that they need to be more patient to reap those disproportionate rewards. “I would say that when looking at investment periods, on average you require about a year and a half longer than in developed markets. So, for example, if you could expect an investment time frame of about three and a half years in a developed economy, then in an emerging market you would be looking at about five years. I believe this may moderate a bit, but the key is to see that the companies that you have invested in are improving and that their values are increasing.” About PineBridge Investments: PineBridge is a global asset manager with nearly 60 years of experience in emerging and developed markets, delivering innovative alpha-oriented strategies across asset allocation, equities, fixed income and alternatives. PineBridge manages over US $70.8 billion in AUM worldwide as of September 30, 2014. 1 According to the EY Private Equity Roundup Africa report dated February 2014.

This market commentary is not investment advice or an offer to sell or the solicitation of an offer to purchase any investment product or service.

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Asset management

Asset allocation:

navigating the stormy seas

hen markets move in one direction for a sustained period of time, investors can lose track of why it is important to diversify their portfolios. But diversification reduces risk. Risk Defined very broadly, investment risk is the possibility of getting an unanticipated or unpredicted outcome. When asset classes behave in a particular way for extended periods of time, this can cause investors to extrapolate this behaviour far into the future. When this seemingly consistent behaviour inevitably changes, those investors who have pinned their hopes on travelling one way up a two-way street can find themselves crashing into the oncoming traffic. All aboard the QE Ship Since the advent of various global quantitative easing programmes, we have seen a strong run in equities, credit instruments and bonds. The global hunt for yield spilled into the South African credit market, resulting in very strong demand for domestic corporate credit. However, this could not carry on forever. Ship on the rocks We all know what happened with African Bank in August 2014. In the wake of its failure, we have seen waves of consequences buffet South African credit markets. Where auctions were previously over-subscribed and clearing at the lower end of yield guidance, we quickly began to see quite the opposite, with many auctions being under-subscribed and clearing towards the upper end of yield guidance. Where corporates, banks and parastatals were regularly bringing new issuances to the market, this has all but dried

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up. In fact, numerous scheduled auctions have been postponed. The tide has gone out. Watch out for the waves In South Africa, as in the United States, cash is currently offering a negative real yield. In other words, one loses money in real terms when you invest in cash. For obvious reasons, cash is currently a somewhat unpopular investment and people are investing instead in other asset classes. Which asset classes would be the most affected by this? Government bonds would be the best substitute for cash because these instruments also offer a predictable yield. When real yields on cash return, money could flow out of bonds back into cash instruments, putting pressure on bond prices. We don’t know when this will happen, but when it does, investors in products which are regarded as ‘low risk’ could be in for some rough seas. It’s not only about the bonds If we look at the entire investment landscape for investors now, it is clear to us that it’s not just the credit markets that need close attention. Globally, including South Africa, we have seen a very strong run in equity markets and many equity and property stocks have shown significant re-ratings from their post-2008 levels. Some companies, particularly some of the large-cap South African industrials, are trading on very demanding multiples. Although we do still see value in equity markets, in many instances there could be strong headwinds.

will not catch every day. They will not always catch the same type of fish. Sometimes the tide will be high, and it will be dangerous to fish, and sometimes it will be lower, which will enable them to wade safely to where the good opportunities are. The fish don’t always swim in the same direction and different types of fish swim at different speeds. The more rods in the water, the more likely one is to catch a fish – but not every rod will catch. It has been relatively easy for investors to stick with a few stocks or play just in one or two asset classes like corporate bonds or large-cap equities. For some time, these asset classes have delivered largely straight-line returns. The risks lie with those investors and managers who don’t provide for the fact that there are no perpetual straight lines in investing. Asset allocation calls will always be important and having an experienced asset allocator who is mindful of both the potential returns and the potential risks is crucial. Those investors and managers who are looking for the risks and are mindful of the fact that the fish never swim in just one direction are sure to bring home the catch. The others may just find that they have empty nets when the tide goes out.

Don’t end up on the rocks Any seasoned investor will appreciate the analogy of the old fishermen who go down to the edge of the sea to make their living. They

Mark Cliff, head of marketing, PSG Asset Management

Allan Gray

Working on your business in an

Jeanette Marais, director: distribution and client service, Allan Gray

RDR world

and how it might impact on your business, the proposals are likely to take some time to be legislated. Therefore, rather than focusing too much on how your business will respond to each proposal in detail, spend time trying to understand and implement best practices aimed at helping you to run a more efficient business, improve client satisfaction and increase profits so that your business can survive the changes and thrive in a new environment.

f you want to take your practice to the next level and remain relevant in an ever-changing regulatory landscape, it is critical to work on your business, not just in your business. Working in your business means performing the core functions the business is built upon, such as developing financial plans and giving investment advice. Working on your business means ensuring you have the strategies, goals and systems in place to make your business successful. Not since FAIS ‘rocked our world’ over a decade ago has there been so much change in the air for the industry, particularly now that Treasury’s intentions have been made clear in the Retail Distribution Review (RDR) discussion paper published late last year. The paper, which closes for comment in early March, contains 55 proposals covering, among others: • The types of services and advice offered by intermediaries. • Relationships between product providers and intermediaries. • Intermediary remuneration. One of the desired outcomes of the RDR is to support sustainable business models for advisers that ‘enable adviser businesses to viably deliver fair customer outcomes over the long term.’ What is meant by ‘fair customer outcomes’ has been articulated in the six outcomes of Treating Customers Fairly. At the same time, the paper’s proposals on intermediary remuneration may present major challenges to advisers. However, resisting the changes may not be possible or practical; rather advisers will need to use their energies

to find innovative ways to respond to the RDR challenges, which ultimately level the playing fields and ensure that the financial services industry has a more client-centric focus. The difficulty is that responding positively will call on advisers to use a substantial proportion of their time to develop new strategies and innovative plans for their practices. This can be easier said than done, particularly where a practice is built around a few key personalities. Nevertheless, making time to think through your practice and map out its future will be a business imperative in 2015. Striking a balance between spending time planning and innovating and spending time on activities that generate an income will be key. Focus on your value proposition While it’s important to have a thorough understanding of the RDR discussion paper

There are various aspects to practice development that need to be tackled over time: from building your business plan, creating a value proposition and reviewing financial planning processes to understanding international trends. Whether you are starting out, or established in the advisory business game, giving these aspects of your business attention can have far-reaching benefits for your clients, your practice and you as an individual. References: tech.co; business.financialpost.com; createtheconditions.com; huffingtonpost.com; nytimes.com; stuff.co.nz Allan Gray Adviser Services and financial services consultancy Fundhouse are working together to bring Allan Gray-registered advisers an exclusive, Practice Development Initiative, launching in March 2015. After the success of the first programme, and the positive feedback received from IFAs about the impact it has had on their businesses, we are excited to be able to offer more advisers the opportunity to gain invaluable insight into how to grow and develop their practices through learning, interaction and debate. For more information please contact Allan Gray’s Adviser Service Centre on 0860 000 653 or email info@allangray.co.za.

This page is sponsored by Allan Gray, an authorised financial services provider. The Allan Gray Retirement Annuity Fund is administered by Allan Gray Investment Services Proprietary Limited, an approved fund administrator. Allan Gray Investment Services Proprietary Limited is also an authorised administrative financial services provider. The underlying investment options of the Allan Gray retirement products are unit trusts. Collective Investment Schemes (unit trusts) are generally medium- to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/ scheme. Commission and incentives may be paid and if so, would be included in the overall costs. Some portfolios forward price while other portfolios price historically. Consult the company/scheme for details.

investsa

Barometer

HOT

NOT VOLATILE YEAR EXPECTED FOR EQUITY MARKETS Investors can most likely expect a volatile year for equity markets. Barclays Research was reasonably upbeat in its predictions for global equities, saying they were better positioned for a solid start to the year after correcting in December. Global equities lost five per cent in the last two weeks of 2014. Barclays said the sell-off was ‘fairly orderly’. The JSE lost most of its earlier gains towards the end of 2014 as the market started to give more weight to the possible effects of rising interest rates in the United States and selling in emerging markets occurred.

SA and China sign agreement to strengthen investment South Africa and China have signed strategic agreements following President Jacob Zuma’s visit to China in December 2014. The agreements aim to create sustainable investment opportunities between the two countries, as well as strengthen bilateral relations and trade co-operation.

ENERGY REGULATOR PONDERS CREDITS FOR SOLAR POWER The National Energy Regulator of South Africa (Nersa) is looking at a framework that would enable homes and businesses to receive credits for feeding surplus power they generate from rooftop solar panels back into the national electricity grid. This is according to a draft discussion paper, published on its website. If such a plan were to be introduced, South Africa would be copying countries such as Germany, Spain and the United States, which have had small-scale renewable generation that included feed-in tariffs or credit programmes through banks. Eskom caused widespread negative sentiment in late 2014 with its inability to prevent national power outages during the key December retail period, with further widespread outages expected to continue into 2015.

Global SMEs don’t view Africa as a growth opportunity According to an in-depth study conducted by the Economist Intelligence Unit (EIU) on behalf of DHL Express, approximately 40 per cent of global small and medium-sized enterprises (SMEs) do not perceive Africa as a growth opportunity, despite the positive economic growth stories and growing middle class in the regions. The report further reveals that while many multinationals and stateowned companies are actively taking advantage of the opportunities that Africa offers, SMEs still remain apprehensive and are choosing to trade with other emerging markets instead.

Infrastructure spend on the rise in SSA

Japan’s drop in GDP results in recession

According to PricewaterhouseCoopers' Capital Projects & Infrastructure in East Africa, Southern Africa and West Africa report, which interviews 95 key players in the infrastructure sector, infrastructure spend in sub-Saharan Africa is expected to reach $180 billion (R2 trillion) a year by 2025, up from $70 billion in 2013.

Japan’s GDP fell at an annualised rate of 1.6 per cent in the third quarter of 2014 after it was forecast to rise by 2.1 per cent. Following a drop of 7.3 per cent in the second quarter, the further decrease has led to the world’s third-largest economy slipping into an unexpected recession. The drop has been attributed to weak exports and consumption.

s y a w e Sid 18 investsa

Credit rating downgrade for SA, but outlook stable Moody’s Investors Service downgraded South Africa’s credit ratings from Baa1 to Baa2, the second-lowest investment grade. This lowered rating was as a result of slower mediumterm growth and rising public debt. South Africa’s outlook however was adjusted from negative to stable.

Economic commentary

2014

IN REVIEW:

The economics and politics that affected South Africa’s investment landscape

n eventful 2014 marked South Africa’s 20 years of democracy. We cast our votes and continued to uphold the right in the first year without the physical presence of Nelson Mandela. Unfortunately, 2014’s economic data yielded less than impressive figures, even though a recession was narrowly avoided. The wheels of democracy continue to turn, but the economy continues to be a laggard where growth is concerned. The theme of ‘access to the economy by the vast majority’ came under the spotlight during 2014 and the formation of the Economic Freedom Fighters stirred some interesting dialogue in the national assembly. However, we must ask ourselves: to what extent do the robust conversations in the national assembly affect South Africa’s investment landscape? In the larger scheme of things, they play a very small part, but where its international investment potential as a developing country is concerned, factors such as political risk and governance factors are key. South Africa's political risk, economic structural features and its performance have been thrust into the spotlight. Notable political events with respect to the political environment and its players have cast a dark cloud on the future of the South African labour market. The inner conflict in the labour union Congress of South African Trade Unions (Cosatu) has led to a wider realignment of its positioning in the African National Congress (ANC). The expulsion of the National Union of Metalworkers of South Africa (NUMSA) is a

factor that weakens the strength of the ruling party. NUMSA’s criticism of the alliance with the ruling party has been underlined by the disappointing performance of the economy and the growing perception of corruption under President Jacob Zuma.

Business confidence is threatened by Eskom’s load shedding, where value added by the electricity, gas, and water industries fell 1.1 per cent in the third quarter, mainly reflecting the impact of ageing and limited power capacity on electricity production.

International investors appreciate South Africa’s mineral wealth, but a volatile labour market rearranges the attainment of productivity. Productivity is traditionally a product of labour and capital with some technology, given its availability.

Inflationary trends provide a glimmer of hope into 2015. Inflation was steady at 5.9 per cent in October, contained by falling fuel prices and moderate food inflation. The outlook for inflation has improved. Provided that the rand holds relatively steady, inflation could lose ground to around 5.6 per cent by mid-2015. The local unit remains vulnerable given the country’s twin deficits.

The longest strike ever in South Africa, coupled with the tensions growing in the unions, left investors having to discount labour in the pursuit of productivity. The mechanisation of South Africa’s historical key growth contributor will be seen by increasing international mechanisation contracts to avoid domestic labour market struggles, and so the future prospects of employment in this sector become less. The structural features of the economy, which give information on what makes it tick, give insight into which international demand and supply opportunities can be explored. The avoidance of a further contraction in quarter two was fortunate: from a contraction of 1.6 per cent in the first quarter, post the recent rebased and reweighted Gross Domestic Product (GDP) figures, to a revised 0.5 per cent in the second quarter. The slight improvement was due to increased activity in the financial markets and a slow recovery in mining output from the strike-affected base. During the third quarter, GDP data was up 1.4 per cent.

South Africa narrowly escaped a recession in 2014, a milestone year. Political activities continue to be robust influencers at the expense of the economy. Economic emancipation for the vast majority remains a work in progress.

Sanelisiwe Gantsho, economist, Liberty Investments

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Exchange Traded Products

State of the Industry Review – 2014

wenty fourteen was a difficult year for most investment asset classes. The FTSE/JSE Top 40 Index, for instance, only rose by 9.17 per cent, on a total return basis for the year ended 31 December 2014. This compares with a 21.9 per cent increase in 2013 and 26.1 per cent increase in 2012 for the Top 40 Index.

Performance issues The reduced returns in the JSE market benchmark is, of course, only half the story. Other indices performed far better in 2014. For instance, the FTSE/JSE Industrial 25 Index (up by 17.2 per cent); Financial 15 Index (up by 27.3 per cent); listed property SAPY index (26.6 per cent up).

Selected Top Performing ETPs (Total returns with dividends reinvested) (period ended 31 December 2014) 1 Year (%)

3 Year (% per annum)

Proptrax Ten ETF

30.06%

22.39%

Satrix FINI 14 ETF

26.01%

27.22%

DBX Tracker MSCI World ETF

23.86%

32.40%

DBX Tracker MSCI USA ETF

23.22%

33.74%

RMB MidCap ETF

18.67%

n/a

DB MSCI China ETN

18.99%

24.49%

Satrix INDI 25 ETF

16.06%

31.82%

Satrix SWIX Top 40 ETF

13.00%

20.63%

RMB Inflation-Linked Bond ETF

10.56%

9.63%

FTSE/JSE Top 40 Index

9.17%

19.13%

Source: Profile Media / etfSA.co.za (31/12/2014).

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The table below shows a selection of the top performing ETPs in 2014, and for the past three years compared with the Top 40 Index. The above analysis indicates a broad sweep of various asset classes outperforming the general equity market indicating that a key element for good investment performance is both selecting the correct indices, as well as a strategic asset allocation model that aims at diversification and risk management. Given the uneven performance of the JSE and other stock markets in 2014, it has been difficult for the active investment managers to outperform stock markets that still show a general upward momentum. For instance, the latest Blackrock Landscape report indicates that “eight out of ten US active fund managers failed to beat their index benchmarks in 2014”. Data for the quarters ended June and September last year in South Africa (December 2014 data not yet available at the time of going to print), indicates that only 15 per cent of actively managed unit trusts that benchmark the All Share or Top 40 JSE indices were able to outperform their benchmarks for the past six and twelve month periods. If 85 per cent of the active industry cannot outperform the index in the short term, which is where they have flexibility on their side, the prospects for longerterm outperformance are relatively slim.

etfsa.co.za

This is borne out by the statistics that indicate that only 10 per cent of unit trust active managers can outperform the All Share Index over the past 10 years in South Africa.

Growth in Market Capitalisation and ETPs on the JSE (2008 to 2014) 123 890

130 000

Market Capitalisation of the South African ETP Industry

110 000

The market capitalisation of all ETFs and ETNs listed on the JSE grew to R123.9 billion at the end of 2014, nearly double the R62.9 billion as at the end of 2013. The market cap figures are distorted by the R40 billion market capitalisation allocated to the BNP Guru ETNs, which have very large JSE approved share capital, on which the market capitalisation is measured, but do not disclose the actual number of shares in issue in the market. Even excluding the BNP Guru numbers, the market capitalisation of the ETP industry grew by some 33 per cent in 2014.

90 000 62 975

70 000 50 000 30 000 10 000

27 534

33 334

47 770

16 443 2008

2009

2010

2011

2012

2013

2014

Market Cap (R billion) Source: JSE/etfSA.co.za (31/12/2014)

New Capital Raised by the ETP Industry ETPs, with their high liquidity and guaranteed market markers, saw significant increases in volumes traded for many of the popular ETP products during the course of 2014. As such, natural buyers and sellers were typically available and the bids and spreads narrowed accordingly. However, there was still the need for new ETPs to be issued to meet specific market demand from time to time, or in the case of commodity ETPs, to accommodate periodic sell-offs. The table below shows that close to R7 billion new capital was raised by the main issuers of Exchange Traded Products in 2014. Possible Trends in 2015 Offshore Exchange Traded Products – Deutsche Bank, with its DBX Tracker ETFs and DB ETNs, has dominated the industry for JSE-listed foreign portfolios. These products

trade as ‘inward listed’ investments, which is a highly effective and cost-efficient manner of gaining access to international indices. Other issuers are likely to join Deutsche Bank in listing ‘foreign’ ETP products on the JSE in 2015. ETFs or ETNs – Exchange Traded Notes (ETNs) do not require 100 per cent physical holding of the underlying assets being tracked and are, therefore, simpler to set up and operate than ETFs, which need to be structured as collective investment schemes and have complicated underlying structures to hold all assets independently and to ensure 100 per cent cover of all liabilities. The market, however, showed a distinct preference for the perceived ‘safer’ ETFs during the course of 2014. This promoted Standard Bank to issue a series of very successful physically backed precious metal ETFs in mid-2014, which

New Capital Raised/Redeemed by ETP Issuers in 2014 Company

40 059

Brand

New Capital Raised/ (Redeemed) (R million)

NewFunds, NewGold, NewWave

4 748.9 2 323.5

Absa Capital

Standard Bank

Africa ETFs

Deutsche Bank

DBX Trackers

1 965.0

Satrix Managers

Satrix

(1 986.6)

Nedbank Capital

BettaBeta

153.2

Rand Merchant Bank

RMB

(338.9)

Grindrod Bank

GTrax

82.5

Others

14.0 6 962.0

Source: JSE/Profile Data/etfSA.co.za (31/12/2014)

significantly exceeded the popularity of their commodity ETNs. Passive Unit Trusts or ETPs – there are now 21 index tracking unit trusts, available to the retail investment market in South Africa, compared with 14 at the end of 2012. Active asset managers are increasingly looking to meet the market demand for index tracking products by issuing passive unit trusts, which suit their existing platforms and distribution channels in preference to ETPs. This behaviour by traditional asset managers can be expected to continue in 2015. Smart Beta – rather than purely using market capitalisation to determine index constituents, fundamental analysis or other types of selective technology are used to construct ‘smart’ indices. A number of these products were listed on the JSE in 2014, with limited acceptance by investors, but as they build up a track record of investment returns, may become more popular in future. The full Performance Survey of all 90 index tracking products is available on www.etfsa.co.za

Mike Brown, managing director, etfSA.co.za

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Global economic commentary

Global Economic commentary

The US ends QE but what about

Europe?

hile global economies remain weak, it is encouraging to see central banks outside the United States becoming more actively engaged. While the US has benefited from aggressive monetary stimulus, the Fed has now ended Quantitative Easing (QE). The Chinese central bank announced in November that it had cut its one-year deposit rate by 25 basis points to 2.75 per cent and the one-year lending rate by 40 basis points to 5.6 per cent. This was the first such cut in almost two years and came in the midst of weaker than expected manufacturing numbers from China. China may still struggle to achieve the 7.5 per cent GDP growth rate it has set itself. So this rate cut was welcome news to consumers and investors in China – in fact, most emerging markets rallied on this news.

they park at the ECB window. This will likely help boost equity markets in the Eurozone shortly. Eurozone and emerging market stocks have been lagging behind US stocks by double digits over the past 18 months and have significant ground to still make up. We expect 2015 to be the year when these markets step up and narrow the gap between themselves and the impressive US equity market gains.

This follows all-time high equity markets in the US where the Dow was fast approaching the 18 000 mark, following the mid-October sell-off that took it well below 17 000. Similarly, with the S&P 500 recovering to levels of 2 063, the FTSE at 6 750, DAX at 930 and Nikkei at 17 357, most developed markets showed impressive gains throughout November. The further stimulus announced by the Japanese central bank has helped power its stock market to further heights and weakened the Yen, which was approaching a low of 120 to the US dollar.

Expectations in the US are for the Fed to make a rate increase around mid-2015, thus increasing short-term rates most. Analysts see the two-year rate being the most affected – perhaps rising from its current low level of 0.50 per cent to end at around two per cent within the next 18 months. The likelihood is that US bond markets will overreact at the very front-end of the yield curve. We expect global long-term interest rates to remain low for a further extended period.

Europe continues to show almost no economic growth and recent comments by European Central Bank (ECB) president Draghi appear to indicate he will provide further stimulus shortly. He has already penalised banks by providing negative interest rates on deposits

22 investsa

The strength in the dollar will help European exporters. Europe’s economy continues to struggle, and we are skeptical about the ECB’s ability to aggressively fight deflationary pressures. Trends that remain a significant drag on economic growth in Europe include its ageing population and slowing population growth, which lead to a slowing down in the workforce and downward pressure on inflation.

However the sizeable foreign money flowing into the US seeking higher yields, in the face of collapsing Japanese and German 10-year rates, means the 2.3 per cent US 10-year Treasury yield will remain under pressure for the foreseeable future. So 18 months from now, we could see a strange phenomenon in that short- and long-term US interest rates

are not that dissimilar. Optimism in the US is reflected in continued monthly job gains well above the 200 000 mark, while the oil price has now almost halved over the past four years with Brent Crude trading at just $76 in mid-November. This is effectively a tax cut for the US consumer and those in developed countries too. In contrast to the US data, we have seen disappointing growth in China, Europe and many emerging markets. Even Germany – Europe’s ‘strongest state’ – has shown weak manufacturing and export data. Despite the recent volatility in financial markets, we believe equities, particularly those in Europe and emerging markets, remain cheap compared to the US. While we remain positive on the US equity market outlook, further volatility may be on the cards as the Fed begins raising rates in mid to late 2015.

Lisa Segall, director, GinsGlobal Index Funds (Mauritius) Ltd

Industry associations

Taking

tax-free savings into account for a client’s financial plan

South Africans have a particularly bad savings record in comparison with other developing nations. The government has taken note of this and begun developing savings incentives as a result.

uring 2014, a paper entitled Nonretirement savings: Tax-free savings account was published, consisting of responses to the initial discussion document published in 2012 and further laying out the foundation for implementation. The draft Taxation Laws Amendment Bill 2014 also made reference to the tax-free savings accounts. More recently, the revised draft Taxation Laws Amendment Bill clarified a few questions and set forth an implementation date, 1 March 2015. One of the key elements retained is the continued existence of interest exemption. This means that an individual would not have to transfer their existing investments to a savings account to qualify for any tax exemption on the interest earned. The retention is in essence a transitional arrangement, and the interest exemption will not be adjusted annually, upon implementation of the tax-free savings accounts in 2015, to account for inflation. Therefore, over time the benefit would erode. The annual contribution limit remains the same at R30 000. This is despite requests from certain stakeholders that the limit be increased. The National Treasury did, however, note in its response paper that it would consider greater

annual limits for people 65 years and older. This limit was implemented to encourage saving timeously to reap the rewards in a given time frame. In essence, it encourages an individual not to procrastinate. The annual limits will be adjusted to take account of inflation. The lifetime limit, however, will not be increased to take account of inflation in the short term. This is to ensure that the fiscus will not be detrimentally affected by the tax reliefs. The lifetime limit is R500 000. The limits do not take account of earnings but merely refer to contributions made. Amounts invested in these vehicles above the annual limit will be taxed at 40 per cent.

terms of section 12T of the Income Tax Act, 1962, in respect of persons or entities that may administer financial instruments as taxfree investments’. The section defines a ‘tax-free investment’ as being a savings product, financial instrument or policy. In terms of section 12T of the Income Tax Act, the following persons or entities may administer financial instruments as a tax-free investment: • A bank • A long-term insurer • A manager, as defined in section 1 of the Collective Investment Schemes Act 52 of 2002 • The government • An authorised user, as defined in section 1 of the Financial Markets Act 19 of 2012 • An administrative Financial Services Provider as defined in board notice 79 of 2003 issued in terms of section 15(1) of the Financial Advisory and Intermediary Services Act (FAIS) 37 of 2002. The products qualifying as tax-free savings and investments should be simple to understand, transparent (with disclosures) and suitable for most individuals making use of the savings and/ or investments. The regulation does allow for transfers of the full value or a portion thereof from one service provider to another, provided the service providers are able to facilitate the transfer (among other requirements). Investments that expose the investor to excessive levels of risk are excluded from being considered tax-free investments. The investment also has to be liquid: individuals must be able to access their monies within seven business days on request. Products with performance fees will also not qualify. To ascertain the suitability of a product, an individual should have a customised financial plan. It is the task of the financial planner to make sure the product is suitable, taking into account the client’s individual circumstances. This article was first published in The Financial Planner, the official publication of FPI.

Reinvested amounts will be allowed provided they are not more than the annual limit. An individual will be allowed to open multiple tax-free savings accounts per annum. Each account may have interest-bearing investments or equity products, or both. The National Treasury released a draft Regulation in mid-November 2014 for comment. Further, a notice was published together with the draft Regulation entitled: ‘Notice: Publication of proposed notice in

Carla Letchman, Financial Planning Institute, competency specialist

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Investment

The perils of

too much

he former has economic benefits as it can be used to increase the productivity of an economy while generating returns to pay off debt. That is to say, it is self-financing debt. The latter is problematic as there is no prospect of it being productive and self-financing. There has been a surge in the accumulation of debt by developing and emerging economies since the 2008 global financial crisis (GFC). Some has been used productively, but most countries have resorted to debt-induced, consumption-led growth. Aggregated data shows a sharp increase in the global stock of debt as a percentage of GDP – it was less than 190 per cent before 2008 and had risen to about 215 per cent in 2013. To deal with the consequences of the GFC, private institutions and governments, including the BRICS countries, have borrowed more than was historically the case. In the latest Geneva Report on the World Economy, which focused on the state of global debt and deleveraging, China and the so-called Fragile Eight – Argentina, Brazil, Chile, India, Indonesia, Russia, South Africa and Turkey – were highlighted as countries with precarious debt trajectories in the near- to medium-term. China, since its massive US$652 billion stimulus of 2008, has seen a surge in debt accumulated by households, local governments, state-owned entities and the central government. In 2013, the total debt/GDP ratio, excluding that of financial corporations, was 220 per cent, having surged from less than 150 per cent before 2008. This accumulation of debt has been rapid and has negatively affected the growth potential of the Chinese economy. Similarly, the Fragile Eight,

24 investsa

half of which are BRICS countries – Brazil, Russia, India and South Africa – have also seen a surge in debt levels. Falling commodity prices, especially that of Brent crude oil, will negatively affect the sovereign balance sheets of Russia and Brazil. To finance future growth, more debt may need to be accumulated. The commitment by the Organization of Petroleum Exporting Countries (OPEC) – especially Saudi Arabia – to maintain the oil output at current levels even in an oversupplied market, is likely to cause Brent crude prices to remain low for some time. Although Russia has been defensively positioned with large foreign-exchange reserve levels and small fiscal deficits, a falling oil price will place significant pressure on the country’s fiscal budget and potentially increase the need to borrow. Even with efforts to consolidate government expenditure (for example, the introduction of an expenditure ceiling), the South African National Treasury has warned that the weak economic growth could have entrenched a structural imbalance between revenue and expenditure. The trajectory of the debt/GDP ratio is forecast to deteriorate further even after the fiscal package introduced in the mediumterm budget policy statement in October 2014. Before the GFC, South Africa’s debt was less than 25 per cent per cent of GDP and has risen to around 45 per cent in 2014. Future gross borrowings are forecast to exceed 50 per cent of GDP, an outcome that will leave South Africa among countries with the largest increase in the amount of debt within the emerging-market countries with similar credit ratings and those in the BRICS.

Debt Laffer curve

GDP Growth

Governments that run up a large stock of debt not aimed at financing investment in new productive capacity often reach a point where additional debt negatively affects growth. There are two types of debt – that used for productive purposes, and that to finance consumption activities.

Debt The perils of an increasing stock of debt are witnessed when a certain point is reached where additional leverage curtails the ability of a country to grow faster. This phenomenon can be described as a ‘debt Laffer Curve’. The curve shows a situation in which, if a country borrows excessively, it can reach a level where the stock of debt does not produce the requisite growth. At the extreme of this situation, the magnitude of the debt burden can derail growth and the ability of that country to service the debt. Although China and the Fragile Eight have not yet reached this catastrophic level of debt accumulation, without consolidation and efforts to raise economic growth much faster, debt will become a huge problem for these countries.

Lesiba Mothata, head: market and economic research Investment Solutions

Investment strategy

Cashing in Within the last five years, buying equities was an obvious first choice. But as last year unfolded, investors became a little ‘twitchy’. Markets soared to a high, and intimations of a correction came and went for the best part of the year.

lthough the market scrambled back onto its feet, investors were left increasingly cautious about what was coming next. As all of this presented itself, cash stepped quietly into the limelight. When the markets are charging, some call cash ‘safe’, ‘boring’, or even ‘money that is not invested’ – but in uncertain times investors recall and appreciate its rightful place as an asset class and an important part of their portfolio. When markets rise to glorious highs, the need to review a portfolio and ensure it is diversified becomes ever more important. Diversification as a tool to reduce risk in an investment portfolio has been tried and tested throughout history, with cash delivering capital security and a relatively stable return. In addition, it also provides some time and a vantage point to watch the markets and then review when to re-enter after it corrects, allowing investors an opportunity to buy assets at ‘bargain prices’. In fact, following the 2008 financial crisis, return of capital became the key phrase used by financial advisers as opposed to return on capital, seeing investors making the shift to ‘shore up’ and avoid losses, or keep a reserve available for unforeseen circumstances or expenses. Cash is not just a strategic anchor. Many investors have shorter term goals with a pre-determined time frame – normally less

than three years – for needs such as shortterm education, house deposits, or holidays. Equity and other asset classes generally provide volatility in returns that require medium to long-term investment horizons, as well as patience and flexibility on the part of the investor. Most investors hold at least five per cent of their investment portfolios in cash. However, one of the concerns with holding cash over the longer term is that inflation could erode your capital. As an example, holding shortterm cash with a five per cent return in a six per cent inflationary environment would result in a one per cent loss of ‘real’ capital over one year. Another concern, of course, is that you miss out on a bull run, in other words, the opportunity cost of sitting in cash rather than the market. However, history dictates another market correction will come in its typical cyclical fashion, and there will be the usual mix of those who adjusted in time, and those who didn’t. The seasoned investor knows how to walk this tightrope – stay invested in the market over the longer term while keeping sufficient cash reserves to be ready for opportunities as they present themselves. So when does it make sense to increase your allocation to cash? The five and a half years following the 2008 global financial crisis delivered good, if not exceptional, returns in all domestic asset classes. Combine this with a widely held view that the South African equity market is ‘expensive’, and you find a classic scenario where nervous investors would cash in on their gains on shares and

wait out the market in relative safety. In a rising interest rate environment, expected returns from cash can appear more attractive on a risk-adjusted basis, considering the relative risk of asset classes and their returns. Many investors these days are opting for safety and stability as they wait out unpredictable and volatile equity markets. The diversification benefits of including cash as a part of an investor’s portfolio suggests that a balanced investment portfolio should have a cash component. The relative size of this allocation will be dictated by factors such as the investor’s risk appetite, economic climate, investment horizon and market conditions. One of the world’s most successful investors, Warren Buffett, has long appreciated the optionality of cash. According to one of his biographers, he considers cash as a call option with no expiration date.

Rene Grobler, head of cash investments at Investec Specialist Bank

investsa

South African unit trusts experience more subdued returns

in 2014

Listed property, financials and industrials top the charts while resource funds are the sole losers for the year.

ll things considered, South African unit trusts could have fared much worse this past year. Between the collapse in the price for oil, a depreciating rand, a rapidly slowing domestic economy, geopolitical turmoil, continued labour unrest and the African Bank debacle, there was no shortage of negative news in 2014. And yet, 24 of the 25 ASISA categories tracked by Morningstar produced positive returns for investors. However, all that negative news didnâ&#x20AC;&#x2122;t go unnoticed by markets, and it resulted in much more subdued returns compared to previous years. During 2013, the largest unit trust categories had enjoyed large double digit returns in the region of 15 per cent to 20 per cent off the back of a 21.4 per cent return for the FTSE/JSE All Share Index (ALSI). During 2014, the figures were more toward the high single digit range and in line with the ALSIâ&#x20AC;&#x2122;s

26 investsa

10.9 per cent return. For instance, the South African Multi-Asset categories all experienced similar returns: High Equity (9.8 per cent), Medium Equity (9.2 per cent), Low Equity (8.2 per cent), and Flexible (10.3 per cent). The off-shore multi-asset categories generally produced similar performance as the benefit of the depreciating rand was offset by more modest returns from many developed markets. The best performing categories this year included more specialised categories such as South African Financials and Industrials, which returned 22.5 per cent and 16.7 per cent respectively, and the Global and South African Listed Property categories with 28.6 per cent and 25.2 per cent returns. Predictably, the fixed income categories experienced even more muted returns, falling toward the bottom half of the performance

Morningstar

1 Month

2014 Calendar Year

3 Year

5 Year

Global Real Estate General

5.8

28.6

26.7

20.6

South African Real Estate General

2.0

25.2

21.6

19.1

South African EQ Financial

0.1

22.5

25.3

19.4

South African EQ Industrial

0.7

16.7

26.5

22.3

Global EQ General

3.1

12.0

26.4

17.1

Worldwide MA Flexible

2.3

11.1

19.9

14.6

- 0.1

10.3

16.5

14.1

Global MA Flexible

2.9

10.0

21.8

14.6

Global MA High Equity

2.6

9.8

23.7

16.0

South African MA Flexible

0.5

9.7

15.0

12.7

South African MA High Equity

0.7

9.5

14.6

12.0

South African EQ Mid/Small Cap

1.2

9.2

18.7

16.7

South African MA Medium Equity

0.8

9.2

13.5

11.5

Global MA Low Equity

3.3

9.1

16.7

11.7

- 1.2

8.9

8.3

9.6

Global IB Variable Term

3.4

8.3

13.0

11.3

South African MA Low Equity

0.7

8.2

11.1

9.8

South African EQ Large Cap

- 0.9

7.9

17.6

14.0

Regional EQ General

2.5

7.8

22.9

13.1

Global IB Short Term

4.2

7.3

11.1

8.6

South African IB Short Term

0.4

5.5

5.9

6.4

South African IB Money Market

0.0

5.3

5.6

Global MA Medium Equity

2.9

5.0

18.4

12.4

Regional IB Short Term

3.3

2.6

11.2

7.6

- 0.3

- 3.0

- 0.9

1.7

ASISA Categories

South African EQ General

South African IB Variable Term

South African EQ Resources

charts. For instance, the South African Interest Bearing Variable Term and South African Interest Bearing Short-Term returned 8.9 per cent and 5.5 per cent respectively. The worst performing unit trust category was the South African Equity Resources category. Continued labour unrest and a softening in the gold and platinum markets hurt local miners. Meanwhile, the price for oil imploded in 2014. Oil ended the year down nearly 50 per cent, marking levels not seen since 2009. Remarkably, despite this frightening backdrop, the South African Equity Resources category lost just three per cent on the year. The best performing funds for 2014 were Prescient China Balanced Feeder Fund (46.3

per cent), Sanlam India Opportunities Feeder Fund (39.7 per cent), and ABSA Property Equity (39.7 per cent). These results arenâ&#x20AC;&#x2122;t surprising, given that the Shanghai SE Composite returned 52.9 per cent in 2014 (in local currency terms) and the S&P BSE SENSEX returned 29.9 per cent (in local currency terms). Meanwhile, the three worst performing funds included Old Mutual Mining (-14.8 per cent), Momentum Resources (-15.8 per cent), and Momentum Value (-15.9 per cent). The two resources funds were casualties of falling resource prices and continued labour unrest in South Africa. Momentum Value was hit hard by the African Bank collapse, as the fund had the largest percentage exposure (10 per cent) to the failed lender.

David Oâ&#x20AC;&#x2122;Leary, CFA, MBA, director of fund research, South Africa, Morningstar South Africa

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Passive investing then it’s working for someone else. Remember to prioritise and commit to destroying your debt as a key part of your financial strategy. But also try to start the habit of investing at the same time.” Nerina Visser spoke on the theme of ‘Establishing your own portfolio of JSE-listed ETFs covering all asset classes to manage your risks and maximise growth’. She outlined the different types of asset classes, including the impact of inflation and why cash is not a long-term investment option as it gives a nominal return.

Stocks for frocks By Vivienne Fouché

InvestSA attended the last ‘Stocks for Frocks’ event. This four-hour workshop empowers women to create their own financial destiny.

tocks for Frocks is a regular investment seminar event hosted by Mike Brown, MD of etfSA.co.za, and organised by Nedbank Capital, etfSA.co.za and the Wealth Chef. Speakers at the event included Ann Wilson, international wealth mentor and best-selling author of The Wealth Chef; Nerina Visser, head of ETFs and Beta Solutions, Nedbank Capital; and Mike Brown, founder of etfSA. co.za and also known as ‘Mr ETFs’ in South Africa. The focus was on passive investing with the intention to empower the delegates by demystifying index investing. Ann Wilson, the first speaker, spoke on ‘How to set up your investment plan and strategy for financial independence using index-tracking ETFs’. She commented that 97 per cent of people never achieve financial freedom. “So many relationships break because of this money conflict,” she said. “Eventually, two out of three people will have to rely on their children.” She continued, “Hope is a disastrous financial ‘plan’. You need processes, systems and habits that you use to create a great plan. It’s imperative to understand the distinction between a need versus a want. Money needs

28 investsa

to flow. Stashing it away is not the answer. It wants to work for us. It’s so important to distinguish between saving and investing. The key thing is to start these habits. “You get more when you show you can handle what you’ve got. We are the chef and money is the ingredient. Money is a disastrous master but a fantastic servant. The more you can manage yourself, the more you can manage your money.” With regards to passive investing, Wilson commented, “You are financially free when you have a big enough pot of assets that earn money for you and pay for your chosen lifestyle without your having to work. Income is not the most important thing in creating wealth – your assets are. Money seldom solves a person’s money problems. Becoming financially literate solves a person’s money problems.” She mentioned the importance of compounding by saying, “For most people, compounding is working against them in the form of consumer debt. When investing, compounding needs to be left alone so it can do its work. Compounding means that the money can earn the money! Expand your ‘dough’. If money isn’t working hard for you,

“The impact of inflation is massive in terms of both savings and investments,” she commented. “Cash is a return-free risk. I’m guaranteed to get poorer every day if my money is only in the bank! It doesn’t generate enough returns to compensate for inflation. You have to work beyond the mattress and the savings account and start investing.” She advised delegates to expect volatility: “Then it won’t surprise you and cause you to act inappropriately. It’s important to diversify and combine your investment portfolio into different asset classes. In this way we create the concept of a balanced fund: an investment portfolio with a mix of cash, bonds, equity and property investments. It gives you a mixture of safety, income and modest capital growth.” Mike Brown gave the closing presentation, discussing ‘How to take advantage of the tax savings applicable to retirement funds to save in low cost, low risk, transparent ETF portfolios for your retirement’. He opened by saying, “Costs are a huge penalty on your final investment outcome. Passive fund costs are, on average, 2.5 per cent per annum lower than on an active fund. These costs make a massive difference – the costs compound just as much as the investment returns. The key to successful retirement investing lies in perseverance, preservation, penalties and pre-determination.” He said an advantage of owning a retirement annuity fund lay in the fact that the RA is in the individual investor’s name as opposed to being owned and controlled by your employer. “With your own RA, you have greater control, can choose your own retirement age and can ensure the preservation of your capital till at least age 55.” Brown says that an RA is tax-efficient in the investor’s hands: “You have full control of the investment. You can set your own conditions for retirement. etfSA.co.za offers a retirement annuity fund with low, medium and high-risk portfolios, based on your investment time horizon and using only ETFs and ETNs. We offer high transparency in that the prices of our portfolios are published daily, the portfolio constituents are known at all times, and you can view your account online anytime. The monthly publication of our fact sheets and all policy documents are also available online. We add alpha with our strategic asset allocations,” he concluded.

Practice management

Manage your practice post-RDR Often we talk about ‘unforeseen consequences’ when we evaluate legislation or other changes that have permanent impact. Of course, if someone writes about them before the implementation, then they are just ‘consequences’. This article looks at what two of the practice management recommendations might be if the RDR proposals are implemented ‘as is’.

hen it comes to the target for the RDR measures, the distributors fall into two groups: those who sit back and hope they will be retired before any change happens, and those who do not.

To survive, your closing rate will now have to be extremely high. The regulator has still not recognised that selling financial services, whether it is life insurance, shortterm insurance or savings plans, constitutes ‘work’, even if a sale is not made.

To the former, I say, “Be active in your evaluation and critique via your trade association: you may not have a big market to sell your business as you retire.” To the latter, I say, “Be active in your evaluation and critique via your trade association: this is the way you will see out your career in financial services.”

Leave the hard and unrewarded work of exposing the need to protect oneself against life’s risks, and create retirement and intergenerational wealth through savings and life insurance, to the vast and unregulated advertising and direct call centre expenditures that will emerge post-RDR. See it as your role to identify those committed to building wealth and protecting their loved ones, by exposing them to the full benefits of financial advice and planning.

Cynics will say that the most wonderful thing about regulation at this level is that you don’t have to think about your business: the government has prescribed how it works every step of the way, and if you just apply the regulations, you will be a successful entrepreneur in the financial services sector. Others say that if you truly are an entrepreneur, then this over-regulated industry will soon identify you and weed you out of its bureaucratic system. Two specific hints for advisers and intermediaries follow. Go as up-market as your skills and expertise allow There will be no reward worth the effort in dealing with ‘savers’ rather than ‘investors’. Remember that the days are gone when your reward for missed sales and no-shows was compensated for by a relatively higher, shareholder-funded, commission reward from the assurer for the sales actually made.

Initial evidence that this will be the scenario that emerges post-RDR is contained in the Heath Report by Garry Heath on the state of the industry post-RDR in the UK. His analysis, tabled in parliament, shows that although the industry advice headcount has stayed flat, there are ‘now 15 million more people who no longer had access to professional financial advice’ (FT adviser Jonny Paul; 10 September 2014). Fortunately for advisers this failure of advice is a challenge to the ‘product factory’ rather than to professional advisers. For professional advisers, the task is to simply wait for the committed clients to become aware that there is more to financial planning than the one-off product they ‘bought off a highway billboard’.

Only look after clients who have, in the past, looked after themselves Linked to the first point is that clients who have under-provided for their loved ones in the case of risk benefits, and themselves in the case of retirement planning, are a bigger ‘complaint’ risk than clients who have provided. It is a fact that these financially challenged clients take more risk and are more likely to enter questionable schemes than comfortable clients. This exposes you, as their adviser, to the likelihood that they will seek a scapegoat for their planning shortcomings. Your role should be to fine-tune an already comfortable financial circumstance. The postRDR world for committed planners is certainly rosy, even if only because they will have fewer competitors as the retirees, and those who won’t change, all exit.

Gavin Came, BComm, LLB, CFP®, consultant, Sasfin Financial Advisory Services

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30 investsa

Profile

Sbu Gule Global chairman, Norton Rose Fulbright

Sbu Gule was appointed the first South African global chairman of Norton Rose Fulbright in May 2014. As a rotating position, he will hold the title for one year. Thereafter, he will move into a vice chairman role, as there are five vice chairmen in the various regions at any given time, and he could once again become the global chairman in another four to five years.

What would you describe as the major challenges in your role? One of the challenges, most certainly, is the fast-changing legal landscape. Our sophisticated clients need cost-effective solutions and, therefore, the emphasis on efficiencies has become more pronounced, and driving efficiencies in law firms has become very important. My position as global chairman does constitute the greatest part of my responsibilities currently. We have five offices in the Africa region and approximately 50 offices across the globe. So it’s safe to say that currently, my international responsibilities take up the bulk of my time.

What are the highlights of your role? No two days are the same! This is particularly true when I’m travelling around the world. When I’m in different countries, I really appreciate the way that the economic and political landscapes differ from country to country. I enjoy seeing the similarities and the differences and what makes people tick, and how it changes from one country to another: it keeps me going. Since my appointment, I’ve probably never been in Johannesburg for more than ten successive working days in total!

My travels as global chairman have taken me to Japan, China and Hong Kong in the Far East; in Europe I have spent time in Germany, France, Italy and the UK; in Africa I’ve been to Kenya, Ethiopia, Tanzania and Zimbabwe, and I’ve also travelled to the United States, Canada and Australia.

What personal attributes do you believe contributed to you becoming global chairman of Norton Rose Fulbright? The basics that I believe in include the values that were instilled in me by my parents, whose attitude was: “Hard work never killed anyone!” During the apartheid era, my dad was a medical practitioner and my mom trained nurses. They taught me that you can succeed against all odds and that you should give your all in terms of the opportunities given to you, striving always to achieve excellence. I must also acknowledge the teamwork and support of my colleagues. I value the opportunities that are given to me and my colleagues’ willingness to work with me, including the free giving of their time, knowledge, skills and friendship.

What would you describe as being your greatest personal success to date? On Thursday 30 October 2014, in the recent inaugural South African Professional Services Awards, I was honoured with a lifetime achievement award in law. My fellow nominees included some who were in their 70s and 80s, and at the age of 55, across all the disciplines, I was the youngest nominee. I was deeply honoured to win the award. As it was my birthday just two days later, it was an early birthday present!

If you had R100 000 to invest, what would you do with it? I would invest it in a few individuals whom I believe could make a difference in the lives of others. I believe in helping those young people who have shown, through what they have done, that they are future leaders. I would like to help give them a break in life.

How do you strike a balance between your personal life and your work schedule? Although there isn’t that much private time, I believe in using the little time that I have available to the best of my ability. I try to spend quality time with my family. Even when I’m travelling and away from home, there are things I enjoy doing and that I can take advantage of. For instance, I enjoy reading, so I make use of my time on long-haul flights to catch up, as well as taking advantage of the time to reflect and think, which can in itself be calming. I enjoy visiting museums as well and try to pick an hour in between meetings to make some time for myself. While travelling I try to eat and sleep well and drink lots of water – which is all part of the basics of avoiding jet lag! I also try to gym and maintain a healthy mental attitude. I enjoy the excitement of travelling and experiencing different cultures, politics and economics. In essence, when it comes to my free time, I try to choose quality over quantity and make the best use of my time.

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Regulatory development

The Retail Distribution Review

a boost for improving investment outcomes for clients The RDR aims “to ensure that financial products are distributed in ways that support the delivery of Treating Customers Fairly (TCF) outcomes.” All fees paid by customers ‘must be motivated, disclosed and explicitly agreed to by the customer’. The key benefit to the client is that investment advisers will be empowered to truly act in their interests and make decisions about investments that are not clouded by incentives.

Risk two: Conflicts of interest arising from ownership or similar arrangements and relationships between intermediaries and product supplier

Risk one: Conflicts of interest and complexity of charging structures arising from platform fees and rebates paid by product suppliers

The restriction on the outsourcing of certain functions to financial advisers includes a prohibition on a collective investment scheme (CIS) manager outsourcing investment management to an ‘authorised agent’ who is a financial adviser. Effectively this proposal is putting a stop to the existence of what are commonly known as broker funds, which are white label funds set up by CIS managers on behalf of financial advisers.

t is disappointing that the regulator needs to take this action, given that the first principle of the Financial Planners’ Code of Ethics is ‘Client First’. However, the RDR also recognises that product providers have as much of a role to play as financial advisers in achieving fair customer outcomes: they now have a ‘shared responsibility’ in this regard. This article focuses on three key risks identified and addressed by the RDR.

The RDR states: “Product suppliers will be prohibited from paying any form of remuneration to intermediaries in respect of investment products… Intermediaries will correspondingly be prohibited from earning any form of remuneration in respect of investment products, other than advice fees agreed with the customer.” It seems that (with some exceptions that will apply to investment products marketed in the low-income market), the RDR proposals mean that advisers will only be able to be remunerated for their advice on these products.

32 investsa

The proposed RDR reform with probably the biggest impact is the proposal to restrict the outsourcing of certain functions to financial advisers, and the prohibition of rebates or any incentives being paid to LISP platforms or intermediaries.

The efficiencies offered by broker funds can be matched and probably improved upon by the trend to advisers using model portfolios. These are usually managed by an investment expert, often referred to as a discretionary fund manager. The discretionary fund manager will charge for this service, but the key benefit of this service versus broker funds is that the client

is very clearly paying for advice separately from fund management, and there is no conflict of interest for the adviser, who can hire and fire their discretionary fund manager as they see fit. The prohibition on rebate payments also removes any conflicts of interest for advisers with respect to what investment platforms they decide to use or not. Risk three: Inadequate disclosure standards, particularly with respect to remuneration and intermediary status The RDR wants clients to know exactly in what capacity their adviser is acting, and how they are being remunerated. Advisers will need to describe their status as an independent financial adviser (IFA), multi-tied financial adviser, or tied financial adviser. The definitions of these terms still need to be finalisd, but each category will still need to provide advice, whether upfront and/or ongoing, and be remunerated for that advice. In all three categories, the adviser will be able to offer objective financial planning services. In simple terms, advisers will need to disclose their status, which enables clients to determine whether there is any bias in the advice they received or the products they are offered. Clients will know what they are paying, for what service, and how this fee is being collected. Most importantly, clients will be able to stop paying this fee if they are not happy with the service, without being prejudiced regarding the product in which they are invested. In short, the RDR as it currently stands is going to shake up the market – but for the right reasons. Clients will benefit from the elimination of potential conflicts of interest, greater transparency of fees and the emphasis on fair client outcomes. It does, however, present some challenges for product providers who have historically developed products for the wrong reasons, and for advisers who have seen themselves more as salespeople rather than as professional advisers. For these players, the RDR will be the catalyst for some tough choices to be made.

Rob Macdonald, chief operating officer, MitonOptimal

Retirement annuities

While the table is a very rough guide it does give a target to save towards, which can be used to determine what monthly contributions will be needed to achieve this. RAs a useful retirement saving tool

Retirement annuities:

structured to encourage saving

o retire comfortably requires planning, discipline and time for the plan to be effective. In addition, there are many uncertainties over which investors have little control, so a reasonable margin of safety is required. Starting early Building up an investment that can be used to fund retirement takes time. Starting early not only increases the amount that can be contributed, it also increases the effect that growth can have on these contributions. For an investment of R500 per month, growth accounts for 25 per cent of the fund value after five years, 43 per cent after 10 years, 57 per cent after 15 years and 68 per cent after 20 years (assumptions: six per cent inflation over the period, 12 per cent investment growth). The Association for Savings & Investment SA (ASISA) has drawn up guidelines for living annuities, specifically showing how

the income rates that are drawn from an investment affect the length of time before income rates start to fall (see Table 1). These can be used as a gauge in the planning process. If an investor should retire today and draw 2.5 per cent to 7.5 per cent of the investment per year, the investment could potentially sustain retirement for more than 13 years before the investor’s income falls (some basic investment assumptions are detailed in the table). In the table, the column on the left shows the starting income drawn from a living annuity and assumes that this will be adjusted to keep up with inflation (inflation assumed to be six per cent). The top row refers to the investment return that can be expected from the investment. This is a nominal figure after deducting fees. The years in the table indicate how long it will take for the income, which increases with inflation, to reach 17.5 per cent of the remaining capital amount. This is the point where the income will drop in subsequent years.

Retirement annuities are structured to encourage saving. Contributions are excluded from personal taxable income and any interest and growth (including interest and dividends) is tax-free. In addition, at retirement the tax exemptions and subsequent tax rates are favourable. Before the end of February each year, an opportunity arises to maximise the benefits of an RA and reduce the tax payable. Fifteen percent of non-retirement funding income (see text box) can be contributed to an RA and this amount is deductable off your taxable income. Therefore, if an investor owes tax, contributing to an RA can reduce the amount of tax owed, while building up the retirement investment.

Non-retirement funding income For those who are self-employed, or whose employers do not offer a pension/ provident fund, their income is considered ‘non-retirement funding’. They may contribute the greater of R3 500 or 15 per cent of their non-retirement funding taxable income to an RA tax-free. If an employer offers a pension/provident fund, the employee’s income is known as ‘retirement funding income’. However, such employees may still earn nonretirement funding income such as a bonus or car/entertainment allowance and can contribute the greater of R1 750, R3 500 less the allowable pension fund contribution, or 15 per cent of the nonretirement funding income tax-free. Any additional payments (over the 15 per cent limit) may be carried forward and offset against future taxable income.

Table 1

Annual income rate selected at inception

Investment return per annum (before inflation and after all fees) 2.50%

5.00%

7.50%

10.00%

12.50%

2.50%

21 years

30 years

50+ years

5.00%

11 years

14 years

19 years

33 years

50+ years

7.50%

6 years

8 years

10 years

13 years

22 years

10.00%

4 years

5 years

6 years

7 years

9 years

12.50%

2 years

3 years

4 years

5 years

15.00%

1 year

2 years

17.50%

1 year

Source: ASISA

Rob Formby, director of retail operations, Allan Gray

investsa

Retirement annuities

The use of passively managed

index tracking ETFs in retirement funds

ith over 70 passive index tracking ETFs and ETNs listed on the JSE, plus a further 21 index tracking unit trust passive funds also available publically in South Africa, there are now ample building blocks for the construction of multi-asset balanced portfolios to be used in retirement fund products. ETFs, for instance, cover the majority of asset classes: South African equities, foreign equities, bonds, commodities, currencies, interest bearing assets, listed property and preference shares. Accordingly, it is not only feasible but possibly also more effective to look to passive index tracking portfolios when constructing retirement funds. What are these qualities? Costs As the National Treasury paper quoted below has demonstrated (together with various other studies conducted globally), total costs are notably lower in passive products. As passive funds merely replicate an index and this can be done by largely mechanised methods, the resources, research, risk management and selection processes involved with largely people-driven active management methods are avoided. This has significant cost savings. The etfSA retirement annuity funds, for instance, offer fully Regulation 28 multi-asset portfolios for a total fee of 0.35 per cent per annum, which covers all the costs of the ETF products, asset management and all transaction costs. One benefit of using ETFs, not always realised by investors, is that the ETFs trading on the JSE are already in creation and are transacted in a secondary market, whereas active managers have to create portfolios in

34 investsa

the primary market, with brokerage charges, taxes (STT) and JSE transaction/settlement fees payable, before such units can be used to construct portfolios. Transparency ETFs trade live on stock markets, so their value is always known and is public information. The constituents of any ETFs are also made public, as they entirely replicate the index, and the index constituents have to be known at all times for the index to be calculated and valued. This complete transparency not only assists the investor, who then knows the value of their retirement portfolio at all times, but also helps the asset manager to ensure that mandates and regulatory requirements, like Regulation 28, are adhered to on a constant basis. Liquidity Listing regulations require that an ETF issuer has to appoint at least one market maker, whose function is to provide liquidity to the secondary market, when bids and offers are not available. In practice, the market maker is happy to provide liquidity, particularly for sizeable trades, as there is normally a futures contract on the index, which they can use to hedge their liability. Instant liquidity, at any size, at a single price, gives a clear advantage over the active manager, who often has to laboriously construct a portfolio, with significant price and trading risk until this is completed, sometimes over an extended period. As the main indices only cover the most liquid stocks in a stock market, the scalability problems that often plague the active manager are also non-existent for the passive manager.

Risk (standard deviation) As risk is measured by the standard deviation against the benchmark (index), by using index trackers, the risk is significantly reduced. etfSA retirement annuity funds, for instance, offer CPI plus five per cent and CPI plus seven per cent portfolios that have recorded average standard deviations, over an extended period of 10 years, that are 40 per cent lower than the average standard deviation of the largest active asset managers providing similar retirement annuity funds. The South African passive industry has now developed to the point where using passively managed building blocks in retirement funds can often be demonstrably more efficient, with lower costs and more consistency than typical active investment management methods. â&#x20AC;&#x153;Over the long term, in efficient markets, passive management is not demonstrably inferior to active management, and is significantly cheaper.â&#x20AC;? [Charges in South African Retirement Funds â&#x20AC;&#x201C; paper released by the South African National Treasury, 11 July 2013]

Mike Brown, managing director, etfSA.co.za

PLACING YOUR OWN RETIREMENT INVESTMENT ASSETS? PLACE YOUR BETS. We’ve long been against the ‘member choice’ option for retirement savings. That’s because individuals who choose where and how to place their own investments invariably make wrong decisions. A recent survey, for example, shows that around 65% of people checked their returns less than twice a year. Seriously, would you hire an asset manager who did that? To find out how FedGroup can help, speak to your broker, or visit www.fedgroup.co.za.

@FedGroup

/fedgroup

011 305 2300

FedGroup is an authorised financial services provider

investsa investsa 35 31 27

NEWS Metrofile announces expansion into Dubai JSE-listed Metrofile Holdings Limited announced the acquisition of United Arab Emirates based eFile Masters LCC (eFile), one of the fastest growing imaging and information management companies in the Gulf Co-operation Council (GCC) countries. This allows Metrofile to further implement its strategy of acquiring bolt-on acquisitions in areas

only to the GCC, but also to the Middle East, North Africa and Common Wealth of Independent States (CIS).”

believed to offer medium- to long-term growth opportunities.

McGowan explains that this regional growth is generating substantial demand for the products and services that eFile is offering, making it an attractive proposition for Metrofile.

Mark McGowan, chief financial officer of Metrofile Holdings Limited, says the GCC region as a whole is undergoing a growth phase with significant spending across a wide range of sectors. “The UAE, in particular, is now widely regarded as the gateway not

“We are confident that this acquisition will enable Metrofile to benefit from eFile’s impressive track record, extensive customer base, local knowledge and understanding of the particulars of the regional market, making this endeavour mutually beneficial for stakeholders and clients.”

Investec sets Asian investment record with rqfii allowance Investec Asset Management is set to grow its strong investment track record on the Asian continent by directly accessing the mainland Chinese equity and bond markets. The firm announced that it has been awarded an RQFII (Renminbi Qualified Foreign Institutional Investor) licence by the China Securities Regulatory Commission, and has subsequently been allocated its first RQFII investment quota by the Chinese State Administration of Foreign Exchange. The firm can access these assets across their global and regional products, including within its flagship Luxembourgdomiciled UCITS range of daily dealing funds. John Green, global head of client group at Investec Asset Management, says the

36 investsa

reform in the Chinese investment markets over the past few years has provided an opportunity for international investors to participate through local investment in this dynamic economy undergoing structural change at attractive valuations. In the near future, Investec Asset Management intends to utilise its RQFII licence and quota to launch two new daily dealing funds within its Luxembourgdomiciled UCITS range (subject to regulatory approval), with one focusing on Chinese equity exposure and the other on onshore Chinese bonds. This builds on its range of dedicated Asian investment strategies, including the Investec 4Factor All China Equity Strategy and the Investec Asia ex Japan and Investec EM Equity Strategies.

Foord marks a threedecade track record Foord Asset Management recently reached the milestone of an uninterrupted thirty years of managing retirement fund mandates. Paul Cluer, director of Foord, gives the example of Foord’s longest standing institutional client, the AJ North Pension Fund, having been a Foord retirement fund client for 25 years and earning a compound annual real return of 14.1 per cent per annum (a nominal return of 21.6 per cent per annum). The effect of such a premium return is exemplary, with many AJ North staff members having retired to pensions that have exceeded their final salaries. Cluer stated that over the last thirty years during which Foord has managed its retirement

fund-oriented Global Balanced investment strategy, the compound annual return has been an impressive 21.4 per cent per annum. Foord’s Global Balanced investment strategy has outperformed the average pension fund in South Africa by 4.1 per cent per annum (calculated using data from the Consulting Actuaries Survey up to December 1997, thereafter the average of the Alexander Forbes Large Manager Watch).

According to Cluer, “Astute avoidance of any fickle preoccupation with the shortterm has safeguarded the appreciable returns earned by retirement fund investors in Foord’s portfolios. Consistent with Foord’s philosophy, the variability of short-term returns is not a basis for decision-making, but rather an opportunity to invest in assets that are valuable, but cheap, and to sell assets whose prices are in excess of their values.”

private equity firm. She is also a former vice-president at Deutsche Bank and held positions in their Johannesburg, London and Tokyo offices. In her previous role as an executive director at WDB Investment Holdings, she led acquisitions in companies such as Bidvest, FirstRand and Discovery. She has 12 years’ board experience and is currently a nonexecutive director at RMB Holdings and Discovery Group. Sonja De Bruyn Sebotsa

New directors appointed at Savca The Southern African Venture Capital and Private Equity Association (SAVCA), the industry body and public policy advocate for private equity and venture capital in South Africa which represents about R160 billion in assets under management, has announced two new appointments to its board of directors.

Arnold van Wyk The new SAVCA board members are Sonja De Bruyn Sebotsa, principal partner at Identity Partners, and Arnold van Wyk, executive at RMB Corvest. Together, the two bring over 30 years of financial and private equity experience to the SAVCA board. De Bruyn Sebotsa is a co-founder of Identity Capital Partners, which is a women-led

Van Wyk completed his articles at Deloitte and spent a number of years in the firm’s corporate finance division. He then joined the FirstRand group in 2003 as a corporate banker at FNB and was promoted to an investment banker at RMB in 2013, where he specialised in acquisition and leveraged finance. During his time at RMB, he was instrumental in helping to expand the company’s operations in the rest of Africa, with a specific focus on West Africa.

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Products

Alexander Forbes launches retirement savings tool  For over two years, Alexander Forbes has published the Alexander Forbes Pensions Index, which tracks how projected retirement incomes of defined contribution fund members have changed over time. While most retirement funds typically target a replacement ratio of 75 per cent, members are rarely given the opportunity to see whether they are on track to achieve this target. That is why Alexander Forbes has created the Retirement Savings Tool, which is now available on the Apple App Store and the Android Market. The intention of the Retirement Savings Tool is to make the calculation of retirement outcomes accessible to retirement fund members so they can take action to improve their outcomes if they are falling short. The tool is available as an application on smartphones and as a computer-based tool. Users need to fill in some basic information about themselves, like their current age, current retirement fund savings and their intended retirement age. The tool then shows members how far off they are from a target of 75 per cent, in rands and cents terms, under three different return scenarios. The tool also provides information on the measures that members can take to improve their retirement funding position. To download the app, visit the Apple App Store or the Android Market and search using the keywords ‘Retirement Savings Tool’.

Exceptional companies at low prices key to investment success Buy shares in exceptional companies at low prices. If exceptional companies trading at low prices are not on offer, stay in cash. This is the core philosophy of the PSG Flexible Fund which celebrated its 10th year in existence and its 10th year under the management of Jan Mouton. The fund managed top quartile performances over all rolling five-year periods, and R100 000 invested ten years ago would now be worth R542 780. According to Mouton, the characteristics of exceptional companies are that they have some form of sustainable competitive advantage and that it is easy to understand the industry they are operating in and how they make money. “In 21 out of the 35 shares that we hold, we have invested where management has a large shareholding or where a large strategic shareholder exists. Where management are shareholders, interests are aligned with a focus on the long-term sustainability of the company. “With this investment philosophy the PSG Flexible Fund fell less than the FTSE/JSE All Share Index (including dividends) during the

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2008/2009 financial crisis and reached a new high after just 15 months. It took the All Share Index 30 months to reach a new high,” says Mouton. The fund employs an integrated domestic and foreign equity process with eight

years of experience in direct offshore investment. The PSG Flexible Fund is suitable for investors who have a medium- to long-term investment horizon and wish to have exposure to the equity market, but with managed risk levels.

The world

SEYCHELLES, SWEDEN, ZIMBABWE, SOUTH AFRICA, EGYPT, RUSSIA, WEST AFRICA

 Seychelles accepted into WTO After 18 years of negotiations, the Seychelles has finally been accepted into the World Trade Organisation (WTO), becoming the 161st member. According to WTO chief Roberto Azevedo, the WTO provides a vital platform for small economies like Seychelles to make their voice heard at the global level. The WTO membership accounts for over 97 per cent of the world’s total trade. Household debt increases in Sweden According to Sweden’s central bank, Riksbank, Sweden’s household debt-toincome ratio has risen to above 170 per cent, which is among Europe’s highest. Sweden is one of Europe’s strongest countries with minimal public debt, sound state finances and profitable banks. However, Sweden’s new centre-left government and its financial authorities have indicated that the country will have to deal with a huge amount of household debt, which is weighing on the government and financial officials and casting a negative light on the country. The worry is that private consumption, nearly half of GDP, would suffer if rates rose or property prices fell. Zimbabwean economy shows no signs of improvement Zimbabwe is showing no signs of recovery after adverse weather, low exports and election year uncertainty shattered growth prospects. This is according to the International Monetary Fund (IMF), which says the distressed African country’s

economic situation “remains difficult” and the Zimbabwean Government needs strong macro-economic policies and debt relief plans, together with a strategy to clear arrears, to move away from the economic challenges. The global lender has previously indicated that the country cannot get fresh financial aid until it services its old debts.

2023, to $13.5 billion from $5 billion. The country also plans to develop 76 000 square kilometres in the area into an international industrial and logistics hub to attract more ships and generate income.

Moody’s downgrade threatens SA economy

Recent Global Poll research, conducted by Bloomberg among international investors, has indicated that Russia is seen as the biggest risk to the world markets. The conflict between Russia and the Ukraine was ranked as the highest risk to financial markets with 52 per cent of votes, followed by the Islamic State conflict in Syria and Iraq, with 26 per cent. Russia has experienced multiple sanctions from the United States, the European Union and other international organisations and ‘an oilmarket sell-off’ threatens its economy.

After the Moody’s downgrade in November 2014, South Africa is in danger of losing its investment grade credit status. The pressure is on for the South African Government to reduce public debt, which is now close to 50 per cent of economic output. This is as compared to about 27 per cent five years ago. The last time the country was below investment grade was in 2000 when it was rated by Standard & Poor’s and Fitch. Capital Economics analyst, Jack Allen, says that the South African economy is likely to grow at a slower pace than other emerging markets around the world, but for now the “rising levels of debt could be more of a problem.” New Suez Canal will enlarge transit capacity and increase industrial activity Egypt has signed six contracts with various international organisations to dredge the new Suez Canal, which is an expansion on the existing canal to enlarge its transit capacity and increase industrial activity. The new canal is intended to help the Egyptian economy recover, after the political chaos over recent years, and attract more ships. Egypt hopes that revenues from the new canal will more than double by

Russia-Ukraine conflict biggest global risk

Global relief project proposed by World Bank to safeguard against Ebola Due to the Ebola outbreak in West Africa, the World Bank Chief, Jim Yong Kim, has proposed that global economy funds are made available “in case of a pandemic emergency”. Kim, a physician by training who specialised in infectious disease, assumed the presidency of the World Bank in 2012. Kim believes that Ebola could lead to massive food shortages globally and that the world needs to prepare to deal with this grave issue. He said the financial aid raised so far to grapple with the Ebola crisis had been “totally inadequate” but praised the “spectacular engagement” of the United States and Britain.

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They said

A collection of insights from industry leaders over the last month

downgrade of South Africa’s sovereign credit rating to BBB- in June, one level above junk status. “I don’t think they’re at that turning point yet but it seems like they’re getting closer … The most important thing (people were looking for) was like-for-like sales, because they’re comparing it to like-forlike expense growth. There has been a lot of store movement happening in the base, and in the current period that can affect the top line.” Equity analyst at 36ONE Asset Management, Daniel Isaacs, comments after Walmart-owned Massmart reported a marginal rise in sales, as disposable income continued to decline due to factors such as debt, unemployment and rising costs. “Companies will have to ensure that their accounting systems are aligned with the requirements of the standard, and they will have to train their staff. This will require a lot of investment.” Project director for financial reporting standards at the South African Institute for Chartered Accountants, Bongeka Nodada, gives his opinion following the announcement of a new accounting standard due to be implemented in 2018, forcing banks and retailers who offer credit to anticipate future losses and account for such occurrences much earlier.

“Nene could announce the complete or partial privatisation of some assets, which would mean a smaller liability for government. Then, on paper, he would be able to put down numbers which will keep the rating agencies happy.” Maarten Ackerman, investment strategist at Citadel Asset Management, comments following Finance Minister Nhlanhla Nene’s first medium-term budget policy statement to Parliament during October. “Low-volatility conditions are coming to an end. The expectation was for the Federal Reserve to raise interest rates soon but global growth rate fears have made markets unsure on the exact timing of these hikes.” Market analyst at ETM Analytics, Sean McCalgan, says the end of quantitative easing (QE) would not have had such a strong impact consequence if it had ended a few months ago, but this had changed due to the uncertainty concerning when the US would hike rates.

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“The emergence of Reits in South Africa has already been beneficial, as the other vehicles such as Property Unit Trusts (PUT) and Property Loan Stocks (PLS) were relatively unique to South Africa. By following international practice, we could also encourage foreign investors to invest in South Africa’s largest listed property counters.” Gauteng regional executive at Nedbank Corporate Property Finance, Ken Reynolds, comments following the introduction of the real estate investment trusts (Reits) in South Africa during last year, which has caused a stir amongst South Africa property investors. “Government is committed to narrowing the budget deficit, stabilising debt and rebuilding the fiscal space that enabled South Africa to escape the worst effects of the global economic crisis”. This was stated by the Treasury following rating agency Standard & Poor’s (S&P)

“I think guys are looking for relative value; the dividends are very high. I think it’s been a place for investors to hide.” Portfolio manager at PSG Wealth, Adrian Cloete, comments after FirstRand, Africa’s largest banking group by market value and earnings, hit a record high during November 2014. Analysts’ opinions were mixed on the sustainability of the rise, with some saying banks remained a relatively attractive sector for investors to hide in, thanks to some earnings certainty. “Because of those two deficiencies, if we maintain things at this pace, within five years we could easily be at speculative (or junk) territory.” Senior economist at Nedbank, Isaac Matshego, comments that factors such as weak public revenues and inactive exports are threatening South Africa’s coveted investment grade credit status, which may be lost in the next five years.

You said

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

@DURITZ79: “South Africans spend so much money on the dead e.g. funerals but so little on the living e.g. retirement. Don’t get it.” Ruan Jooste - Associate editor and financial journalist.

@pietviljoen: “These days annual reports are aimed at lawyers and regulators. Investors find them increasingly complex + useless.” Piet Viljoen - investor, dad, cyclist, art collector.

@daytrend: “All time highs don’t matter nearly as much as what’s happening now and next.” Vic Scherer - Stock trader since 1995. Swings and dip-meat in liquid trends; a few hours to a few days. Market Stats, BBQ hobbyist, former engineer. I do my own homework.

@MichaelJordaan: “The world’s largest hedge fund is actually a country and it is called Japan.” Michael Jordaan - Venture capitalist and wine enthusiast.

@InvestSensibly: “Journalists love writing about ‘star’ managers. But the evidence suggests luck plays a much bigger part than skill.” Sensible Investing - We promote the benefits of lowcost, evidence-based investing and campaign for a better deal for the consumer. Our content does not constitute financial advice.

@WarrenIngram: “SA is still a great country with fantastic

prospects, our President is a problem BUT this is NOT the end. If you don’t agree go to Australia.” Warren Ingram - Author of Become Your Own Financial Advisor. Award winning Wealth Manager, regular on 702 Radio with Bruce Whitfield.

@ceesbruggemans: “Only in retrospect can you see how much of a dent major labour strikes leave in economic landscape. Economy popping back nicely tho.” Cees Bruggemans - Consulting Economist.

@Frances_Coppola: “The Eurozone is a set of countries that have collectively decided to rejoin a gold standard, but with a synthetic form of gold – the Euro.”

Frances Coppola - Associate Editor at http://Pieria.co.uk. Singer, teacher, financial writer, bank refugee. Rubbish housewife. I may not even have read things I RT.

@YellowtailFP: “How can money make you happy? Research says investing in others.” Dennis Hall - I believe that your financial planning should be simple, elegant and affordable – not complex unfathomable and expensive.

@devinshutte: “Fear is the easiest thing to sell …” Devin Shutte - Half broker, half human, all heart. CEO of Regenesys Investments.

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And now for something completely different

£541 2 50 Meissen porcelain tea set

tea? Spot of

The rise of the world’s tea market

The eight-piece tea set was made by the worldfamous German based Meissen porcelain company. Produced in 1723, the collection features an incredibly rare ‘Half-Figure Service’ decoration – one of the most coveted types of painting for European porcelain. The collection was auctioned off by Bonham’s in London in 2012. The set is made up of a hexagonal tea canister and cover, milk jug and sugar bowl, beakers and saucers and tiny tea bowls. The teapot is, unfortunately, missing,

$2.18 million

Famille Rose Melon Teapots

ince its initial discovery approximately 4 000 years ago in China, tea has become the most popular beverage on the planet. While most people wouldn’t spend an arm and a leg on the tea that they drink, the popularity of expensive artisan teas in Western countries is continuing to grow and is showing no sign of slowing down. The Chinese may have venerated rare and speciality teas, creating an entire culture and tradition out of drinking tea, but some savvy investors globally are now turning to tea as a burgeoning investment opportunity. In recent years, a number of companies and investors have started placing a greater focus on artisan and rare types of teas, which are typically very high quality and have rich histories. It isn’t surprising that the growth in the tea industry has become so big that there is the possibility that tea futures could hit the market within the next few years. Should this go ahead, it will mean that investors, producers and suppliers will be able to hedge their risks by participating in tea futures The investment in the tea market goes beyond just traditional teas. Certain speciality teas are so rare that even the purchase of a single ounce could yield great returns. For example, the Chinese Tieguanyin tea easily

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sells for $3 000 per kilogram. Named after the Buddhist deity Guanyin, this oolong tea is considered one of the most sought-after and prized teas in the world. Beyond just the price of the tea, there are also certain teas that appreciate with age. This means that investors can confidently place their money in particular teas, knowing that it will have very strong yields. A great example of one of these teas is pu-erh tea, a variety of fermented dark tea produced in Yunnan province in China that only increases in value over time. Tea may be a great investment opportunity, but investors shouldn’t ignore extremely rare and antique tea sets as valuable investments either. While not every tea set that has been handed down from generation to generation may be worth much, a silver or bone china tea set packed away in a box could hold tremendous value. Ranging from Chinese silver-gilt tea collections through to 19th century Tiffany & Co sterling silver coffee and tea services, rare tea sets and teapots have been snapped up at auctions over the years for millions of dollars at a time. Should you manage to get your hands on one of these, however, we wouldn’t suggest placing it in your dishwasher.

The Famille Rose Melon Teapots are considered the most expensive teapots in the world. The pair of extremely rare 18th century teapots dates back to the Chinese Qianlong Dynasty. Sold by a Scottish family to an anonymous Chinese collector, the pair of teapots was auctioned for six times more than their estimated price.

$1 million per kg

Da Hong Pao In 2006, seven-tenths of an ounce of Da Hong Pao, an ancient strain of Chinese tea, was sold for $30 000. As legends go, a Ming Dynasty emperor’s mother was cured of a disease by the tea. The tea is so rare that it has only been auctioned to the public three times. Due to its rarity and high quality, the tea is often reserved for honoured guests and dignitaries in China.

Marriottâ&#x20AC;&#x2122;s Retirement Annuity is a tax-efficient vehicle for individuals wanting to save for retirement or supplement their existing retirement savings. It provides: an on-going indication of your income at your projected retirement age a disciplined savings method long-term growth

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FCB10016130JB/E

HOW MUCH IS ENOUGH TO GIVE YOUR DAUGHTER A DREAM WEDDING & STILL GROW YOUR INVESTMENTS LOCALLY & OFFSHORE? Let Old Mutual Investment Group deliver on your ‘enough’ by putting its 169 years of investment expertise to work.

The rand’s performance is up today, down tomorrow, but one thing that doesn’t change - your dreams and goals. Whatever the rand does, what you really need to know is how many rands invested is enough for your lifestyle, today and tomorrow? How much is enough? At Old Mutual, we’ll help you work out exactly how much is enough for you. Then Old Mutual Investment Group provides the investment solutions to deliver on those goals. Solutions like the Old Mutual Global Equity Fund – a consistent top quartile performer over all periods and since inception*. Speak to your Financial Adviser today about how this fund can help ensure you have enough to do great things.

Call 0860 INVEST (468378) or visit www.howmuchisenough.co.za

ADVICE I INVESTMENTS I WEALTH

Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium to long-term investments. Past performance is no indication of future performance. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. *Performance periods to 30 September 2014. Since inception 1994.

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