InvestSA Magazine June 2014 by COSA Media

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Under the microscope: Health care sector report

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CONTENTS 06

The risky business of risk management

HEALTHCARE SECTOR REPORT: Sentiment still healthy

The search for returns: investor views on private equity in Africa

Investment perspective: Q1 2014

Fixed Interest: Navigating the global fixed income universe

Flexible interest bearing funds versus core bond funds

South Africa’s sovereign credit rating: should we care?

Diversification key for income funds in bond bear markets

Are bonds still a good investment?

Head to Head – THE BANKING PERSPECTIVE

Passive Investments

Profile: Andrew Bradley, CEO, Old Mutual Wealth

‘Good to great’: the PSG 2014 Conference

The case for offshore investing

News

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From

the editor The future gets closer and closer, speeded up by massive developmental changes in technology that will shift the way we think and invest. We will soon be using 3D printing to print our own shoes, among many other possibilities. But the problem with the future is that while it may be getting closer, it’s also increasingly unpredictable. We offer you a glimpse of the future in this issue of INVESTSA. Our views may not always be correct but we try; and it’s always better to try and maybe fail, than not try at all. Investors and their advisers need a view of the future to make the correct investment decisions. Muitheri Wahome from Investment Solutions, tells us how to build a successful asset management company. As she says, the first seven years of a new company are perilous, with 40 per cent of the independent asset managers which were set up from the 1900s either vanished, merged or acquired. Nolan Wapenaar, who heads fixed income at Efficient Select, explains their increasing conviction for listed property in South Africa, saying it’s based on quality, attractive valuations and additional factors like margins of safety. In all their constantly adept analysis of investment trends, David O’Leary of Morningstar SA looks at the performance of equity funds, saying unit trust funds in resources and financials lead the pack while fixed-income funds and offshore lag. The future of black empowerment in South Africa is a fascinating topic, covered by Ismail Laher, a director at Norton Rose Fulbright SA. Among other things he says the revised BEE Codes bring confusion. What’s not confusing is the search for returns from private equity investments in Africa, with long-standing contributor Rory Ord from RisCura telling us that Africa is more attractive than other emerging markets for private equity investors. Marc Hasenfuss adds another solid feature on the healthcare sector, in surprisingly good health, he says; with two new listings in the past six months and more, like Dischem, possible in the near future. I look at the risky business of risk management, where asset managers have to perform a delicate balancing act matching risk and return. And fixed interest investment strategies are well covered in five articles, looking at the conundrum that cautious investors face trying to get real returns in a rising interest rate cycle. The future may look bright, but this issue does not cloud the outlook. Read our clear views on where the future of investing may be taking us. Until the next issue in the near future,

Shaun Harris

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

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

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Asset Management

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The risky business of

management By Shaun Harris

Risk management has come to mean many things to investors. At the core, though, itâ&#x20AC;&#x2122;s about protecting an investorâ&#x20AC;&#x2122;s capital, or the value of investments in their portfolio. Itâ&#x20AC;&#x2122;s a concept that has become increasingly important to asset management since the global financial meltdown started in 2008, and will probably become even more important in the future.

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efinitions of risk management all stress one important point. For example, The Penguin Dictionary of Economics says risk is when there is a range of possible outcomes with objectively known probabilities to these outcomes. That differentiates risk from uncertainty, where there is a range of possible outcomes that cannot be objectively assessed. The M&F Handbook Basic Economics makes the same point: risks can be foreseen and estimated in advance; uncertainties are unpredictable and the measurement is impossible. Thus, it says risk can be insured against, but uncertainties cannot. Definitions of risk also mean different things to different investors. The Investors Chronicle A-Z of Investment points out that arguments between financial advisers and their clients

often stem from misunderstandings about each other’s definitions of risk. “It is so obvious with hindsight, but investors do forget that a low-risk investment to one person may seem wildly reckless to another,” it says. The example quoted is that a 25-year-old millionaire will worry less about losing £5 000 than a 65-year-old investing a £50 000 pension lump sum. When it comes to asset managers, who are very aware of the importance of risk management, it’s about matching risk and reward. A very conservative portfolio of fixed interest and money market investments could be constructed that would virtually guarantee no loss of capital. But that would weigh down on the reward side of the equation, with such a portfolio unlikely to offer a real return. For an investor saving for retirement, such a portfolio then becomes a long-term

risk. Matching risk management and returns is a very delicate balancing act. Asset managers also have different understandings of risk management, or at least the severity with which risk should be treated as part of the risk/reward balance. Simon Pearse, CEO of Marriott Asset Management, says investors often go into denial when faced with bad news and thereby miss critical changes that are happening. He does not see much growth coming from South African companies that are tied to the economy, with long bonds and listed property likely to fall in value. Marriott is therefore looking overseas, and likes the defensive equities in developed markets, like CocaCola, Unilever and Johnson & Johnson. Pearse also says pensioners should reduce withdrawals from annuities, as there will be little capital gains on shares or property.

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conditions. It also provides the potential to increase returns by offering access to industries and companies that may not be available locally, or that may be performing differently. Different sectors can present opportunities at different times. As you broaden your investment universe, so these opportunities also increase.” The point Dower makes is important because risk management is not only about protecting capital and the value of investments, but done properly can increase the chance of higher returns. A good investment manager with a sound risk management strategy will therefore protect investors’ capital and offer them the chance of better returns. Coronation Fund Managers, winners of a string of recent awards, also has clearly defined and effective risk management strategies. In the cover article for the Financial Mail in late February, Stephen Cranston wrote: “The same investment team, now under chief investment officer Karl Leinberger, offers investment performance at different levels of risk with everything from equity-only long-term growth down to income only.” This is a prime example of efficient risk management, allowing investors to select not only the level of risk they want products under, but also the types of assets.

Peter Brooke, head of Macro Solutions at Old Mutual Investment Group SA, is less pessimistic, saying that local equities should give a 5.5 per cent real return over five years, with foreign shares offering a similar return at lower risk. Ian Anderson, chief investment officer of Grindrod Asset Management, warns investors against selling local shares now to lock in profits and prevent capital losses. “Such moves are bad if your long-term objective is capital growth, especially if it means switching from growth assets such as equities and property into cash,” he says. Risk management is practised differently by different asset managers, as well as for the management of different asset classes. Contrary to popular public perceptions, South African hedge funds rank among assets with the best risk management. They can play the market both ways: capitalising on rising share prices and protecting against market downturns, and employ a number of different techniques, including shorting and derivative contracts, to do this. “Hedge funds need to be seen as particular investment strategies within the asset classes in which they invest, as opposed to a separate asset class themselves,” says Claire Rentzke, head of manager research at 27four Investment Managers, writing in the November issue

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of INVESTSA. “They offer the investor the opportunity to access different sources of return because they have the ability to employ different investment views through the use of derivatives and shorting, which long-only strategies don’t have access to.” The above applies mainly to active equity management. Risk management is applied to passive investing slightly differently. In the same issue of INVESTSA, Mellisa Breda, head of portfolio construction at Momentum Manager of Managers, looks at smart beta investment strategies. “There has been an increase in the number of smart or alternative beta offerings, ranging from style to alternatively weighted indices, which aim to provide some reward for the risk taken by investors investing in securities markets.” She adds that there are clear benefits to investing in smart beta strategies. “They deliver on a risk-adjusted return basis, while the methodical construction leads to a very costeffective solution.” For individual retail investors, diversifying an investment portfolio is an important way of controlling risk. Being able to take on risk means the potential for better returns, says Rob Dower, chief operating officer at Allan Gray. “Allocating a portion of your investment offshore spreads your risk across different economies and geographic regions and opens up the possibility of earning returns under different

However, to get back to hedge funds: while there may be debate between active and passive investment managers over risk management and levels of risk, funds of hedge funds perhaps carry the most effective risk management from a products point of view. Few products can capture most of the upside in the market, or for that matter interest rate cycle, while offering equal protection on the downside. Fund of hedge funds get pretty close to this. When it comes to individual hedge funds, strategies and managers vary greatly. There are a few hedge funds that seem to virtually ignore risk management, putting all the emphasis on securing the highest possible returns. That’s fine, as long as the mandate is clearly spelt out to investors. And these hedge funds would be the minority. Most hedge funds in South Africa are fairly conservatively managed with a strong emphasis on risk management. Performance fees paid to some asset managers, controversial for a number of reasons, can encourage undue disregard for risk. This is what John Kinsley, MD of Prudential Unit Trusts, has to say about performance fees: “In multi-asset funds, if there is a performance fee, there is the temptation for the manager to put more risk into the fund than the mandate allows.” As noted earlier, risk management has become increasingly important since the start of the global financial crisis. It will continue to be important in the unsettled investment markets we are currently living in. But investors and their advisers must carefully consider the balance between risk management and reward. Investing is ultimately about making and saving money. You can make money only if you take some risk. Don’t risk manage yourself out of the rewards.

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Sentiment

healthy

still

By Marc Hasenfuss

Other than the JSE’s burgeoning real estate sector, the other boards of the local bourse have not seen much in terms of new listing action in recent years. Maybe it’s significant then that the broader healthcare sector has hosted two new listings in the last six months. 10 investsa

ate last year, acquisitive health brands business Ascendis listed with a market capitalisation of over R2.5 billion. At the time of going to press, day clinic specialist Advanced Health – the brainchild of former Presmed founder Carl Grillenberger – was set to make its market debut. Although Advanced Health is listed on the JSE’s alternative exchange (or AltX), it’s surely a matter of time before this promising venture wends its way to the healthcare sector on the JSE’s main board.

Of course, there are other investment company listings that do hold exposure to healthcare in their respective portfolios. For instance, a significant portion of BEE investment company Brimstone comprises its holding in JSE-listed Life Health. Others have exposure to mainly unlisted assets. Sekunjalo Investments has a multi-pronged thrust into healthcare (via biotechnology, information technology and pharmaceutical dossiers), while investment specialists RE:CM and Calibre have exposure to healthcare via a stake in unlisted pharmaceutical chain Dischem. Well-known retailer Clicks also has a sizeable exposure to pharmaceutical distribution. It’s quite possible one or two of these investments (the smart money would be on fast-growing Dischem ventures) might be listed on the JSE in the not-too-distant future. What drives sentiment in the healthcare sector is the reality that private hospitals, pharmaceutical distributors and wellness specialists all cater for a human fallibility. There is a defensive aspect to broader healthcare offerings in that everyone gets sick. And there is considerable pricing power in the healing process – despite the best efforts of medical aid schemes, as most people are willing to pay up to feel chipper again. On top of that, the stressed modern lifestyle has made it imperative that healthier habits are followed – whether that means nutritional supplements, regular check-ups at a doctor or preventative prescriptions. The affordability of healthcare in South Africa – and this might apply more to our large private hospital groups – is, of course, of great concern and the subject of a fair bit of political rhetoric by a government eager to deliver quality health to a broad base of the population. The ‘profit before people’ argument has been aimed at the private hospital groups on several occasions. Whether the government should instead concentrate on more effectively mobilising the substantial tax contributions made by large private hospitals groups to upgrade public hospitals is perhaps a debate for another time.

Of course, the overriding point is that if the market is accepting of two (relatively) small specialist healthcare offerings, then the underlying fundamentals of the sector must still be in rude health. The healthcare sector is not the biggest slab of the JSE by any means. It comprises eight listings (nine if you include AltX-based Advanced Health) with a collective market capitalisation of around R280 billion, which, for the purposes of perspective, is less than

the market capitalisation of coal-to-fuel giant Sasol. The sector is dominated by Aspen, an acquisition-driven success story that continues to unfold in many territories around the world. Aspen has a market capitalisation of over R120 billion, which is almost equivalent to the collective market values of the three large private hospital groups that are listed on the JSE.

Nevertheless, this persistent political noise has hardly rattled the share prices of the JSE’s three big private hospital groups, Mediclinic International, Life Health Care and Netcare. All three are wedged close to five-year highs. Market watchers reckon the most interesting growth prospects for the private hospitals groups will come from endeavours outside South Africa. Netcare has cornered a slice of the UK market, while Mediclinic has a meaningful presence in the Swiss (and to a lesser extent Middle Eastern) private hospitals market.

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Africa) now that Litha’s Canadian-based controlling shareholder Paladin Labs has been taken over by global giant Endo Pharmaceuticals, which distributes the well-known Voltaren muscle relaxant. What will undoubtedly keep the market’s focus on the healthcare sector is the listing of Advanced Health. The company, which also has operations in Australia, is pitching the concept of day-hospitals or day-surgeries; a concept that was well received by investors who caused the R80 million private placement to be heavily over-subscribed.

Life Health has been less industrious in its offshore endeavours, but it has clinched a promising deal in India that in years to come could have a meaningful impact on the operating profile of the company. With South African growth prospects fairly limited and a scant chance of corporate action, the enthusiasm of the three private hospital groups for snagging the growth in the middle classes in fast-growing African economies could be rather telling in the years ahead. On the pharmaceuticals side, the market’s single-minded fascination with Aspen has somewhat waned. Aspen remains a quality counter with powerful and diverse cash flows from various geographies, but the share has run hard in the past six years and may no longer appeal that greatly to investors seeking value. At the same time, sector laggard Adcock-Ingram was embroiled in a bidding war between CFR (a Chilean pharmaceuticals company) and Brian Joffe’s innovative conglomerate Bidvest. This development reinforced notions that Adcock-Ingram was a value-laden opportunity that could unlock potential, if new management or a new strategic shareholder could enforce a change in strategic tack. Bidvest eventually elbowed CFR out of the running, and now the market waits with bated breath for Mr Joffe’s team of turnaround specialists to bring healthier

12 investsa

margins and secure rosier prospects for Adcock-Ingram. What transpires at Adcock-Ingram could have bearing on other (smaller) healthcare listings – most notably the acquisitive Ascendis and perhaps even Litha Health. Presumably Adcock-Ingram, under Bidvest’s critical eye, will undergo a restructuring to bring out operational efficiencies and product focus. There may then be an opportunity for smaller players to snatch up brands that might be deemed marginal to the core thrust at new-look Adcock-Ingram. Ascendis, which has spent over R1 billion on acquisitions in the last 18 months, would no doubt be keen to extend its range of pharma-brands. Litha, which is looking to bring a vaccine plant in Pinelands on stream shortly, may also have an appetite for unwanted AdcockIngram brands. But much might depend on the plans for Southern Africa (and indeed

Aside from majority stakes in three-day hospitals in Australia (Sydney Surgery Centre, Epping Surgery Centre and Central Coast Surgery Centre), Advanced Health also owns 100 per cent of eMalahleni Day Hospital and Medgate Day Clinic. The company will also operate a day hospital in Soweto, which should open early next year. In a recent note to its clients, Investec Securities noted that in many countries the healthcare reimbursement systems encouraged using day hospitals. Investec said this had not been the case in South Africa until a few months ago, when Discovery Health announced its intention to pay surgeons an incentive if they treat patients in a day hospital. If other medical schemes follow this incentive route, Advanced Health can rapidly grow a presence in the South African day hospitals market – which compared to international countries is a relatively under-traded sector. Some market watchers have already dubbed Advanced Health as the ‘Curro of the private hospitals’ sector’, a reference to Curro’s successes in rapidly growing its affordable private schools model in South Africa.

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Alternative investments

The search for returns:

Investor views on private equity in Africa

While many business leaders in the West remain sceptical about Africa, the continent is now home to some of the worldâ&#x20AC;&#x2122;s fastestgrowing economies and offers the highest risk-adjusted returns on foreign direct investment among emerging economies. More attractive and profitable than other emerging markets Africaâ&#x20AC;&#x2122;s resilience to the global economic growth slow-down, its growing consumer base and its many economic, political and social reforms have all contributed to the continent being rated the most attractive destination for global emerging market private equity investors. This is according to a recent inaugural study, The search for returns: Investor views on private equity in Africa, produced by RisCura, the South African Venture Capital and Private Equity Association (SAVCA) and the African Private Equity and Venture Capital Association (AVCA).

14 investsa

Graph: Attractiveness of different regions within Africa

Global investors are currently extremely optimistic towards African private equity, with 85 per cent indicating that they plan to increase their exposure to the continent’s private equity over the next 24 months. Among the various types of investors surveyed, both African-focused and global fund of private equity funds will spearhead the increase in exposure. Earnings growth the primary driver When asked to identify the main drivers of private equity returns in Africa over the next 10 years, an overwhelming 69 per cent of respondents identified earnings growth as the primary driver, in line with the high GDP growth rates forecast for most African countries and in contrast to other more developed markets. Furthermore, 80 per cent expect African private equity returns to compare favourably to African-listed equity over the next 10 years. However, some felt that the increased competition in the market, especially on the larger end of the scale, might affect returns. Survey respondents’ perceptions of the attractiveness of different African regions As per the graphic, most respondents didn’t single out a favourite geographic region. More than half stated either that no particular region is more appealing than another, or said that the whole of

RisCura RisCura is a global independent investment adviser and financial analytics provider with specialist expertise in Africa. The company services institutional investors with over US$ 200 billion in assets under management, as well as a significant number of asset management, hedge fund and private equity firms. www.riscura.com SAVCA The South African Venture Capital and Private Equity Association (SAVCA) is the industry association representing around

sub-Saharan Africa was the most attractive proposition. However, this result was closely followed by west Africa and then Southern Africa as leading sub-regions.

90 private equity fund managers in the private equity and venture capital industry in southern Africa. www.savca.co.za AVCA The African Private Equity and Venture Capital Association’s (AVCA) mission is to promote and catalyse the private equity and venture capital industry in Africa. Together with a network of experts and collaborators across Africa and beyond, AVCA represents the voice of the pan-African industry in discussions with governments, regulators, lawmakers and the media.

The industrials sector, mining and real estate were considered the least attractive for private equity investment.

The message appears to be that investors are looking more at industry sectors than geography. The continent’s large population and growth of per capita income make it an attractive region for consumer-oriented businesses. The consumer discretionary, financials and consumer staples are seen as the most attractive sectors in the next three years due to a combination of growth areas, capital needs and company valuations.

Rory Ord, Head of Fundamentals, RisCura

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Asset management

Bricks and mortar Our increasing conviction for listed property in South Africa

a price to this. If you had invested in the All Share Index in 2009, you would expect to earn 50 per cent more cash flow over the next 10 years compared to an investment in bonds. Similarly, in May 2013, equities were offering an attractive premium. The equity rally of last year, downgraded growth forecasts and bonds sell-off have reduced the premium earned by equity holders to a mere 10 per cent excess over returns from bonds. In short, this means that today the cash generation of equities is expensive. You are paying a lot to generate relatively modest gains in future. If we look at property, a different picture emerges. Listed properties are generating approximately 50 per cent more cash flow than bonds. Additional factors Listed property is made even more appealing by other margins of safety that might not be available with other investments:

fter a half-decade of stratospheric returns, the listed property sector fell out of favour in May last year. Thenchairman of the US Federal Reserve, Ben Bernanke, adjusted the world’s nearterm interest rate expectations, leading to an adjustment of financial asset prices across the globe, including South African listed property. Every asset to which we allocate our clients’ capital is based on conviction. This conviction is very simply a combination of the following criteria: quality, attractive valuation and additional factors. This article sets out our conviction in South African-listed property according to the investment case. Quality This is derived from a number of factors including those set out below: • The right type of asset: Buildings are typically rented out for fixed terms with fixed rental escalations. Forecasting revenue has fewer variables and is less susceptible to surprise outcomes. The margin of safety from a

16 investsa

greater visibility of earnings in listed property is appealing. • Ease of understanding: Property companies rent space to tenants. The business model is easy to grasp. • High barriers to entry: The listed property sector is all about size. It is difficult to raise R1 billion to acquire a shopping mall. • Attractive margins: The above chart looks at the average cash flow margins over the past five years for property companies compared to some of the favoured equities. • Sustainable competitive advantage: Retailers and businesses will need premises from which to operate. There is a low risk of fads and fashions impacting on the viability of the business. Similarly, retailers will retain shop space during downturns because of a fear of losing the space to a competitor. Letting out bricks and mortar is a defensive business model. Attractive valuation The attractiveness of every financial asset is determined by estimating the future cash that will be returned to the investor and assigning

• We like the fact that REIT structures compel property companies to pay out most of their earnings as dividends. • Many property companies are paying dividends in excess of 100 per cent of the money market rates. Therefore, you earn more than if you had left the money in a bank or money market fund from day one, and you have an appreciating asset. • The defensiveness of the sector appeals. Shopping malls are here to stay. Many retailers will not vacate premises during an economic slowdown for fear of competitors taking over the space. Vacancy risk is real, but has many mitigating factors. There are headwinds to all asset classes at the moment and listed property is susceptible to interest rate hikes. However, if you look beyond the short-term price movements, a long-term investment in listed property is attractive today, offering more attractive earnings and greater certainty than almost any other asset class.

Nolan Wapenaar, Efficient Select: Head of Fixed Income

Barometer

HOT

NOT

GDP in the UK expands

Business confidence in Africa falls

Gross domestic product in the United Kingdom (UK) expanded by 0.8 per cent in the first quarter of 2014, up from the 0.7 per cent in the last quarter of 2013. The Office for National Statistics revealed that the region’s growth accelerated in the first quarter as the recovery broadened, leaving output, excluding oil and gas, back above its pre-recession peak.

According to the YPO Global Pulse Confidence Index for Africa, confidence levels among business leaders in Africa fell for the second consecutive quarter during the first quarter of 2014. The index, which tracks CEO confidence levels in the region, dropped 2.2 points to 61.8 and makes this the first time in four years that confidence in Africa has fallen below the global composite reading. South Africa dropped to 62.9, its lowest level in 18 months.

Air freight figures increase The International Air Transport Association (IATA) released data showing air freight markets in March increased by 5.9 per cent and capacity grew by 3.4 per cent when compared to March 2013. African airlines expanded by 5.9 per cent year on year and capacity grew broadly in line with demand at 5.5 per cent.

SA wine exports soar Bulk and bottled wine exports from South Africa experienced strong growth in 2013. According to Rabobank, a global financial services company’s latest quarterly report on the international wine industry, exports increased overall by 26 per cent in 2013. South African bulk wine – wine sold before it is bottled or bagged – rose by 37.6 per cent and now accounts for 65 per cent of South Africa's wine exports. The increase was attributed to South Africa's competitively priced wine attracting new buyers who are impressed by the quality of the wines.

Entrepreneurship lagging in SA The Global Entrepreneurship Monitor (GEM) South African report for 2013 reported that early stage entrepreneurs in the country remain significantly lower than other sub-Saharan countries. It also revealed that while the established business rate in sub-Saharan Africa is high at 13 per cent, South Africa is placed well below the norm at 2.9 per cent, and that the rate of the number of established small businesses closing down is rising. This has resulted in more established businesses in South Africa shutting rather than starting.

Sub-Saharan Africa to see economic growth

s y a w e Sid

The International Monetary Fund’s April 2014 Regional Economic Outlook: Sub-Saharan Africa report, which analyses the possible impact of global forces on continued growth in sub-Saharan Africa and the policy actions that are needed to address these challenges, anticipates a pick-up in economic growth in 2014 of approximately 5.5 per cent, up from 4.9 per cent in 2013. However, it also states that the region continues to face risks from both external and internal factors, among them slower growth in emerging markets, which could impact on both export demand and commodity prices.

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Economic commentary

Investment perspective: Q1 2014 The year’s first quarter was dominated by the South African Reserve Bank’s (SARB) January decision to increase interest rates by 0.5 per cent to 5.5 per cent. The SARB is expected to raise interest rates by a further two per cent over the next 12 months.

S Federal Reserve Governor Janet Yellen’s comments in March suggested that US short-term rates, which have been at 0.25 per cent since 2009, could increase as early as mid2015, if tapering continues as expected. The last time South Africa raised interest rates was between 2006 and 2008, when Tito Mboweni raised the repo rate 10 times from seven per cent to 12 per cent over a 24-month period. In that cycle, the bank raised rates partly in response to a tightening US Federal Reserve, as well as our own economy growing above its long-term growth rate. This time around, the market is expecting a far less aggressive interest rate tightening cycle, despite interest rates still being at near-record lows, given the risk that rate hikes would have on subdued economic growth. According to the International Monetary Fund (IMF), the South African economy is expected to grow at just 2.3 per cent in 2014, after having grown at 1.9 per cent in 2013. Raising short-term rates aggressively could plunge the economy into recession. Nevertheless, the potential normalisation of US interest rates on the back of improving

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economic conditions is placing pressure on emerging economies like South Africa (which runs large current account and fiscal deficits) to increase short-term interest rates. Although the surprise 50 basis point increase has bought South Africa some time, it is unlikely that this pressure will dissipate as international capital will continue to be discerning in an environment where US shortterm rates become more attractive. At the same time, the SARB is faced with the prospect of CPI inflation exceeding its upper six per cent target band. It expects inflation to average 6.3 per cent in 2014 and peak at 6.6 per cent in the fourth quarter. According to StatsSA, CPI inflation was 6.0 per cent year on year in March. Five years after the unprecedentedly loose monetary policy put in place after the global financial crisis, the global economy is slowly adjusting to a more normalised world. Although economic conditions are beginning to improve in developed markets, for investors the starting point of exceptionally low interest rates and stretched equity valuations impedes the

ability of investment markets to deliver strong returns on their own. Increasing interest rates are typically negative for equity market returns, particularly if the SARB is forced to raise rates more than expected. Local short-term interest rates remain considerably lower than their longterm average of around eight per cent. In addition, the South African equity market is trading on a historical price: earnings ratio close to 18, significantly higher than its longterm average of around 12. In the absence of further earnings re-ratings or exceptional earnings growth, the market will need to reprice to more affordable levels. Consequently, PPS Investments’ multimanaged portfolios are overweight cash and underweight local equities in terms of their long-term strategic allocation. While we continue to remain well diversified across managers, asset classes and strategies, we have structured our portfolios with an increasing interest rate environment in mind. We believe much of the real returns our investors will achieve in the future will be dependent on our managers’ ability to generate outperformance rather than on the ability of the asset classes themselves to deliver strong returns. This is especially true of the local equity market that has generated much of its strong return over the past five years from earnings re-rating rather than earnings growth – a trend that is vulnerable given the anticipated short-term interest rate increases. Events in January should remind us that as long as South Africa is dependent on foreign capital flows to fund our current deficit, we will have little option but to increase interest rates should US monetary conditions normalise. We continue to believe that a disciplined multi-managed approach, which rigorously combines managers and asset classes, is the best way of achieving consistent returns for clients.

David Crosoer, Executive: Research and Investments at PPS Investments

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Thought leadership revelations at

The Insiders

Glacier by Sanlam and Time magazine hosted another of their thought-leadership forums [The Insiders], at the JSE on 10 April.

he panel, which comprised John Mauldin, chairman of Mauldin Economics and New York Times bestselling author; political commentator Justice Malala; and MonteGray CEO Michael Jordaan, debated and discussed key issues pertaining to the economic and political landscape in South Africa, together with our standing in the international community. The face of Africa

John Mauldin and moderator, Lerato Mbele

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South Africa has a lot going for it – two years ago we became a bona fide member of the BRICS community; we have the world’s 19th largest stock exchange; we have a globally traded currency; and we’re a member of the G20. In addition, our auditing and banking

Events

John Mauldin looks on as Justice Malala debates an issue.

Africa could be more intense, commenting, “The benefits of competitiveness include a lower cost structure and better productivity.” Mauldin agrees, saying that the South African economy is growing, but we need to get rid of competitive disadvantages. On the fact that Nigeria has recently overtaken South Africa as Africa’s largest economy by GDP, Mauldin reiterates that if it is easier to conduct business there, that is where investors will go. The question of employment South Africa currently has a 24 per cent unemployment rate with 15 million people on social grants. Malala comments, “China is single-minded when it comes to ensuring employment. We should be obsessed with creating jobs and making a dent in the unemployment figure.” Is South Africa underperforming?

industries are considered world class. We should be the face of Africa, so why are we seeing capital outflows? According to Jordaan, our biggest problems are crime and our dysfunctional education system. “We’re falling short when it comes to basic education,” he says. Mauldin comments that to attract foreign direct investment, we must make it easy for people to do business with us. “People see South Africa as a difficult place to do business. We don’t only compete with Africa, we compete with emerging markets everywhere. South Africa should be opening up free-trade zones and encouraging business.” How competitive are we? Jordaan feels that competition within South

Jordaan says, “Growth is a decision, it’s not automatic. In studying common themes in, for example, Singapore and China, the same underlying factors are present. These include institutional efficiency, a skilled workforce and certainty for investors. “We are underperforming and we need an internal locus of control. We have a negative mindset. We need to remember the successes, for example the 2010 World Cup.” Harnessing entrepreneurship Mauldin says South Africa has many entrepreneurs: we just need to make it easier for them. Jordaan agrees: “We should be creating special dispensations to support entrepreneurs and creating role models out of the success stories. We’re too tough on people who don’t succeed. A risk culture is important.” According to Mauldin, 80 per cent of all new

Michael Jordaan illustrates a point. businesses in the US fail in the first five years. His advice to business owners is to just keep going and not give up. 2014 is an important year for South Africa Malala feels that, with seven million people unemployed, the economy will be a big factor in the 2014 elections. (This would later seem to have been borne out by the EFF’s relatively good showing in the 2014 national elections, as well as the ANC’s massive drop in support in Gauteng, its worst provincial showing.) Jordaan adds that accountability is a major factor. “People need to be held accountable, to ensure execution.” According to Mauldin, politicians need to not only listen, but implement and act as well. Jordaan says the future success of the country is up to each individual: “Don’t wait for other people.” Malala concludes by saying that we absolutely have to be single-minded about jobs, poverty and unemployment. The last word goes to Mauldin, who says, “The next 20 years have to be better than the last 20 years.”

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Fixed interest

Navigating the

global fixed income universe Mike van der Westhuizen, Investment Analyst, Citadel Investment Services

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To many investors, navigating the global fixed income universe has become far more challenging post the global financial crisis of 2007/2008.

or significant periods over the two decades before the crisis, money in the broad asset class came easily, due to a structural decline in interest rates. With the introduction of quantitative easing in developed economies over the last few years, the party has continued. However, not all good things last forever. It has become increasingly difficult to eke out returns in this time of near historically low interest rates and credit spreads, and thus many of the more traditional tools for the fixed income investor have become less effective in delivering positive real returns. This environment has forced the fixed interest fund industry to innovate, with a consequent proliferation of strategies. Terms like ‘unconstrained’, ‘flexible’, ‘high-yielding’ and ‘negative duration’ have been introduced as solutions to the inevitable normalisation and subsequent rise of developed market interest rates. ‘Unconstrained’ refers to a benchmark agnostic approach within fixed income, with

The starting point in selecting a global fixed income manager is to define clearly the types of exposures you are looking for. Consider the following factors from a risk budgeting perspective: • Currency hedging: currency decisions are often made independently of country/ security selection. Certain managers take aggressive currency positions to try and generate excess return, while others choose to hedge out all non-benchmark currency exposure. Naked currency exposure typically makes a fund much more volatile in the short term – usually not acceptable for the risk-averse investor. • Duration: how much exposure to interest rates are you willing to accept to meet your objectives? Do you make this decision as an investor, for example, by investing in a short duration fund; or do you leave this up to your manager, for example, by investing in an aggregate bond fund where the manager typically has a two- to three-year ‘band’ around the benchmark’s duration to express their interest rate views? • Non-government exposure: this has become increasingly important in a low yielding environment. How much flexibility do you

allow your manager in terms of corporate bonds (from investment grade bonds to high yielding/junk assets), emerging market bonds, loans, securitisations and opportunities like peripheral-country debt in the Eurozone? All these instruments have their own unique inherent risks and can behave very differently at times. Would you be comfortable with exposure to subinvestment grade or illiquid debt, or only a portfolio made up entirely of investment grade credit? Fixed income plays a crucial role in most multi-asset portfolios, but we currently see better relative value in other asset classes. We are thus underweight global fixed income in our global multi-asset portfolios. In our view, value will slowly start to creep back as rates begin their long normalisation process; and, as rates are expected to remain lower for longer, investment opportunities will eventually arise. It would be unrealistic, however, to expect fixed income returns like we have had in the past. Having an open mind in the new era of fixed income investing is as important as selecting an experienced manager skilful enough to navigate the limited opportunities available in this everchanging asset class.

Flexible interest bearing funds

versus core bond funds

the flexibility to invest anywhere along the credit spectrum to try and achieve the best risk-adjusted returns. These types of strategies are also typically able to hedge out duration risk or even take negative duration positions, thereby gaining when rates rise. According to Morningstar’s 2013 Global Flows Report, there was a 22.6 per cent increase in flows away from traditional, core fixed income funds into what they term ‘exotic’ fixed income funds. ‘Exotic’ fixed income funds now make up slightly less than 10 per cent of the total worldwide fixed income fund space. Ultimately your choice of fund depends on your investment objective. Are you trying to beat an index, with a relative return mind-set, or do you have an absolute return goal? The strategies to achieve these two goals would be markedly different in the current environment. It is important for us to find something that matches the objectives of our portfolio managers and ultimately our clients.

Wikus Furstenberg, Portfolio Manager & Head: Interest Rate Process, Futuregrowth

A flexible fund is typically mandated to invest in multiple interest-bearing asset classes, such as nominal and inflationlinked bonds or cash.

he main objective of a flexible fund is to match the highest return of the above asset classes over a three-year rolling period and, in particular, to preserve as much capital as possible in an interest rate bear market. It implies that the fund structure reflects the asset manager’s interest rate view and strategy in the strongest possible way. In order to deliver on the objective, the mandate allows maximum flexibility, specifically no restrictions on the size of holdings of any of the three asset classes (except for a small liquidity provision), the level of fund modified duration or the extent of yield curve positioning. In turn, this means significantly more focus on interest-rate strategies that tend to be implemented in the relatively liquid South African Government bond market and money market instruments. Unfortunately, the reverse side is a smaller role for nongovernment or credit strategies in light of the illiquid nature of the market.

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Fixed interest

Graph 1: Total index returns (rolling 12-month periods)

Graph 2: IAAF delivered strong relative returns over time (periods ended 31 March 2014)

to offer significant potential benefits from active allocation decisions. Of course, this is easier said than done and requires a sound investment process and an appropriately skilled team. What we have learnt from the past is that a strong forward-looking view should put less emphasis on being ‘on the money’ for the full cycle, as this is almost impossible to forecast accurately and consistently. We have to allow enough time to reposition the fund, even if this means losing out over shorter time periods. In other words, it is about catching the tides as opposed to the waves. This suits Futuregrowth’s interest rate process, which endeavours to combine macro themes (top down) with market valuation (bottom up). Performance of the flexible fund

Graph 1 serves to illustrate the intention of the fund in the most simplistic way. It is crucial for returns between the three classes to have the lowest possible correlation. For the period under review (March 2001 to February 2014), the correlation between nominal and inflation-linked bonds was 39 per cent. It declines to 35 per cent between cash and nominal bonds and 29 per cent for the relationship between cash and inflationlinked bonds. We believe this is good enough

The proof is in the pudding, right? Graph 2 reflects the performance of a flexible fund, the Futuregrowth Interest Rate Asset Allocation Fund (IAAF) relative to its benchmark, the Futuregrowth Core Bond Composite, the three main indices in the South African interest rate market and Headline CPI. The fund outperformed all of these by a significant margin over the three-year period. The downside to an investment strategy that relies heavily on a pure interest rate play is potentially higher return volatility in the short term and the risk of negative alpha should the view turn out to be wrong. However, the potential for outperformance and capital preservation makes flexible funds worth considering.

South Africa’s sovereign credit rating:

Should we care? Global credit rating agencies have experienced their fair share of controversy since the financial crisis. Conrad Wood: Head of Fixedincome Strategies at Momentum Asset Management

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uestions around independence, conflict of interest and reactive rating methodologies have all come to the fore. Nonetheless, credit rating

agencies remain firmly embedded in the fixed-income investment world because of the formal inclusion of public credit ratings in legislation, investment guidelines and client mandates. We have had a significant increase in foreign investment into our local fixed-income market, and we place a high reliance on this capital to fund our deficits. It is therefore essential that we consider the outlook for our sovereign rating going forward, given that associated risks include the loss of some of the decade-long benefits we have enjoyed as a strong investment grade bond issuer. During the course of 2012, South Africa’s sovereign credit rating was lowered by each of the three globally acclaimed agencies and remains on negative outlook with two of them. How big is the risk of another downgrade and does this have ramifications as we approach the all-important investment grade threshold (BBB-)? It is important to understand the rating drivers and current trend in each of them.

These factors are both global and local and are interwoven through a rating methodology at each agency to establish the overall credit rating at country level. South Africa responded very aggressively to the global financial crisis, with countercyclical policy (government spending) to stave off a recession. This spending was principally debt-funded and economic growth has been lacklustre at best, which has resulted in this debt burden becoming more overwhelming for us to service. In addition, with emerging market fundamentals deteriorating, bond yields have risen fairly dramatically, which makes the cost of debt funding even more prohibitive. This theme is central across all the agencies when it comes to assessing South Africaâ&#x20AC;&#x2122;s creditworthiness. We have one of the largest budget and trade deficit combinations in the entire emerging world and spending on servicing our debt burden ranks second only to public sector wages as the biggest expense in governmentâ&#x20AC;&#x2122;s budget.

In an environment where we are not seeing the structural reform that is necessary to rebalance our economy away from spending towards saving, and away from un-beneficiated commodity exports to diversified manufacturing, a sustainable upward shift in economic growth looks unlikely. If we consider this in conjunction with the deteriorating debt metrics, our credit rating variables look more consistent with countries a notch lower than where we are currently. It therefore looks likely to us that we will have to endure a downgrade in our sovereign credit rating at some stage during the year.

keep the foreign investor market pricing in some probability of a further downgrade, which, in an environment where sentiment towards emerging markets has deteriorated, may be a bridge too far for them to retain current exposure and expect our sovereign credit spread to remain at current levels.

Should this ring alarm bells? There may well be a short-term, sentiment-based reaction but all indications are that as long as the downgrade is only one notch, in other words we retain our investment grade rating, life as a mainstream, reputable global bond issuer goes on relatively unchanged.

We do feel that a rating action from one or more of the agencies is likely during the course of the year, especially given that there is some technical difference between where the three have pitched the local and foreign currency rating levels. However, we do not think the fallout will be significant, unless there is a surprise in the magnitude of the downgrade.

Where things could get interesting is if we are downgraded one notch and the negative outlook is retained. This would

This scenario would be most unwelcome as the base of foreign investors willing to invest in our bonds would narrow and the cost of issuing to those that still remained would go up substantially, entrenching our current challenging debt dynamics.

Should we care then? Not in the short term.

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Fixed interest

Diversification key for income funds in bond bear markets

David Knee, Head of Fixed Income, Prudential Portfolio Managers

s the current rising interest rate cycle brings with it the heightened risk of losses in interest ratesensitive assets like bonds and property, prudent diversification is essential to managing enhanced income-type funds so that they can continue to meet their above-cash benchmark returns (generally cash plus two per cent) while avoiding capital losses over the medium term. Recently, returns from enhanced income funds have come under some pressure due to weakness in some of their underlying bond and property investments. This has been attributable largely to investors’ anticipation of rising US interest rates, which has triggered widespread sales of fixed income assets across the globe, particularly in more risky emerging markets like South Africa. We saw this weakness particularly in mid-2013, following Ben Bernanke’s May ‘tapering’ announcement, and again in January 2014 in the wake of the Fed’s December reduction in bond purchases and the South African Reserve Bank’s surprise 50 basis points rate hike. South Africa’s All Bond Index and Listed Property Index lost 3.2 per cent and 7.1 per cent respectively in January alone, before recovering in February and March after the Reserve Bank’s surprise 50 basis points rate hike made yields more attractive. Such volatility could still be on the cards over the next 12 months, depending on how global investors adjust to the Fed’s ongoing tapering and the eventual rise of US interest rates. This means fund managers must continue to carefully balance the risk-reward trade-offs involved in seeking higheryielding assets for their income portfolios. The Prudential Enhanced Income Fund,

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which I co-manage, returned cash plus three per cent per annum over the past three years to 31 March 2014, while also avoiding capital losses over all rolling six-month periods and longer. Managing the fund successfully has included the following key factors: careful diversification across many different types of assets as well as choosing attractively valued, higher-yielding investments that offer some safety in their valuation combined with an appropriate level of risk. For example, for capital protection nearly 50 per cent of the fund is invested in local cash and near-cash assets like floating rate notes (FRN) issued by banks and other South African companies. While these are

considered among the safest investments, Prudential still limits its exposure to any issuer to a maximum of three per cent of total fund value, to further diversify and minimise risk. Nearly 19 per cent of the fund is invested in longer-dated corporate bonds from highly rated borrowers such as Denel, DBSA, the IDC, Nedbank and Redefine, all of which have undergone comprehensive credit analysis, where the yield being offered more than compensates for the risks undertaken. Also for yield enhancement, the fund holds a mix of inflation-linked bonds (7.6 per cent) and fixed-rate government bonds (8.7 per cent). Importantly, the latter are long-dated: Prudential believes that bonds with 20-plus-year maturities continue to offer attractive yields and protection against future market weakness and rising interest rates. This was proved

true in the first quarter, as 20- and 30-year bonds returned 3 per cent and 4.1 per cent respectively, while three- to 12-year bonds lost 0.5 per cent to 0.7 per cent. To offer further yield enhancement and diversification, the fund has invested in foreign corporate bonds (9.7 per cent, mainly US high yield) and SA listed property (6.2 per cent), which has the potential to produce low double-digit returns this year.

Are bonds still a good investment?

Given this attractive mix of assets, the Prudential Enhanced Income Fund has the potential to weather any market weakness well. We also see potential for long-dated bond gains, since we believe the market is overly pessimistic regarding the pace and magnitude of future rate hikes. We continue to believe South Africa’s rising rate cycle will be more gradual and subdued than previous such cycles, a view that Reserve Bank governor Gill Marcus has supported in her recent comments.

strategy, investors should always be mindful of the overall quality of their investments. A well-diversified bond portfolio is therefore of paramount importance. The last thing fixedincome investors can afford is to lose all their savings because one company defaulted.

Chris Hamman, Head of Fixed Interests at Sanlam Investments

he ‘taper tantrum’ of 2013 gave fixedinterest investments a bad name. The emotional reaction to then-US Federal Reserve chairman Ben Bernanke’s perfectly reasonable statement – that the US Federal Reserve could not use its balance sheet indefinitely to stimulate US economic growth – was unfortunate because it focused almost exclusively on the speculative element associated with investments. It was possibly greed that drove the US 10-year bond yield to 1.5 per cent and the South African 10-year bond to 6.2 per cent in the first place. Similarly, it was probably fear that caused the subsequent sell-off. But where does this leave long-term investors with a more fundamental orientation to investments? In thinking about bonds, the first thing to realise is that informed fixed-interest investors should not be overly concerned about capital losses, at least not compared with other asset classes. To understand this, consider that the future cash flow associated with bonds is known in advance. Investors know exactly how much interest will be paid and when it will be paid. They also know exactly when their capital will be returned to them. Neither the interest amount nor the capital amount to be repaid changes when interest rates change. Investors can therefore match their investment horizons with the maturity of the bond (or bond fund) in which they want to invest. If your investment horizon is short, a money market product may be most appropriate. On the other hand, if your investment horizon is five or six years, a bond fund may be most appropriate. Secondly, many investors aim to increase the interest amount they can earn on their fixed-interest investments. A typical strategy is to invest in lower quality bonds such as that issued by corporates as opposed to government bonds. While this is a perfectly legitimate

The argument so far is that bonds carry far less risk than one might think, judging from the headlines in the financial news in 2013. In fact, when used correctly, they carry far less risk than other asset classes. Unfortunately, bond investments are subject to one major risk, namely unexpected inflation. Most people save for one reason only and that is to make provision for the future. If your investment returns cannot beat inflation, it defeats the purpose of saving. Bond investments are particularly vulnerable to this risk, specifically because once a bond is issued, future interest and capital amounts payable are fixed. They generally do not rise or fall with inflation. Investors should therefore only invest in bonds if they believe they are getting sufficient compensation for the risk associated with an unexpected rise in inflation. Luckily, fixed-income investors have an ally in the form of the Central Bank. When the Central Bank becomes concerned about future inflation, as happened in South Africa earlier this year, it typically raises short-term interest rates to keep inflation in check. Generally, the better the inflation-fighting credentials of the Central Bank, the less fixed-interest investors should be concerned that they may underperform inflation. The outstanding question then is this: how much should investors be compensated against future inflation uncertainty? Because fixed-interest investors are risk-averse, they obviously prefer maximum compensation to less. But they also need to be reasonable. The historic returns from long-term bond investors were roughly 1.75 per cent higher than inflation on an annual basis. When global bond yields reached their lows in 2013, the expected future returns were much lower than the historical norm. This is still the case in the US. However, the South African 10year bond yield is presently trading above eight per cent, and therefore offers a reasonable compensation given the inflation outlook and using history as a guide. Investors may increase this return further by investing in lower quality bonds. But such a strategy should be carefully considered in an environment where economic conditions are tough.

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Global economic commentary

Expect the unexpected The first few months of 2014 have proved to be fairly challenging for most investors.

ntering the year, there was an almost universally held set of consensus views: equities would perform well, bonds would suffer as yields rose and the US Dollar would strengthen (against the Yen and Euro in particular) as the Federal Reserve pared back Quantitative Easing (QE). Most economists were optimistic about US prospects, expecting accelerating growth. But there will always be surprises. The unforeseen escalation of events in Ukraine as well as the prolonged bout of severe winter weather in the US reminds us of this. Such events have contributed to the â&#x20AC;&#x2DC;surprisingâ&#x20AC;&#x2122; outcomes in markets so far this year: equities have underperformed government bonds, the US Dollar has been lacklustre and US growth has been weaker than expected. Other important factors have been less unexpected but have weighed on markets, including growing concerns around Chinaâ&#x20AC;&#x2122;s economy and fragilities in several emerging market countries. The upshot of these events has been to shake confidence among market participants and the previously tight range of views has widened. We continue to believe that the global economy will accelerate this year from the sluggish performance of 2013. This will be led primarily by stronger growth in the Euro area and the US, which together make up 40 per cent of world spending. Recent data suggests the Euro area economic recovery is on track. The US outlook has been questioned by recent data, but we believe this has been overwhelmingly a weatherrelated slowdown. As the winter thaws, we

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expect stronger data. The February pick-up in manufacturing and recently stronger loans growth are encouraging. Emerging markets face a more challenging backdrop than for some time, although overall growth should still surpass developed markets. Much has been made of the so-called Fragile 5 (Brazil, India, Indonesia, South Africa and Turkey) which have been forced to raise interest rates in response to currency pressures and inflation concerns. But it is China that will determine the overall outlook for emerging markets and the global economy. While we are aware of the downside risks, our central view remains that China can achieve growth in the region of seven to 7.5 per cent this year and avoid a financial crisis. If our central economic views are correct, the Federal Reserve should continue reducing the pace of QE purchases, ultimately winding up the programme in the fourth quarter this year. Attention will increasingly turn to the timing of interest rate hikes both in the US and UK. Our central view is that rates will start to rise in Q1 2015 in the UK and Q2 2015 in the US. In contrast, we think the Bank of Japan and the European Central Bank will further ease policy. With inflation low across the industrialised world and investors likely to worry about the implications of a post-QE world, the Federal Reserve is likely to proceed cautiously with monetary tightening. Government bond yields are expected to rise gradually in this environment, suggesting minimal returns for the asset class. As such, recent underperformance of equities versus bonds is

likely to reverse and equities will remain the asset class of choice, benefiting from stronger revenue and earnings growth. Valuations have become less attractive as the equity market has risen strongly over the past two years, but not prohibitively so on a global basis. Of course we must always be attuned to potential risks. Presently, developments in China are our most significant concern given the growing spate of financial sector problems. While on a slower path, we believe the authorities have room to stimulate the economy should growth deteriorate further. As the recent events in Ukraine demonstrate, geopolitical events will always pose a risk. In Europe, we expect a quieter year, but vulnerabilities remain and the debt crisis could re-emerge as an issue in the event of a negative shock. We will watch developments closely and are prepared to change our view if events, and our analysis, change.

Tristan Hanson, Head of Global Asset Allocation, Ashburton Investments

Industry associations

New regulation must ensure

SA’s risk and financial advisers are appropriately remunerated The Financial Services Board’s Retail Distribution Review (RDR) discussion paper, expected midway through 2014, will redefine advice, intermediary services and product sales as well as determine appropriate remuneration models for South Africa’s risk and financial advisers.

o unpack the many challenges that the RDR process presents to independent financial advisers (IFA), insurer Altrisk, in partnership with the Financial Intermediaries Association of Southern Africa (FIA), hosted a roundtable debate on 27 March 2014. Participants from the industry, intermediary representative associations and the regulator provided invaluable insights to the IFAs in attendance. From an intermediary perspective, the RDR has to correctly define advice and clearly set out what is expected of intermediaries in terms of giving advice, what constitutes a fair fee for advice, and how this fee should be collected. More importantly, it must acknowledge that intermediation and advice are two different concepts. “The intermediary introduces business to the product supplier and is paid a commission by the product supplier for introducing this business,” says Robert Vivian, professor of finance and insurance at the University of the Witwatersrand. He adds that there is nothing wrong with the commission model and suggests that intermediaries resist any attempt to unilaterally abolish or tamper with the model. “The main rationale for the intermediary to be paid is for introducing business to the product supplier, not for the advice they may or may not give,” says Professor Vivian. Clarifying that the intermediary plays a vital role in the distribution of financial products rather than in the professional advice space, he says that abolishing commissions would relieve product providers of a valid expense incurred for the introduction of new business. The FIA agrees that a major stumbling block in previous debates around intermediary and adviser remuneration is that the fees paid for advice versus the commission paid for the

sale of a financial product were not properly differentiated. Traditionally, both advisers and intermediaries have received a commission in return for introducing business in the life or risk space, with some charging additional fees for advice or other services. But the costs of, and responsibility for, administrative duties have shifted increasingly onto the adviser or intermediary since the late 1990s, with dramatic increases in operating costs, administration duties and consumer-related responsibilities following the 2004 inception of the FAIS Act. Michael Blain, MD of Altrisk, says that removing commission outright as a form of remuneration would have serious consequences for the IFA. He says independent advice is a fundamental cornerstone of consumer protection and that any dilution of the independent advice industry would be disastrous for consumers, product providers and regulators alike. Another critical focus of the RDR process is to acknowledge the vagaries that exist across the various financial services disciplines. Early on in the process, the FSB differentiated between short-term insurance, long-term insurance, risk, investments and healthcare. All are very different and offer varying value propositions that must be properly unpacked. The FIA is an active participant in the RDR process and will engage with the FSB to ensure that concepts such as advice versus intermediation, and independent versus tied advice, are adequately and appropriately defined. As such, the FIA has already established sub-committees in both its short-term insurance and financial planning disciplines to deal with RDR matters and make sure that FIA members’ interests are considered at each stage of the process.

The FIA remains committed to ensuring fair remuneration for advice and intermediary services and we know, based on our interaction with the FSB, that there is no intention of ridding the industry of either quality financial advice or intermediated services. Professor Vivian says, “RDR should be seen as an opportunity. The intermediary community should seize the day and take this opportunity to clearly define their roles, duties and obligations – before these are imposed by a centralist third-party regulator that is intent on seizing power over the lives of both the intermediary and their client.”

Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA)

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Head To Head

The

banking

perspective

Nicky Weimar Goolam Ballim Senior Economist at Chief Economist, Head: Standard Bank Nedbank (NW) Research, Standard Bank Group (GB) What are your growth outlook predictions for different sectors of the local economy during 2014 into 2015? NW: The outlook for mining remains bleak. The impact of the strike was clear in Februaryâ&#x20AC;&#x2122;s mining production data, which declined sharply as production of PGMs ground to a halt. The longer the strike continues, the more devastating the impact on the industry and the economy overall.

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The outlook for manufacturing is more promising. Assuming no further disruptions due to strikes or electricity outages, underlying conditions are more favourable with a weaker Rand likely to provide some boost, however temporary, to competitiveness while the Eurozone continues to recover and the world economy strengthens. Although the construction industry has been hard hit by the recession

and tainted by the findings of the Competition Commission, progress in the roll-out of public sectors projects over the past year suggest that the recovery in activity should gather some pace over the next two years. The retail trade industry is likely to experience a softer spell over the next 12 months as consumers adjust to slower income growth, struggle with still high debt levels, feel the pinch from rising interest rates and continue to face an uncertain labour market. The banking industry will also feel the effects of a strained consumer, but increased activity in the corporate and public sectors may help to soften the impact. Real estate activity will remain muted in 2014 given the pressure on household finances and softer demand in the commercial property market, but a more convincing recovery in both demand and prices are expected from 2015 onwards. Overall, the South African economy is expected to grow by 2.5 per cent in 2014 and 2.9 per cent in 2015, with considerable downside risks. However, the completion of some of large projects in the power-generation industry and better conflict resolution in the labour market could make a major difference to the country’s growth prospects. GB: South Africa’s economy has, in recent years, underperformed relative to both international peers and domestic potential. This is likely to continue through 2015. Due to general weakness in aggregate demand, most sectors of the local economy will exhibit strain. The mining sector will struggle to restore uninterrupted production; manufacturing will be especially weighed on by weak durables goods demand; and services, which draw a fair amount of impetus from industry, will underperform. Your comment on the effects of quantitative easing on investment in South Africa? NW: We feel that the market’s initial reaction to the US Federal Reserve’s tapering of large asset purchases was exaggerated. Generally we expect emerging markets to face volatile capital flows in 2014, with emerging market assets and currencies coming under spells of pressure, followed by periods of rebound as capital returns to snap up bargains at undervalued currencies. We also expect that investors will become more discerning among emerging markets. South Africa is vulnerable given both the current account and fiscal deficits, but also the infrastructure constraints on growth and the conflict in the labour market. These concerns are partially contained by a sophisticated and stable financial system characterised by deep and liquid financial markets. GB: In recent years, the various rescue measures adopted by the world’s leading central banks inserted a scaffolding under the global economy and financial markets. This buoyed South African asset prices as well. In the near to medium term, central banks’ monetary tightening is likely to occur in tandem with improved economic prospects, and while there may still be occasional bouts of volatility, it is unlikely to trip the continued, albeit gradual, global recovery. Do you think the recent narrowing of the current account deficit could be the beginning of an ongoing trend? NW: The improvement of last year has probably already been

reversed in the first quarter given the strike in the platinum mining industry. Although hard to quantify, if we assume that the strikes end soon and there are no other disruptions to production such as power restrictions, then exports are likely to recover given the weaker Rand and a stronger world economy. At the same time, imports are likely to increase at a slower pace as consumer spending moderates. Together these two forces should help reduce the trade deficit and, in the process, the current account deficit. We expect the current account deficit to narrow from 5.8 per cent of GDP in 2013 to 5.2 per cent in 2014 and 4.4 per cent in 2015. GB: In the prevailing cycle, it is likely that the current account deficit (as a percentage of GDP) peaked in 2013. Admittedly, any prospective narrowing will be gradual and the nominal balance will remain high for an extended period. This suggests that the Rand will be prone to bouts of weakness in coming quarters. Do you believe the rise of unsecured lending in South Africa could be heading us to the possibility of a credit bubble? NW: No. It is true that unsecured lending has grown at an alarming pace over the past five years, but the National Treasury, the banking regulator and the commercial banks themselves spotted the warning signs early enough. Growth in personal loans slowed sharply towards the end of 2013, falling off from a pace of 32.8 per cent year on year at the end of 2012 to only 5.8 per cent year on year at the end of 2013, and is currently growing at only 4.8 per cent. Personal loans account for 7.4 per cent of total credit extended and 13.2 per cent of household credit. GB: No. The share of unsecured lending in overall credit is small, at about one-tenth of the total. Consequently, the risk of widespread credit defaults is implausible. Moreover, for the most part, the banking industry has lent judiciously and with appropriate pricing and provisions so as not to undermine the industry’s sustainability. What is your comment on current levels of household debt as a percentage of disposable income? NW: Although the ratio of household debt to disposable income has come down from its peak of 83 per cent in early 2009, it is still high, amounting to 74.3 per cent at the end of 2013. Disposable income growth is slowing, currently growing at an annualised quarterly pace of around two per cent. This softer trend is expected to continue as growth in public sector employment and wages slow in line with the government’s plans to reduce the budget deficit and control escalating public sector debt. While the ratio of debt service costs to disposable income still appears manageable at 7.7 per cent at the end of 2013, debt service costs will increase over the next two years as income growth slows and interest rates are expected to rise. This will place pressure on household confidence. GB: South African households have been deleveraging since the 2009 great recession. Admittedly, the pace and extent of reducing indebtedness in the current cycle has been lighter than historical experience. Generally, there is a greater credit dependency among South Africans for the purchase of essential goods and services today, and especially as society transforms to include individuals who were historically prejudiced. Favourably, the low interest rate environment has helped to buffer debt-service strain.

investsa

Investment strategy

Research-driven portfolios

important traits within a fund, such as manager style, team culture and the ability to handle under-performance. This information helps guide portfolio construction and allows us to design appropriate portfolios for clients, with high conviction in fund selection and low turnover or switching levels. Fundhouse has been focused on establishing and managing investment functions for clients since 2007. Our team is staffed with ‘insiders’: professionals who have worked alongside fund managers, within investment teams and in management roles for over 15 years. This level of experience allows us to engage fund managers in detail and to really test how they make and implement investment decisions.

Managing investments for clients can be a complex task filled with difficulties including a lack of good information, considerable fund choice and a number of poor options.

These services are driven through in-depth manager research and an experienced team. We spend a considerable amount of our time researching and evaluating fund managers and investment businesses both in South Africa and offshore.

consider. We see it as vital to being able to make good investment choices for clients and ensuring that good financial planning advice is implemented in the best way possible. Our research is centred on trying to establish if a particular fund is likely to be able to deliver on its investment ‘promise’ in future. To do this, we assess: • The business and shareholders, to establish if the environment in which the fund operates supports successful fund management. • The fund’s investment process and philosophy is covered in detail so that we can gain insight to whether or not the fund has investment merit, and if this process is likely to deliver the expected results over time. • We then evaluate the investment team, covering individuals as well as team dynamics, to gauge the quality and consistency of decision making. • Lastly, we focus on the fund analytics to test whether the evidence supports the theory. • Across all of these areas we are looking for quality and consistency. This approach results in a strong and evidence-based opinion on a fund, and what we believe to be a materially higher success rate in fund selection.

Manager research provides us with the fundamental understanding of each fund we

As part of the research we perform, we gain insight into the less obvious but equally

t Fundhouse we aim to simplify the world of investments through an informed, independent and researchdriven approach. Our service offering to clients covers model portfolios, where we assist financial advisers with portfolio construction and management for their clients. We also provide investment advisory services as well as ratings on funds to multi-managers, investment platforms and advisers.

32 investsa

It is difficult to differentiate between the assortment of investment products available in the market today. This can impact negatively on clients. We can help to simplify the areas of fund choice, portfolio construction and the knock-on consequences of complexity within a business. In the absence of detailed and informed research, we find that decision-making often reverts to what is publically available, past performance being the largest culprit among these. A reliance on quantitative information alone is also something which may disguise hidden risks. The undercurrents within investment businesses and teams are too important to ignore, and decision-making without this level of insight may provide false comfort. When concluding on portfolio construction for a client, we ensure we have met all the requirements for the ‘best practice’ outcome, namely good process, governance, informed research and recommending the best funds available in the market, all encapsulated within a portfolio built around the client. This helps advisers meet their regulatory obligations and keeps business risk low. We are steadfast in our independence, a trait which we believe to be crucial for the successful management of client investments.

Peter Foster, Director, Fundhouse

Investment solutions

How to build a successful

asset management company and aims to build relationships with distribution channels is also key to growth and sustainability.

reaking into the local asset management industry can be challenging, given the dominance of big brands and the need to build relationships with distribution channels that control access to institutional and retail assets. It is important that investment professionals assess the landscape before opting to start an entrepreneurial company. The 1990s saw the birth of a number of independent asset management companies, nearly 40 per cent of which have since vanished or merged with or been acquired by other companies. A new company’s first seven years of existence are perilous and, in fact, the average life expectancy of the failed companies that started between 1990 and 2013 was five years. They failed for many reasons, including extreme market volatility, poor performance, an inability to grow assets and build sustainable businesses, poor business models, lack of financial conservatism, and a lack of steadfast shareholder support. Some companies that survived the first crucial years later faltered through failure to innovate or because of a culture that lacked focus and controls, which often affected returns. The most significant steps a start-up asset manager can take to set the company apart in a keenly contested market place are to deliver top performance, provide impeccable service, build a solid reputation and protect it at all costs. To compete and thrive, companies require strong relative results, enough resilience to overcome periodic underperformance and the inevitable market crises, and the ability to recover when the market bounces back. Astute leadership, a

single-minded focus on excellence and business agility are essential. Embedding a strong company culture and values within the company helps a business attract and retain talent. It is critical to secure ‘patient’ assets at the start that afford the company the time to establish a foundation for a sustainable business. This core amount of patient assets to build a performance track record often comes from private clients, friends and family, incubator funds and personal savings. Introducing a strategic shareholder that can inject capital into the business is another source of assets in the early years. A wellnegotiated shareholders’ agreement that sets the parameters of management independence and establishes a governance framework helps ensure the longevity of the company. Institutional clients trickle in only once there is an established public track record, typically after three to five years. A lean start-up when the business is sub-scale is important, and saddling a business with high costs is risky. New companies also need to temper growth expectations and build a significant margin of safety via their capital base to survive the first five years. Without top performance, a company is unable to grow assets and inevitably fails. A competitive performance track record that can capture the interest of umbrella funds, multi-managers, consultants, independent financial advisers and wealth managers and get a company ‘voted’ onto consultant buy-lists and retail investment platforms is essential for success. A targeted marketing effort that positions the company, highlights the performance track record

Building credibility and trust takes time and requires continual communication. In addition to face-to-face interaction, technology increasingly offers a cost-effective way to connect with clients. The savvy use of e-mail, Twitter, apps and YouTube to share performance, investment views and thought leadership, reduces the need for massive clientfacing and marketing teams. Companies that invest in the skills necessary to succeed in handling consultant relationships and gain access to distribution channels, and which also have empowerment credentials, are also likely to do well. In 2008, many young companies won first-time mandates from the Public Investment Corporation (PIC), and, with over R1 trillion in assets and growing, the PIC will continue to play an influential role in supporting transformation in the assetmanagement industry. Building a new asset management company is a long-term endeavour. Persistence, perseverance, performance, fair fees, business agility, a demonstrable commitment to build a sustainable business, a clearly defined process and the ability to articulate competitive advantage in a market with low perceived differentiation between companies are critical. Skill, luck, patient investors and shareholder backing will be key to a company’s longevity.

Muitheri Wahome, Head: Technical Solutions, Investment Solutions Limited

investsa

Equity funds lead as SA unit trusts post modest gains: Q1 2014 Name

One month

Three months

One year

Three years

Five years

# of funds in category

South African Equity Resources

-0.3

9.9

13.5

1.1

11.4

South African Equity Financial

6.7

6.1

19.4

21.3

24.4

South African Equity Large Cap

2.3

4.8

23.2

16.5

20.7

Global Real Estate General

-1.0

4.8

14.5

22.3

23.7

South African Equity General

2.5

4.1

20.6

15.3

19.9

133

South African Multi-Asset High Equity

1.3

2.3

15.5

13.7

14.3

119

South African Multi-Asset Flexible

1.3

2.1

15.1

14.0

15.4

South African Multi-Asset Medium Equity

1.2

2.0

13.4

12.7

13.5

Global Interest-Bearing Variable Term

-1.1

1.6

14.1

18.1

7.7

South African Multi-Asset Low Equity

1.0

1.5

9.8

10.7

10.6

South African Equity Industrial

2.1

1.4

26.1

24.7

27.1

South African Interest-Bearing Money Market

0.4

1.3

5.2

5.3

6.1

South African Interest-Bearing Short-Term

0.6

1.3

5.5

6.2

6.8

Worldwide Multi-Asset Flexible

-0.3

1.0

21.8

18.4

15.8

Global Multi-Asset Flexible

-1.3

1.0

27.1

22.1

13.0

South African Interest-Bearing Variable Term

1.7

0.9

8.9

Global Equity General

-1.5

0.9

31.6

24.0

18.0

South African Real Estate General

4.1

0.8

2.1

16.6

17.2

Global Interest-Bearing Short-Term

-1.2

0.7

16.1

14.5

3.0

Global Multi-Asset Low Equity

-1.9

0.7

20.0

18.6

8.7

Regional Equity General

-1.2

0.5

25.1

18.9

15.2

Global Multi-Asset High Equity

-2.1

0.4

27.8

23.3

15.6

South African Equity Mid/Small Cap

1.4

0.4

13.4

18.3

22.7

Regional Interest-Bearing Short-Term

-1.4

0.3

19.8

15.5

3.4

Global Multi-Asset Medium Equity

-2.6

0.1

25.5

20.1

11.0

34 investsa

Resources and financials top the charts while offshore and fixed income funds lag behind

outh African markets got off to a strong start in 2014 as the FTSE/ JSE All Share Index outperformed major global markets in the first quarter of the year. The JSEâ&#x20AC;&#x2122;s 3.3 per cent return was good enough to beat the S&P 500 (1.5 per cent), FTSE 100 (-2.2 per cent) and the Nikkei 225 (-9 per cent). Generally speaking, those categories with higher domestic equity exposure performed the best. The top three were the South African Equity Resources, South African Equity Financials and the South African Large Cap Equity categories. Equity-heavy multi-asset categories also sat towards the top end of the charts, as evidenced by the South African Multi Asset High Equity category and the Multi Asset Flexible categories in fourth and fifth places. Meanwhile, the more muted international market returns meant offshore categories

Morningstar

depreciated slightly versus the Yen, Euro and Pound during the quarter. At the individual fund level resources funds dominated the performance charts for the first quarter, with Old Mutual Gold (18.5 per cent), Investec Value (13.9 per cent) and Stanlib Gold and Precious Metals (12.1 per cent) taking the top three spots.

The worst performing funds in the first quarter included various broadly based African equity funds such as Investec Africa (-6.9 per cent), Stanlib Africa Equity (-3 per cent) and Prescient Africa Equity (-2.4 per cent). Rounding out the bottom three funds were Prescient China Balanced Feeder Fund (-6.2 per cent) and Third Circle Targeted Return (-5.3 per cent).

Resource names like AngloGold Ashanti (48.8 per cent), Assore Ltd (20.9 per cent) and Anglo American Platinum (20.2 per cent) were among the best performers in the FTSE/JSE Top 40 in the first three months of 2014.

sat towards the bottom of the charts along with the fixed income categories. Global multi-asset and fixed income categories made up five of the worst six performing categories, with the Global Multi-Asset Medium Equity category coming in last place at 0.1 per cent. Despite the Rand’s nosedive in January, it powered back in February and March to end the quarter just shy of where it started the year. Meanwhile, the currency

Financial stocks such as Barclays Africa Group (15.7 per cent), Investec (13.9 per cent) and Nedbank (8.7 per cent) experienced more muted returns but still were among the index’s best performers. On the bottom end, Kumba Iron Ore (-10.9 per cent), Intu Properties (-9 per cent) and Life Healthcare Group Holdings (-8 per cent) were some of the worst performing names in the index. JSE heavyweights SAB Miller and Compagnie Financière Richemont SA were also down during the period as both lost 3.4 per cent.

David O’Leary, CFA, MBA, Director of Fund Research, South Africa, Morningstar South Africa

There’s only one Investment Solution In an industry riddled with jargons and complexity, we offer our clients investments they can count on, delivered with simplicity and transparency -- and we’ve been doing it for 17 years. So, when you need an investment solution, cut to the chase and go straight to www.investmentsolutions.co.za or call 011 505 6000. Follow us on twitter @InvestmentSolZA. Investment Solutions. 17 years. With confidence

Investment Solutions Limited is a licensed Financial Services Provider. FAIS licence number 711. Registration number 1997/000595/06.

investsa

Passive investments

Passive versus active investment methods:

The real debate How does passive investment technology work?

Mike Brown, Managing Director, etfSA.co.za

number of articles have been written recently by active investment managers defending their investment methods relative to passive index tracking investment techniques. These articles often focus on the superior methods of active managers that supposedly allow them to beat the average returns of the market, which is the performance return provided by the passive index trackers. However, passive investment methods and techniques can be as scientific as active management techniques, a view that is not often conceded by the active manager.

36 investsa

The passive manager in South Africa has around 70 different index tracker ETPs listed on the JSE to choose from. These cover all applicable asset classes, market sectors and alternative investment types. Passive investors can also exercise their intellectual capacity in finding the optimal mix of such index tracking products to deliver the risk profile plus the performance returns they require. This requires active choices to be made regarding asset classes, indices chosen and the multi-product mix. The passive methodology involves the following key features: 1. The passive investment manager looks only at the indices, not at individual securities. This means that fundamental analysis of individual shares is not needed. The passive manager is concerned with long-term performance of indices, their variability in performance and their constituent weightings.

2. The passive investor uses a strategic asset allocation model, and sticks to it rather than a tactical asset allocation approach reacting continuously to changing market news or trends. The strategic asset allocation stays intact over the medium- to long term. 3. The passive manager pays particular attention to risk and variation of returns by carefully considering the standard deviation and correlation coefficients of the various index trackers used in a portfolio. The idea is to lower the overall risk of the portfolio. 4. Asset allocation is the core of the passive investment method. The passive investment manager is a strong adherent to the wellresearched finding that the correct asset allocation accounts for over 90 per cent of investment performance over the medium to long term. 5. The passive manager then chooses ETFs or other index-tracking products that will give direct access to the asset classes chosen in the strategic asset allocation market, with the most consistency of performance and lowest risk. By focusing on an asset allocation model that is proven over time to deliver good performance, for an acceptable amount of risk, the passive manager delivers on this required return by using only index tracking products in a multi-asset managed solution. The real debate The passive manager does not react to every market turn or changes in economic

Both passive and active investment strategies

have a place in your portfolio central bank indicated a likely move in the bond market, or perhaps listed property, investors could switch a portion of the savings they had accumulated through a passive investment portfolio into an actively managed fund. This would give them the opportunity to benefit from the market sector they believed was best positioned to outperform, given particular market fundamentals. Johann Erasmus, Head of Global Structuring Group, Standard Bank

P forecasts, instead sticking to the selected strategic asset allocation throughout the investment cycle. Portfolio churn and unnecessary costs are avoided and consistency of returns is paramount. Active investment managers often take a largely bottom-up approach focusing on individual shares and opportunities. Portfolio churn and higher risk is often accepted as the corollary of investment rewards. Economic forecasts and market expectations are embraced, factories and mine shafts are visited, company presentations attended, and money spent on research and hiring the best professional staff. All activity is based on the premise that the market is inefficient and the active manager can regularly identify undervalued stocks. Passive managers have a less ‘frenetic’ approach. They accept the collective wisdom of investors in setting market prices and the difficulties of beating the average return of the markets, instead focusing attention on optimal asset allocation between asset classes. The clear differences in the approach of the active and passive managers typically result in different types of solutions, investment performance and risk/reward payoffs. Clearly, there should be room for both approaches for an investor, whether individual or institutional, in building up a portfolio. The real debate should be about blending the optimal mix between active and passive products in an investment portfolio, rather than focusing on their differences.

assive investment vehicles like indexlinked products and exchange traded funds are a fairly recent addition to the South African investment universe. As a result, much of the debate around these products has focused on their advantages over actively managed portfolios, with the discussion often split into two camps: those who favour passive investment versus those who favour active management. However, this approach is short-sighted, as both strategies offer significant opportunities for investors to grow their savings. Passive investments offer lower costs as well as the benefit of knowing that their savings will perform in line with the index or basket of underlying assets they’re invested in. Actively managed portfolios have the potential to outperform the index. What isn’t always acknowledged is that both of these options should form part of your investment strategy. You can use passive investment vehicles to grow your wealth at relatively low costs, and then use active management with certain parts of your portfolio to try and outperform the market by weighting your exposure to particular sectors according to your conviction in their ability to provide returns at a particular point in time. For example, investors with a fairly healthy appetite for risk could take advantage of an index-linked product with a very hefty exposure to stocks to build up a position in the equity market. If at any point they believed that equity markets were overvalued, or if they believed that a particular part of the equity market (such as financials stocks) began to offer greater value, they could shift a portion of their investment into a portfolio offering exposure to their preferred asset class. Likewise, if an interest rate signal from the

Of course, cost is the crucial factor in this strategy, as the effect of fees and administration costs can cause significant decay on your savings when compounded over time. There is also the matter of whether the particular actively managed portfolio you have opted for is overseen by a manager with a commendable track record of being able to outperform the market. This is where a seasoned financial adviser can help with decision-making. Unfortunately, financial products are too often sold on a commission rather than a performance basis. However, there is an increasing tendency for people to negotiate financial adviser fees that are linked to the performance of their investment and we believe this is a very positive development. Another positive in the local market is the increasing effort by the National Treasury to promote low-cost savings products as a means for wealth accumulation among ordinary consumers. This principle is particularly suited to a country like South Africa, which is plagued by glaring wealth disparities. It’s also why we predict that the local market for passive investment vehicles has significant opportunity for growth. While South Africa’s passive investment market is comparatively small compared to its actively managed counterpart, this is likely to change over time. We estimate that the entire passive investment market in South Africa is about R60 billion, compared to R1.5 trillion for active managed products. By comparison, the market in the United States is characterised by an almost 50-50 split between passive and actively managed products. In Europe, roughly a third of investment products are passive vehicles with the remainder being dominated by actively managed solutions. South Africa is catching up and over time the local market will start to resemble what we see in the more developed markets. We’re likely to see further growth in the market for passive investment solutions as more people become aware of their advantages and how they can augment an active strategy. investsa

You have been CEO of Old Mutual Wealth since January 2012. What have been your biggest challenges so far?

drewAndre

CEO, Old Mutual Wealth

well-diversified unit trust portfolio to achieve my required target return. How do you keep a work-life balance?

From my side, understanding the working dynamics of a huge company like Old Mutual. Having spent most of my working life as an entrepreneur, working in a corporate is very different, yet exciting. Then understanding how I could make the changes I was mandated to make, to achieve the objectives I was given. The organisation has a long and fantastic history in South Africa. We need to manage a very delicate balance between changing for the future while not losing some of the magnificent heritage. Has the global financial crisis of 2008 had any lasting impact on the way clients do business? Yes. Clients understand that disasters can and do happen. These have a significant and lasting impact on their financial well-being. This requires that they continually review their plans and investment strategies to make sure that they meet not only their current requirements, but also their needs well into the future. Where do you foresee the best value for investors in 2014? Make sure that their investment plan is well thought through, clearly articulated and fully implemented accordingly. Do not get caught up in day-to-day emotions. Stick to a welldiversified long-term financial plan. Value will be rewarded to those who stick to their sound principles. If you had R100 000 to invest (not in Old Mutual products), what would you do with it? Add it to my existing investment strategy as a top up; which by the way is fully invested in a

38 investsa

Bradley Bradle

Andrew Bradley I try to make sure that I am enjoying what I do at work and that it is meaningful. That way my life is already well on its way to balance. My family also needs to understand this and buy into what I am doing, so they do not see work as competition for their time. Then it is a question of being able to draw boundaries where needed, to keep yourself healthy and spend enough time with family and friends. It is possible to achieve a number of these objectives at once. You recently took part in a mountainbike ride for charity â&#x20AC;&#x201C; please tell us more.

It was the Change a Life tour â&#x20AC;&#x201C; on the road. It is more of a tour than a race where we ride together in groups. It is very special because of the camaraderie of embarking on a tough challenge with others. You share adversity and the joy of accomplishment. What makes it even more special is that we are raising funds for the Change a Life charity that does some remarkable work in a number of areas. The charity believes that by supporting skills developments and uplifting people with new skills, you can make a difference to their lives and the others they interact with. This resonates with me as I believe you need to keep learning and growing. Those involved in these initiatives have also made this choice. How do you fit in cycling and running training and your work obligations?

It is a question of discipline and putting it in your diary and not wasting time on irrelevant things. I also try and exercise with one or more colleagues, clients, family or friends â&#x20AC;&#x201C; that way I cover a number of bases at once.

Andre

Bradley

Profile

investsa

‘Good to great’

the PSG 2014 Co What an interesting conference it turned out to be, with over 700 delegates arriving at Sun City for a three-day stay, from 7 to 9 May 2014. When the conference was planned, of course, the election date had not been fixed for 7 May and the day declared a public holiday.

he right to vote is such an important human right in our still-young democracy, and a satisfying number of people were seen sporting those significant black dots on their thumbnails. Francois Gouws: Stirred not shaken The conference’s opening speaker, Francois Gouws, chief executive officer at PSG Konsult, gave an overview of the company’s results and its strategy of moving from ‘Good to great’. “We reward excellence where we see it – this underpins why we perform,” he said. Giving an amusing James Bond analogy – the super spy famous for his love of martini shaken not stirred – Gouws remarked, “It is time to stir things rather than shake them!” Mentioning that the competition is repositioning and the industry changing, Gouws said that financial services conglomerates are emerging and much automation is going on. “They don’t touch people anymore,” he said, “but of course

40 investsa

this has always been a PSG distinguishing factor. We place a premium importance on our client interaction. We have noted the need to continue maximising our administration in the interests of efficiency, to allow our consultants more time with their clients.”

to from here?, Klopper commented, “Eskom must be sorted out; we must put the platinum strike behind us; we need a new president in the country and with it increased confidence.” The latter, of course, a particularly interesting point that was made on South Africa’s election day.

Dawie Klopper: Economic overview

Klopper also commented that he believes the Rand is too weak according to purchasing power parity data. He added, “In my opinion, the SARB might have to recall that interest rate hike if the economy remains weak.”

Dawie Klopper, investment economist, PSG, gave an interesting overview of the economic landscape and PSG’s predictive accuracy since last year. “We said the Rand could come under pressure because of our twin deficits and it has. We are now, unfortunately, billed as a part of the Fragile 5 group of economies due to our current account and budget deficits. We said that property stocks were expensive and since then they have come down 17 per cent between May and February this year and bond yields have risen. On a positive note, we called equities doing well and that is where we have been invested.” In terms of the eternal question: where

Dan Hugo: The power of partnerships The third and final speaker on 7 May was Dan Hugo, chief executive officer PSG Distribution. “Partnerships shaped our past and will shape our future,” he said, explaining that the company supports its business partners in two main propositions: “We help you provide advice to clients and enable you in your practice management.”

Left to right: PSG Wealth panel discussion chaired by Alec Hogg, featuring Wayne Waldeck, chief executive officer, PSG Wealth; Lizé Visser, head of sales at PSG Wealth investment platform; Adriaan Pask, chief investment officer PSG Wealth; and Leon Ferreira, portfolio manager PSG Pretoria East.

Conference He spoke of the broad PSG distribution offering, which includes investment advice, portfolio management, employee benefits, short-term insurance, stock broking and online trading, asset management, administrative support, market support, product and provider analysis, technical support services, compliance and risk management and succession planning. Into day two The delegates looked forward to more wit and wisdom on day two and continuing the ‘Good to great’ theme with a jam-packed programme that boasted something for everyone: PSG leaders’ own inspirational words, interesting panel discussions and two marvellous motivational speakers: one a global businessman and the other, our very own legend, Gary Player.

Willem Theron, chairman of PSG Konsult, opened with a warm welcome and a brief overview of the day, introducing a business leader and world-class speaker. Kevin Gaskell: Global business icon and adventurer Kevin Gaskell, UK business leader and global business speaker (among many other accolades to his name) began the day with anecdotes that included skydiving, mountain climbing and trips to both the north and south poles – not to mention his exploits in the world of business. In terms of improving a business, Gaskell’s impressive CV includes turning around a struggling Porsche UK in the late eighties/ early nineties; being appointed MD of the company in 1991 at the age of 32; and

moving to BMW (GB) as its MD and leaving after four years of record performance. Since then his CV boasts positions at CarsDirect.com Europe, which he founded; group chief executive of EurotaxGlass’s AG, Switzerland; and his current tenure as deputy chairman of Achilles Group. In terms of turning a business from good to great, he says, “Getting ordinary people to achieve extraordinary results starts with a dream of doing something extraordinary. Every successful businessman or woman is a dreamer, although not every dreamer is a successful business person. I personally am driven by the dream of building a dream. “When I was at Porsche we were in crisis. We got the people together and reignited their passion and their belief in the dream. We transformed the business and took Porsche from near-bankruptcy into the top

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five in the local car industry by recapturing the passion.” Gaskell says it can be painful and difficult to force people to think differently. “I am a hardnosed businessman and we ask the hard questions. Changing the way people think about running the business means building a simple plan and getting everyone aligned. It is important to look at issues such as who your market is, who your company is targeting, and whether you are looking to be local or international. The secret to achieving international performance is to decide how good you want to be and then use a structured approach.” He provides the following three Cs of a successful business plan: • Commit – make a positive decision and say: yes, I am going to do something extraordinary. • Connect – you cannot do this alone. Implement the visible process. • Create – enjoy the magic of shared achievement.

at the top; a middle layer incorporating your activity plan, marketing plan, communication plan, personnel plan and technology plan; and a bottom layer showing your budget plan. Budgets give you priorities; too many businesses do too many things.”

He was pleased to point out that PSG is building off a very strong base, which saw the company in third position in the latest PlexCrown survey (which ranks management companies on their consistency of performance), behind Coronation and Allan Gray.

PSG Insure Group panel discussion Following a short break, a panel discussion followed with seasoned journalist and motivational speaker Derek Watts chairing for the PSG Insure Group. Panelists included Rikus Visser, chief executive officer, PSG Insure; Dan Hugo, chief executive officer, PSG Distribution; Ian Kirk, chief executive officer at Santam; and Gordon Whitcher, chief executive officer of PSG Short-term Administration. Jannie Mouton: PSG Group Investment Strategy going forward The panel discussion was followed by Jannie Mouton, chief executive officer, PSG Group, discussing PSG Group Investments future strategy.

His wide-ranging presentation took the conference through some of the company’s investments. He made special mention of two investment causes clearly dear to his heart in the private equity investments space: Impak, which supports home and support centre education and offers an accredited matric in both English and Afrikaans; and Curro, which assists education in South Africa through a different platform. “Curro is the largest private school group in South Africa with 31 campuses and over 27 000 learners,” he explains. Mouton said it is particularly important to follow a strong investment philosophy in the turbulent times in which we find ourselves. “Through its investments, PSG Group has built a good reputation

Gaskell says he doesn’t believe in threeyear business plans. “Talking in terms of three-year business plans means it might as well be forever. At my company, we talk about 1 000 days. We purposefully talk in days and not years to change the way people think. We count the days and end up raising the heart rate. People are more inclined to do it now.” Final practical words of wisdom come around planning and budgeting. “I work with business plans of just one page. Make it simple – this is what we do – and make it so everyone can understand. Then have a vision of success that includes a three-tiered vision of success

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The dynamic team of PSG 2014 conference organisers.

PSG Asset Management panel participants: Johan van der Merwe, CEO Sanlam Investments, Pieter Koekemoer, Head of Personal Investments, Coronation, Anet Ahern, CEO PSG Asset Management, and panel chair Derek Watts.

most famous and philanthropic sons, was the final guest speaker before the conference information sessions were wrapped up by Willem Theron, chairman of PSG Konsult. Gary Player is not a procrastinator and he advised delegates, “Now is the time to do it. Don’t postpone and wait for tomorrow. Celebrate life and don’t let the negative override the positive: don’t sweat the small stuff!” Reminding everyone that life is 10 per cent what happens to you and 90 per cent what you do about it, he touchingly exhorted the men in the room to “Buy flowers for your wife now.” This, of course, is consistent with Player’s humanitarian ethos and his insistence on good service – as well as the importance of not forgetting a warm touch for a person.

based on trust, integrity and delivery of shareholder value.”

PSG Asset Management panel discussion

Commenting on the difficult political times we are currently traversing, Mouton highlighted the following negatives which impact on investor perception and include: service deliveries, Eskom and municipalities; crime; education; wasting of public funds, for example e-tolls and Nkandla; corruption, and the fact that our labour unions are very aggressive.

Following on from the PSG Wealth panel discussion, it was the turn of PSG Asset Management, with Derek Watts once again in the facilitator’s chair. The panelists included Anet Ahern, chief executive officer, PSG Asset Management; Pieter Koekemoer, head of personal investments, Coronation; and Johan van der Merwe, chief executive officer at Sanlam Investments.

However, he also pointed out the positives: our South African and global icon Nelson Mandela and the peaceful transition to democracy; our stable economy and our introduction to the BRICS economies; our constitution, embodying true democracy; the fact that we are a leading economy in Africa; our world-class financial institutions, and the great improvement in living conditions for a significant portion of the population.

The discussion centred on the biggest challenges facing asset managers right now, opportunities presented by offshore investing, and the challenges presented by currency fluctuations, inflation and the increasing importance of investors not outgrowing their wealth.

PSG Wealth panel discussion The PSG Wealth panel discussion was chaired by economist, journalist and businessman Alec Hogg. The panelists included Wayne Waldeck, chief executive officer, PSG Wealth; Leon Ferreira, portfolio manager, PSG Pretoria East; Adriaan Pask, chief investment officer, PSG Wealth; and Lizé Visser, Head of Sales at PSG Wealth investment platform. Pertinent points included the importance of time spent with clients, a strongly recurring theme throughout the conference, as well as performance fees, which are under scrutiny from a regulatory perspective. PSG is ahead of the curve as it has already removed performance fees.

A pertinent point was also made about today’s information overload, highlighting the need for expert advice. The discussion broke for lunch with a brief overview of the active versus passive management debate, and finally advice on what makes for a winning asset manager. In the words of the panelists:

As someone who has faced great performance pressure throughout his enormously successful golfing career, he spoke about facing one’s fears, saying, “The word ‘fear’ is composed of ‘False Emotions Appearing Real’. Your mind runs away with you. Don’t let that happen.” More seriously, he advised: “When it comes to business, change is the price of survival and we have to live with it. Everything in business is negotiable except quality. A promise made must be kept. Also, there is no substitute for personal contact. Perseverance is one of the most important qualities you can have.” At the end of Gary Player’s presentation, the delegates, obviously touched by the humanitarian themes that resonate so much with the PSG importance of preserving the human element in their dealings with clients, rose to their feet and gave him a standing ovation. The conference ended with a gala awards dinner, with marvellous commentary given by dynamic guest speaker and political analyst Dr Piet Croucamp. The delegates then had a relaxing golf day to look forward to the next morning after all the hard work was over.

• Johan van der Merwe: “Have a philosophy and stick to it.” • Anet Ahern: “Make sure you are consistently applying a process and doing the right thing for your clients.” • Pieter Koekemoer: “Culture, independence and focus. Keep your business simple. Ask yourself: would I put my own money there?” Gary Player: Lessons from my career The Black Knight, one of South Africa’s

Vivienne Fouche, Content Editor, InvestSA

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Practice management

What’s luck got to do with it?

that many of the underlying companies of Berkshire Hathaway were in themselves holding companies. How lucky have we been? Over the past 10 years, the share market returned almost 20 per cent per year. The listed property market had an even better return, around double the average annual long-term return. Even the most astute analysts would not have predicted this outcome.

This article is inspired by a paper written by Howard Marks at Oaktree Investments in the USA, on the role of ‘luck’ in life, as well as by some of the extraordinary events that have occurred in the financial markets over the past decade.

ome may call it providence, others chance. For the purposes of this article, I shall call it luck. Success in anything, including investments, is the product of many different contributors. Even Marks concedes that “hard work, planning and persistence are essential for repeated success.” However, these factors do not cause consistent success alone, especially with investments. Luck and investing I think it hurts the credibility of the investment industry to claim that luck has nothing to do with investment returns. Even those who believe in the fundamental analysis of a company’s long-term prospects need the future to look like their assumed set of circumstances. The right initial analysis is important. You also need the environment to unfold in a way that you had assumed. Elroy Dimson,

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Emeritus Professor of Finance at the London Business School, said: “More things can happen than will happen.” Often, the future unfolds in a way that rescues incorrect analysis and you could be lucky or right for the wrong reasons. In addition to the right analysis and the right environment, you also need the right timing. The only element that is under the investment manager’s control is analysis, yet to claim that vigorous analysing can somehow remove the risk of an uncertain future or timing is bowing to our human desire for certainty. We cannot promise this certainty to investors. How to have better investment luck Show up: If you do not save or invest, you cannot participate in the good fortune that sometimes comes our way. Choose the right game: Playing the short-term trading game, or currency investing, or even investing in single properties requires a lot of luck. Investing for the long term in a variety of quality investments, chosen through rigorous analysis, or even just investing in index trackers of this type, is more assured. Admitting that luck is involved and that even the best analysis can be wrong or poorly timed will lead you to believe in healthy diversification. I do not quote Warren Buffett on this one, who often says that diversification is for those who do not do their homework. If you look at Buffett’s portfolio, it is widely diversified, seeing

Ten years ago, the world was experiencing corporate scandals, the aftermath of the Gulf War, emerging markets in turmoil and a poor outlook for South Africa. We have since been very lucky. For example, interest rates consistently declined due to a global, lower inflation environment; we saw a stable local economic policy; exchange controls limited our financial institutions’ exposure to bad debts during the credit crisis; we experienced a commodity super cycle; we hosted the 2010 Soccer World Cup, and most recently we have seen the creation of abundant liquidity in developed markets. Most of these factors were largely unforeseen. More recently, developed markets showed spectacular returns, especially when converted to Rands. When we started to invest in developed markets three years ago, we had no idea that we would make 30 per cent per year over three years. If you choose the long-term game, sometimes most of the return comes in the short term. The timing was lucky. Just admit it The investment industry should admit to the influence of luck (even just sometimes). We cannot promise certainty. Of course, we can influence our good fortune by rigorous analysis and by choosing long-term investment strategies. If we admitted that the future could look different from what our isolated ideas predict, we would build more robust and better-diversified portfolios.

Sunél Veldtman, CFP® CFA®, CEO of Foundation Family Wealth, author of Manage your Money, Live your Dream

Regulatory development

The revised BEE Codes and sector BEE Codes:

different regimes for different sectors x Black economic ode: BEE C empowerment is generally governed by the Broad-based Black Economic Empowerment Act, the generic Codes of Good Practice on Broad-based Black Economic Empowerment and various sectorspecific Codes of Good Practice issued in terms of the BEE Act.

ode:

BEE C

BEE

e: x

Cod

BEE Codes revisions bring confusion The generic Codes were amended on 11 October 2013. The revisions will come into effect on 30 April 2015. Between October 2013 and 30 April 2015, entities may choose to be scored under the generic Codes or the revised Codes. The Department of Trade and Industry (dti) has not, however, revised the various sector Codes. This has resulted in confusion over whether these will apply after 30 April 2015 and, if they do continue to apply, in a misalignment between the generic Codes and the sector Codes and a potentially easier BEE regime when measured under the sector Codes. As part of the revisions to the generic Codes, the BEE Scorecard has been reduced from five to seven elements (by merging, firstly, the management control element and the employment equity element; and, secondly, the preferential procurement element and the enterprise development element). The revisions have also introduced priority elements which, if not achieved, may result in an entity having its BEE contributor level discounted. Despite the revision of the generic Codes, none of the various sector Codes have been revised. This results in such sector Codes (which are based on the pre-revision generic Codes) not aligning with the generic Codes.

of Section 9 of the BEE Act may only be measured for compliance in accordance with that sector Code. Except for the preceding statement and defining the term sector Code, the revised Codes do not contemplate sector Codes. In our view, this is an accidental omission on the part of the dti and the revised Codes should have included guidelines for the development and Gazetting of sector Codes. The dti has similarly defined equity equivalent contributions and equity equivalent investment programmes, but failed to include the relevant chapter which dealt with equity equivalents in the revised Codes. There was no proposal to amend or remove either the guidelines regarding sector Codes or the principles relating to equity equivalents in the proposed amendments to the generic Codes issued for public comment on 5 October 2012. It is our view that it was intended to retain these chapters but that they have been erroneously left out.

It is probable that the Codes will be aligned in due course and entities should start preparing BEE plans and initiatives based on the revised Codes.

Best advice: working towards the revised Codes Although the sector Codes are not presently aligned with the generic Codes, it is understood that the dti will revise the various sector Codes during October 2014 to align these with the generic Codes.

An accidental omission? The revised Codes state that an entity in a sector that has a sector Code issued in terms

statements that the sector Codes will fall away and the generic Codes will apply. There is no legal basis for this statement, as no procedures or empowering provisions are in place to cater for this revision. This statement also does not take into account the variances between the Codes. Entities should, therefore, be measured against the relevant sector Codes until such time as these are formally and officially revised or repealed. Being measured in this manner will result in entities avoiding the priority elements and the five element BEE Scorecard and so being governed by a less onerous BEE regime.

There is, however, no formal process to revise the various sector Codes. Despite there being no formal process, the dti has made unofficial

Ismail Laher, Director, Norton Rose Fulbright South Africa

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Retirement investing

The case for

offshore investing Offshore developed markets in 2013 performed very well relative to the local equity market. This relative outperformance of developed markets can be attributed to two factors, namely the stronger underlying performance of various offshore equity markets, and the depreciation of the Rand relative to the Dollar, Euro and Pound. There are three primary advantages to allocating a portion of pension fund assets offshore: • Diversification (reduces overall portfolio risk) • Enhancing returns (by choosing markets that perform better than the local equity market) • Hedging (to protect against the devaluation of the local currency and high domestic inflation). However, offshore investment also has its own challenges. These include: • The need for specialist expertise

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• Possible adverse currency movements (strengthening local currency) • Tax implications of overseas economies (such as withholding taxes) • Differing accounting standards and legislation in overseas economies • Information scarcity and poor market regulation in some countries • Language barriers, different time zones and distance • Political risks possibly preventing the repatriation of funds.

comparable mandates are not uncommon.

Another disadvantage is that the fees on offshore investments are typically significantly higher than local investments. Increases of up to 30 per cent on

Studies suggest that an offshore allocation of even more than 25 per cent is optimal for portfolios. However, Regulation 28 of the Pension Funds Act restricts retirement funds

Retirement fund trustees need to be aware that in most cases, investment strategy is set in the context of a long-term investment horizon. There may be short-term periods where asset classes do not behave as expected, but this should not detract from the long-term benefits of having diversification in a portfolio with long-term objectives. Asset allocation

to an offshore allocation of up to 25 per cent of total assets in foreign currency denominated portfolio assets, with a further five per cent being allowable in the case of foreign currency denominated portfolio assets in Africa. Ultimately, portfolios including an offshore allocation should be constructed to be consistent with a fund’s risk appetite and the regulatory environment.

Rand-denominated annualised rolling three-year returns: MSCI World versus ALSI

Asset class strategy Having made an offshore investment decision, trustees also need to ensure that they pay due attention to the asset allocation decision, as the success of an investment strategy in meeting fund objectives is heavily reliant on asset allocation. Offshore investing requires a consideration of the mix between equities, bonds, cash and alternative investment classes. This decision can either be delegated to an asset manager (balanced mandates) or managed by the trustees (specialist mandates). The asset allocation decision will have an impact on the risk levels of the portfolio and any selection should be chosen to meet with the fund’s objectives and risk appetite.

the correct or superior method of allocating offshore assets. Trustees will need to assess each of the above issues while paying due attention to their specific fund’s objectives and risk appetite in determining the optimal offshore allocation strategy.

trustees should always be mindful of the principles underlying the objectives of their fund in setting the offshore investment strategy, and strive to choose the manager that is best suited to the fund’s overall investment strategy.

Selecting a manager

It is equally important for trustees to consider the more detailed aspects of their offshore investment strategy. These will include the qualitative and subjective issues related to managing the portfolio such as:

The increased universe of asset classes and managers adds to the task of selecting a manager to manage an offshore portfolio. While not exhaustive, the following key questions should be carefully considered:

• Active or passive portfolio management • Fixed allocations or allowing asset managers to make tactical asset allocation decisions • Determining appropriate benchmarks • Any style biases that the managers have • Rebalancing policies – this will be driven by currency moves and asset class returns There is no clear-cut answer as to which is

• Should the trustees choose a local or offshore manager? • Should the trustees consider the use of a multi-manager? • What sort of mandate should the trustees give to each chosen manager? • Should the trustees consider pooled or segregated accounts? In addition to the above questions, fund

Nazia Suleman, Senior Asset Consultant, Alexander Forbes Financial Services

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NEWS Novare looks to Nigeria for further property development Novare Equity Partners, the private equity fund manager in the Novare Group, is in the process of launching a second property fund that will invest $250 million in strategically located urban real estate in Nigeria, as well as other sub-Saharan countries in Africa. The Novare Africa Property Fund II follows the Novare Africa Property Fund I which was closed in September 2011 with assets of $81 million. Novare Equity Partners is also subadviser to the new Africa property fund, which, like its predecessor, expects to benefit from Nigeria’s increasingly open economy and the revolution taking place in its retail sector. Jan van Zyl, head of property development at Novare Equity Partners, says that the company has learnt a lot about doing business in Nigeria since the launch of the first fund. “The factors that make Nigeria a worthy investment space include the size of its $432 billion economy that is expanding by around seven per cent a year, its fast-growing middle class and a continuous inflow of foreign exchange from oil and gas exports. “Nigeria’s increasingly open, Englishspeaking economy is a gateway to West Africa. The country has huge potential for agricultural development and is experiencing growing demand for developed world goods and services.”

FSB approves Ashburton

Investments’ Global Leaders Equity Fund Ashburton Investments, the investment management business of FirstRand Limited (FirstRand), has gained Financial Services Board Veronika Pechlaner (FSB) approval for its Global Leaders Equity Fund for distribution to South African investors. The FSB-approved fund, with current AUM equivalent to R583 million ($54.5 million), offers a concentrated global portfolio of around 20 shares which are expected to produce above-average total returns over the medium to long term. Veronika Pechlaner, manager of the Ashburton Global Leaders Equity Fund, says that their focus is on finding 20 quality mega caps which are global leaders within attractive industries. “Through their market position and sustainable competitive advantage, we expect these global leaders

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to consistently generate and grow excess cash returns over their cost of capital, part of which they will return to shareholders in the form of dividends and share buybacks.” She adds that while volatility could pick up from historically low levels, global equities remain their preferred asset class. “We believe the quality of earnings will potentially become more important during the course of 2014, after the significant re-rating valuations we have seen in recent years. Given its focus on quality and sustainable leadership, the Global Leaders Equity Fund is well positioned to benefit from these trends. “The investment style of the fund combines Ashburton Investment’s top-down, macro led views with a particular long-term focus on quality companies for this relatively low turnover portfolio. The Global Leaders fund is also UCITS compliant (Undertakings for Collective Investment in Transferable Securities).”

Finbond moves to the JSE main board Finbond Group Limited (JSE: FGL) moved from AltX to the JSE’s main board. South African financial services institution Finbond specialises in the design and delivery of value and solution-based savings, credit and insurance solutions. Dr Willie van Aardt, CEO of Finbond, says that the transfer to the main board is another important milestone in the growth and development of Finbond Group Limited. Finbond listed on AltX in 2007 and the company’s market capitalisation has since climbed to just over R1.82 billion.

Andre Tuck

Zeona Jacobs, director of issuer and investor relations at the JSE, says that the JSE regards each company moving from AltX to the main board as a demonstration of the success of AltX. “We believe a listing on AltX can make a positive contribution to the growth of companies. A listing on AltX not only allows companies to raise capital, but also provides them with greater opportunities for profiling and enhanced relations with stakeholders including banks, suppliers, distributers and customers.”

Peter Takaendesa

Andre Tuck has been appointed as an investment account manager at Glacier by Sanlam. He will service the Cape Town City Bowl and Southern Suburbs regions. Andre has over 20 years’ sales experience within investments, gained from a number of financial services companies including Old Mutual, Plexus, and most recently Absa Investment Management Services. Tuck is a Certified Financial Planner and holds a financial management qualification from Unisa and a bachelors in management leadership from the University of the Free State. Peter Takaendesa was appointed as an equity investment analyst within the investment research team at Mergence Investment

Mark Selcraig

Managers. Takaendesa worked as an equity analyst at RMB Morgan Stanley for four years, Credit Suisse Standard Securities for three years and was the winner of the 2011 SA Research Analyst of the Year in equities. Prescient Wealth Management (Pty) Ltd announced the appointment of Mark Selcraig as executive director of wealth management. A private banking specialist, Selcraig has 25 years of international experience, advising clients on all aspects of their financial affairs. Selcraig was previously director of private banking at HSBC South Africa, where he was responsible for servicing clients and their families and for new business growth at the company.

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Products

The portfolio is built from passive building blocks – exchange traded funds – and so investment costs are very low, approximately 0.51 – 0.55 per cent per annum (all inclusive). Contributions are tax-deductible by up to 15 per cent of non-pensionable income, returns on investment are tax-free and, at retirement, a significant portion of the lump sum payout is also not taxed. With a minimal lump sum investment of R10 000, or a recurring debit order of only R500 per month, the Core Retirement Annuity is ideal for people who:

www.businesstech.co.za

Absa launches low-cost life-stage retirement product Vladimir Nedeljkovic

The corporate and investment banking division of Absa Bank Ltd (Absa) the member of Barclays, launched its low-cost retirement annuity based on the life-stage investment philosophy. The Absa Retirement Annuity Fund: Core Portfolio or the Core Retirement Annuity allows members to benefit from increased income generated by higher risk taking when young, while automatically reducing risk and consolidating gains as members approach retirement age.

Vladimir Nedeljkovic, head of exchange traded products at Absa’s corporate and investment banking division, says that the Core Retirement Annuity provides diversified exposure to multiple asset classes such as domestic and international equity, property, fixed income and the money market. The risk associated with the investment is automatically adjusted according to the investor’s life stage. “Younger investors, for example, whose primary objective may be to build their wealth, will have a greater exposure to risky assets such as equities. Exposure will then automatically reduce as the investor approaches retirement and the goals shift to protecting their retirement nest egg.”

• Are self-employed and do not belong to a pension or provident fund • Are employed, but not provided with an employer-provided pension fund • Receive a salary and wish to make additional provision for their retirement years • Wish to reduce their tax liability • Seek to invest in a flexible retirement savings vehicle • Wish to make lump sum investments or recurring contributions to a retirement fund On retirement, members may take up to one-third of the retirement benefit proceeds available in cash, of which a portion may be received tax-free. Any additional contributions that the member may have made that did not qualify for tax deduction at the time may be added to this tax-free portion. The balance of the retirement benefit proceeds must be used to purchase a compulsory retirement annuity, drawdowns from which are subject to normal tax. “The Core Retirement Annuity is designed to help South Africans to better save for their retirement by making the investment process simpler and more convenient, and significantly reducing the investment costs. This product is accessible to all existing and potential Absa customers via Absa’s Internet banking portal, absa.co.za,”says Nedeljkovic.

New range of ETNS listed on the JSE BNP Paribas, one of the world’s largest banking groups, recently listed a range of exchange traded notes (ETN) on the JSE. These ETNs will offer South African investors greater opportunities to diversify their investment portfolios through offshore exposure. Guillaume Dolisi, creator of the Guru strategy at BNP Paribas, says that ETNs are transparent, liquid instruments aiming to provide simple and cost-effective exposure to assets that are traditionally difficult to gain exposure to as an individual investor. “They serve as convenient building blocks for portfolio allocation according to individual market views. By having the ETNs listed on the exchange, African investors are able to buy and sell them through a registered stockbroker, just

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like any other JSE-listed instrument.” Leanne Parsons, director of the equity market at the JSE, adds that the company was pleased to have partnered with BNP Paribas to offer investors a broader range of equity products and allow them opportunities to diversify their portfolios through the JSE. The new products that will be listed include the Guru US ETN, the Guru Europe ETN, the Guru Asia ETN and the Guru Equity World ETN. They are denominated and traded in Rand while retaining the exposure to the corresponding offshore currency in addition to the underlying equity exposure. The listing of the new ETN range brings the number of ETNs listed on the JSE to 28.

The world

ZAMBIA, GREECE, PORTUGAL, US, AUSTRALIA, SOUTH AFRICA, TANZANIA, RWANDA, BURUNDI

World Bank to double loans to emerging economies The World Bank is set to increase its lending capacity by R1.06 trillion over the next 10 years to middle-income countries in its effort to eliminate extreme poverty by 2030. Emerging economies such as China and India are expected to receive almost double the amount of lending from the World Bank. World Bank President Jim Yong Kim says, “The World Bank is strengthening its financial house to make sure it has the capability and financial firepower to meet the needs of the developing world.” Zambian forex laws abolished Laws which were implemented in 2012 to restrict foreign exchange trade in Zambia, Africa’s second-biggest copper producer, have been abolished as of April 2014. Before the discarding of these laws, the Kwacha had weakened by more than 13 per cent against the US Dollar. After the announcement, the Kwacha saw its biggest increase against the US Dollar in 15 months. The laws were revoked after the government held meetings with business leaders who were strongly opposed to the regulations. According to Geoffrey Sakulanda, the president of the Zambia Association of Chambers of Commerce and Industry, the laws had a negative impact on business’s ability to secure foreign loans. Greece’s four-year drought ends Greece’s recent five-year debt sale, which raised $4.2 billion, is an indication that the Eurozone debt crisis is fading. The five-year debt sale has ended the four-year drought Greece found itself in after it made known its public accounts had been falsified, which led to the bailout from the European

Union and International Monetary Fund. According to Stelios Papadopoulos, head of Greece’s Public Debt Management Agency (PDMA), the bond sale was the first step in an attempt to renew the interest of foreign investors in Greece. Portugal’s outlook positive Portugal’s outlook has been raised from negative to positive by Fitch Ratings. This is a result of the nation’s strong economic recovery and falling budget deficit. Portugal has maintained its BB+ rating and Fitch has raised its economic forecasts from 0.2 per cent to 1.3 per cent this year and from one per cent to 1.5 per cent in 2015. According to Fitch, if Portugal’s economy continues to recover the nation could be upgraded to investment grade. US economy strengthens at slow rate According to the International Monetary Fund, the strengthening of the US economy will be at a much slower rate than previously, and economists are questioning how powerful it will be. Mark Zandi, chief economist of Moody’s Analytics Inc, says the US is still the most important engine of global growth, even though it may not be as strong as it was previously. According to the IMF, recordlow interest rates, strong private demand and an end to the fiscal drag all have an impact on the growth of the US economy, which is set to grow 2.8 per cent this year from 1.9 per cent in 2013. Unchanged interest rate for Australia Australia’s governor, Glenn Stevens, has kept the overnight money market

interest rate at a record low of 2.5 per cent and reiterated that borrowing costs are likely to remain steady. According to Stevens, the decline of the exchange rate from a year ago will assist in achieving a balanced growth in the economy. Savanth Sebastian, an economist at the Commonwealth Bank of Australia in Sydney, says the Reserve Bank officials prefer to stay on the interest-rate sidelines for as long as possible to ensure the economy has a firm base. Four South africaN banks fined The recent R125 million in fines the four major South African banks faced over money-laundering controls, has raised questions over whether major banks put greater emphasis on meeting other regulatory requirements as set out by the Financial Intelligence Centre Act (FICA). The Reserve Bank fined the four banks for failing to implement regulations set out to control money laundering and combat the financing of terrorism. Standard Bank was fined R60 million, FirstRand R30 million, Nedbank R25 million and Absa R10 million. The Reserve Bank said that among other things, some of the offences the banks were fined for included keeping inadequate customer verification details and transactional records. Railway project for Tanzania, Rwanda and Burundi Tanzania, Rwanda and Burundi are looking to secure financing for a $4.13 billion railway project which will link Tanzania’s port city, Dar es Salaam, with the capital cities of Rwanda and Burundi. According to Imara African Securities Research, the aim of the railway is to strengthen economic linkages and intra-regional trade.

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They said

countries gave South Africa a score of 41, way ahead of Nigeria at 147. Corruption is notoriously rife in the bigger economy. Also, despite its power constraints, South Africa still produces 10 times as much electricity as Nigeria for a population of 52 million – which is less than a third the size of Nigeria’s total of 170 million.

A collection of insights from industry leaders over the last month

“They (governments) need to make … regulations more predictable and … think about how to strategically make investments in infrastructure. South Africa needs the energy, other parts of Africa need the energy, and we want to be the people who are bringing the parties together and decreasing the overall risk so that the private sector will invest.” Jim Yong Kim, president of the World Bank, announced this during spring meetings of the International Monetary Fund. He said finding long-term capital for infrastructure projects in most African and emerging countries had been difficult even with historically low interest rates. This was because investors were concerned about the investment climate and the politics in these countries. “One of the significant factors around heightened mergers and acquisitions activity in SA is that we are seeing increased FDI (foreign direct investment) interest from North America.” A partner in M&A and equity capital markets at Bowman Gilfillan, Charles Douglas, comments that the country’s activity in mergers and acquisitions is on the move again during 2014. Douglas says this is possibly linked to the ongoing expansion into the rest of Africa by foreign companies and organisations.

“The results of the research show that a majority (70 per cent) of institutional investors surveyed believe Africa is more attractive than other emerging markets.” Head of RisCura’s private equity valuation business, Rory Ord, comments on the results of a survey launched by the company, which saw a majority of the 48 private equity firms who were interviewed favouring Africa as an investment destination over other emerging markets. “Investing in the economy is consistent with making sure that you generate stable returns over a period of time. If you do the bold thing the likelihood is that you’re going to guarantee yourself good returns on a sustainable basis over a long period of time.” Chief executive officer of Public Investment Corporation (PIC), Elias Masilela, advises that maintaining local ownership of South Africa companies is the best way to boost the country’s economy. Over the past three years, the company has partially shifted its approach to focus on projects that would support growth by improving productivity, infrastructure and employment opportunities available in the country.

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“There is now a real competitor for South Africa and the country has to reposition itself and not rest on its historic laurels. It means global business will consider Nigeria, rather than South Africa, as a possible gateway to Africa.” Managing director for Pan-African Investments, Iraj Abedian, suggests that Nigeria stands a good chance of usurping South Africa’s prominent role as the gateway to Africa and damaging its appeal as an investment destination, since the Nigerian economy has overtaken South Africa as the continent’s biggest economy following the recent overhaul of GDP statistics. However, on the other side of the debate, the World Bank’s chief economist for Africa, Francisco Ferreira, believes that South Africa does not need to worry about losing investment to Nigeria. “I don’t think it means that foreign investors are looking at GDP statistics. They’re looking at how profitable investments they can make in that country are.” South Africa scores much higher than Nigeria in terms of its infrastructure, regulatory environment and the rule of law. A World Bank report on the ease of doing business in 189

“It may be slightly positive, it may be slightly negative.” Senior economist for Old Mutual Investment Group, Johann Els, comments while attending a company briefing that, although complete sets of economic data for the first quarter have not been released, initial indications suggest that the significant decline in mining production could see first quarter gross domestic product (GDP) reach levels of around zero per cent. The group’s expectation is in line with earlier projections by the International Monetary Fund (IMF), which cut South Africa’s growth forecast for 2014 to 2.3 per cent from 2.8 per cent. The Reserve Bank also lowered its outlook for the year to 2.6 per cent from an earlier 2.8 per cent. The subdued growth is not only bad news for job creation, but is also expected to inhibit fixed investment. “In multi-asset funds, if there is a performance fee, there is the temptation for the manager to put more risk into the fund than the mandate allows.” MD of Prudential unit trusts, John Kinsley, comments that one of the most controversial aspects of fund management is performance fees and that this issue will become an increasingly difficult one as the Treating Customers Fairly regulations are rolled out.

You said

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

@jdrsampson: “Platinum strikes have so far lost the country 0.5% of annual growth. No winners! Time for the govt to bang heads. Start with the minister.” Jeremy Sampson – Jeremy, founder and group executive chairman of Interbrand SampsonDeVilliers, based in Johannesburg. Enjoys a life of branding, design and wine. Personal views.

@RudivNiekerk: “There’s a reason one is getting the ‘rump for free’ in Naspers. Cause you more than overpaying for it via the excessive valuation of Tencent.” Rudi van Niekerk – Iconoclastic. Contrarian. Passionate about investing.

@MarkYusko: ‘“We don’t have to be smarter than the rest. We

have to be more disciplined than the rest.” Mark Yusko – Chief investment officer of Morgan Creek Capital Management.

@ceesbruggemans: “Nigeria $510bn. That’s impressive. SA $375bn. Dethroned as the biggest, though still the richest per capita 2.5x Nigeria...” Cees Bruggemans – Consulting economist/ Raadgewende ekonoom.

@ttmygh: “I’ve been in markets almost 30 years and I don’t see why it’s so hard to say it. Folks, the markets are rigged. There.” Grant Williams – Portfolio and strategy adviser to Vulpes Investment Management. What a long, strange journey it's been...

@mark_barnes56: “Do they see us coming? Do SA companies over-pay to expand offshore ... or is it just an escape premium we’re prepared to bear?” Mark Barnes

@Investor_Quotes: “In the business world, the rear-view mirror is always clearer than the windshield.” Warren Buffett’ Investment Quotes – Quotable quotations from major investors for inspiration, motivation and insight.

@mayaonmoney: “I suspect that if we spent as much time sorting out our money as we do worrying about it, there wouldn’t be any reason to worry!”

Maya Fisher-French – Personal finance columnist focusing on information that actually matters.

@AdrianSaville: “The 19m unemployed people in the Eurozone outnumber the populations of all Eurozone capital cities combined!” Adrian Saville – CIO and founder @ Cannon Asset Managers. GIBS visiting professor; economics, finance and strategy; passionate South African, dedicated husband and dad. Ninja.

@ReutersJamie : “The %age of investors who think stocks are ‘overvalued’ is now the highest since July 2000, just as the tech bubble was bursting – BAML.” Jamie McGeever – Chief markets correspondent, Europe. @Reuters

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And now for something completely different

Unmasking tribal Finding an investment in African artwork and antiques

here is nothing primitive about investing in tribal or original African art. While this hasn’t always been a firm favourite among art collectors and investors, this type of art is slowly gaining prominence within the investment community. Largely due to its colourful and exotic nature, in recent decades it has grown in popularity with interior designers. The prices for tribal art sold at major auction houses, such as Sotheby’s and Christies, have soared in recent years. Unlike most Western art, which is created for decorative or commemorative uses, most tribal art was, and is, made for ceremonial or other functional purposes. This type of art is usually hand-carved totems, statues of human or animal figures, or masks. Many works of tribal art directly reflect the belief systems of the cultures that created them.

Notable tribal investments

The investment principles that apply to any other collectible item stand true for original and, most notably, rare pieces of African art. Apart from the globally recognised pieces that hail from ancient Egypt, masks from Gabon through to pottery from the Ndebele tribe are fast becoming items worth adding to a collection. Even tiny, fairly modern pieces of tribal art can

New World Map – $850 000 Ghanaian sculptor El Anatsui sold a woven tapestry of flattened bottle caps for a record price of $850 000 at a Bonham’s Contemporary African Art Sale, which was held in London. Anatsui, 68, is famed for using wood, metal, clay and recycled materials to create artworks that are heavily influenced and inspired by indigenous traditional African cultures. In this case, the masterpiece titled New World Map was inspired by the Kente cloth, an extremely popular traditional narrow-strip woven silk cloth peculiar to the people of Ghana.

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Ngil mask of the Fang culture – $7.5 million A Ngil mask of the Fang culture of Gabon, which was sold at auction 17 June 2006, for the record sum of $7.5 million, was the highest price ever paid in the world for a work of African art. The mask, which is said to have inspired artist Pablo Picasso, brought in four times its estimated price of $1.9 million. It formed part of one of France’s premier private collections of ancient art, which was started by Pierre Verite and his son Claude in the 1920s.

be valued in the thousands, with many going well into six figures. According to a study done by Michael Moses, internationally recognised art economist, African art pieces puchased at higher prices, from 1875 through to the present day, often provide a lower return. Simply put, the masterpieces that sell for extremely high amounts are not the best investment candidates. Instead, works that are considered less known can often outpace the more famous pieces. For example, tribal artefacts, which in certain years sell for vast sums at auction or through private deals, are often overlooked by the large majority of art collectors, versed typically in paintings and sculpture. As most of the original, ancient African art pieces are unique and increasingly becoming rarer items, the values and returns on these types of pieces are carrying a far greater return than before. However, caution needs to be taken before considering investing in any piece. It is imperative that proper research is done and, where necessary, an expert in these types of antiquities and pieces brought in to ensure that the item you buy will provide you with a reasonable return on investment.

Bangwa Queen – $3.4 million A Cameroon sculpture known as the Bangwa Queen sold for $3.4 million in 1990, which at the time set the record for the most expensive African sculpture sold. The wood sculpture represents the dual female roles of Earthcult priestess and mother of twins. The piece was originally bought by Gustave Conrau, a German colonial explorer who later gave the statue to a museum in his home country in the 1890s.

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FROM A LOCAL TO A GLOBAL INVESTOR HOW DANIEL JACOBS* INVESTED IN ADVENTURE

“I’ve always dreamed of one day travelling the world. But it wasn’t something that would happen overnight and so I began planning for it. I decided to diversify my portfolio by investing offshore. I put away a lump sum of R50 000 and contributed R1 500 a month to the Old Mutual Global Equity Fund. Ten years later my investment has grown to R739 254 (that’s a 16.3% return a year). I’m now travelling the world, seeing the places I’ve always wanted to see.” GREAT THINGS HAPPEN TOMORROW WHEN YOU START INVESTING TODAY Make Old Mutual Investment Group your investment partner today. Contact your Old Mutual Financial Adviser or Broker, call 0860 INVEST (468378) or visit www.omut.co.za/myglobaltravel

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