INVESTSA Magazine February 2013 FPI by COSA Media

R37,50 | February 2013

An industry on the line if exams are not taken seriously

Profile: John Eckstein Managing Director Analytics Consulting

Retirement annuities Still around and still relevantinvestsa

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Contents 06 An industry on the line if exams are not taken seriously

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08 Retirement annuities â&#x20AC;&#x201C; Still around and still relevant 10 Much ado about post-retirement annuities 14 Profile: John Eckstein â&#x20AC;&#x201C; Managing Director:

R37,50 | February 2013

Analytics Consulting

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16 Head to head: Financial Planning Institute of Southern Africa (FPI) and Financial Intermediaries Association of Southern Africa (FIA)

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An industry on the line if exams are not High net worth investors

Advised to get asset taken seriously Nicky allocation right but will they listen? Newton-King CEO at the JSE Retirement

Budgeting for uncertainty

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Bad but getting better

Asset allocation & risk

Profile: John eckstein managing Director: analytics consulting

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Letter from the editor letter from the

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re you settling into 2013? Is your business going according to plan? is progress being made? I ask these, perhaps rhetorical, questions in the hope that all is going well. I know, however, that the year so far has been a disturbing time for a number of financial advisers. New and proposed regulations, additional costs of compliance and, in many cases, nervous clients don’t make for a settled year. But as in all tough times, there are opportunities for those who look through the mist and are prepared to take well-considered, calculated risks. This issue examines the impact of new and proposed regulations. Read colleague Fiona Zerbst’s feature on post-retirement annuities and her column on what to expect in the budget. True to the theme it is titled, ‘Budgeting for uncertainty’.

The Head to head section has two heavyweight CEOs – Godfrey Nti of the FPI and Justus van Pletzen of the FIA – taking different views on the new regulations and how they will affect financial advisers. John Eckstein, MD of Analytics Consulting, discusses regulations and the effects on advisers in our profile.

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

With shares on the JSE seemingly priced to perfection – and I think the local equities market is going to crack later this year – there are many excellent investment articles. Sean Segar of Nedgroup Investments’ Cash Solutions looks at how to make high cash balances work for you, while James Saulez of GT247.com considers why South Africans don’t save and don’t invest, concluding education might be needed. Philip Saunders and Max King of Investec Asset Management look at investment themes for 2013. What caught my attention are the opportunities in emerging markets. Diane Radley, CEO of OMIGSA, also looks at investment opportunities for 2013. It is worth noting the section on ETF index tracking, offering low costs and good returns.

investsa, published by COSA Media, a division of COSA Communications (Pty) Ltd.

Copyright COSA Communications Pty (Ltd) 2013, 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

Carla de Waal from Novare Investments tells us why hedge fund risk management is evolving as proposed regulations encourage more retail investors to consider the market. Ian Anderson, CIO of Grindrod Asset Management, looks at the outstanding listed property sector (up 35.9 per cent in 2012) but wonders whether some or all of those gains will be given back this year.

Communications Pty (Ltd). The mention of specific products in articles or

With much consolidation in the industry, Jeanette Marais of Allan Gray has a pertinent article on buying or selling a financial advisory service. Look closely at establishing a valuation for the business.

on any information contained in this publication is at your own risk. The

There’s plenty more and we hope the content helps to settle you down. Or at least gives you something to think about. Contemplation during these times will bring opportunities. All the best,

Shaun Harris 4

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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 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.

Shaun

Harris

An industry on the line

if exams are not taken seriously

investsa investsa

Not many people like studying for exams. Those who do are regarded as rather odd, as the nerds who thrive on academic achievements. And few people like meeting deadlines though it’s the reality of business. Financial advisers (FA) are currently facing both pressures.

he deadline for intermediaries to write and pass the Financial Services Board’s Regulatory Exams has been extended, yet again, to 31 March 2013. Those who do not write the exams or fail again could face dire consequences, including losing their jobs or having their business, in the case of sole proprietors or key individuals, disallowed to practice.

These FAs are by no means stupid. It seems they are just not prepared to study. This is confirmed by a family member I have in the industry, who has written and passed both level exams (for representative and key members or sole proprietors). She says some FAs walk into the exams, sit down and stare at the paper for 10 minutes, then leave the room. That’s why the failure rate remains high and why some FAs are going to be forced out of business.

It’s a harsh reality that FAs have to face. Most argue that the exams are important to maintain consistent professionalism in the industry. Many FAs have already written and passed the exams. But there is also criticism of the FSB, and the exams, for not being user friendly. On the other side, it seems that some FAs just don’t want to write the exams, or when they do, are not prepared to study.

But it’s not all bad news. “Even though the exams were approached with a large degree of fear and suspicion in the early stages, there has been a dramatic turnabout and success stories have begun to spread. Currently, about 60 per cent of representatives and 68 per cent of key individuals have successfully passed,” Kotzé notes. These were the latest exam statistics by the FSB and have not been updated since June last year. What they did indicate was that only 35 646 representatives of the 51 790 that had written the exams had passed.

There are some valid reasons for this. Here’s an interesting note from the Independent Docking Platform, a group that has developed a learning methodology to help FAs pass the exams. “Over 50 per cent of South African advisers are over the age of 53. Many of them have not had to study for exams since they finished school.” For advisers in this category, studying for exams is a big break from the past. Many ran a successful business based solely on the relationship they had built up with clients. Now they have to write exams to prove it. The many extensions to the exams – the first ‘final’ deadline was at the end of 2011 – show some willingness on the part of the FSB to try and help FAs through the procedure. But there is also notable criticism of some FAs just not taking the exams seriously. Here’s what Joe Kotzé, national manager of compliance with the Financial Intermediaries Association of Southern Africa (FIA), had to say after the previous “no further extensions” deadline in June last year. “The FIA believes in professionalism as a solid foundation for the financial services industry and therefore supports the exams and does its best to ensure that its members are fully equipped to effectively complete the exams.” But he goes on to say: “It is with a degree of concern, however, that the FIA takes note of intermediaries who have so far done little to prepare for and take the exams, despite the fact that the first deadline was the end of 2011.”

It seems inevitable that with rising costs and more time spent on regulatory matters, the quality of client service is going to suffer. But while it seems serious studying is the way to get through the exams, the methodology is open to criticism. “The poor management of the Regulatory Exams by the FSB is causing widespread uncertainty among employees in the financial industry. Thousands of FAs could lose their jobs by the end of March 2013 if employers carry out their threats of dismissing brokers who do not pass the exams before the cut-off date,” said Johan Kruger of trade union Solidarity. It called for a moratorium on the exams. The exams, however, are only one of a long list of issues facing FAs and the viability of their business in the future.

because of regulatory pressures,” says the Independent Docking Platform. It says these pressures include: • Maintaining an FSP licence and ongoing Regulatory Exams. • Increasing cost of compliance. • Increasing cost of professional indemnity cover. • Ongoing skills development. • Regular and organised client communication. • Building operational efficiencies in a business. • Documenting all business processes and procedures. • Finding an integrated technological business solution. • Business continuity planning. • Exit and succession planning. • Valuation of a financial advisory business. “FAs will struggle to survive if they are not provided with direction and a cost-effective solution that can assist them in continuing their business development so that they will survive the tsunami facing them.” All of this points towards continuing consolidation in the industry. It’s a trend that has been in place for some time, with smaller broking firms either being forced to sell their book of business or just deciding to opt out. It looks like the days of small, often family-run advisory businesses are limited. Perhaps what is worse is that, given the pressures highlighted above, it brings into question how much time advisers will be able to spend with clients. It seems inevitable that with rising costs and more time spent on regulatory matters, the quality of client service is going to suffer. Writing and passing the exams is just the first necessary step. The intermediaries industry is all about assisting clients. There’s already a move towards clients abandoning advisers and going the do-it-yourself route. Without clients, the industry will die. Advisers will lose jobs and businesses, and the quality of advice for those who remain will be compromised. It’s up to FAs to make sure that this doesn’t happen.

“FAs are currently faced with a plethora of business risks and pressures that will increase running costs or force them to exit the business investsa

Shaun

harris For many investors, retirement annuities (RAs) are unpopular. They have the products, probably bought a long time ago when there were limited options outside a regular company pension fund to invest towards retirement, but don’t like them. Come age 55, they will get out of the RA with a sigh of relief. And probably a few regrets that their money could have been better spent.

ut those are the old life assurance fund RAs, also called underwritten RAs. Fees were higher and more complex, in many cases returns were worse and investors had to pay penalties if they wanted to terminate the RA or switch it to another company. Commission on the old RAs was charged on an upfront basis. However, one good feature about the old RAs is that they forced people to save. And those who invested in the product for a long time and did not miss any payments ended up with a decent, taxefficient investment.

Retirement

annuities still around and still relevant

RAs that give investors access to outperforming unit trusts remain one of the best savings vehicles for retirement over the long term. 8

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The focus now is on what’s called the new generation RAs. Costs are lower, there are no penalties, and often the underlying investments are unit trusts or, more recently, low cost exchange traded funds. Jeanette Marias, director of distribution and client services at Allan Gray, believes unit trusts are an excellent underlying investment for RAs. “RAs that give investors access to outperforming unit trusts remain one of the best savings vehicles for retirement over the long term. As an investment product, RAs have a number of advantages, if properly structured. The biggest advantage is their tax efficiency.” Investors not contributing to a company pension fund can spend 15 per cent of their taxable income into an RA, tax free. Even people belonging to pension funds can contribute 15 per cent of income not classed as money for pension contributions to RAs tax free. And additional payments over the 15 per cent limit are carried forward and offset against future taxable income, which in an RA structure is favourably taxed. One of the arguments life assurers will present for RAs is that they are a safe product in which to preserve capital. Much is made of preserving capital. All investment products should start off by preserving capital. But RAs

are a safe, less volatile way to do this. However, most unit trust funds preserve capital and provide better returns than many RAs, even the new generation unit trust-based RAs. What is the better option for investors? “In order to benefit from the superior returns from unit trusts over the long term, investors have to live with the risk of a certain amount of short-term volatility,” says Marais. “They are able to do so in retirement savings vehicles such as RAs because of the time horizons of these products.” Which brings us back to the old argument: can an investor consistently choose a top performing unit trust fund, or should the decision rather be left to an investment professional? In a unit trust-based RA, the decision is made for the investor but often with the additional advantage that the investor can choose the underlying unit trust funds or switch them at no cost. Unit trusts are fairly simple investment products. They are liquid, easy to understand and affordable. RAs are more complex. They require disciplined saving and, ideally, should be part of the investor’s longterm thinking about retirement. As part of a properly planned investment portfolio, RAs do add in a number of ways, from product diversity to structured savings. There’s not really a better option but RAs still have a place. Craig Gradidge, director of investments at financial planning practice Gradidge-Mahura Investments, says he often uses RAs for his clients. But that would be the new generation RAs. “For someone saving for retirement they are fantastic products. There are a number of benefits, especially tax benefits.”

They require disciplined saving and, ideally, should be part of the investor’s longterm thinking about retirement. RAs do force people to save but often with layers of fees, which can make them expensive. Many investors are already tied into old generation RAs and have to endure the cost, compounded over years. This is another advantage that Gradidge emphasises with the new RAs. “Old generation RAs are expensive, you are paying the adviser upfront commission. This makes a big difference. It’s expensive for the client and destroys value for the client. What you want in any investment is minimal cost.” The unit trust-based RAs he uses do not have these layers of costs and advisers are not paid upfront commission. “There are also no penalties if you miss payments. With new generation RAs you can stop and start paying at no extra cost. There’s a tax benefit when you go into the RA, a tax benefit while you are in the RA, and if the client’s savings go pear shaped, nobody will be able to touch what’s in the RA.” Therefore, it would seem sensible for investors to incorporate both unit trusts and RAs in an investment portfolio, combining protection of capital with better returns. That might be the case in theory but it goes back to having the most suitable unit trust funds and RAs. That is probably going to need good financial advice from an adviser. Gradidge also warns against holding all retirement money in an RA. “The days of the old generation RAs are over. And when a client is in retirement, if all the money is in a retirement savings product, it can pose a problem. In retirement you will use the RA to buy an annuity, but what protection are you getting from inflation?” Government, as part of its retirement reform, is looking closely at the issue of post-retirement. The State puts the tax incentives in place that make RAs attractive. As most people buy an annuity for income in retirement, often with their pension savings, National Treasury is looking at ways to reform the annuity market. The costs of annuities, including RAs, is one area receiving special attention. investsa

Fiona

zerbst

ne of the key reasons for reform – and it’s a compelling one – is that South Africans are simply not saving enough. Only about 10 per cent of South Africans retire comfortably; the rest end up dependent on the State or on relatives. Treasury claims that, aside from not saving enough, we’re also paying too much away in fees or simply making poor decisions when we retire because we’re not getting the right advice (or if we do enter the advisory market, we’re hit with the high price of advice). But is this the case? A balance needs to be found between making informed decisions about retirement income and the cost associated with those informed decisions. Standardisation proposed Retirement income is governed by the Pension Funds Act, Long-term Insurance Act and the Income Tax Act. While there is standardisation on the products that can be used to provide income (guaranteed annuity or living annuity) there is no standardisation of investment portfolios, fees and the terms and conditions of such products – there are so many retirement funds and insurers with so many different rules. In 2011, there were about 2 500 active funds of 12 different types, excluding insurers providing income products. Treasury’s position is that the structure of retirement income products needs to be standardised; and with standardisation would come standard fees.

Much ado about post-retirement

annuities Roughly 10 years ago, government began to talk about retirement reform. Over the years, Treasury has released discussion papers and done cost analyses in the interests of getting savers a better deal.

“Industry costs are unnecessarily high due to a proliferation of products, choice and complexity,” agrees Steven Nathan, CEO of 10X Investments. “Investors need a simple risk-appropriate portfolio rather than complex products that create an artificial need for advice. These portfolios should be available to the saver at a low cost, without high advice fees.” Jason Sharp, CEO of Paramount Life, argues that consumers should be free to elect to choose their retirement income structure with or without advice, according to their own specific circumstances and risk appetite. “Retirement product mechanics are less complex than the implications of the decision of which product to purchase,” he says. “Retirement can last in excess of 25 years. A retiree therefore needs to understand the long-term ramifications of investment, longevity, inflation and behavioural risks associated with any retirement income decision. This is the crux of receiving ongoing financial advice.” The positive potential of good financial advice can far outweigh the potential of running out of income or taking excessive risk, he argues. The issue, then, is how to bring costs down so clients are still getting advice if they want it, at reasonable cost. Treasury has suggested that financial advice should be fee-based, not tied to products sold, and Nathan agrees. “Direct product distribution costs should be borne by the service provider out of their revenues; it must not come off the investor’s return,” he says. Sharp is strongly in favour of an approach that ensures that financial advisers are remunerated for the advice they provide. FAIS provides a strong regulatory framework for governing quality of advice and therefore using product design for this purpose is unnecessary. If clients want advice, they should not be restricted as to the source from which they pay for it. Treasury has proposed a Retirement Income Trust (RIT) that looks a lot like a living annuity, although there is a distinct lack of investment choice. But according to Almo Lubowski, head of technical and advocacy services at the Financial Planning Institute (FPI), it’s not clear why a new legal vehicle is needed, when amending existing legislation would allow living annuity vendors to offer such a product. “Introducing another vehicle into the annuity market will add to the confusion and complexity,” he says. In fact, simply having the option to use passive investment strategies could well help to keep costs lower, though Lubowski is not sure how many index funds are currently offered on investment platforms (LISP). And Sharp says as new providers like Paramount Life enter the market, competition and innovation

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will revitalise income provision. “Paramount Life offers a living annuity that transparently illustrates the cost of the protection of a life insurancebacked living annuity – the cost of which is negligible with massive protection”, he argues, noting that clients can opt for a comprehensive selection of active, passive or multi-managerbased strategies. The living annuities question Currently, retirees are able to choose between a conventional (life) and a living (phasedwithdrawal) annuity post-retirement. The conventional annuity functions as an insurance product, guaranteeing an income for life, with capital protection offered for a separate premium. The living annuity is an investment product, allowing for a higher draw-down, and you can also bequeath it after your death. But the risk is that members can outlive their capital and investment returns have typically been poor. Treasury says brokers are incentivised to push living annuities on consumers, knowing full well they run the risk of outliving their services. But Gavin Came, a consultant at Sasfin and chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern Africa (FIA), says there are mechanical reasons why living annuities are more easily ‘sold’. “The fees or profits that come out of a conventional annuity are unknown. You may die next year, or at 101, so there is no clear ‘end result’,” says Came. Of course, this is the payoff with any insurance contract, so it’s not confined to life annuities. “In addition, when a client buys a fixed-interest annuity, they are buying the interest rate of the date of purchase and are locked in for life (because you cannot switch from a fixedinterest annuity to a living annuity, though you can do the reverse),” Came says. Sharp does however clarify that, “The calculation of a guaranteed annuity does take account of expected increases in the yield curve. Clients are therefore buying into an expectation of future interest rate increases as opposed to the current interest rates. The protection from ever-improving longevity adds an additional protective dimension.” Nathan points out that a life annuity pays a once-off commission of up to 1.5 per cent of the investment balance, while a living annuity can pay commission of up to one per cent of the investment balance every year, so on average a living annuity pays approximately 10 times more commission. If providers are not making full and frank disclosure when it comes to fees and any conflict of interest, the living annuity itself is not at fault, says Nathan – rather, advice providers are failing their clients by flouting the FAIS Act General Code of Conduct. However, this does rather suggest that dishonest advisers abound and clients are victims, while the FAIS act does, in fact, protect them. Understanding the future implications of a living annuity is crucial – therefore insurers

and advice providers need to make clients aware of accurate projections showing how high draw-downs can deplete income. If they have not developed these projections, they need to do so. Sharp elaborates that the key ingredient needs to be flexibility for individuals, with different risk profiles and income replacement ratios, to be able to select products that ensure a sustainable long-term income with reduced reliance on the State. Rather than introducing new products that may not be in the public’s best interests – a living annuity based exclusively on SA retails bonds, or a conventional annuity with a fixed level escalation of three per cent a year (CPI has compounded at six per cent a year on average for the past 10 years, which would mean a 30 per cent drop in real income within 10 years) – the solution is to target the efficiency of the accumulation and de-accumulation phases and to put more emphasis on helping retirees understand the cost and risk implications of their decisions. Treasury’s proposal that you start off with a living annuity-type approach and shift the annuitant’s investment into a conventional annuity as they age seems interesting, but how this will play out is unclear at this stage.

between interest rates and living annuity recommendations, you will see that advisers have inclined towards living annuities in a low interest rate environment, for good reason,” he says, adding that risk-averse clients may prefer a life annuity, but guaranteed escalation would then be a good option. • That said, clients do need to be made aware of the risks and costs of living annuities. It is critical they understand the implications of draw-down rates. And are hybrid products – for example, living annuities offering a guarantee – all they’re cracked up to be? • Investigate index-tracking products in retirement – some life companies are in fact offering index-linked investments, which is an interesting development. • Sharp says that passive investments provide a cheaper option for those clients who wish to match an index without the risk of underperformance. Understand the performance and cost implications of passive versus active asset management. • Costs need to be considered in relation to the benefits received or to be received for those fees. In many cases paying a little bit more results in greater long-term benefits.

Advice for advisers • Despite Treasury’s concerns regarding financial advice, Lubowski urges advisers to voluntarily subject themselves to the stringent Code of Ethics and Professional Standards requiring higher standards than the FAIS Act. One cannot underestimate the value of quality financial planning. • Treasury has made these retirement reforms a consultative process, so if you have not yet commented, in both an individual and representative capacity, consider doing so. “Treasury wants real scenarios. And if you have an investment base of R500 million, for example, Treasury will pay attention. They have invited the public and NEDLAC to comment – there will obviously be an impact on labour – so if you have objections or recommendations, you should make them,” advises Lubowski. • “When recommending a guaranteed annuity or a living annuity, always consider the risk appetite of your client and their ability to continue to receive a sustainable long-term income. This is particularly important when considering the possibility of major investment or longevity events,” say Sharp. • “Plan around what is happening today – government is likely to recognise existing rights,” advises Came. “The law won’t change what clients need at retirement. They should still be saving 15 to 25 per cent of income. You can’t play a wait-and-see game and lose out on investment time.” • Came is not convinced that advisers have recommend living annuities purely for their own gain. “It’s obviously personal, but with interest rates currently so low, tying clients in to this in perpetuity is unjust. If you look at the correlation

Currently, retirees are able to choose between a conventional (life) and a living (phasedwithdrawal) annuity postretirement.

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Procrastination has serious consequences when saving for retirement Melvyn Lloyd | Investment Analyst at Glacier by Sanlam

People today are living longer than ever before and the need to supplement retirement savings has never been greater. A retirement annuity (RA) allows you to make additional savings, over and above your occupational retirement fund. In addition, RAs offer the potential for tax and estate duty savings.

he crucial thing is to start saving as soon as possible, preferably from your very first pay cheque, and to let compound interest work for you. Research has shown that 95 per cent of people have procrastinated at some point and that a staggering 20 per cent of the world’s population are chronic procrastinators. In this article we illustrate the serious consequences of procrastination when it comes to saving for retirement.

monthly disposable income. This is due to the fact that the longer you wait, the higher the monthly contribution needed to achieve the same targeted investment amount of R5 million at retirement. In the example below, we make the assumption that your salary will increase annually with inflation. As a result, the actual buying power of your monthly salary (R15 000) will remain static, irrespective of your age.

The following assumptions are used (all fees include VAT): • Annual platform fees of 0.57 per cent. • Annual intermediary fee of 0.85 per cent. • Inflation rate of seven per cent. • Recurring premiums will increase by inflation. • Retirement age is 65. • Target investment amount at retirement is R5 million. • Risk profile of investment is aggressive and a real return of seven per cent per annum is assumed. How does procrastination impact your monthly salary? When saving for retirement, procrastination will have a significant impact on your

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As you know, many investors are risk averse and as a result will be invested more conservatively, making the desired outcome (target retirement amount of R5 000 000) even more difficult to achieve. If you start investing at the age of 27 and earn a monthly salary of R15 000, you will have to sacrifice 21 per cent or R3 199 of that R15 000 in order to achieve your investment goal of R5 million. If, however, you wait until the age of 33, you will have to contribute 32 per cent or R4 737 of your monthly salary – which is 11 per cent or R1 538 per month more than the contribution needed at the age of 27. If, in an extreme case, you wait until the age of 45, you will have to contribute a massive 77

per cent of your monthly salary in order to achieve the same investment target of R5 million. From the above-mentioned examples it‘s clear that it becomes increasingly difficult to achieve the target amount of R5 million the longer you delay saving for retirement. It not only means that you have to sacrifice a bigger portion of your monthly salary, but it also translates into making ends meet on a tighter budget due to a smaller disposable income. Here we see the impact your age can have when saving towards retirement. This hopefully illustrates that when you start investing early in life, you don’t have the additional stress of having to contribute a significant portion of your monthly salary in order to reach the same investment target. A very important point is that in this example we used an aggressive risk profile which assumes a real return of seven per cent. As you know, many investors are risk averse and as a result will be invested more conservatively, making the desired outcome (target retirement amount of R5 million) even more difficult to achieve. At the end of the day if there’s one thing that we ought to delay, it would be our constant desire for instant gratification. What we should be doing is looking at the long-term benefits of deferring instant gratification and start making decisions that will not necessarily benefit us in the short term but those where we will reap the rewards in the long run.

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RETIREMENT REFORM: Adding to the attractiveness of your RA Hugo Malherbe | Product Specialist: PPS Investments

Retirement annuities (RA) present investors with a number of attractive tax benefits.

or a start, investment returns generated within an RA portfolio are effectively tax free, as all returns are exempt from income tax, capital gains tax (CGT) and dividend withholding tax (DWT). RAs also allow for a tax-free lump sum withdrawal upon retirement or retrenchment (with withdrawals over and above the tax-free amount taxed according to a sliding scale). However, a feature for which RAs remain particularly popular is the tax deductibility of RA contributions. A portion of an investorâ&#x20AC;&#x2122;s total annual investment contribution can be claimed back from the taxman without any impact on the value of the RA portfolio. By choosing to reinvest the money we are able to reclaim back into the RA, investors are further able to boost total retirement savings without any additional outlay. These unique advantages have already positioned the RA as a favourable alternative for investors who do not require access to their savings in the near future and are seeking to save towards retirement in a structured and disciplined manner. Now, imminent retirement reforms, which National Treasury put forward in its 2012/2013 Budget and which will come into effect on 1 March 2014, will serve to further enhance the value proposition most RA investors are able to access. RA contributions for the tax year ending February 2013 are tax deductible for the greater of 15 per cent of non-retirement funding income (income not already being used for individual or company contributions

to a pension or provident fund), R3 500 less pension fund contributions or R1 750; with any excess being carried forward to the following year of assessment.

By choosing to reinvest the money we are able to reclaim back into the RA, investors are further able to boost total retirement savings without any additional outlay. As of 1 March 2014, individual taxpayer deductions will be set at 22.5 per cent (for those below 45 years of age) or 27.5 per cent (for those above 45 years), of the higher of employment or taxable income. While affording greater potential tax deductions to the majority of investors, government will at the same time limit the maximum annual deductions allowed. These will be capped at R250 000 per annum for taxpayers below 45 years and at R300 000 per annum for taxpayers above 45 years. Importantly, non-deductible contributions (in excess of these thresholds) will still be exempt from income tax if, on retirement, they are taken either as part of a lump sum withdrawal or as part of annuity income.

Effectively, this means that investors below the age of 45 who earn less than R1.6 million per annum (the threshold at which the R250 000 cap equates to 15 per cent of annual income) stand to benefit from these reforms and will be able to reclaim a greater proportion of their annual RA contribution than they are currently able to. However, their peers who earn R1.6 million or more will be restricted from claiming a deduction of greater than 15 per cent. Similarly, investors above the age of 45 who earn less than R2 million per annum will benefit from a potentially larger tax deduction, while those who earn more than this amount will stay capped at 15 per cent. Such highearning investors may, of course, make contributions in excess of the 15 per cent deduction which they are able to claim, but the tax benefit afforded to amounts over this threshold will be deferred to retirement. It is important to emphasise that while these reforms may be disadvantageous to highearning individuals who can currently claim deductions greater than the new prescribed maxima, they favour all investors who earn smaller to moderate-sized annual incomes. And even high-earning individuals may very well continue to be better placed in an RA than in a discretionary investment due to the other tax breaks on offer (and provided that these investors do not require access to their savings before retirement and are comfortable with the asset class limits that Regulation 28 of the Pension Funds Act imposes). The RA therefore remains an attractive retirement savings vehicle which continues to afford very favourable tax benefits.

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Profile

I think that it’s crucial for advisers to get involved and to participate in all legislative reform processes that affect their businesses as early as possible before promulgation.

1. As managing director of Analytics Consulting, responsible for product development, legal and governance, what challenges did 2012 bring to fund managers in terms of meeting regulatory changes? Without a doubt, the most significant challenge faced by fund managers in 2012 from a regulatory point of view, was the Level 1 Regulatory Exams. Fund managers were forced to focus on study material that had, until then, been the sole domain of compliance officers – the Financial Advisory and Intermediary Services Act (FAIS). Many industry participants complained about the manner in which the exam questions were posed initially. However, as the year progressed and the questionnaires were refined to eliminate ambiguous questions, the protests faded away. 2. How different will the regulatory landscape be in 2013? When we view the numerous legislative reforms that are in the pipeline, the main thing to remember is to not panic. My suggestion is to participate in the legislative process with a view to ensuring positive outcomes rather than to shy away from the inevitable. Treat Customers Fairly (TCF) is a consumer protection framework that requires businesses to ensure that specific fairness outcomes are enjoyed by their clients. The good news is that the six outcomes which have been identified are essential for any business that wishes to survive in an increasingly competitive environment. Although there hasn’t been any formal confirmation of the effective date of implementation of TCF at the time of writing, I would suggest that businesses start reviewing the outcomes and complete the TCF self-assessment

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that is available on the FSB’s website. A further legislative development that we need to watch out for in 2013 is the socalled Intermediary Remuneration Review (IRR). The IRR will, among other things, introduce rules relating to the basis on which intermediaries may be remunerated, define when an intermediary will be considered to be independent and potentially outlaw all forms of rebates. Although I don’t foresee its implementation in 2013, further clarity regarding the IRR rules will probably be released for comment this year. 3. How important is it for advisers to take on these challenges and what are the practical implications failing to do so? I think that it’s crucial for advisers to get involved and to participate in all legislative reform processes that affect their businesses as early as possible before promulgation. I recommend that they seek out the opportunities (of which there are many) that lie in the proposed changes and that they position their businesses accordingly rather than focusing solely on the threats to their businesses. Businesses which fail to appropriately position themselves for these changes may miss the important trends that will define successful and unsuccessful financial service providers in future. Then, of course, there is obviously always the risk of regulatory sanction for non-compliance. 4. How much time should advisers dedicate to compliance-related matters? I don’t believe that it’s possible to define the amount of time that should be spent on compliance-related matters. In order for compliance to work in your business, it’s important to nurture a culture of compliance. All management and staff should have a

clear understanding of what the compliance requirements are (which was the primary objection of the Regulatory Exams) and of how to conform to those requirements. 5. Should regulations be more focused on advice or the products being offered? I believe that there is room for the regulation of advice and for specific legislation relating to the various financial products on offer. For example, we currently have FAIS which regulates advice and the Collective Investment Schemes Control Act which regulates unit trust funds. 6. How do you wind down from the pressures of your position? I am a passionate scuba diver so nothing relaxes me more than strapping on a scuba unit and exploring the other seven-tenths of our planet. 7. How do you define success? For me success is measured in terms of happiness and I’m happiest when I’m with my family and close friends and when I’m passionate about my work. “Success without happiness is failure.” – Anthony Robbins 8. Finally, if you had R100 000 to invest, where would you put it? The bottom line when it comes to investments is that the old adage: “If it sounds too good to be true – it usually is,” is more often than not an accurate reflection of reality. I will therefore always go for a well-diversified portfolio of investments that matches my financial needs and objectives. It may sound boring, I know, but then again investments are closer to a fiveday test than a T20!

John Eckstein M anag i ng D i rector : A naly t i cs C onsult i ng

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Head to head

Chief Executive Officer

Financial Planning Institute of Southern Africa G odfre y

1. What do you believe is the most farreaching legislation to be implemented in the financial services industry over the last few years? Without doubt, the most far-reaching legislation to impact the financial services industry in recent years is the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS). This act came into operation on 30 September 2004. FAIS was introduced to regulate the market conduct of those operating within the financial services industry, with emphasis on the nature of the financial advice and intermediary services provided to consumers. 2. What impact has this had on financial intermediaries?

this will be achieved through regulations, but a whole lot more can be achieved by financial advisers making a voluntary and personal commitment to higher levels of competence, ethics and professionalism in how they go about plying their trade. 4. Are your members supportive of such moves or do they oppose them? Our members are fully supportive of the FAIS Act. FPI members will always welcome measures that aim to protect consumers, and more so, measures that will help ensure transparency and professionalism within the industry. CFP® professionals not only embrace such regulations, but they look to go one step better, by voluntarily obtaining the highest possible qualification in this industry.

The FAIS Act is meant to regulate all activities of financial advisers and intermediaries. It requires financial advisers and intermediaries to be licensed and imposes a moving target of certain fit and proper requirements that must be met before they can operate in the industry. The act furthermore requires compliance with a code of conduct which enforces professional conduct by financial advisers and intermediaries in their dealings with consumers.

5. Do you believe your members are fully prepared for incoming legislation, such as Treating Customers Fairly?

3. Do you believe regulators were correct to introduce more stringent legislation?

The TCF regulatory framework is evolving through various discussions taking place within the TCF Steering Committee, on which FPI is represented, that has been set up by the Financial Services Board (FSB). This means that it is difficult to gauge the exact state of readiness of CFP professionals for this regulation. However, based on our understanding of how similar regulations have been implemented in the United Kingdom, we do not foresee that it will be a challenge for CFP professionals.

Absolutely: prior to the enactment of the FAIS Act, there existed very limited legislation governing the market conduct of financial advisers and intermediaries. The furnishing of advice to consumers was barely regulated, which in many instances resulted in poor and inappropriate services or advice, being supplied to consumers. The introduction of the FAIS Act was necessary, so as to systematise and regulate the conduct of financial advisers and intermediaries, thereby ensuring professional service and avoiding market/ consumer abuse. As an industry we are still some distance away from regaining broad consumer trust. Some of 16

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The name taken literarily, Treating Customers Fairly (TCF), is a cheeky reflection of where the industry is at currently, in terms of its service to consumers. One would think that because it makes good business sense for businesses to treat their clients fairly, they will then voluntarily do everything possible to do so.

6. What has your organisation done to ensure members are prepared for these and other regulatory changes? As a professional body, we are constantly combing the local legislative/regulatory

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environment and leveraging our wide international reach, through our affiliation with Financial Planning Standards Board (FPSB), to advocate for views to members, policymakers and industry players that help strengthen financial planning as a distinct discipline that will be beneficial to all South Africans. As the custodian of the financial planning profession, it is the FPI’s responsibility to nurture the profession and help ensure that all financial planning professionals are part of the evolutionary journey of the profession as new legislations and regulations are introduced. 7. Do you think further regulation is required within the financial services industry? If so, what? Regulation is a critical part of ensuring that there is general fairness in the market place and, if used judiciously, a mechanism through which desired strategic and tactical outcomes can be pursued. As such, FPI generally welcomes regulation as a means of achieving important ends. The FAIS Act, together with subordinate regulations put in place by FSB has been massively instrumental in shaping the industry. TCF is certainly a step in the right direction, especially if implemented correctly. 8. Lastly, what is your advice to intermediaries who are struggling to comply with various legislative changes? My advice to such financial advisers and intermediaries is to find a way to comply or consider a different industry. There is simply no getting around compliance in this industry anymore. It is more than just compliance; it is about doing the right thing for the public. We need to change public perceptions and regain their trust. The CFP®, CERTIFIED FINANCIAL PLANNER® and are trademarks owned outside the U.S. by Financial Planning Standards Board Ltd (FPSB). The FPI is the marks licensing authority for the CFP Marks in South Africa through agreement with FPSB. Visit FPSB’s website for more information at www.fpsb.org.

Chief Executive Officer

Financial Intermediaries Association of Southern Africa (FIA) J ustus 1. What do you believe is the most farreaching legislation to be implemented in the financial services industry over the last few years? Legislation governing competency requirements, specifically the Financial Services Board (FSB) Regulatory Examinations (RE), definitely had the greatest impact on the industry. These REs were offered in a format that some intermediaries found difficult to master, despite proper preparation and several attempts at writing the exams. However, they are slowly becoming recognised as a necessary step towards professionalising the industry. 2. What impact has this had on financial intermediaries? We have seen two major impacts of the RE on intermediaries. Firstly, the financial burden in respect of training, study material, exam fees combined with the financial impact on business continuation and potential loss of income. Secondly, failure to pass the exams resulted in a loss of valuable experience and, in many cases, financial services providers (FSP) had to lapse their licences. This had the spin-off effect of valuable staff and representatives seeking other employment in a shrinking financial services career environment. Many FSPs closed shop and entered into associations with other FSPs as a solution to this problem. 3. Do you believe regulators were correct to introduce more stringent legislation? There is no doubt that there was a need to professionalise the industry. Hindsight is the perfect science and it is easy to criticise now, but we need to learn from the mistakes made and ensure that the industry consults widely with regulators in order to ensure that processes are fair and seamless. 4. Are your members supportive of such moves or do they oppose them?

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P letzen

The FIA encouraged and supported its members from the outset. We also believe that the FIA members in general were the best equipped to tackle the challenge and come out successful. There will always be different opinions, but in general our members have been supportive and as the FIA, we applaud them for their continuous effort and perseverance.

As a member organisation we have the huge responsibility to communicate and guide our members on a day-to-day basis on industry news and developments. This is achieved via internal communications, workshops presentations, guidelines and templates on our member website, for example. The different executive committees (short term, financial planning, employee benefits and healthcare) will identify solutions and provide guidance to the membership.

The FIA is represented on the FSB TCF Steering Committee and we will make sure that our members are informed and educated about TCF developments as appropriate.

7. Do you think further regulation is required within the financial services industry? If so, what?

5. Do you believe your members are fully prepared for incoming legislation, such as Treating Customers Fairly? The emphasis and focus during the last 18 months has been on RE Level 1 and binder agreements. Although the emphasis of TCF will be on firms, intermediaries will not be excluded. The FIA is represented on the FSB TCF Steering Committee and we will make sure that our members are informed and educated about TCF developments as appropriate. The FSB will also attend the FIA regional conferences to share background and developments which will ultimately enable members to prepare themselves and their practices accordingly. 6. What has your organisation done to ensure members are prepared for these and other regulatory changes?

We have come a long way and have achieved a great deal in the South African financial services sector over the past few years. TCF will address most of the gaps that remain. My greatest concern is how regulators are going to address institutional failure. There are too many schemes, regulated and non-regulated, where investors, and more so the elderly, lose their life savings. We need to be more proactive in identifying these fraudsters. 8. Lastly, what is your advice to intermediaries who are struggling to comply with various legislative changes? There are probably two reasons why intermediaries might be struggling. The first is that they may find it difficult to cope with the volume of change. They need to realise that regulation is here to stay and that legislative changes are taking place globally, for positive reasons. The bigger challenge is the additional administration and financial burden on intermediaries, large and small. Business plans need to be revisited and diversification should be considered. We have already seen many mergers and acquisitions during the past few years, though many highly successful one-man practices remain. Being a part of the FIA gives intermediaries the opportunity to share views and learn from one another.

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Fiona

zerbst

budgeting for uncertainty In October 2012, at the time of the Medium-Term Budget, Pravin Gordhan stated that revenue collections were R5 billion under target, and this was before the fiscal effects of the drastic slowdown in mining production post-Marikana. This means that the screws will be turned even tighter for taxpayers.

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February’s budget is unlikely to be kind to South Africans and investors may once again be hard-hit, says Fiona Zerbst.

n as much as GDP tells us stories about growth – and it is probably still the best indicator to measure this, despite shortcomings – what is clear is that global growth is slowing down. China’s economic growth fell to a three-year low in December, growing by only 7.6 per cent over a year earlier. China is cutting interest rates and boosting spending to maintain growth, but with the US recovery some way off and Europe still battling recession, major regions are facing tough times. Add volatility to the mix and growth scenarios become even more uncertain. South Africa is also facing tough times and budgeting in an uncertain geopolitical context puts pressure on the fiscus, says Idasa researcher Len Verwey. “We have been running larger deficits as private demand has contracted but the issue is whether the transition to smaller deficits can be achieved even if growth does not occur to the hoped-for extent,” says Verwey. The 2012 Medium-Term Budget Policy Statement (MTBPS) assumes a real GDP growth, for 2013/14, of 3.2 per cent, followed by 3.9 per cent for 2014/15 and 4.2 per cent for 2015/16. “In October 2012, at the time of the Medium-Term Budget, Pravin Gordhan stated that revenue collections were R5 billion under target, and this was before the fiscal effects of the drastic slowdown in mining production post-Marikana. This means that the screws will be turned even tighter for taxpayers,” says Magnus Heystek, director of Brenthurst Wealth Management. If the private sector doesn’t recover, and that’s partly dependent on European and global economic recovery, we may well face a bleak year. We can no longer increase real spending every year to address our challenges. Verwey feels that debt servicing will remain the fastest-growing expenditure item in the budget over the medium term. The MTBPS says we need to move away from recurrent expenditure towards capital expenditure. But our ability to establish and maintain effective multi-stakeholder partnerships is weaker than it was preMarikana and, if we couldn’t manage the

necessary structural economic transformation during our ‘golden age’, what hope now? “If the global economy continues to perform poorly, then the South African economy will continue to perform poorly, and tax revenues will not recover as anticipated,” predicts Verwey. Do we cut spending in real terms, which has never happened in democratic South Africa, or maintain deficits that are too large and risk running into severe debt?

Both CGT and dividends tax are perceived as a tax on the wealthy but we need to remember that all of us who have retirement funds (including all government workers and mineworkers) are affected by increases. Against this broadly bleak macroenvironment, we need to look at likely moves Treasury may make in February, particularly with regard to retirement funds. A key question is: will dividend tax remain at 15 per cent? It was hiked from the 10 per cent in April last year and this is easy money for government, so it certainly won’t be reduced. “During his Budget Speech last year, the minister was at pains to point out that our dividends tax rate is low by international standards, which makes me think he might have been preparing us for an increase this year,” says Warren Ingram, director of

Galileo Capital. Heystek agrees, adding that a further increase in CGT looks likely, along with an increase in company taxes, almost as a penalty for not investing the mountains of cash they are sitting with. “Both CGT and dividends tax are perceived as a tax on the wealthy but we need to remember that all of us who have retirement funds (including all government workers and mineworkers) are affected by increases,” warns Ingram, adding that an increase would be a negative for investors. Heystek says the extent of the increases will be determined by social spending ambitions, on the one hand (and we have already seen a hint of a national unemployment payment, which will cost R30 billion), and the effects of further incometax slowdowns. It’s hard to predict just how steep these increases will be, however. What will be on the budget wish list? “What would be great, and not likely any time soon, is for private investors to be able to invest as funds,” says JustOneLap’s Simon Brown. “The issue is that we get hit by tax and dividends tax. Every time I sell, I pay tax, whereas funds do not. This really hurts the private investor. But this isn’t on government’s agenda.” “My hope for this budget is that Treasury creates additional incentives for private individuals to save. This could take the form of no tax on RSA retail bonds and similar investments. I also hope for some further clarity on the proposed retirement savings reforms as this uncertainty is detrimental to the industry,” says Ingram.

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Asset

management

CASH IS KING: C

businesses urged to put cash assets to work

orporate cash balances have been rising steadily since mid-2010, according to data released by the South African Reserve Bank (SARB) for October 2012, that non-financial corporate cash balances are sitting at a record R554 billion. Meanwhile, business confidence has been falling since the first quarter of 2011 – indicating a relationship between local business confidence and the confidence that corporates feel with regard to the local economy.

“The graph indicates that there seems to be a strong inverse relationship between business confidence as reported by SA Chamber of Commerce and Industry (SACCI) and corporate cash balances,” he says. Corporates are holding onto higher cash balances as banks are not lending as freely as they used to. Furthermore, projects are being deferred due to political and economic uncertainty and companies are increasingly hesitant to invest their capital into local projects and are opting to hold the cash instead. However, while it is understandable that many corporates are adopting an overly conservative balance sheet in the face of market uncertainty, there are opportunities to capitalise more effectively on the potential returns their cash piles generate. Segar warns that in the prevailing low interest rate environment, fortress balance sheets or surplus cash on balance sheets creates significant drag on earnings and returns in equity.

This is according to Sean Segar, head of product at Nedgroup Investments, Cash Solutions, who says corporate cash balances have been rising steadily since mid-2010. Segar adds that it is an anomaly that corporates have so much cash despite tough trading conditions and low interest rates and points to the relationship between business confidence and corporate cash balances as illustrated in the graph below.

Business confidence for December 2012 recorded a small increase. Sacci’s Business Confidence Index (BCI) improved from 91.7 points in November 2012 to 93 in December 2012. Sacci economist Richard Downing says while there was some improvement, business confidence was still not at a convincing level for investors. Segar feels it is too early to determine if this is the start of a positive trend and, despite this recent uptick, average business confidence for 2012 is the lowest for more than a decade.

“At some point business confidence will rise again from current low levels. This will only follow some domestic political stability and an improvement in both the local and international economies. When this happens it is likely that corporate cash balances will fall, but until then it is important that corporates make what cash they have work as hard as possible.”

Self-investment – reckless or responsible? In the current uncertain economic times, many investors in search of some level of control are looking to manage their own assets. As a result, we have a look at the debate around online trading as part of an asset management strategy – and what is necessary in order to ensure successful online trading.

South Africa has one of the lowest household savings rates, even among developing nation peers. As a result, the likelihood of South Africans choosing to self-invest – whether through short-term trading, selecting a unit trust or managing one’s own equity portfolio – is also alarmingly low.

trading tend to discourage South Africans from taking charge of their own financial strategy. “Education is crucial in changing this mindset. Unlike many financially mature nations, South Africans are simply not brought up with the concept of self-investing and this trend is increasing. People believe that self-investment is reckless, that selfinvestors do nothing but self-invest and that those who do so have to have lots of money to self-invest. The reality is very different and the biggest challenge we face as an industry is educating investors; firstly about what online trading is and, secondly, how to self-invest safely and successfully.”

This is according to James Saulez, CIO and head of online trading at GT247.com, who says widely held negative perceptions of online

According to Saulez, in the last 12 months, only 33 per cent of GT247 customers who opened accounts went on to place their

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first trade. “The South African broking community is not adequately addressing this problem. No-one offers a deep level of learning assistance and we find customers seeking comfort in overpriced rapid learning solutions, not putting in the required hard work to educate themselves or simply giving up before putting their toes in the water. All three scenarios generally lead to a shortlived experience in stock market trading.” The answer lies in providing practical and experiential-based mentoring, managed by a dedicated team using education systems proven in other industries. “The answer also lies in industry collaboration. We intend engaging with all stakeholders who have a common goal in the growth of the retail market segment,” Saulez says.

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Alternative

investments

Can listed property keep its gains? Ian Anderson | chief investment officer at Grindrod Asset Management

South Africa’s listed property sector returned 35.9 per cent in 2012, but is not expected to produce a similar return in 2013. While this is not a difficult assumption to make, the bigger question for investors is whether or not the sector will give back some or all of those gains in the year ahead. A good starting point to answer that question would be to look at what contributed to the sector’s return in 2012.

isted property is unique among South African asset classes in that it provides investors with both an inflation-beating income yield and inflation-beating income growth, both of which contribute to total return each year (capital growth is a function of income growth over time). During 2012, the combination of income yield and income growth would have generated a return of approximately 15 per cent, or half of the total return for the year. So where did the other 15 per cent come from? In July, the South African Reserve Bank (SARB) unexpectedly cut the repo rate by 50 basis points. The message being communicated to the market by the SARB and other central banks around the world was that interest rates would stay lower for longer in an effort to resuscitate an ailing global economy. Interest rate sensitive sectors like banks, retailers and listed property all responded positively to the news. From the end of May to the end of August, the listed property sector rallied an impressive 22.7 per cent, as investors were prepared to accept a lower yield on listed property in a lower interest rate environment. At the same time, foreign investor interest in the sector increased on news that Real Estate Investment Trust (REIT) legislation would become a reality in South Africa during 2013. REITs are the de facto standard for listed property vehicles throughout the world, having been introduced in the United States during the 1960s to allow the man in the street access to the benefits of commercial

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and industrial property in a tax-efficient manner. A number of South Africa’s largest listed property companies are expected to enter global REIT indices during 2013 and many fund managers have already started acquiring positions in these companies ahead of their inclusion.

The message being communicated to the market by the SARB and other central banks around the world was that interest rates would stay lower for longer in an effort to resuscitate an ailing global economy. It is clear therefore that last year’s phenomenal returns were impacted by a move to lower official interest rates in South Africa, as well as the introduction of significant foreign investors into the sector. It stands to reason that a move to higher official interest rates in South Africa or significant foreign selling would result in price weakness in the sector during 2013. While neither of these scenarios can be ruled out, it seems unlikely that the SARB will raise interest rates in South Africa until there’s a sustained recovery in the country’s economy. Foreign investors can be quite fickle and a sell-off due to foreign investor concerns

about South Africa can never be ruled out. However, REIT legislation is being introduced in the second quarter of this year, which is likely to lead to a further bout of foreign buying, particularly among the larger, more liquid listed property companies. While this is unlikely to be a catalyst for further dramatic capital appreciation, it is likely to provide support for current valuations. It is worth noting that the listed property sector in South Africa has developed into a two-tier market and there are still a number of opportunities for more astute investors willing to look beyond the top five or six companies by market capitalisation. According to research compiled by Grindrod Asset Management, the historic income yield on the 15 largest securities by market capitalisation was just 6.25 per cent at the end of 2012, while the historic income yield on the 16 smallest securities by market capitalisation at the same time was a very attractive 8.46 per cent. The smaller listed property companies, which didn’t benefit from last year’s foreign buying, continue to offer investors extremely attractive initial income yields, as well as the prospect of inflation-beating income growth of between eight and 10 per cent per annum over the next three to five years. The larger, more liquid property companies, on the other hand, offer significantly less value and are at risk of giving back last year’s gains if interest rates rise unexpectedly or if foreign investors turn sellers during 2013.

Chris

Hart

Investment objectives

and outcomes Chris Hart | Chief Strategist, Investment Solutions

n 2012, the JSE managed a strong performance despite a background of negative trends and events. The global economy has been slowing and the SA risk profile deteriorating, culminating in the downgrade of the credit rating and the widespread labour unrest late in 2012. The US fiscal cliff dominated the news at year-end, emphasising serious structural issues in US government finances. However, negative economic trends were met with a very determined response from central banks with quantitative easing (QE) expanded to infinity and a long-term commitment to keep interest rates at ultra-low levels. Debt levels continued to escalate as a consequence and the recovery spluttered along. Essentially, investors faced many conflicts but still managed a good outcome. Central bank commitment to the current policy path means negative real interest rates will dominate investment planning for some time. Tax rates are also climbing as governments seek to sustain unsustainable fiscal trajectories. Financial repression is on the rise and this means continued distortions to investment strategies. Ultra-stimulatory monetary and fiscal policies are also distorting the investment time horizon.

The effect is to artificially boost the short term but with damage to the long-term outlook. This means investors need to evaluate their investment objectives and their risk appetite more than ever.

cash for both capital and income. Unfortunately, the strong intrusion of policymakers into the investment arena generates a higher degree of uncertainty over the long-term performance of different asset classes. Only one outcome has become more certain â&#x20AC;&#x201C; cash will be obliterated by inflation given the entrenchment of negative real interest rates. Bonds are also unlikely to provide much protection from the ravages of inflation. However, while policy measures support riskier assets such as equities (where risk is volatility) over the short term, overvaluation is a risk that threatens the long-term prospects.

Risk evaluation is critical to understand what risk exposure needs to be taken and what needs to be avoided. For example, shutting down volatility risk means taking on inflation risk. Reducing inflation risk implies higher volatility risk. This is due to the nature of assets required to reduce a particular type of risk. However, volatility risk and inflation risk have been enhanced through ultra-low interest rates and excessive systemic liquidity. Rising financial repression risk can be diminished by investing through multiple jurisdictions. Against the backdrop of a comprehensive risk evaluation needs to be the determination of the investment objectives. Enhancing income or capital? The effect of risk on income and capital is different. For example, cash has the lowest volatility from a capital point of view but its income volatility is high and is not as reliable as dividends. Capital volatility of equities is high but the income volatility of dividends is a lower risk and dividends on blue-chip equities provide a high degree of protection against inflation and income volatility. Inflation risk is highest for

In addition, assets with their own intrinsic value such as property and precious metals also need to be considered, given the value erosion risk currently contained in assets that depend on confidence for their value, principally cash and bonds. Understanding the interplay between policy, different risk factors and investment objectives is essential to reduce the prospects of being disappointed in the ultimate investment. Too often, investors are placed in an inappropriate investment strategy because risk and investment objectives are not properly assessed.

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Economic

commentary

Investment themes to dominate 2013 Philip Saunders | Head of Investec Asset Managementâ&#x20AC;&#x2122;s Multi-Asset team and Max King, Strategist in the Multi-Asset team

1. Divergent economic prospects Over the last year, forecasts for global growth in 2013 have been stable at a little over three per cent on a purchasing power basis, and a little under 2.5 per cent on actual currencies. However, divergence is likely to increase. Overall, growth in emerging economies is likely to remain strong and in developed markets weak. Slow economic growth in developed markets will not necessarily prevent solid increases in corporate revenues and profits. 2. No end to the Eurozone crisis There is no solution to the crisis without a return to growth in the peripheral countries, but remorselessly declining money supply in these countries will ensure a continued squeeze. The authorities are focused on a futile attempt to control deficits, keep down funding costs and reverse increases in debt ratios. However, there is no light at the end of the tunnel for the peripheral economies, no prospect of their reversing the capital outflows and no plausible long-term alternative to a rolling break-up of the Eurozone. The suggested investment implication is to avoid the bonds of stressed European governments and the equity of vulnerable banks. 3. Equity returns likely to be positive Equity returns last year were satisfactory rather than strong, but after 18 months of corporate earnings forecasts being steadily eroded, we think stabilisation is near. Forecasts for earnings growth for the last quarter of 2012 and for 2013 look realistic overall; this should ensure positive market returns and rather more if earnings growth looks likely to continue into 2014. The upward path will not be smooth but setbacks are likely to be modest, as they were in 2011. Reasonable valuations, earnings growth and support from dividend yields point to global equities being an attractive place to invest. 4. Persistent inflation is a growing threat Even with an endless depression in much of 24

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the Eurozone, inflation is expected to remain around two per cent. In the US and UK, inflation is likely to be higher. The risks are to the upside; near zero interest rates and continued quantitative easing will be very difficult to reverse in a timely manner if growth resumes. With a return to positive real interest rates still a distant prospect, a further rise in the gold price looks likely. The suggested investment implication is to hold physical gold. Gold equities, which disappointed in 2012, should perform better if costs are controlled. Inflation-indexed bonds should outperform conventional bonds. 5. Resource equities can add value

Emerging market debt should continue to be a bright spot in the global bond market, offering falling yields and appreciating currencies. 8. Quality stocks at reasonable prices will continue to outperform Contrarian investing in out-of-favour stocks and sectors can be highly rewarding, but the investment world is full of value traps. Change is faster and more disruptive than ever, making it harder for companies that fall behind to catch up. The world is full of value investors, but there are far fewer prepared to pay up for quality, sustainable growth and strong market positions.

In recent years, share price performances have varied enormously. The best companies have raised output, kept costs low, secured new resources on advantageous terms, avoided extravagant acquisitions or projects, kept debt comfortably affordable and returned cash to investors via dividends and buy-backs. The companies that have been slow to learn are benefiting from new management and shareholder pressure. Provided commodity prices do not fall sharply, companies can continue to prosper. Stock-picking is key to successful investment in this sector.

9. Active rather than passive

6. Be selective with mega-caps

The first decade of the millennium brought two of the worst four bear markets since 1900. 2010 and 2011 saw significant corrections as investors, fearing a third occurrence, rushed to sell at the first sign of turbulence only to see markets rebound strongly. In 2012, corrections were much more modest as most investors had learned not to chase markets in either direction. Trading the market usually destroys value. 2013 is likely to be no different; investors should expect to invest for the long term and accept the ebbs and flow of sentiment.

Market indices around the world are dominated by companies that have seen better days. They look cheap and offer tempting dividend yields but often face serious strategic challenges. Some will prosper and some rejuvenate themselves, but most are likely to continue to languish. We believe small, mid and the smaller large-cap equities will outperform. 7. Emerging market opportunities Emerging market equities are starting to perform better after nearly two years of underperformance. They look undervalued relative to global equities on a PE discount of 14 per cent with similar earnings growth. Any evidence of better translation of economic growth into corporate earnings would be very positive.

Passive approaches may be low cost, but that comes at a price. These investors favour a market weighting in the index dinosaurs, tend to automatically buy equity issuance and automatically sell, generally at the wrong time, stocks that fall out of indices. This approach cannot pre-empt the market however compelling or repelling the companyâ&#x20AC;&#x2122;s prospects and valuations are. 10. D onâ&#x20AC;&#x2122;t try and trade the market

ETFs

index tracking one of top investment

opportunities for 2013 Diane Radley | CEO of Old Mutual Investment Group SA (OMIGSA)

Despite the difficult investment conditions heading into 2013 with local equities generally expensive and bonds and cash investments offering low yields, at OMIGSA we see four important trends and opportunities for investors to be mindful of: asset allocation; global investments; index tracking and alternative investments.

ver the past three years, like their offshore counterparts, many local investors have been moving away from money markets in search of both higher yields and more diversification through asset allocation funds. According to ASISA, these funds have grown from 22 per cent to about 31 per cent of total unit trust industry assets currently under management.

If you had added some offshore exposure at the beginning of 2012, you would have benefited from both the good gains in offshore equities and the weaker Rand – the local currency depreciated 8.3 per cent against the US Dollar and 8.6 per cent against the UK Pound in the 12 months to the end of October, while the MSCI World Free Index returned 10.1 per cent and the US S&P 500 produced 15.2 per cent in US Dollar terms.

Diversification is always a wise option, since it helps to lower risk in these times of high equity valuations and volatility, while also offering the potential for good returns through some exposure to rising equity and listed property markets, as well as bond markets. Would anyone have been able to predict that listed property – after its strong showing in 2011 – would again perform so well in 2012? Importantly, asset allocation funds need to be actively managed in line with fast-changing market conditions to help avoid losses when markets take a dive, or to capitalise on improving conditions.

Interestingly, an increasing number of investors wanting to lift their global holdings have been doing so using index tracking funds. Index tracking is immensely popular in the US and Europe, and our own National Treasury has recently stressed that South African investors should look to incorporate more index tracking funds in their investment strategies, especially considering the lower fees they offer.

Another popular diversification option has been global investments. Many analysts, including our own, have been advocating an increasing allocation to global equities over the past two years. The principal reasons for this are the more attractive equity valuations available and the likelihood of Rand depreciation. Almost all of the multi-asset class funds managed by OMIGSA’s MacroSolutions are currently sitting with the maximum allowable 25 per cent of their assets in global markets (mandates permitting).

Costs are a critical consideration for investors in today’s lower-return world. Considering inflation at five to six per cent, the real returns we are receiving today are much lower than the exceptional double-digit returns prior to the 2007 global financial crisis. Index tracking funds such as the unit trusts offered by Dibanisa Fund Managers, for example, typically have total fees of less than 1.5 per cent. Dibanisa’s global and local index tracking unit trusts continue to gain in popularity among both institutional and retail investors. In 2011–2012, they attracted over R16 billion in inflows into their funds offering offshore exposure; their recently launched fund tracking the FTSE RAFI All World 300 Index has been especially sought-after.

A final opportunity we see for 2013 lies in the alternative investing arena, spanning private equity, infrastructure and development or SRI investments. Here the diversification theme applies again. Thanks to their low correlation with equity and bond markets, these investments can act as significant diversifiers to a portfolio by both lowering the risk and increasing the return potential. Changes to Regulation 28 of the Pension Funds Act now allow retail investors to invest more in private equity funds, while infrastructure and SRI investments are more tailored for institutional investors. These investments require long time horizons of around 10 years to benefit fully from the returns available. Through OMIGSA funds like the IDEAS Fund, Housing Fund and Schools Fund, institutional investors are able to participate in funding the government’s renewable energy programme and other important infrastructure projects like roads, railways, airports and prisons, not to mention affordable housing and low-income schools. This all contributes to improving the country’s socio-economic base and future sustainable growth potential. So for 2013, it is diversification through the above opportunities that is critical to getting the best possible returns out of today’s difficult markets. The trends tell us this, as do time-tested asset management principles. Cost considerations are also important, which means that index-tracking solutions, blended together in a portfolio with actively managed funds, are a smart option in today’s lowerreturn world. investsa

Industry

associations

TCF a cinch for advisers who implement FAIS – Part 2 Almo Lubowski CFP® FPSA(TM) | head of technical and advocacy services at The Financial Planning Institute of Southern Africa (FPI)

his is the second part of the comparison between the six TCF outcomes and how they match up with the FAIS Act. The aim of the comparison is to indicate that if the FAIS Act is being comprehensively applied in your financial advisory practice beyond a mere compliance function, but as a framework for good business practice, there should be very little that needs to change to achieve the TCF outcomes. For part 1 and the first three outcomes, you will need to refer to the INVESTSA, January 2013 issue to see the comparisons. The next outcome is Outcome 4 – Where customers receive advice, the advice is suitable and takes account of their circumstances. The Code of Conduct makes provision for the suitability when furnishing advice to a client in section 8 of the Code of Conduct of FSPs. In terms of section 8 of the Code of Conduct, an FSP must “take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice”. Furthermore, an analysis must be conducted based on the relevant information for the purpose of the advice. Following this a financial product or products can be identified that will be appropriate to the client, in relation to their risk profile and financial needs. The FSP must ensure that it takes all reasonable and necessary steps to ensure the client understands the advice given and the client is able to make an informed decision.

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The management of conflicts of interest is important in receiving suitable advice and product solutions in that an FSP should act in the best interest of the client and not because of a specific incentive or benefit it may be receiving from a product provider or any third party for that matter. This is dealt with in section 3A of the Code of Conduct.

As an FSP is more concerned and involved with the service that is extended to clients, it would be prudent to begin with the ability to provide that service. According to the fit and proper requirements, certain operational abilities are required of all FSPs. These requirements would therefore ensure that the service delivered to the client is of an acceptable standard.

Outcome 5 – Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.

Outcome 6 – Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

The FSP must ensure that it takes all reasonable and necessary steps to ensure the client understands the advice given and the client is able to make an informed decision. Once again this outcome would point mainly to a responsibility that would be carried by product suppliers that are creating the products. However, it points back to what information is given to the client and what was disclosed in this regard. The requirement of suitability of advice and products as outlined above would also play a significant role in meeting this outcome, due to the fact that unsuitable products will certainly not perform in line with the specific needs that the client may have.

Again this outcome is aimed mainly at product providers. However, often the customer’s link to the product supplier is the financial adviser and specifically, if there is a form of agreed ongoing service between the parties there would be an obligation to assist the customer when they need to deal with the product supplier, this can be implied by the fact that an adviser is obliged to give yearly information (at a minimum) to the client on their product portfolio in terms of section 7 the Code of Conduct. At that point there may well be a desire to cancel, switch or change aspects of the current portfolio and naturally the adviser or intermediary would need to assist with this. As mentioned previously, the principles and stringent requirements of the FAIS Act, if applied adequately and not just as a compliance exercise by an FSP, fair outcomes would certainly be achieved. It must be noted that the comparisons in parts 1 and 2 were a very brief comparison between TCF and the FAIS Act and was adapted from the writer’s dissertation in partial completion of his LLM degree.

Morningstar

Morningstar launches analystdriven ratings and research reports for South African unit trusts David O’Leary, CFA, MBA | Director of Fund Research, South Africa | Morningstar South Africa

Morningstar’s Analyst Ratings are qualitative, forward-looking visual representations of the analyst team’s view of a fund’s potential to succeed.

n November 2012, Morningstar launched analyst-driven unit trust research to South Africa. While we have been conducting fund research since 1986 this marks our first foray into Africa. The launch introduces two ground-breaking tools to help South African fund investors and advisers: the Morningstar Analyst Rating and the Global Fund Report. Both tools are designed to convey Morningstar’s expectations for a unit trust’s ability to produce future outperformance. Morningstar Analyst Ratings are assigned globally on a five-tier scale running from Gold to Negative. The top three ratings, Gold, Silver, and Bronze – what we call Morningstar Medallists – all indicate that our analysts recommend a fund; the difference between them corresponds to differences in the level of analyst conviction in a fund’s ability to outperform its benchmark and peers through time. The Neutral and Negative ratings are assigned to funds that we lack confidence in or believe are impaired in some way.

The ratings should be interpreted as follows: • Recommended ratings:

o Gold: Best-of-breed fund that distinguishes itself across the five pillars (our ratings criteria) and has garnered the analysts’ highest level of conviction. o Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars; strengths that give the analysts a high level of conviction. o Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, with sufficient level of analyst conviction to warrant a recommended rating.

• Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform.

• Negative: Fund with at least one flaw that is likely to significantly hamper future performance, and is considered an inferior offering to its peers. Morningstar’s fund research is completely independent. We do not seek or accept payment from fund companies for issuing ratings or reports on funds. Morningstar was founded on the belief that investors have the right to unbiased information and analysis and we continue to hold that belief today. This gives us the freedom to speak frankly about a fund’s prospects and to rate those funds that investors most care about. We are also introducing the Global Fund Report (GFR). This report details the research our analysts have conducted and discusses the factors that have led to the fund’s Morningstar Analyst Rating. The GFR also provides robust quantitative data to help investors understand a fund’s characteristics.

Morningstar’s evaluation of a fund is based on five key criteria or pillars: People, Process, Parent, Performance and Price. Fund analysts use a combination of public data, proprietary data and extensive meetings with fund managers and fund company executives to inform their research. All ratings are subject to a rigorous peer review process and require approval through Morningstar’s global ratings committee. Morningstar-rated funds are monitored constantly and our reports and ratings are updated anytime a significant development occurs that may change our thesis (e.g. a change of fund manager). However, we do strive to update reports annually whether or not any significant developments occur. The Morningstar Analyst Rating and Global Fund Report can be found in the following Morningstar products: • Morningstar Direct • Morningstar Advisor Workstation (available in 2013) • www.morningstarsa.co.za

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Practice

management

The case for

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

Justice is often graphically illustrated as a blindfolded lady holding an old-fashioned scale. The blindfold obviously hints at impartiality, and the scales at fairness and balance.

icture these same scales being used to measure the relationship between regulatory controls and clarity. The more clarity there is, the less controls are required to ensure compliance. Unfortunately, the opposite also applies.

The best example I ever saw of this was on the road from the airport to the capital of Singapore. On our left was an army base, which was a no-go area for unauthorised people. There was no written sign, only a drawing of someone, climbing over the fence, being shot. You did not need to understand the language â&#x20AC;&#x201C; the message was crystal clear. In our young democracy, new legislation is often a conflict between good intentions and poor execution. In some cases, the old adage about the paving of the road to hell comes to mind. A cynic once defined controls as the tools, systems, processes and other activities often devised to make it more difficult for people not to comply with requirements and demands. Legislation requires that all possible angles are covered. While this makes sense in the legal environment, it becomes a problem when the man in the street is dependent on applying legalese to earn his livelihood. This is particularly evident in the financial services industry, where

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the regulator had to implement regulatory examinations to ensure that laymen knew and understood what the FAIS and FIC Acts required of them.

the part of the regulatory authorities, and rightly so. Consumerism demands that people understand their rights and obligations.

A cynic once defined controls as the tools, systems, processes and other activities often devised to make it more difficult for people not to comply with requirements and demands.

Perhaps the lawmakers should practice what they preach. What goes for consumers, also applies to financial advisers. They are experts in the provision of financial advice. They are not lawyers.

When virtually every new piece of legislation is followed by an explanatory circular or an amendment to recently released legislation, there is a problem. This can escalate to a scenario where not even the regulator is sure of the correct application of the law. The knee-jerk reaction is to add more controls, rather than to clarify. This sets in motion a chain of events which is very difficult to turn around. A perception in the market that the custodian of the law is not in full control leads to resistance to compliance, schemes to avoid it, or attempts to manipulate it. The Regulator, in reaction to this, makes full use of the powers it is endowed with, which widens the chasm between the two parties. The simplification of policy documents is a huge focus on

Simplification also removes the smoke and mirrors concealed in the fine print which some unscrupulous operators use to avoid fulfilling the obligations expected by their victims.

Understanding leads to acceptance, uncertainty to distrust. This problem is exacerbated by the introduction of legislation which focuses on outcomes, rather than rules. The soon to be introduced Treating Customers Fairly is one example of such legislation. The initiative will no doubt be welcomed by the industry with the same expectations that it had of FAIS. What the practical experience will be remains to be seen. Increasing pressure is being placed on the regulators to play a more preventative role where financial scams are concerned. Complexity of rules makes it easier to hide untoward practices, as appears to have been the case in the Herman Pretorius saga. A final thought Increased engagement with the industry ensures better insight into the practical development and implementation of legislation, as well as buyin and self-regulation from those affected. This will, of course, lessen the need for strenuous control measures.

Jan Delport, Leadership 2000

Regulatory

developments

New regulations

to raise the risk management bar for hedge funds Carla de Waal | Head of Funds of Hedge Funds at Novare Investments

How hedge funds manage risk in their businesses and investment portfolios is evolving under new proposed regulations that are expected to encourage a broader retail investor market to consider including hedge fund strategies in their portfolios.

arla de Waal, head of funds of hedge funds at Novare Investments says, “Investors and regulators are placing greater emphasis on risk management. For example, the recently published proposed framework for the legislation of South African hedge fund products says that all funds should have a risk management programme (RMP). In the proposed framework issued by the National Treasury and Financial Services Board (FSB), there is a section dedicated to risk management, which incorporates disclosure of conflicts of interest, valuation, liquidity, segregation of assets, leverage and service providers like the auditor and compliance officer.”

to be adaptable in order to add value. It is also important to understand the challenges of risk management, including that reality often plays out differently to theory, betas and correlations are not stable over time and frames of reference may change. People, process, control and support are the four pillars of a successful risk management framework. There are currently around R33.6 billion in assets managed in South African hedge funds, most of which employ vanilla long/ short strategies, like equity hedge, equity

market neutral, fixed interest long/short, fixed interest arbitrage and multi-strategy, which is a combination of strategies across different asset classes. “The South African hedge fund industry has been characterised by high selfregulatory standards in the absence of more formal regulation, although local hedge fund managers have been subject to FAIS (Financial Advisory and Intermediary Services) legislation since October 2007. Transparency is good, mainly as a result of funds of hedge funds being the largest investor group,” says De Waal.

The framework proposes that the RMP covers, among others, risks relating to investment in unlisted instruments, the use of derivatives in the portfolio, and the trading process employed. With regard to the usage of derivatives, the hedge fund manager will need to specify the risks associated with the derivatives and how they will be managed. De Waal adds: “Keeping in mind that one of the objectives of the proposed regulatory framework is the prevention of systemic risk, hedge fund managers will be required to report on their counterparty risk exposure. This is particularly important when a large proportion of portfolio assets are invested in over-the-counter instruments.” With risks in the investment world ever changing, risk management processes need

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Responsible

investing

Ongoing corporate instability in SA points to shortcomings in addressing sustainability issues Johann de Kock | ESG Analyst, Momentum Asset Management

Investors have a significant role to enforce the sustainability agenda

ngoing corporate, social and labour instability in SA, most notably in the mining and resources sector, have put the spotlight on corporate sustainability: an issue that many companies take seriously in lieu of the King Code of Governance, but as events like Marikana highlighted, more can and should be done. One of the main contributing factors for companies’ inability to address the social costs associated with operations, is that they hardly price social costs into products and services they provide. These social costs are either deferred to the next generation in the form of a deteriorating environment or a liability to the future taxpayers. This is blatantly obvious in the mining sector if we consider the acidic water problem in Johannesburg, which some experts warn could be a ticking time bomb and turn Johannesburg into a wasteland. South Africa’s low-cost gold deposits have been sold without paying for the water pollution caused. Whether or not this is the case, it is yet another issue that hangs over the heads of SA’s miners, potentially discouraging investors and destroying value. The sad reality is, as a direct result of mining activities, for which the cost of water treatment was not priced into the final product, either gold miners or taxpayers are now on the hook. Either way: it’s a lose-lose situation for SA. While local companies are acknowledged to be among the best in the world in terms of governance reporting compared to their international counterparts, the current status of corporate upheaval does call into question

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the relevance of the sustainability reports of many companies. In many countries around the world, particularly in the US, investors have played a meaningful role in persuading companies to properly address sustainability issues – in part spurred by the country’s litigious culture.

South Africa’s low-cost gold deposits have been sold without paying for the water pollution caused. In comparison, South African investors have played a lesser role. However, last year, SA became the second country in the world, behind the UK, to formally encourage institutional investors to integrate environmental, sustainability and governance (ESG) considerations into their investment decisions after the Institute of Directors in Southern Africa (IoDSA) released the Code for Responsible Investing in South Africa (CRISA). The Code seeks to encourage socially orientated business practices by shareholders and companies, and, equally importantly, it requires investors to report on their policies at least annually, as to what extent the Code has been applied. The carrot for asset managers is that companies which apply socially responsible principles to management decisions will likely be more valuable than those that operate in isolation to the communities in which they operate. The sobering reality is that many asset

managers are unwittingly hamstrung in their ability to play a leading role in demanding greater management attention to sustainability issues due to the many conflicts of interest that are likely to discourage financial services companies from following suit. These range from issues like director remuneration (which asset managers themselves are unlikely address) to pressuring a potential client. Asset consultants, who advise pension funds, and the pension funds themselves, could and should play a meaningful role in demanding a greater focus on sustainability issues. Both asset consultants and pension funds could and also should put greater pressure and scrutiny on asset managers’ ESG policies. There are encouraging signs that companies have recognised the new role investors are likely to play in lieu of CRISA and some boards are proactively engaging with shareholders about practical solutions to sustainability issues such as remuneration policy and other governance issues. It has been speculated that one of government’s objectives for the National Social Securities Fund proposal will be the creation of a super fund, similar to those in Australia which, as an investor, will have a major influence on companies as corporate citizens and the role of asset managers in unlocking value. So far, SA asset managers have only flexed their muscles in unbundling or unlocking value. We expect to see similar action but on a far larger scale through sustainability issues.

Retirement

investing

Employers urged to increase focus on disability cover as a result of falling Aids deaths Neil Parkin | Group Assurance Actuary at Old Mutual Corporate

Old Mutual Corporate says there has been a marked reduction in the number of deaths in recent years for a number of large employers and retirement funds insured by Old Mutual. However, while Aids deaths are decreasing, disability claims due to Aids have been increasing steadily. Employers could therefore take advantage of lower group life premiums by focusing on improving disability benefits for employees.

eil Parkin, group assurance actuary at Old Mutual Corporate, says the experience of Old Mutual’ s group risk schemes has shown that Aids is changing from a certain death sentence to a chronic and manageable disease. “There is much speculation about the future of Aids, but one thing is clear – although its effects may be changing, the disease has had, and will continue to have, a profound impact and employers are well-advised to plan for this,” he says. According to Parkin, while there are various options in terms of utilising the savings in group life premiums as a results of declining Aids deaths, disability insurance is arguably the most pressing need. He refers to the ASISA insurance gap study which showed that South African families are underinsured by R6 trillion of disability cover. “The focus on death cover, and the rising costs of that cover, has diverted focus and money from disability insurance. The result is that many disability arrangements are based on insurance that was available in the market a decade ago. A reduction in group life premiums is an excellent opportunity to re-evaluate a group’s disability needs,” he says. Parkin says disability insurance has evolved considerably over the past decade, and there are a number of new generation products available, such as Old Mutual’s full salary replacement for the entire duration of a claim. Parkin explains that a key factor for disability

income cover is the replacement ratio – the level of income an employee gets if they become a claimant. “Traditionally this is set at 75 per cent of pre-disability earnings. By increasing this to 100 per cent, the employee will have their full salary replaced and will be able to cope with the reduced ability to earn an income and any additional expenses as a result of the disability,” he says.

start. This is commonly known as a ‘waiting period’. Employers can customise products to pay earlier (as short as one month) or later (e.g. six months), according to their budget and ability to cope with paying extra sick leave before the benefit starts. “By using some of these levers, employers can significantly add value and protection through disability insurance,” says Parkin.

There is much speculation about the future of Aids, but one thing is clear – although its effects may be changing, the disease has had, and will continue to have, a profound impact and employers are well-advised to plan for this. Parkin warns that the annual increase of the benefit a claimant receives is another often overlooked option, which can rapidly erode the person’s purchasing power. He advises employers to help retain the real value by including inflation-linked (CPI) increases, but says people should beware of products with limits on the increase (e.g. five per cent). “Some products even offer increases at above CPI to mirror salary inflation,” he says. Disability policies typically require a period of time to elapse before benefit payments investsa

Sunel

veldtman

We need faith,

not religion Sunél Veldtman, CFP CFA is the author of Manage Your Money, Live Your Dream, a guide to financial wellbeing for women. She is also a presenter and facilitator. Sunél is currently the CEO of Foundation Family Wealth and has more than 20 years of experience in financial services, most of which as a private client adviser.

In his book, Tribes, Seth Godin writes: “Faith is the unstated component in the work of a leader and I think faith is underrated. Paradoxically, religion is vastly overrated.” Although I believe this applies to spiritual faith and religion as well, I want to talk about the faith and religion of financial advice.

odin writes further: “Faith goes back a long way. Faith leads to hope, and it overcomes fear.” The dictionary defines faith as, “the confidence in a person or a thing or a belief that is not based on proof”. Investors need faith in order to be successful in the financial markets – they need faith that asset prices will continue to rise, faith that financial institutions will continue to exist, and faith in the people in our industry. Faith is also a prerequisite for innovation. Religion on the other hand represents a set of rules; rules that overlay faith. Religion supports the status quo and encourages us to fit in not stand out.

forecasting, actually destroy belief in our industry. Why do we think that our clients should believe we can forecast anything, when the vast majority of financial advisers missed the colossal credit crisis? Fortunately, new research increasingly points to the futility of this practice. Other practices such as disclosure of fees are clearly necessary – they uphold faith in the system. However, if only seen as a practice or a box to tick, and not as an opportunity to educate and discuss value proposition, this practice will destroy the faith of clients.

The financial industry is supported by a lot of religion. Call them religious practices, such as economic forecasting, fundamental company analysis, including management reviews or using risk profile questionnaires to determine one’s client’s risk appetite, or giving clients ‘faith’ based on past performance or telling clients to focus on the long term. Some of these religious practices are even required by regulation, such as disclosure of fees.

The reason it’s so difficult to have a considered conversation about religion is that people feel threatened. Not by the implied criticism of the rituals or irrationality of a particular religious practice, but because it feels like criticism of their faith.

Religious disciplines help faith stay alive but when they replace faith they become meaningless. At worst, they can destroy faith. The practices I have mentioned here are dear to many people’s hearts. I believe that some of these practices, like economic

I recently met a wealthy investor, who had invested all his money through a prominent bank. I know that the investments wouldn’t have been made without all the boxes being ticked.

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The investor completed the risk profile questionnaire and signed the necessary disclosures and records of advice. However, the investor could not tell me what he had invested in, how much he paid, and what the tax implications of the investments were. The adviser missed the opportunity to educate the client about the risks involved in the investments and the chances of him achieving his goals. As a result his faith in the adviser, as well as the bank, is wavering. The religious practices did not help. Faith requires courage. It also requires courage to help other people believe; the courage to educate people and tell them the truth before doing the deal. If we don’t educate our clients about the faith required to invest (as everything might not be fine) they will lose faith. Godin points out: “The reason it’s so difficult to have a considered conversation about religion is that people feel threatened. Not by the implied criticism of the rituals or irrationality of a particular religious practice, but because it feels like criticism of their faith.” If we want to continue in this industry, we have to protect our clients’ faith – faith in the markets, faith in our institutions and faith in ourselves. This implies that we need to query our practices, many of which are completely outdated and will soon be obsolete. Our practices should intend to and result in building faith.

allan gray

Buying or selling a financial advisory practice Jeanette Marais | director of distribution and client services, Allan Gray

With the South African financial advisory services industry changing at a rapid pace, the pressures of industry requirements have become increasingly onerous. This has made it difficult for many independent financial advisers to stay in business. For some, this means that selling their practice has become necessary. For others, the changes in the industry have created the opportunity to grow an existing practice through acquisition. Before you rush into a transaction, there are certain important factors to consider. Establish a valuation One of the most important steps in buying or selling a business is establishing an appropriate valuation for it. This can be a time-consuming process and is the result of discussion and negotiation between both parties. Arriving at an accurate valuation is made easier when both parties have access to as much accurate information about the business as possible. If you’re considering selling your business, put together a thorough brief for the buyer, including all the pertinent facts about the business. In your brief, don’t forget to include the performance measures of the business and how it has measured up. Consider past timeframes and give the buyer the facts about revenue, profit, client retention and staff retention. If you’re the buyer, make sure you obtain all this information. You also need to establish how dividends are distributed in the business. Are they paid to shareholders, reinvested into the company or used to pay debt? Is there an incentive scheme in place? Insufficient information can distort the perceived value of a business, so it’s in the interests of

both parties to be transparent. Remember that both parties are liable for the accuracy of the client and business information that is used as the basis for the agreement. Establish the ownership structure The next step is to establish the ownership structure of the business, as this influences policy making within the business, exit strategies and the procedures for the purchase and sale of shares. You’ll need to know all of this when drawing up the sale agreement.

all information relating to the transaction is kept confidential, other than the specific details noted in the communication plans. Client ownership is another issue that should be covered. Who owns the clients going forward? Who will retain the right to market products and services directly or indirectly to clients? And don’t forget to discuss intellectual property. Termination clauses should be spelt out. Once the agreement is in place

Terms of payment

Once the transaction is complete, the seller should agree to a restraint of trade which should specify the following:

Establishing the terms of payment comes next. Will the sale be a once-off payment or staggered over a period of time? What is the payment structure for the owner of the business, e.g. cash, lieu of salary, bonus, commission or dividends?

• The time period of the restraint • Whether there is any geographic exclusion • Agreements about soliciting staff, clients, suppliers or other alliances

Agreement of sale In addition to the valuation, price and terms of payment, the agreement of sale would also provide guidance on how the sale of the company will be communicated to shareholders, staff and clients. At the same time, a confidentiality provision will ensure that

If for some reason, one or both of the parties fails to live up to their obligations in terms of the agreement, both parties need to be readily available to discuss issues and concerns in order to facilitate a resolution. They also need to determine strategies to resolve disputes. It may be wise to agree that an independent mediator be appointed to solve the problem before any legal action is taken.

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

Barometer

World Bank announces South Africa as most improved country in facilitating trade

Hot

According to the World Bank’s 2013 Edition of the Doing Business Report, South Africa has been named as the most improved country in terms of facilitating trade, improving 30 places in the global rankings since 2012. Charles Brewer, managing director of DHL Express sub-Saharan Africa, believes that this ranking improvement will provide a strong positive impact on the domestic economy. Pointing to research from the report revealed that a reduction of

four days in the time to either import or export was positively associated with a 0.1 per cent rise in GDP per capita. Additionally, the implementation of these measures will dramatically improve South Africa’s ability to attract foreign direct investment. Listed property shows more value than the bond market Grindrod Asset Management announced that in November South Africa’s listed property sector increased 1.8 per cent, bringing the sector up to 6.7 per cent. The sector outperformed both the equity

market, standing at 2.6 per cent, and the bond market, which stood at 0.9 per cent. Investors upbeat on economic recovery The latest Bloomberg Global Poll revealed that the global economy is in its best shape in 18 months. Of the 862 investors polled, two-thirds described the global economy as either stable or improving, which is the highest response since May 2011. The increase in confidence comes as a result of China’s economic prospects improving and an outlook that the United States will likely avoid the so-called fiscal cliff.

Slower than expected economic growth for SA While South Africa’s economic growth increased by 1.2 per cent in the third quarter of 2012, the growth figure is below the consensus of 1.5 per cent, reported by Stats SA. The slower than expected growth was partly due to mining production falling sharply as a result of strikes in the sector throughout August and September 2012.

Sideways Unsecured lending threatens financial stability of SA

Not 34

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The National Treasury announced that the growth in the unsecured market could become a threat to the financial stability of South Africa’s economy. These concerns were brought on due to the rapid growth in South Africa’s unsecured lending market, consumer over-indebtedness and impaired credit accounts.

Business confidence drops in South Africa

South African mining shares drop

The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index, which measures the level of business confidence within the South African economy, dropped 0.3 index points to 91.7 in November compared with 92 in October. The index was also down 5.7 points year on year.

PricewaterhouseCoopers (PwC), reports that as of November 2012, the top 39 South African mining shares had lost all the gains they had made since 2008. This loss is as a result of wildcat strikes, mainly on platinum and gold mines, which commenced in August and continued during the months leading up the end of 2012.

etfsa.co.za DECEMBER 2012 – etfSA.co.za MONTHLY SOUTH AFRICAN ETF, ETN AND INDEX Mike Brown | Managing Director | etfSA.co.za TRACKING PRODUCT PERFORMANCE SURVEY

he Performance Survey for the period ended 31 December 2012 reflects a year in which the performance of many sectors of the JSE exceeded expectations. The FTSE/JSE All Share index showed a total return (with dividends reinvested) of 26.68 per cent for 2012. Some other JSE tracking

Fund Name Satrix INDI 25

indices did even better than this. The table shows which index tracking products exceeded or closely approximated the All Share index returns, both in 2012 and over the past three years. A total of 16 ETP and unit trust index trackers were able to provide total returns in excess of the All Share

index in 2012 and nine index tracking funds (from a smaller pool of funds) outperformed the All Share index over the past three years. This indicates that now tracker funds, which now cover many different asset classes, sectors and markets, can provide market beating performance at low cost and with full transparency.

Index tracking ETP and unit trusts that outperformed the All Share Index* 1 year 3 year Type Total Return Fund Name Type ETF 43.51% Satrix INDI 25 ETF

Total Return (per annum) 25.77%

NewFunds eRAFI FINI

ETF

43.22%

Prudential Enhanced Property

Unit Trust

23.56%

DB Africa Top 50 Satrix FINI 15

ETN ETF

42.54% 35.94%

Proptrax SAPY NewFunds eRAFI INDI

ETF ETF

22.38% 20.88%

Prudential Enhanced Property Unit Trust

33.93%

NewGold

ETF

19.65%

NewFunds NewSA

ETF

32.70%

NewFunds eRAFI FINI

ETF

19.27%

NewFunds eRAFI INDI Proptrax TEN BettaBeta EWT 40

ETF ETF ETF

31.62% 31.44% 31.11%

Satrix DIVI Plus Satrix FINI 15

ETF ETF

Satrix SWIX Top 40

ETF

18.89% 18.16% 15.98%

Proptrax SAPY

ETF

30.56%

FTSE/JSE All Share Index

SIM Equally Weighted Top 40 Standard Bank Africa Equity DB China Equity Satrix SWIX Top 40

Unit Trust ETN ETN ETF

29.16% 28.34% 27.97% 27.49%

Gryphon All Share Sanlam All Share Stanlib Index Fund

Unit Trust Unit Trust Unit Trust

15.31% 15.19% 15.19%

Stanlib SWIX 40

ETF

27.49%

Gryphon All Share

Unit Trust

26.81%

FTSE/JSE All Share Index

15.63%

26.68%

Sanlam All Share

Unit Trust

26.30%

Stanlib Index Fund

Unit Trust

26.30%

SIM Dividend Plus

Unit Trust

26.27%

RMB Top 40

ETF

25.81%

Satrix DIVI Plus

ETF

25.72%

Source: Profile Media FundsData (31/12/2012)

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

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

Industry

news

Appointments

David Marshall has been appointed strategy director of Old Mutual Emerging Markets (OMEM). Marshall is a qualified accountant with a wealth of corporate finance skills and experience in the Americas, Europe and Asia. Before joining Old Mutual, Marshall was the managing director for Credit Suisse’s Southern Africa ultra-high net worth business in London, and has worked for many global companies, including UBS, Deloitte, Standard Corporate and Merchant Bank. At UBS Wealth Management, he advised the board on its global strategic acquisitions.

Namibia establishes R3 billion Medium-Term Note on the JSE The Republic of Namibia has issued its inaugural R850 million 10-year bond under its R3 billion Medium-Term Note programme, becoming the first-ever Rand bond transaction by a sovereign (other than the South African National Treasury) to be listed on the JSE. Namibia’s South African Rand bonds priced at 8.26 per cent in line with the Namibian Dollar government bonds which usually track approximately one per cent above the South African government benchmark bonds. The issue was 2x oversubscribed, representing strong support and understanding of Namibia’s credit story from the South African institutional investor base. The South African capital markets have

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Absa Capital has appointed Chris Kotze as head of transactional product in Africa to build a regional cash and trade strategy for Africa. He will also join the corporate banking executive committee. Prior to joining Absa, Kotze held the position of chief executive officer of Global Transactional Services at FirstRand Corporate and Investment Banking.

held a long standing appeal for issuers outside of South Africa due to the favourable liquidity conditions and well developed capital markets. Access to the South African capital and money markets for the Common Monetary Area (CMA) member countries is already provided for in the CMA Multilateral Agreement. The CMA governments and private entities are treated as local issuers in the South African market and the issued instruments are classified as domestic in the South African market. As a domestic issuer, the Republic of Namibia will therefore be subject to the same relevant financial laws and policies applicable to the National Treasury. South African investors will be allowed to freely invest into the instrument and without restrictions. Namibia’s debut bond is expected to set a ZAR benchmark for future issuers from the country looking at approaching the South African capital markets. The Government

Safs Narker has been appointed portfolio manager and senior analyst in the specialist equity product group at Vunani Fund Managers. Narker is a qualified CA (SA) and CFA charter holder. He previously worked at Deloittes, KPMG, Ernst & Young and Metropolitan Asset Management holding various positions in senior management, portfolio management, product development, and as an analyst with a wealth of experience in the financial services sector.

of the Republic of Namibia also seeks to diversify its funding sources and attract the South African investors previously not taking part in the Namibian domestic debt markets. Having alternative funding sources becomes even more critical given the limited access to concessional funding following Namibia’s classification as an upper middle income country. South Africa is Namibia’s biggest trade and FDI partner and this transaction is a natural step in deepening economic and trade ties between the two major economies of the CMA. With a view of cementing these strong relationship and collaboration, institutions selected to arrange the inaugural Republic of Namibia ZAR bond, were taken both from Namibia and South Africa. This consortium consists of Absa Capital, Namibia Equity Brokers, Rand Merchant Bank, RMB Namibia.

Agri-Vie scoops investment initiative award Agri-Vie, a major sub-Saharan Africa private equity fund investing in food and agribusiness, recently received the Agribusiness Investment Initiative of the Year award at the African Investor Agribusiness Investment Awards 2012. The Africa Investor awards are a first of its kind and recognise agribusiness investment leaders across the agricultural sectors that improve the agribusiness investment climate in Africa. Herman Marais, managing partner at Agri-Vie, says the award demonstrates the commitment to partnering with companies of proven quality and growth potential. “It also demonstrates the validity of the fund’s three-pronged investment strategy focusing on financial returns, in combination with social and environmental sustainability. “The award should signal to the fund’s investees and investors alike that the Agri-Vie Fund maintains high standards with regard to selecting investments, as well as postinvestment governance from which both investors and investees stand to benefit.” Marais said that this award is indicative of the importance of driving food security and sustainable agribusiness practices. “Awards such as these demonstrate how investments into food and agribusiness are winning acceptance as a sought-after investment category, both for their defensive and growth qualities as well as their ability to harness the incentives and disciplines of private equity investment to address rural development challenges and food security.”

Grant Thornton Capital announces strategic partnership with Lephatsi Financial Services Grant Thornton Capital (GTC), one of the country’s leading independent financial consulting businesses for more than 20 years, has announced that Lephatsi Financial Services has acquired a 35 per cent stake in the group’s holding company. Lephatsi Financial Services is a joint initiative between businessman Nic Frangos and Lephatsi Investments (Pty) Ltd and was established by one of the country’s most successful entrepreneurs and Black Like Me founder, Herman Mashaba. “We’re delighted to have Lephatsi Financial Services join our business,” says Gary Mockler, chief executive officer of Grant Thornton Capital. “Lephatsi Financial Services’s participation in our company will help take GTC to new levels with a highly professional offering, enhanced management skill set as well as improved BEE credentials to our company.” Lephatsi Financial Services acquired its 35 per cent stake from the Grant Thornton Johannesburg audit practice. The Securities Exchange Commission (SEC) in the USA and the Independent Regulatory Board for Auditors (IRBA) recently determined that audit firms may no longer have significant shareholdings in asset management businesses, in order to further ensure that no investment management decisions are compromised for clients. In light of this, Grant Thornton Johannesburg was required to reduce its shareholding in Grant Thornton Capital to comply with these rules. “While Grant Thornton’s shareholding has been reduced in line with governance and ethics requirements, we are pleased to continue our association with Grant Thornton Capital while simultaneously

starting a new alliance with Lephatsi Financial Services,” says Deepak Nagar, national chairman of Grant Thornton South Africa. “This acquisition by Lephatsi Financial Services brings new shareholders of a laudable calibre to Grant Thornton Capital’s board and this will certainly strengthen the overall business offering for clients.” Mockler will continue in his role as CEO of GTC; while Farhadh Dildar, currently GTC’s COO joins the board as an executive director. Ms Thebi Moja has been appointed as chairman on the board, with immediate effect. Moja has had previous experience at the National Gambling Board as well as serving on a number of audit committees. Herman Mashaba and Nic Frangos will assume non-executive directorships on GTC’s board “GTC will continue to build critical mass and we are well on track in terms of our growth objectives,” says Gary Mockler. “With the increased capability at board level as well as valuable new shareholders at GTC, the business now offers expanded services and enhanced expertise to the benefit of all clients.”

Absa’s corporate and investment banking come out tops at Spire Awards The corporate and investment banking division of Absa Bank Limited (Absa) secured first place rankings in the overall categories of Best Fixed Income House and Currency House, and Best Bond House at the recent Spire Awards. The awards, which celebrates its 11th anniversary this year, recognises those individuals and teams who have used talent, intelligence and commitment to grow the fixed income and currency market in South Africa. The firm also went on to achieve top rankings in 12 sub-categories including: Best Market Making Team – Government Bonds; Best Team – Inflationlinked Bonds; Best Team – Credit Bonds; Best Sales Team - Cash Bonds; Best Market Making Team – IR Derivatives; Best Market Making Team – FX; Best Onscreen Market Making Team – IRD – Volumetric; Best Sales Team – IRD; Best Sales Team – FX; Best Research Team – FX; Best Research Team – Technical; and Best Structuring Team. Absa’s corporate and banking division was also runner up in a further five sub-categories. “This accolade demonstrates that our customer-centric approach and unique fully local, fully global client offering continues to yield results,” said Stephen van Coller, chief executive of corporate and investment banking and wealth at Absa. “This achievement clearly displays our clients’ confidence in our capabilities, and we are pleased that we can continue to maintain these successful partnerships.”

Export Trading Group receives $210 million investment The Pembani Remgro Infrastructure Fund and Global Alternative Asset Manager, the Carlyle Group, has announced a strategic minority investment of $210 million (R1.8 billion) in Export Trading Group (ETG), an African agricultural commodities supply chain manager. This is the first investment by Carlyle’s sub-Saharan Africa Fund and the Pembani Remgro Infrastructure Fund. Standard Chartered’s Africa Private Equity division (SCPE), the first private equity investor in ETG, is increasing its investment and ETG’s founders have also subscribed for additional equity. Marlon Chigwende, managing director and co-head of the Carlyle sub-Saharan Africa Fund, says this is a remarkable opportunity to invest in a business with a proven model that is highly scalable, has delivered impressive financial performance and has tremendous development impact on Africa and its economies. “Carlyle has a strong track record of helping companies in emerging markets become highly competitive, global companies. “ETG offers a unique combination of strong management and access to both the agriculture supply chain in Africa as well as key markets in China and India,” says Herc van Wyk, CEO of Pembani Remgro Infrastructure Managers. Ketan Patel, managing director of ETG, says the new capital will allow ETG to expand operations across subSaharan Africa, India, China and South-East Asia and create new markets for African smallholder farmers.

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Products

The app also keeps track of a user’s most recently accessed information, ensuring fast retrieval.

Glacier by sanlam launches application for mobile devices Glacier recently launched its mobile app, giving users access to a wealth of information. The app is available in both the Android and Apple stores.

lacier’s app features product brochures, the latest Glacier publications, as well as links to financial news and information websites, obtained by searching ‘Glacier by Sanlam’. Users have the option of saving a publication or brochure on the app by simply adding the applicable document to their favourites. This will provide easy access to the document without connecting to the Internet. The app also keeps track of a user’s most recently

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accessed information, ensuring fast retrieval. Financial intermediaries can make use of the secure services login facility, using their web login username and password. In addition to having a detailed view of their clients’ portfolios, they have access to the latest fact sheets of all funds available on the Glacier platform. The Glacier app is available in Google Play for Android devices and was also recently launched in the Apple Store as an

application for the iPhone. Although it can be downloaded on an iPad as well, the view will be the same as for an iPhone. The full iPad version will be available shortly.

In addition to having a detailed view of their clients’ portfolios, they have access to the latest fact sheets of all funds available on the Glacier platform.

The

world china, south africa, italy, kenya, europe, japan, greece, tanzania, russia

Chinese economy to overtake the US and become the world’s largest economy Xi Jinping, China’s recently elected president is set to lead the country for the next decade. The International Monetary Fund and the Australian Government’s Asian Century White Paper has projected that China will overtake the United States to become the largest economy in the world over this period. The paper predicts the Chinese economy to grow at an annual average growth rate of seven per cent from 2012 to 2025. New US law adds to SA’s lingering compliance burden South African businesses are facing yet another financial regulatory burden with the announcement of the Foreign Account Tax Compliance Act, the new US tax compliance law which takes a stance on preventing tax evasion, specifically by clients from the US. The new law will require compliance with mandatory tax measures, which will affect South Africans investing in the US. Recovery in sight for the US, China and Italy The US, Chinese and Italian economies have steadily recovered in recent months, according to a leading economic indicator by the Organisation for Economic Co-operation and Development (OECD). According to the Paris-based organisation, the US improved from 100.8 per cent to 100.9 per cent while Italy’s increased from 98.9 per cent to 99 per cent. China’s economy has remained unchanged, yet stable. Kenya looking to expand on oil through new investors As leaders of the oil business in the EastAfrican region, Kenya is searching for an investor in order to solidify its status as the oil hub of Africa. CEO of the National

Oil Corporation, Sumayya Athman, says they will focus their efforts on sourcing an international investor for the million Dollar project. The oil project is one of the strategic investments Kenya is making in order to develop a dominant oil supply route to its landlocked neighboring countries. New supervision rule accepted by EU and ECB Around 200 of the biggest banks will come under the supervision of the European Central Bank (ECB) following the new supervision policy ahead of the annual EU summit. International lenders want to see political cohesion in the Eurozone. The mutual agreement serves as a key step towards a banking union and the new rules focuses on preventing banking failures from occurring within the Eurozone’s government books. “Piece by piece, brick by brick, the banking union will be built on this first fundamental step today,” said EU Commissioner Michel Barnier. Japan falls into its fifth recession Japan, the world’s third-largest economy, entered into its fifth recession in 15 years, joining Spain and Italy. The economy shrank in the last half of 2012, following an annualised 3.5 per cent. Uncertainty over external demand, limited wage rises and a tight labour market, means the economy will continue to struggle even with financial aid. Greece buys back debt Holders of Greek debt agreed to sell 31.9 billion Euros of bonds back to the country at 33.8 per cent. However, the indebted country awaits an answer from its lenders as to whether they will agree to lend an extra 1.29 billion Euros to buy back all bonds from the rescue fund to unlock cash to avoid bankruptcy. This indicates that the 17 nations

behind the Eurozone will have to hand over 1.29 billion Euros more. UK unemployment falls to 82 000 The unemployment rate in the UK has fallen to 82 000 in the last quarter of 2012, the biggest quarterly fall in unemployment since 2001. According to Mark Hoban, minister for work and pensions, employment has risen from 40 000 to 29.6 million, which was the highest figure since records began in 1971. “The fact that UK employment is rising, consumer confidence is up and anecdotal evidence of retail sales haven’t been too bad offers some hope that the domestic situation in the UK is stabilising.” Scramble for Tanzania Denmark, Netherland, Vietnam, Pakistan and the UK, in a joint venture with Tanzanian and Korean firms, are seeking to invest 77.9 million US Dollars at the Tanzania Export Processing Zone Authority (EPZA), a move which is estimated to create over 3 274 jobs by 2013. According to the EPZA, companies are attracted to Tanzania‘s cashew nuts processing, jewellery and ornament, copper processing and avocado oil processing. EPZA’s investment facilitation officer, Lameck Borega, expects a total sales turnover of $187.45 million (R1.6 billion) from all the five companies in the first year of production. Putin implements new anticorruption law Russian President Vladimir Putin’s new anticorruption legislation will repatriate as much as US $1 trillion in capital held by companies and high ranking officials abroad. Speaking at his first state-of-the-nation address since returning to the presidency in May last year, Putin said putting limits on bureaucrats and politicians owning foreign bank deposits and securities will help reignite and diversify the sagging economy through investment.

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they

said

They said “If growth does stay very weak, and inflation stays low to the target level, there is more that we can do; we have not run out of ammunition.” David Miles, Bank of England policy maker comments on their ability to revitalise the English economy. “A flight to safety has pushed up the prices of typically low risk asset classes to levels where they have become risky and have beaten down the prices of many high risk investments to a level where they offer relatively more long-term protection in real terms.” Johannes Visser, analyst at RE:CM, explains how attractive market prices can be found in high-risk investments that have been neglected by the market. “Firstly we need a sustained period of economic growth, at least two per cent higher than our population growth, so around five per cent. This in turn requires most existing business to at least double their size over the next 18 years. And it requires that many new businesses be established.” Bobby Godsell, chairman of Business Leadership SA, commented on the outlook of South Africa going into 2013. “Access to finance for small firms, particularly start-ups, continues to be a challenge. The most important thing a bank does is that we have to make

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absolutely certain the loan gets repaid. If it does not get repaid, banks become insolvent. People say we should be taking risks, [but] we should be making absolutely certain that when you go to the bank to draw your hard-earned salary [the funds are there].” Standard Bank chief executive Sim Tshabalala recognised the need to supply more financing to SMEs, but defended the need for banks to implement safe strict financing conditions in order to mitigate risk. “But the longing for one act, one miracle solution, one truth that means all our problems are gone tomorrow ... this will not be fulfilled. What was neglected over years, over decades, cannot be taken care of overnight and therefore we will need to continue to move step by step.” German Chancellor Angela Merkel said she believed an emergency aid deal was imminent, but conceded that it would not be miraculous cure to the European crisis. “Between Sandy and the fiscal cliff, the pace of consumer spending and business investment is really unclear.” Joel Naroff of Joel Naroff Economics commented on the worrying state of the US economy. “When offshore funds subcontract their management responsibilities to local asset managers, they are dragged into the SA

tax net because of the local managers activities.” Director of International Tax at PwC, Cor Krammwinkel, says the lack of an attractive taxation policy is hindering South Africa’s ability to attract foreign investment and for this reason Mauritius is becoming an attractive gateway to Africa. “Provided traders stick to solid trading rules, the reduced levels of gearing should not stop them from making just as much money as they would on contracts for differences or single-stock futures.” Independent derivatives trader, Simon Brown, illustrating the importance of a sound trading philosophy. “The reasons for the change in heart are varied. Moody’s talks about declining institutional strength, shrinking fiscal space and a negative investment climate.” The chairman of Nedbank, Reuel Khoza, commented on South Africa’s downgrades. “(The law) kills investor confidence. You cannot bring your money to invest in Zimbabwe when someone takes over 50 per cent. Capital is timid.” Zimbabwe Prime Minister Morgan Tsvangirai, commented on the national law that requires international companies to relinquish 50 per cent stake of their business to black Zimbabweans.

you

said

u o Y id sa ets e w t st e t b s a e l h f t er the o e som you ov f o tion ned by eeks. c e l A se mentio four w as @EuroWadhwa: “Learnt today life insurance originated in ancient Rome when they devised ways to assist families of injured or ill members, courtesy PwC.” Silvia Wadhwa – CNBCs £uro watcher ... sometimes feels like the Jean d’Arc of the £ ... Views on £ et tout le reste my very own. Live with it! Gallopping across £-land @geraldcelente: “#Soros Buying Gold as Record Prices Seen on Stimulus. GC: Must b reading The Trends Journal 2 stay on Top of the News & Ahead of the Trends!” Gerald Celente – Gerald Celente has earned the reputation as “today’s most trusted name in trends” for his accurate and timely forecasts since 1980. New York · http://trendsresearch.com @Sentletse: “Eskom posts a R13bn half-year profit. Their last full year results were also R13.2bn. They are doubling earnings by screwing consumers.” Sentletse – Follower discretion is strongly advised! Johannesburg, South Africa @DanKraus1: “#ArcelorMittal - 30% in the past 13 trading days. I haven’t heard any shareholders/media say a word. Strange. The move in the stock fascinates me.”

Daniel Kraus – Stockbroker/Trader/ Loudmouth/Tennis player/Founder of www. stockalert.co.za Aspire to be a success. Tweets shld be taken seriously & as ADVICE!U should follow me! Johannesburg · http://www.stockalert.co.za @realDonaldTrump: “Washington must come together on a deal to avoid a fiscal cliff. If taxes are raised, they must come with real, hard cuts.” Donald J. Trump – The official Twitter profile for Donald Trump http://www.youtube. com/trump New York, NY · http://www. trump.com @jacanapartners: “Fundraising for SSA private equity funds could reach $3 billion in 2013 @AfricanInvestor Jacana is raising an SME fund: http://www.jacanapartners.com” Jacana Partners – Investors in African Entrepreneurs – Jacana Partners is a panAfrican private equity firm that invests in SMEs to deliver social and financial returns. http://www.jacanapartners.com/ @PatriceRassou: “SA Platinum falls to 11 year lows. With market going into deficit per Johnson Matthey” patrice rassou – Head of Equities, Sanlam Investment Management Joburg · http://about.me/hiltontarrant

@SmallTalkDaily: “Argent 16.6% past 7 days. Told you results would be perky & market would have to look at its cheapness. Chuck in share buyback & looks good.” Anthony Clark – Small-to-Mid cap analyst covering a vast swathe of listed and unlisted stocks in South Africa with focus on industrial, food and agriculture stocks. Cape Town · http://www.vunanisecurities.co.za @pwc_za: “PwC mining report: A tough year ahead for the mining industry in wake of recent industrial action. http://ow.ly/ft2OI ” PwC South Africa – PwC Southern Africa provides industry-focused assurance, advisory and tax services to public, private and government clients in all markets. South Africa · http://www.pwc.co.za @vc4africa: “Entrepreneurs rising, research shows 72% of African students consider starting a company” VC4Africa – VC4Africa.biz –- The largest online community of venture capitalists, angels and entrepreneurs dedicated to building businesses on the African continent. Africa · http://vc4africa.biz/

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And now for something

completely different

Megastar memorabilia

can rake in millions for star-struck fans

ome celebrities make their way to fame through TV screens around the world, others attract thousands to performances on stage, movie stars enthral their fans with epic film releases, while musicians, artists and sportsmen mesmerise their audience through their creativity and brilliance. But the common thread among all celebrities lies in the fact that they are idolised by millions of fans. Nowadays almost anybody desires to capture a part of their favourite superstar by investing in celebrity memorabilia. The collection of their personal items can make for very lucrative investments. Collecting something that was once owned, and in some cases used, by a celebrity brings with it bragging rights. The appeal of owning such an item lies in the envy of other hard-core celebrity fans and thus the demand and consequently the value of it is great. In most cases, celebrity memorabilia items are one of a kind and extremely rare. Then there is collecting the personal items of deceased celebrities. It goes without saying that when a particular celebrity dies, the value of their personal effects is likely to increase dramatically. Thus, taking ownership of celebrity items while they are living can yield great returns when they are no longer alive. The most popular and similarly most valuable type of celebrity memorabilia are clothing items once owned and worn by superstars. One such example is the dress worn by iconic actress, Marilyn Monroe when she delivered a sultry “Happy Birthday” serenade to President John F Kennedy on 19 May 1962. The flesh-coloured, curve-hugging, jewel-encrusted dress was so tight and sheer that, according to legend, Monroe was sewn into the gown and wore nothing under it. The one-of-a-kind sheath was purchased for $1 267 500 (R10.6 million) in 1999 by the aptly named Manhattan-based collectible company Gotta Have It! after the dress was put up for auction by the widow of Monroe’s acting coach, Lee Strasberg.

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The famous Thriller jacket worn by King of, Pop Michael Jackson, in the video of famed album Thriller, which was released in 1983, is another example. This legendary jacket was a gift to Jackson’s well-known costume designers Dennis Tompkins and Michael Bush. The jacket was estimated to fetch only around $200 000 (R1.7 million) to $400 000 (R3.5 million), but dramatically exceeded this estimation when it was sold for $1.8 million (R15 million) by Julien’s Auction Gallery in Beverly Hills.

The flesh-coloured, curve-hugging, jewelencrusted dress was so tight and sheer that, according to legend, Monroe was sewn into the gown and wore nothing under it. The King of Cool, Steve McQueen, wore a legendary motor racing suit in the famous cult racing movie Le Mans in 1971. It was later offered for sale by Toronto’s Collector’s Studio. The iconic white suit, which was made by Hinchman of Indianapolis, bears the name of McQueen’s character in the movie, Michael Delaney and features the logos of Gulf, Heuer, Firestone as well as the American flag. It was sold at the Profiles in History auction in California for $984 000 (R8.7 million), making it the most expensive item of racing memorabilia ever sold.

the stories don’t match, it’s probably best to leave the item on the table. Remember that while documentation is always crucial, certificates of authenticity are not guarantees of authenticity.

With these sales serving as examples of the returns celebrity memorabilia items could yield and in order to ensure similar returns, it is crucial to educate yourself about the celebrity’s career. Knowing the dates and locations of a celebrity’s landmark career moments comes in handy when examining autographs, photos and provenance.

If the item is signed, find out why it was signed. Compare the dates of the autograph with the date the signed item was manufactured. Always be sceptical of a ‘great deal’ as memorabilia experts and enthusiasts are well aware that the market for these collectibles is strong. If the price is too good to be true, the item may be a fake.

It is important to ask as many questions as possible about the item. Find out how, where and when the item was acquired. If

Lastly, seek outside help, but practise caution and find an unbiased and impartial authenticator.

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