INVESTSA June 2011

Contents

CONTENTS

06 08 10 13 16 18 20 22 24 26

Absolute return or absolute train smash For a smooth ride, get to understand the engine driver

SUBSCRIPTIONS

A case for covenants Hedge funds broaden fixed income opportunity set The long-term outlook for the bond market Profile Arno Lawrenz, CIO of Atlantic Asset Management HEAD TO HEAD OMIGSA Macro Strategy Investments / PSG Asset Management The advice you need to be giving your clients Look to the future, not the past That’s difficult, but performance tables are of little use Financial advisers optimistic on economic outlook FUND PROFILES

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Letter from the editor

letter from the

EDITORIAL Editor: Shaun Harris investsa@comms.co.za

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Features writers: Maya Fisher French Miles Donohoe Publisher - Andy Mark Managing editor - Nicky Mark Design - Gareth Grey | Dries vd Westhuizen | Robyn Schaffner Editorial head offices Ground floor | Manhattan Towers Esplanade Road Century City 7441 phone: 0861 555 267 or fax to 021 555 3569 www.comms.co.za

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

e are moving through a period in investment markets where it’s difficult to get a clear view. Clients are confused; confirmed in the latest Association of Savings and Investment South Africa figures that showed money still moving predominantly into asset allocation and fixed interest funds. Local equity funds are being ignored, despite the good returns delivered over the past year. So are offshore investments. It’s a critical time for financial advisers to be giving clients good advice.

Copyright COSA Communications Pty (Ltd) 2011, All rights reserved.

But it’s also a difficult time to work out what that good advice is. Advisers have a tough job on their hands. We try and make it a little easier in this issue of INVESTSA.

Magazine subscriptions Bonnie den Otter | bonnie@comms.co.za Advertising & sales Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Miles Donohoe | miles@comms.co.za

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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Maya Fisher-French finds an interesting angle that advisers should be helping their clients face the difficult decision about increased mortgage repayments.

One thing we do know is that interest rates will be going up. Maya does the sums on the effect of rate increases over the coming years and how much this will cost clients. Her conclusion is well worth considering.

We profile Arno Lawrenz, long acknowledged as the king of fixedinterest investments. He is now chief investment officer of his own investment house, Atlantic Asset Management. Arno draws on his experience to offer advice to others in the investment industry. You might be surprised to learn where he would invest R100 000.

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Head-to-head goes to the heart of the uncertainty advisers and clients are facing – how to prepare for the unexpected. One black swan is not nice but there’s been a flock so far this year; from earthquakes to political uprisings and sovereign debt crises.

Anil Thakersee, portfolio manager at OMIGSA Macro Strategy Investments, and Neels van Schaik, portfolio manager at PSG Asset Management, answer questions on how to deal with these nasty black birds.

I take a look at those confusing, absolute return funds. Should investors be using these at all, given the past year’s poor performance and higher costs? The funds could be perfect for a particular type of investor, if the adviser does the work on choosing the right fund. I also look at unit trust pastperformance tables and how this is the worst way to choose a fund. Yet many advisers and investors do precisely this.

There are better ways to choose a fund and fund manager.

Hope you find this issue useful. And please let us know of any topics you think we should be covering. Until next time, all the best, if the black swans don’t get me.

SHAUN HARRIS

For a smooth ride, get to understand the engine driver

By Shaun Harris

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hy are investors using absolute return funds? Or more pertinently, why are financial advisers putting their clients into absolute return funds? Over the past year, some of these funds have not provided an absolute or real return at all. Some are even losing money over a one-year period, meaning the funds are breaking the first promise they make, to protect investors’ capital.

Under the collective title of ‘Targeted, absolute and real return funds’ this is one of the newer categories of unit trust funds, launched in the local industry as a sub-sector of asset allocation funds in 2003. Investment mandates and targets vary widely, which is why the performance of the funds is not ranked. And absolute return funds shouldn’t be ranked, top performance is not what they are about.

While investment targets are very different, from a modest inflation (usually measured as CPI) plus one per cent to an aggressive inflation plus seven per cent, the funds have two common goals; to protect investors’ capital and to provide a return above the rate of inflation.

These are typically measured over a three-year rolling period and that’s where the trick comes in. Despite the third objective of absolute return funds, to provide a real return irrespective of financial markets conditions, the rolling three years is a useful escape clause.

One year of not real returns, as some of the funds have been doing, can be dismissed along the lines of “wait for the next two years”. But when three years of solid, real returns occurs, the marketing departments are quick to trot out the figures to show how successful the funds are.

Despite deploying multi-investment strategies, most absolute return funds are pretty market directional. The exception would be those absolute return funds that invest only in fixedinterest securities. In the present low interest rate environment, with inflation on the rise, they are also battling to provide a real return.

However, we cannot rule out absolute return funds. They certainly have a place if the investment objectives of the client and the fund can be matched. In many cases it seems they are not and this is where disquiet about absolute return funds is growing. And this is where advisers must accept a large part of the blame.

Soon after absolute return unit trusts were launched, new legislation was pointing towards advisers being held personally responsible for issuing bad advice. Absolute return funds proved to be a godsend for advisers. In many

cases clients, especially those nearing or into retirement, wanted no more than an inflationbeating return on their money. For advisers, the new absolute return funds flooding onto the market made the job seem easy. Bang the client into one of the funds and they would get a real return.

But it seems this was often done without taking a close look at the funds’ mandates and investment processes. It also seems some advisers did not understand absolute return funds at all. However, the funds proved to be hugely attractive and collected large inflows of money; but so often indiscriminately. I know of two people, in their 20s, who were advised to invest in absolute return funds. Unless the circumstances are exceptional, an absolute return fund is not what you want at that age.

“Despite deploying multiinvestment strategies, most absolute return funds are pretty market directional. The exception would be those absolute return funds that invest only in fixed-interest securities. In the present low interest rate environment, with inflation on the rise, they are also battling to provide a real return.”

Prieur du Plessis, chairman of the Plexus group, said that absolute return funds “are probably the most misunderstood by the investing public”.

And that would include advisers.

“The different investment mandates and performance objectives result in the portfolio compositions of funds in this sector varying considerably. Some funds invest only in fixedinterest securities (including enhanced income funds), some have more balanced portfolios with low equity exposure, while others have relatively high exposure to equities,” Du Plessis said.

His point is that with mandates, performance objectives and strategies that differ vastly, the funds must be understood by clients and advisers. “If prospective investors do not understand exactly what the fund managers are trying to achieve and how they try to attain their objective, the investor may well end up being disappointed.”

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In some cases investors have been. And it’s mainly because they have been put into the wrong absolute return funds. Consider a client with a large amount of retirement capital who is not going to have to make any draw downs, at least over the short term. A fund offering CPI plus one per cent (on average the investment target is roughly CPI plus three per cent) might well suit that client. An absolute return fund with this mandate should be relatively low risk and low volatility. For a client seeking security and a return above inflation, this could be the perfect fund.

However, say a client still has about ten years to go to retirement and realises he needs to grow his capital significantly to maintain his lifestyle.

The advisers could consider one of the more aggressive funds for this client. It will entail higher risk and increased volatility but if it meets the performance objective, that’s all the client will want.

Absolute return funds, in general, also tend to be more expensive than most other unit trust funds. Total expense ratios (TER) range from around 0,7 per cent to nearly 3,5 per cent.

Fund managers could justify the higher cost due to the multi-asset management and asset allocation calls they have to make; if they were delivering their performance objective. Some are not.

In contrast, domestic equity general funds are far cheaper despite also being actively managed. TERs are mostly under two per cent.

And the general equity funds are providing very positive returns. Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa, referring to the latest unit trust performance numbers said that the average fund in this category returned 26 per cent for the year to end-March 2011. That’s a great return (The JSE’s All Share index was up by 15 per cent over the same period) and at lower cost than an absolute return fund. So why are investors still in these funds?

Because, if correctly matched to the investors’ needs, the right absolute return fund can be the perfect investment. Du Plessis notes that some of these funds deliver the best risk-adjusted returns in the industry. “They therefore deserve a place in a well-balanced investment portfolio.”

He goes on to advise clients. “Make sure your financial adviser has the necessary expertise and tools at his disposal to make the right choice for you.”

That really sums it up. Absolute return funds can be the right investment, if the adviser does his homework and gets to understand the different funds.

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MEI-CHI LOU

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The South African listed corporate bond market (including parastatals) has grown exponentially in the past 10 years from a barely known asset class to more than R440 billion in size. Despite the worldwide financial crisis in 2008/2009, markets have all but forgotten the underlying risks in credit with marked increases in appetite, cheaper funding and fewer restrictions/covenants imposed on borrowers.

Covenants play a critical role in the credit asset class and fiduciaries need to be more proactive in ensuring that their clients – who are the ultimate investors – are protected.

With the phenomenal growth in the listed credit market and widespread participation in the sector by traditional bond fund managers, it is important to go back to fundamentals and relook at the different roles of market players and the risks involved in investing in credit.

Like government bonds, buying corporate or parastatal bonds is the same as lending money to that entity with an expectation of being paid back the full amount and interest payments as a return. However, unlike government bonds, where the likelihood of default is low and largely considered risk-free, credit bonds are not.

Lending to a company for five years, for example, means that one would need to look at the financial health of that company right now as well as over a five-year period – something that can be very difficult due to the uncertainties of business.

As asset managers invest on their clients’ (who are typically risk averse pension funds) behalf, it is the managers’ fiduciary duty to ensure that their clients’ investments – and ultimately their pensions – are protected.

One way of protecting investors is to reduce the uncertainties in lending to corporates by imposing certain restrictions or covenants which, if not met, would result in a default and trigger early repayment of the debt. These covenants essentially ensure that management actions are restricted, that they run the firm in a way that reduces excessive risk taking and that the interest of all stakeholders, including lenders, are protected.

Over and above imposing covenants, lenders could also take security over certain assets of the company to increase the recovery rate should they default; much like a bank would take your house if you stopped repayments on your mortgage.

Examples of financial covenants include maximum debt-to-equity ratios – say 60 per cent debt to 40 per cent equity (or one and a half times gearing) and interest cover ratios – say two times, which means that income earned by the company in a financial

year must be at least two times the required annual interest payments of the debt. The debt-to-equity covenant ensures that the company does not get itself into excess debt which would potentially jeopardise repayment of the existing debt, while the interest cover covenant is an early indicator of the company’s profitability and its ability to make interest payments.

Examples of non-financial covenants include change of control and negative pledge clauses which trigger a default if there is a material change in ownership or if the firm pledges assets that are already used to secure their existing debt.

“The purpose of the covenants is not to unduly constrain a business but rather to provide investors with protection against excessive risk taking.”

It is important to note that the purpose of the covenants is not to unduly constrain a business but rather to provide investors with protection against excessive risk taking. Very often covenants are in line with management’s own internal risk measures which are generally conveyed to the public.

Covenants are often just a formalised way of compelling management to behave as they say they will.

Given that company management and executives are usually incentivised on the company’s share price performance, they have strong incentives to take risks and utilise gearing, therefore a lack of any controlling covenants should be a warning sign to debt investors.

What is worrying about the listed credit market is the glaring lack of these aforementioned protections where credit (and its higher than government bond return) is seen to be an easy way to earn higher investment returns for clients without any risk.

After all, how many listed corporates have defaulted up until now? But as the banking sector demonstrated in 2008, in the world of credit, everything is fine until it is not.

So far our attempts to raise these concerns

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Mei-Chi Lou | Credit Analyst | Futuregrowth Asset Management

with borrowers and their merchant bankers have been met with the same response: that the lack of covenants is standard market practice and other investors do not have such requirements. This response seems unreasonable and unacceptable considering that the same merchant bankers would impose the same if not stricter covenants and take security over any and all available assets when granting a loan to the same borrower.

According to a study by Acharya, Bharath and Srinivasan (2004), the recovery rate on bank loans has been on average 20 cents more on a Dollar than that of an analogous senior listed corporate debt. The simple conclusion is that bank lenders know how to negotiate terms, covenants and security provisions to protect their investments, while institutional investors do not. In a nutshell, banks appear to have stricter lending policies than asset managers whose clients are mostly risk averse pensioners. How can this be?

With the phasing in of the Basel III regulatory requirements which require banks to have higher capital requirements and longer term debt on their balance sheets, the likely consequence is increased costs of bank funding. This in turn would see more corporates turning to the listed bond market to fund their borrowing requirements.

In the wake of the credit crisis, and with the banking sector facing tighter legislation, investors can afford to be selective and have the power to dictate their terms rather than being driven by the fear of losing out on a potential investment and having the mentality that all listed credit deals are a take it or leave it proposition. Ideally investors should work together to come up with a standard list of covenants and/or security requirements along with set definitions of those covenants.

This, however, may be interpreted as collusion and consequently there is a real need for this work to be done by an independent party such as the Association for Savings and Investment SA (ASISA).

If ever there was a time for asset managers to work together, it is now. It would be our fiduciary duty to do so.

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Blue Ink Investments

Hedge funds broaden

e m nco i d e x fi set y t i n u opport

Grant Hogan | Research Analyst at Blue Ink Investments

The opportunity set for fixed income investors has, over the past five years, changed dramatically by traders and managers that have (typically moved from investment banks) launched fixed income arbitrage hedge funds. These managers share the portfolio and risk management skill of bond fund managers but use additional tools that lie outside the boundaries of the traditional bond fund manager. Fixed income hedge funds offer investors an absolute return focus while utilising the full ‘toolkit’ of fixed income and fixed income derivative products to extract value by maximising arbitrage opportunities. These funds are also not constrained by many investment restrictions imposed by CISCA.

Fixed-income arbitrage is an investment strategy that exploits pricing differences between fixed-income securities. These funds typically used derivatives to extract value from both long and short strategies across the yield curve. In contrast, bond funds typically comprise of a number of (long only) government and corporate bonds of varying maturities.

The performance of bond funds are determined by the performance of their underlying investments and it is worthwhile to review the basics of bond fund investing before looking at performance.

When interest rates fall, bond prices rise, and vice-versa. This inverse relationship is critically important for any bond fund investor. Moreover, the longer the duration of a bond portfolio, the greater the fund’s interest rate risk. A bond fund with a longer average duration bears greater investment risk to rising interest rates. As the price of the underlying bonds in the portfolio decreases, so too will the value of the investor’s portfolio. The effect that interest rates have on the prices of bonds can cause the returns of the fund to vary considerably. In an environment of rising (falling) inflation, interest rates typically rise (fall) with a deteriorating (appreciating) effect on bond prices and traditional bond fund values.

In view of this, the performances of domestic fixed income bond funds

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over the last three years have been helped by falling interest rates. Since December 2008, the repo rate has been lowered by six per cent. And on average bond funds have returned 10.05 per cent annually over the last three years.

Fixed income hedge funds typically have a trading bias of less than two years (duration). These funds focus on the zero to five-year area of the yield curve, and in particular on specific inflection points along the yield curve.

Like bond funds, the performance of fixed income hedge funds over the last three years was helped by falling interest rates; but unlike bond funds, these funds can benefit from both falling and rising interest rates due to the fact that these funds can short certain positions. Furthermore, these funds can also benefit from inefficiencies in the yield curve caused by timing and uncertainty of rate cuts or hikes. On average, fixed income hedge funds have returned 19.69 per cent annually over the last three years.

Fixed income hedge funds have many tools and strategies at their disposal.

When rates are falling they would typically be long bonds, swaps and received in forward rate agreements. These are but some of the instruments that allow hedge managers to hedge and benefit from rising or falling interest rates.

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“Fixed income hedge funds offer investors an absolute return focus while utilising the full ‘toolkit’ of fixed income and fixed income derivative products to extract value by maximising arbitrage opportunities. These funds are also not constrained by many investment restrictions imposed by CISCA.” Domestic Fixed Interest Bond Funds (annualised return over 1, 2 and 3 yrs to Mar 2011)

Domestic Fixed Income Hedge Funds (annualised return over 1,2 and 3 yrs to Mar 2011)

Best , 11.06% Best , 9.84% Average, 8.54%

Best , 9.80%

Best , 45.43% Best , 39.80%

Average, 10.05%

Average, 8.77% Worst, 7.60%

Worst, 7.01%

Worst, 8.36% Best , 24.10% Average, 18.60%

Average, 19.69%

Average, 13.05% Worst, 9.47% Worst, 5.95%

Worst, 3.94%

1yr

2yrs

3yrs

1yr

2yrs

3yrs

Bond fund investors typically want diversification to minimise their investment risk and generally achieve this by investing in bonds of different maturities.

However, as the price of the underlying bonds in the portfolio decreases, so too will the value of the investor’s portfolio, and this could vary considerably.

The performance of the South Africa All Bond Index (ALBI) speaks to this point. While the ALBI returned 33.39 per cent for the three years up to March, the volatility over the same period was 7.64 per cent. In contrast, the average return of fixed income hedge funds (using the Blue Ink Fixed Income Hedge Fund Composite) over the same period was 64.38 per cent with 3.82 per cent volatility.

When we chart monthly returns of the ALBI against the average return of fixed income hedge funds over the last five years and rank the returns from low to high based on the ALBI, we find some general characteristics of fixed income hedge funds: • Fixed income hedge funds generally exhibit less volatility relative to the ALBI – since 2006 fixed income hedge funds have generated returns with 3.06 per cent volatility compared to the 6.75 per cent of the ALBI. • Fixed income hedge funds generally remain uncorrelated to bonds – since 2006, the correlation between fixed income hedge funds and the ALBI was less than 0.01.

• Fixed income hedge funds offer investors downside protection when interest rates are rising (i.e. when the ALBI is negative). See chart above.

• Fixed income hedge funds can and have generated good returns in both rising (2006–2008) and falling (2008–2010) interest rate environments.

100% 80% 60% 40% 20% 0% Mar 2011 Feb 2011 Jan 2011 Dec 2010 Nov 2010 Oct 2010 Sep 2010 Aug 2010 Jul 2010 Jun 2010 May 2010 Apr 2010 Mar 2010 Feb 2010 Jan 2010 Dec 2009 Nov 2009 Oct 2009 Sep 2009 Aug 2009 Jul 2009 Jun 2009 May 2009 Apr 2009 Mar 2009 Feb 2009 Jan 2009 Dec 2008 Nov 2008 Oct 2008 Sep 2008 Aug 2008 Jul 2008 Jun 2008 May 2008 Apr 2008 Mar 2008 Feb 2008 Jan 2008 Dec 2007 Nov 2007 Oct 2007 Sep 2007 Aug 2007 Jul 2007 Jun 2007 May 2007 Apr 2007 Mar 2007 Feb 2007 Jan 2007 Dec 2006

-20%

ALBI

Fixed Income Hedge Funds

Considering the facts above, a strong case could be made not only for having fixed income exposure in long-only bond funds, but for having a fixed income portfolio comprising of both of fixed income bond funds and fixed income hedge funds.

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ILKE SMIT

Still value to be had in the bond market

Ilke Smit | Economic Analyst at Metropolitan Asset Managers

our view that the SARB will keep rates lower for longer, keeping the short end anchored; especially if inflation does not start ratcheting up as the market expects. MetAM believes inflation will average around 4.1 to 4.3 per cent this year, compared to consensus of 4.7 per cent.

in the economy (the latter fell from 81.6 per cent to 79.4 per cent in Q4 2010) and the risk of gross fixed investment not reviving in 2011 as expected by many, GDP growth will likely come in lower than consensus (currently 3.5 per cent for 2011), bringing bond yields down further in the process.

Despite the inevitable rise of inflation, we believe this will occur only later, around the end of 2011/early 2012. Therefore, inflation linkers as an asset class will start offering value again as the turnaround in the inflation cycle becomes more definite.

But, currently, investors must caution against a mid-term uptick in real yields in the short term (as happened between August 2010 and January 2011), as inflation can surprise to the downside.

The final reason why we believe another good bond market return can be achieved this year is the correlation between the South African and US bond market. As QE2 comes to an end and triggers the emergence of risk-off trade agendas, US treasuries will once again become a more preferred investment option on the margin – dragging SA bond yields lower in the process. That said, the return on the ALBI will probably be slightly less compared to the 15 per cent of last year.

Moreover, another factor which can cause yields to decline is slower than expected GDP growth. Given low capacity utilisation

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any thought the cyclical high in the South African bond market was reached as the bond market started to sell off during late 2010.

But, after a sizeable 80bps increase in the ten-year yield from a low point of 7.9 per cent to 8.7 per cent in February 2011, yields started to retract again, with the ten-year currently sitting around 8.3 per cent.

These recent movements confirms MetAM’s view that nominal bonds still hold some value, given the possibility of lower inflation and forecasts of a stronger Rand. The conviction of curve flattening (the narrowing of the differential between long-dated and short-dated bonds) are driving many trades in the market at the moment – underpinned by the belief that yields on the short-term bonds are going to kick up as the SARB starts hiking rates. Even though curve flatting may be on the cards, the main risk is that it is more likely to emerge from declining yields on the longer-dated end, based on

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fixed interest BONDS

The long-term outlook

for the bond market

Andrew Lapping | Portfolio Manager at Allan Gray

South African 10-year bond yields rose sharply over the past six months to 8.6 per cent. A yield of 8.6 per cent seems to be an attractive proposition compared with cash yielding 5.4 per cent. Unfortunately, in the bond market as in life, it is not that simple.

When buying a 10-year bond the question is not what the pick-up on cash or inflation is today, but rather what the pick-up will be over the life of the bond, says Andrew Lapping, portfolio manager at Allan Gray.

“When buying a 10-year fixed rate note, the difference between the initial yield and inflation over the 10-year period determines the real return.

If investors require a three per cent real rate of return on their money, a 10-year interest rate of 8.6 per cent indicates an expected inflation rate of 5.6 per cent over the period,” says Lapping.

But is an anticipated inflation rate of 5.6 per cent a reasonable expectation; and is a three per cent real return sufficient?

Inflation outlook In a small, open economy like South Africa’s, the exchange rate is a key inflation driver. Over the past 10 years, the Rand has strengthened 11 per cent against the US Dollar, from R7.70/US$ to R6.90, while at the same time weakening 26 per cent against the Euro. The general trend of a strengthening currency has been a substantial tailwind in keeping inflation down.

“From here it is hard to see this tailwind being maintained over the next decade, and the more likely scenario is a weaker currency,” added Lapping.

This is because the Rand is now relatively strong in terms of purchasing power parity against a basket of currencies. If it weakens only gradually, in line with inflation differentials, the Reserve Bank will no longer have the benefit of a strengthening currency.

for the next 10 years is less positive.”

In addition, the steady increases in administered prices such as rates and electricity costs are putting upward pressure on inflation. Administered prices, excluding fuel, are currently increasing by nine per cent, a level not compatible with a long-term inflation rate of below six per cent.

What real return will South African Government bond investors require?

Two metrics guide any estimate: (1) the historical real government bond yield, which has averaged three per cent since the inflation-targeting regime began in February 2000, and (2) the real yield on inflation linked bonds (currently 2.7 per cent).

“A real return of three per cent over the long term is an attractive proposition for non-tax paying investors like South African pension funds,” said Lapping.

The real return is determined by the demand for government debt, which comes from savers/ investors and financial institutions, and supply, which is determined by government borrowing.

Because of the increasing budget deficit and the infrastructure investment programme, government borrowing – including parastatals – has picked up recently.

During 2010, the demand was met through pension funds shifting their asset allocation towards bonds and the inflow of funds from foreign investors. The increased borrowing requirements over the next three years will require a further asset allocation shift and foreign investment.

markets from international investors has led to the substantial net flows into South African assets over the past two years. If this sentiment, and hence the flows, reverses, it will put pressure on government bonds as a big source of demand will disappear.

“Higher real yields may be required to entice investors to move capital into government debt.

The shift in yields, if it occurs, may be gradual or take the form of a phase shift where the situation rapidly changes from one where there are sufficient buyers to one where there is a paucity of demand.”

Increased government issuance may also cause the term structure of interest rates to change.

Historically South Africa has had an unusually flat yield curve from the middle area of the curve to the long end. This was caused by a shortage of the long-dated bonds that insurance companies use to hedge their liabilities. Now that the issuance of long bonds has increased, the term structure has begun to normalise as the supply has satisfied demand.

“Logically it seems right that a 25-year bond should have a higher yield than a 10-year bond; if you just think about what can happen over 25 years, a lot can change that can affect the value of your asset.”

In the United States, the 30-year bond has traditionally yielded about 0.6 per cent more than the 10-year. In contrast, until very recently the yield on 10-year government bonds was higher than that on 25-year bonds in South Africa. “This favours the shorter bonds over the long-term assets, as investors are not compensated suitably for the additional risk of the long bonds.”

Positive sentiment towards emerging “Considering inflation averaged 5.9 per cent over the past 10 years, just inside the target range, the outlook

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NICO COETZEE

Income Funds to get a boost from Reg 28 over a 20-year period is significant and this often balances out the risk that you take on by investing in an income fund.

The nature of income funds have evolved in recent years from funds with a specific mandate to invest solely in cash and bonds, to the more modern managed income funds.

“Managed income funds have wider mandates enabling them to invest in other securities such as preference shares, property and in some cases even offshore. So, the fixed interest managers have a greater range of tools at their disposal with which to generate income and capital growth.”

Nico Coetzee | Head of Sales at PPS Investments

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ixed interest securities are likely to get a major boost from the implementation of the Regulation 28 of the Pension Funds Act on a member level, which stipulates that a maximum of 75 per cent of a retirement fund can be invested in equities, the rest has to be invested in fixed interest instruments, property and foreign investments. However, investors and intermediaries should make sure they do not fall into the trap of investing this money only into money market funds.

This flexibility allows income funds to actively move up and down the yield curve, meaning that an income fund may look very different in different interest rate cycles. When the fund manager expects interest rates to increase, the fund will resemble a money market; whereas with an expected decrease in the interest rate, these funds will look more like bond funds.

An intermediary should be able to see the underlying holdings of the fund when looking at the fund’s fact sheet which will show the allocation between cash, bonds or any other asset class. It is important to bear in mind that the higher the allocation to longer term bonds,

Income funds have a wider mandate than money market funds meaning they can generate a higher return, while still at a low level of risk. In a low interest environment, many investors are looking at single digit returns from money market funds. However, with an income fund, while the risk is marginally higher, one gets a much better yield than a money market fund.

An intermediary who can generate an additional couple of per cent p.a. by advising clients to invest in an income fund is correctly servicing their clients. The difference between an investment generating a return of six per cent or a return of nine per cent

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the more risky the portfolio will be.

While an income fund will generate a higher return than a money market fund, both vehicles are really only suitable for conservative investors. “An income fund is for the investor who does not wish to have any exposure to volatile asset classes such as equities. It is most commonly used in post-retirement, specifically living annuity investors who require an income.”

As a result, neither income funds nor money market funds are appropriate investment vehicles for a young investor with a 30-year time horizon. However, statistics show that many investors with long investment horizons are investing all of their money into money market or income funds, when they should be buying as much equity and offshore assets as possible.

Income funds are not right for everyone, which is why we offer a selection of quality funds in the other asset classes to choose from on our platform. However, for the right investor, an income fund is the perfect vehicle to generate a decent return while keeping your cash relatively risk-free.

PROFILE | CIO: Atlantic Asset Management

Arno L awren z C I O : A tlantic A sset M anagement Arno Lawrenz is the chief investment officer at Atlantic Asset Management with overall responsibility for investment performance. He started Atlantic more than three years ago after gaining experience at a number of firms including Sanlam, Coronation and Old Mutual. INVESTSA caught up with Arno to find out more about his reasons for starting his own firm and his advice to others in the industry.

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INVESTSA

“As one develops and matures, you realise that true money management should not be about ego, but about doing the right thing. There is nothing wrong with awards, but sometimes the way to win an award encourages behaviour which may not always be in a client’s best interest.”

You started Atlantic Asset Management just prior to the financial crisis. In hindsight, would you have chosen to start an asset management company at a different time?

No, when you are ready, then you are ready; and if it’s the right thing to do, there is never a better time to do something.

What was your reason for starting Atlantic?

Having worked for a number of different asset managers over my career – mostly in a purely fixed income role – I began to formulate a vision of a fixed income-only asset manager.

Obviously I believed that having direct ownership was ultimately also the best form of incentive and motivation a person could get.

What was of further importance for me was to use my experience to find a way to give back to the industry by helping to raise levels of awareness about fixed income.

What separates Atlantic from existing fixed income houses?

At this point, there are hardly any other fixed income-only houses. So, that already means that we are different in that we have stuck to our knitting, so to speak. Our strap line speaks to this – ‘Dedicated to fixed income’.

Apart from this single-minded focus on being a successful fixed income manager, we are also trying to ensure that working at Atlantic enables each employee to successfully integrate their personal life with their working life. This means being flexible in working hours and arrangements, amongst other things.

Each person should have the opportunity and encouragement to achieve their own goals and at Atlantic we are striving to be a force for good in society, as small as we are.

You have won a number of awards including a Raging Bull. How important are awards to fund managers/asset managers?

A tricky question! In my younger days, it was very important to me – it was a way of

showing that I was good enough. However, as one develops and matures, you realise that true money management should not be about ego, but about doing the right thing. There is nothing wrong with awards, but sometimes the way to win an award encourages behaviour which may not always be in a client’s best interest.

What do you think are the biggest contributors to being a successful fund manager?

I have always believed that managing your mind is the single most important attribute.

True success lies in the psychology of the managing money and trading. When you taste success it is important to avoid allowing your ego to become too big. This means that you have to be aware of what your own motivation is. Having an enduring passion for what you are doing is a marker for success – you have to really love investments and investing. In my opinion, humbleness is a prerequisite for a truly successful manager, and being able to truly think independently is an incredibly useful attribute.

What advice would you have for someone getting into the investment industry now?

Be prepared to do a lot of donkey work – it will serve you well in the future. Many of the most successful money managers started out at the very bottom and that, with the benefit of experience, helped to give them insights that others miss.

What advice would you have for financial advisers in the current environment?

This too shall pass. A bit of a cliché saying yes, but it would be wise to remember that in the past there have been any number of financial crises and somehow we are able to find a way through things. So to be permanently worried about the future is not going to be helpful for a good investment strategy. What this means is that what happens

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in the short term is not always indicative of what happens in the long term. Be prepared to tell clients that it is better to sometimes sit through rough patches in markets.

How do you wind down from the pressures of your position?

This requires you to separate yourself from what is happening in the markets. So there are a number of ways that I do this – I love running trail ultra-marathons, which are scary enough to get you to get outside whatever the weather and do the necessary training.

Spending time with family and friends is an incredibly important part of life that we should not forget – this too puts things into perspective. I also have many interests – art, sciences, philosophy and technology – that enable me to turn my attention away from the pressure of managing money.

How do you define success?

Achieving one’s goals, whatever they may be, is success. But for me it is more than just that – it is the way that you achieve them that counts.

Look at Tiger Woods as an example. He was the world’s number one golfer, but at what cost to his personal life? What will he remembered for? True success is the ability to integrate all facets of your life and thinking such that one facet does not overly dominate the others.

Finally, if you had R100 000 to invest, where would you put it?

Investing should always be to serve a purpose, to achieve some goal. For a person who has retirement in mind, then consult a reputable financial adviser since each person’s goals are different. For myself, I would invest money in my education, since there is no better way of developing yourself.

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HEAD TO HEAD | OMIGSA Macro Strategy Investments

The first quarter of 2011 had a number of black swans that disrupted markets, such as the Japanese earthquakes, conflict in the MENA region, and further sovereign debt crises in Portugal. INVESTSA asked two experts for their views on what investors can do to prepare themselves for these unexpected eventualities.

OMIGSA Macro Strategy Investments A nil

T h a k ersee

Portfolio Manager at OMIGSA Macro Strategy Investments

1. What impact have recent events had on the financial markets?

These unexpected tragic events have heightened investor uncertainty in financial markets, largely around their impact on global growth prospects over the shorter term. They have added to equity market volatility and pushed oil prices to undesirably high levels, while the continuing debt crisis in the EU has escalated concerns over creditworthiness and the impact of more severe austerity measures in countries like Portugal, Ireland, Spain and Greece.

Although Japan is the world’s third-largest economy, it contributes only nine per cent of total global GDP and 4-5 per cent of world exports and imports, so we see it having only a small and temporary negative impact on global growth. Its economy will soon rebound, initially boosted by rebuilding efforts and what is sure to be massive government stimulus. The sharply higher oil price has also resulted in some estimates of global growth for 2011 being revised downward.

However, it is worth noting that other oil-producing nations have increased supply, and there is a reasonably large risk premium currently factored into the oil price. Resolution of the conflicts should allow this premium to be removed.

2. Do you think these issues will continue to drive investor sentiment over 2011? If not, what will?

Investor sentiment is fickle and there is little value in attempting to forecast it. Corporate earnings

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and market valuation are the key equity market drivers. Corporate earnings have been on a strong upswing over the last two years and will likely moderate in 2011. Markets are certainly not as attractively priced as they were a few years ago; however, we are still able to buy stakes in businesses on reasonable valuations and with reasonable earnings growth prospects. At the same time, the massive fiscal deficits in the developed world and the response of governments in dealing with this will continue to be the central issue impacting markets over the medium term.

3. What are the biggest issues currently facing investors?

Continued relatively low interest rates, high debt levels and fiscal austerity in developed markets have combined to make cash and bonds unattractive investments, and this is likely to be true for some time to come. Equity markets are also likely to produce lower returns going forward, given slower growth prospects in many countries. One of the biggest dilemmas investors face, therefore, is where to invest to get inflationbeating returns over time. Investors need to save more in the face of these expected lower returns and, if their risk profile allows, to invest more in growth assets like equities and property.

4. And what is the biggest risk on the horizon for investors?

We see the policy responses of developed-world governments to sovereign debt as the biggest risk. Economists tend to be divided on the impact

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of fiscal and monetary tightening, with some expecting inflation and others expecting deflation.

Each of these scenarios has different implications for markets.

5. Should advisers be doing anything to prepare their clients for any such events?

History is littered with black swans, wars, natural disasters and a myriad other unpredictable events. Don’t waste your time speculating on where markets, the Rand or interest rates are going; rather take a long-term view.

Typically, most investors fall into one of two categories: you are either in a stage of life where you are accumulating wealth, or in a stage where you have already established your nest egg and are seeking to protect it in real terms while earning a decent level of income. The former investors should defer consumption and save more, and the more time you have until retirement the more risk you can take – hence buy equities and see volatility as your friend. The latter investors are more concerned with diversification, risk management and tax efficiency, and this should be the focus of an adviser.

HEAD TO HEAD | PSG Asset Management

PSG Asset Management N eels

v a n

S c h a i k

Portfolio Manager at PSG Asset Management

1. What impact have recent events had on the financial markets?

The initial correction from the Japanese earthquake was severe, but the market quickly recovered the losses. The MENA conflict, at least initially, coincided to a large extent with events in Japan, hence the very negative impact on markets at the time. Portugal is a known risk though and markets for some time now have been expecting an ECB/IMF bailout.

Forecasting these events is impossible though and forecasting markets based on these events is even more difficult.

2. Do you think these issues will continue to drive investor sentiment over 2011? If not, what will?

The issues around Japan have already been largely forgotten by investors and the focus has now shifted to the rebuilding of the impacted area. In a perverse way, these types of events can be positive in the long run for a country like Japan which has been faced with severe deflationary pressure for more than two decades now. The MENA conflict and the state of affairs in the Eurozone periphery could result in continued market volatility. Eurozone risks have prevailed all the way from the market bottom in 2008, which once again highlights the fact that investors should focus on company valuations rather than macro factors.

Forecasting investor sentiment is impossible as it constantly changes. The longer a perceived risk

prevails though, the less important it becomes from a sentiment perspective – investors in other words become lethargic. That does not mean that the risks have disappeared, but the market just starts ignoring them. High government debt levels across the globe are the new ‘US housing marketelephant’ in the room. Because interest rates are likely to stay relatively low in most parts of the developed world for some time, investors will at some point start ignoring reality and find comfort in the artificial support measures.

3. What are the biggest issues currently facing investors?

Given the low interest rate environment, people are desperate for higher income-earning investments, which are going to be hard to come by. Low rates are forcing people to make investment decisions that they otherwise would not have made, like switching from low-risk interest earnings investments to equities. Investors should be careful not to extrapolate recent returns from asset classes and rather focus on the valuations.

Uncomfortable investment decisions are normally the right ones, and currently sitting on cash is the tough decision, but we expect the market to present better opportunities in the future and it is best to have the cash available when the market pitches opportunities.

4. And what is the biggest risk on the horizon for investors?

many forms which are hard to pin-point, but valuations play the most important role. As discussed earlier, the risks of high government debt levels and the impact of the austerity measures on many Western countries is not new.

The markets knew about them as far back as late 2008 and early 2009, when the market had already collapsed. Yet the market re-rated and rallied not because the risks disappeared, but because they were just too cheap and, in many instances, priced for bankruptcy. At the moment we are sitting at the opposite side of the valuation spectrum while the risks have all but disappeared.

5. Should advisers be doing anything to prepare their clients for any such events?

Everyone seems to be looking for a black swan event around every corner these days, based on the events of 2008. To position yourself for these events can psychologically be very painful. Yet if you focus on and avoid the factors that lead to these price exuberances, you should be fine.

Focus on the facts at your disposal and make sure you invest in products you understand and which you can exit if you need to or want to. If things are too good to be true they normally aren’t true, or ostensibly true for only a short while.

Advisers should ensure that their clients are not over exposed to risk that they financially and psychologically would not be able to stomach.

We look at risk as the potential for permanent capital impairment. The catalyst can come in

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Maya Fisher French

The advice you need to be giving your clients You need to be speaking to your clients about their capacity to absorb a higher mortgage repayment.

by Maya Fisher-French

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R

ate hikes are coming. Whether it starts this year or next, what we do know is that this time next year the interest repayment on our mortgages will be going up by at least eight per cent – that is if we have only had a 50-basis point hike by then. That means your client will be paying an extra R416 a month on a R1 million mortgage.

Unfortunately it is unlikely that the rate hikes will stop there. If we learnt one lesson from the last rate hike cycle, inflation usually surprises on the upside. In 2005, economists assured consumers that we would not see a repeat of the 600 basis point rate hike we had seen in the late 1990s.

At most, they argued, we would see 250 basis points. “This time things are different,” they argued.

Well they were wrong, maybe it took three years instead of one year to get there, but as inflation continued to tick up, we experienced a 500 basis point rate hike, and few were ready for it.

Last month we saw inflation figures surprise on the upside, coming in at 4.1 per cent; and if we have any weakening in the Rand, those international food and oil price hikes will hit us hard. Just as a reminder, global food inflation shot up 36 per cent over the last year and oil prices rose 20 per cent in just three months. The only thing standing between us and a serious inflation shock is a strong Rand that analysts and the Reserve Bank keep trying to talk down.

If we see the same inflation cycle of the mid2000s and a similar monetary response from government, there is no reason why over the next three years we won’t see interest rate hikes of 500 basis points increasing that R1 million mortgage repayment by R4 160 a month.

Between higher interest rates, rising food prices, petrol prices and electricity prices, the probability of your client lapsing on their new policy or investment is growing. A sensible approach is to first bullet proof their mortgage so they are not at risk of getting up to their eyeballs in debt.

“Based on current rates, FNB is offering a 12-month fixedmortgage at 35-basis points above current rates. If the first rate hike is 50-basis points in November, it could be a smart move. If the first hike is only next year, the bank has won.”

months and 225 basis points for a five-year fixed rate. Note that this does not necessarily mean that FNB expects rates to top out at this level – they will have calculated the additional interest paid in the previous years as an offset.

So what does the maths show? If interest rates started to increase in February next year and rose by 400 basis points in increments of 50 basis points every three months, with a sixmonth gap before the last increase, bringing the final rate hike to February 2014 (24 months later) on a mortgage of R1 million your client would have paid an additional R55 000 in interest.

If your client took out a three-year fixed mortgage starting next month and paid 165 basis points additional interest, by February 2014 he or she would have paid R44 000 in additional interest. In this case, fixing would be a smart move.

It is an interesting analysis, but of course there are many variables around the frequency of the rate hikes and increments and of course how high they go. If the rate hike ends at 300 basis points, then the client would be paying R9 000 more in interest by taking the fixed option.

Crunching the numbers

Paying off the asset not the interest

Stanlib economist Kevin Lings has calculated that a 10 per cent fall in the Rand will push our inflation figure to six per cent. The Rand can move 10 per cent in a day. Inflation is back and the probability is that it will be higher than we expect.

The question they will probably ask is whether they should fix their mortgage. Fixing their mortgage rate would provide peace of mind and if we see a serious rate hike they will be cushioned from the worst of it. In 2005, it would have been a very smart financial decision. On the other hand they would start paying for that rate hike before the event – it costs money to buy protection. It really is a bet against the bank.

But there is a better way to take the bet out the game. Rather than fixing the mortgage to a fiveyear fixed deposit rate 225-points higher than current rates, your client should start looking at increasing his/her mortgage repayments by that amount. This way the client is paying off the capital of their mortgage and not interest; thereby increasing their asset base not the bank’s.

The only issue confusing the debate is government’s likely response – will Reserve Bank Governor Gill Marcus favour growth over inflation? With unemployment figures back at 25 per cent, pressure to stimulate the economy is growing.

Based on current rates, FNB is offering a 12-month fixed-mortgage at 35-basis points above current rates. If the first rate hike is 50-basis points in November, it could be a smart move. If the first hike is only next year, the bank has won.

They would be putting an additional R1 860 per R1 million into their mortgage. Given that Marcus is more likely to err on the side of growth, it would take at least 18 months to two years for actual interest rate hikes to reach that level, and if they surpass it, the equity built into the mortgage will give the client credibility with the bank if the client needs to renegotiate.

As a result, economists differ as to whether we will see an interest rate hike this year or early next year. One thing they all agree is that there will be a rate hike. Barclays Wealth predicts that by the end of 2012, our interest rates will be 200-basis points higher.

If you fix your rate for 18 months, FNB will load an additional 70 basis points onto the mortgage repayment. Your client would be nearly in the money with the first rate hike and if Barclays Wealth’s predictions of 200 basis points is correct, the client would be paying 130 basis points less than a prime-linked mortgage for a while.

The interest rate shock from 2005–2008 resulted in a decimation of healthy credit records and pushed people further into debt.

Before your client commits to a five-year investment, advise them to bullet proof their mortgage first.

Just think about that rate hike on your client’s finances. That is a massive 24 per cent increase on their interest portion which equates to R1 600 a month on a R1 million mortgage.

To fix for 24 months, FNB charges an additional 115 basis points; 165 basis points for 36

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SHAUN HARRIS

That’s difficult, but performance tables are of little use

by Shaun Harris

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W

hat do financial advisers do when a client wants to be in the top performing fund? It’s to be hoped they will sit the client down and explain how their financial profile might not match the client being in top performing funds. But if the client is adamant and wants the funds that will shoot the lights out, what does the adviser do? Probably resort to historic performance tables, which is the worst way of choosing what might be the best performing fund.

Performance tables are history, no more than that. How a fund might perform in the future has little to do with its past performance. But time and time again, investors choose the top fund in the latest quarterly rankings, expecting that fund to stay on top. It seldom does.

Here’s an arbitrary time demonstration. It’s no reflection on the funds, just an example of how top funds don’t stay on top. Looking at Morningstar’s unit trust performance tables to the end of December 2010 (end-December is often when clients and advisers start changing investment portfolios), the one-year ranking had the Old Mutual Small Companies fund on top.

The latest Morningstar ranking, to end-April 2011, does not feature the Old Mutual fund in the top 25. In the space of four months, the fund has gone from top performer to nowhere (and again, it’s no reflection on the fund, just an example).

The three-year ranking shows the same thing.

At the end of December, Cadiz Equity Ladder was the top performing fund. At the end of April it had slipped out of the top 25. Pity the poor investor who chose the top funds to try and get the best returns.

But the five-year ranking illustrates another point that’s important in trying to identify which might be the best performing funds. Top over five years to end-December was the Old Mutual Mining and Resources Fund. At end-April, the Old Mutual Fund was still number one. Five years is a decent time frame and it shows what investors and advisers should be looking for – consistency. Past performance may be of little use but often it’s all an investor has. What it can show – if used over a longer time period like five years – is which funds perform consistently.

In a study based on Standard & Poor’s semiannual persistence scorecard for actively managed equity mutual funds in the US, Acsis

found the results were very similar for unit trust funds in South Africa. That is that very few funds managed to consistently repeat top half or top quartile performance. Their conclusion was that investors have to look further than performance tables when choosing a fund.

“The three-year ranking shows the same thing. At the end of December, Cadiz Equity Ladder was the top performing fund. At the end of April it had slipped out of the top 25. Pity the poor investor who chose the top funds to try and get the best returns.”

The research goes back a year but nonetheless remains pertinent. Acsis investment analyst Michael Dodd likened performance tables to form guides for horse races. Both contain the history of the fund, or the horse’s previous form, but cannot predict the future. Dodd found that in the past performance of actively managed South African equity funds over three consecutive one-year periods, only ten of the 74 funds, or 13,5 per cent, managed to consistently achieve top-half performance. And none maintained a top quartile ranking over the period.

Dodd compared it to a random act like flipping a coin and getting three heads in a row. “The probability of tossing three heads in a row is 12,5 per cent. So the research results show the probability of consistent top-half performance of 13,5 per cent is only marginally higher than a completely random outcome.”

So if unit trust past performance tables are little better than flipping a coin, what should investors be looking for when choosing a fund? Dodd said that while a good performance track record is important “other vital aspects to consider are the people, the fund managers, the investment philosophy and process.”

That information is not hard to find. Most will be on the latest fund fact sheets, often with additional commentary from the fund managers, on the websites of the various asset management companies.

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But advisers will need to dig deeper than this to find the best funds for clients. There’s a split opinion over whether to follow ‘the people’ or philosophy and process (the asset management company). Many investors stick with a fund manager, even if that person changes management companies. This is not a bad way to select funds, provided the adviser has clearly identified the client’s risk profile and investment goals and is sure they match those of the fund manager.

Understanding the manager and how he or she invests is also important when the fund underperforms for a period. All funds will underperform at some stage and the worst thing an investor can do when this happens is ditch the fund. Switching between funds entails additional costs that will ultimately come off performance. Advisers should rather urge their clients to stick with a fund. Provided they are happy they have chosen the right fund for that client.

Tamas Kulcsar, research analyst at Glacier, Sanlam’s vehicle for the affluent market, said the people are important because they make the decisions that affect investors’ wealth. “As investors, we need to know who these people are. What qualifications do they have? Do they have any support? How are decisions made?

Does the fund manager have full autonomy or is it a team-based approach.”

He added that the manager’s incentivisation should also be part of the selection process. Is the manager working off a performance fee, or shares or stock options in the management company? Each has potential advantages and disadvantages.

But even after doing all the homework, investors and advisers will not always get it right. When should an adviser consider pulling a client out of a fund? “As a general rule, three consecutive years of underperformance should be a clear warning sign things are not well,” said Kulcsar.

“A manager leaving a fund is another warning sign.”

What advisers should also avoid is complicated funds. Some may be very good, but it’s harder to work out the philosophy and process in these funds. Rather stick with the simple funds that have a clear and transparent mandate.

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ASSET MANAGEMENT

on economic outlook

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“Financial advisers need to rethink how they communicate with their clients. They should focus more on asking questions and listening to their clients’ answers, as well as discussing risk tolerance and the impact of risk on investment returns over various investment periods with their clients.”

D

espite major economic shocks around the world, a new survey has shown that financial advisers remain optimistic in their short-term outlook on equity returns and the market valuation of local equities.

This optimistic outlook is reflected in the results of the latest South African Investor Confidence Index released by the Institute of Behavioural Finance. The component of financial advisers said they expect an average return above inflation from JSE equities over the next six and 12-month periods. This was in contrast to institutional investors who said they expect zero nominal returns from JSE equities over the next six months and negative real returns over the next 12 months.

However, Gerda van der Linde, executive director at the Institute of Behavioural Finance, warned that financial advisers’ views may differ from their clients’ expectations of equity returns. “In analysing the results of the index, the message for South African investors may well be that financial advisers are more optimistic about the market than market signals justify.”

She believes any major differences in views may well adversely influence financial advisers’ relationships with their clients.

“Financial advisers need to rethink how they communicate with their clients. They should focus more on asking questions and listening to their clients’ answers, as well as discussing risk tolerance and the impact of risk on investment returns over various investment periods with their clients.

“This strategy may prove to be vital in retaining clients’ trust,” said Van der Linde. “The only way for a financial planner to get the client on the same side of the table is to increase communication – and communicate even more in volatile market conditions.”

This caution to financial advisers of keeping their optimism under wraps may also be advisable if the results of another survey are proven correct. In its quarterly survey, Ernst & Young said confidence in the asset management industry fell in the first quarter of 2011, in line with a slightly weaker local equity market. The survey, which is conducted by the Bureau for Economic Research in Stellenbosch, found that asset manager confidence fell from 89 index points in the fourth quarter of 2010 to 83 points in the first quarter of 2011.

However, the survey showed that there was a difference of opinion between the larger and smaller asset managers. Large managers (those with assets in excess of R20 billion in funds under management) reported weaker confidence, at 84 index points, while small manager confidence rose to 81 from 77 previously.

SA on the road to recovery The economic recovery in South Africa appears to be well underway.

However, despite good performances in most market sectors during March and favourable domestic economic data released during the month, there is a decided lack of excitement amongst local market watchers.

Madalet Sessions, economist at BoE Private Clients, said that despite some positive economic signals, private sector credit growth (PCSE) and the broad M3 money supply growth rate in South Africa remain relatively subdued. “What this suggests is that the inflationary pressure predicted by financial analysts to occur before year end, is not the result of excess demand in the economy.”

Sessions also attributes the substantial losses in developed equity markets during March to continued unrest in the Middle East and North Africa and its affect on oil prices, the costs of the earthquake and tsunami disaster in Japan and continuing sovereign debt concerns in Europe.

“In general, we remain cautious on the prospects for the SA economy, but would nevertheless recommend a slightly overweight allocation to equities at the expense of cash,” added Sessions.

However, Johann Els, senior economist at Old Mutual Investment Group SA (OMIGSA) urged South African consumers to find reassurance in the fact that, despite the serious shocks seen around the globe in the first quarter of the year, the economic recovery underway in South Africa is still on track and growth prospects remain positive.

“We have experienced some unexpectedly serious shocks in recent months, such as the tragic earthquake and tsunami in Japan and political strife in the Middle East and North Africa, exacerbated by rising oil and food prices, further debt bailouts in Europe and concerns over tightening fiscal and monetary policies in many countries.”

“While all of these have negative consequences for economic growth, we believe that none of these threats has so far been substantial enough to derail South Africa’s growth path this year,” said Els. In line with this, OMIGSA also kept its GDP growth forecast for 2011 unchanged at 3.7 per cent.

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FUND PROFILES

FUND PROFILES Futuregrowth Development Equity Fund Who is the fund appropriate for?

Investors who are large domestic retirement funds and international development finance institutions (DFI). The manager is now marketing the fund to a broader audience of South African domiciled retirement funds.

Please provide some information around the individual/team responsible for managing the fund.

James Howard is the portfolio manager of the Development Equity Fund.

James has been involved with socially responsible investing (SRI) since 1994. He joined Futuregrowth in 1998 and managed the original R1,5 billion equity fund that gave BEE groups access to listed and unlisted opportunities during the initial funding phase of this SRI asset class. James has a wealth of experience in all aspects of managing assets and funds, and working with clients.

Please provide performance of the fund over one, three and five years (please also include benchmark).

Futuregrowth Development Equity Fund Performance as at 30 April 2011

Please outline your investment strategy and philosophy for the fund.

The Futuregrowth Development Equity Fund (DEF) has a broad risk mandate to invest in socially responsible projects and businesses or developmental assets in Southern Africa through equity and related investments such as preference shares and mezzanine debt The fund provides investors with a cost-effective and flexible channel to participate in the infrastructure and development equity asset class. Investors benefit from the exclusive ability to access an existing pool of stable assets, access to a flow of developmental transactions, a lower than market fee and the ability to play a role in creating a new pool of risk capital for South African development.

What are your top five holdings at present?

1. N3 Toll Concession 2. Carecross Health (Pty) Ltd 3. Infrastructure Finance Corporation Ltd 4. Trans African Concessions 5. Airports Company South Africa

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Fund performance

Benchmark performance*

Performance relative to benchmark

1 year

12.05%

14.36%

-2.31%

3 years

11.59%

16.01%

-4.42%

Since inception (September 2006)

23.33%

16.43%

6.90%

*South African CPI plus 10%

Please outline fee structure of the fund.

Flat fee of 2.25 per cent p.a. (excluding VAT). Although this is a private equity fund (most assets are unlisted) no incentive fees are applicable at this stage.

Why would investors choose this fund above others?

Investors have access to an asset class with an SRI focus that they would not normally have access to. The fund provides superior, consistent outperformance at a relatively low fee. It is also managed by a reputable and experienced team with an outstanding track record in both SRI and investment performance.

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Investment Solutions - Entrepreneur Equity Please outline your investment strategy and philosophy for the fund.

Entrepreneur Equity is an aggressive equity portfolio with an outperformance objective of three per cent above its SWIX benchmark over a rolling three-year period. The assets are managed by local investment managers preferred for their skills in managing domestic equity mandates. Investment Solutions blends the investment strategies of these best pick non-benchmark cognisant managers with the aim of achieving superior investment returns at below-average risk.

What are your top five holdings at present?

Entrepreneur Equity Manager Weighting Manager Coronation Investec Value New Horizons portfolio SIM Unconsted Element Total

Current Manager Weighting 22% 18% 27% 18% 15% 100%

Who is the fund appropriate for?

Investment Solutions Entrepreneur Equity is an institutional fund that is relevant for clients who have an appetite for risk as this is an aggressive fund within the equity range.

Have you made any major portfolio changes recently?

There have been several recent enhancements to the fund. We have made some adjustments to the manager line-up and weightings.

These adjustments are mainly to ensure the portfolio has exposure to our highest conviction buy-ranked managers whom we expect to generate the highest level of outperformance over the long term.

The fund ranks highly in the Alexander Forbes equity survey, as illustrated below.

Alexander Forbes Equity Survey (benchmark – cognisant).

Please provide performance of the fund (including benchmarks).

12 months

In an environment where the average active manager in the market continues to struggle against the benchmark (SWIX), the fund outperformed its benchmark over a three-year period by almost four per cent to the end of March 2011.

Entrepreneur Equity performance

-

3 years

Fund

Rank

Quartile

Rank

Quartile

Entrepreneur

4/25

1st

3/21

1st *

*Based on Investment Solutions’ estimates.

Why would investors choose this fund above others?

IS Entrepreneur Equity

Benchmark

Outperformance

1 year

16.5%

15.4%

1.2%

3 year

11.2%

7.4%

3.8%

Since inception

8.0%

6.9%

1.1%

All numbers greater than one year are annualised.

Inception date for calculation is July 2007.

All numbers end March 2011.

Benchmark is FTSE/JSE SWIX.

The overall performance of Entrepreneur Equity remains solid over the medium term (three years), which demonstrates that a robust investment process is in place. This is a dynamic process that requires continued research of the manager universe and significant investment into people and systems; to ensure that the manager selection and portfolio construction and monitoring remain appropriate – which is what Investment Solutions maintains is a core part of its investment process and philosophy.

“Relevant for clients who have an appetite for risk as this is an aggressive fund within the equity range.”

INVESTSA

27

Coronation Fund Managers - Strategic Income Fund Please outline your investment strategy and philosophy for the fund.

The Coronation Strategic Income Fund has a flexible mandate with no prescribed maturity limits for the securities in which it invests. It also has a flexible duration policy and seeks to protect capital in times of bond market weakness. Its asset allocation is defensive, taking exposure to other growth assets to a maximum of 25 per cent.

These growth assets include listed property (maximum exposure of 10 per cent), preference shares (maximum exposure of 10 per cent) as well as foreign yielding assets (maximum exposure of 10 per cent), but excludes ordinary shares.

Strategic Income aims to provide a higher level of income than a money market or pure income fund and moderate capital growth.

The fund’s objective is to produce a return of at least 110 per cent of the three-month STeFI index. This index is the benchmark used by most money market funds in South Africa.

Who is the fund appropriate for?

Strategic Income is suitable for investors who are risk averse with a time horizon of one to three years; who require a regular stream of income from their capital base; who seek managed exposure to income-generating investments; and those who believe in the benefits of active management within the fixed interest universe.

Please provide some information around the individual/team responsible for managing the fund.

Mark le Roux, BCom As head of fixed interest investments, Mark is responsible for the fixed interest investment process and portfolio management functions for both institutional and retail portfolios. Mark has 20 years’ experience in managing traditional fixed interest portfolios (both institutional and unit trust assets), as well as hedge funds.

28

INVESTSA

Tania Miglietta, BBusSc (Finance), CFA Tania joined Coronation in 2002 as a member of the fixed interest team with specific responsibility for the management of all money market and income funds. She is co-manager of the Coronation Strategic Income Fund and the Coronation Preference Share Fund, and is a member of the Coronation Credit Committee.

Please provide performance of the fund over one, three and five years.

Performance figures are quoted as at 31 March 2011.

Coronation Strategic Income

Cash*

Outperformance

Since inception (annualised)

11.5%

9.1%

2.4%

Last five years (annualised)

9.0%

8.7%

0.3%

Last three years (annualised)

10.1%

8.5%

1.6%

Last twelve months (annualised)

9.1%

6.2%

2.9 %

*STeFI 3-month index Please outline the fee structure of the fund.

The fund charges an annual management fee of 0.85 per cent.

Coronation does not charge any initial fees.

“Strategic Income aims to provide a higher level of income than a money market or pure income fund and moderate capital growth.”

Peregrine - Green Oak Capital (Pty) Ltd Please outline your investment strategy and philosophy for the fund.

The Peregrine Group, a pioneer in alternative investments in South Africa, is privileged to count some of the most experienced hedge fund managers in its stable. One such fund manager is the dedicated fixed income hedge fund manager Green Oak Capital. Green Oak Capital was founded in November 2006 by Willie Viljoen and Rean Smit, two veterans of the SA fixed income market. Willie and Rean have combined relevant experience of over 37 years, having previously been responsible for managing the balance sheet of Rand Merchant Bank and FirstRand respectively.

Green Oak Capital manages two strategies: Green Oak Specialist and Go Green. Both follow the same investment philosophy and process but have varying risk levels. Go Green is the more aggressive of the two.

The strategies invest in the SA fixed income markets taking positions predominantly in NCDs, FRAs and swaps with the big five banks as counterparties (FNB, ABSA, Standard Bank, Nedbank and Investec).

No corporate or credit investments are made.

Who is the fund appropriate for?

Please provide some information around the individual/team responsible for managing the fund.

Green Oak Capital has a three-person team with complementary skills. Willie Viljoen and Rean Smit are the portfolio managers with Henk Kotze responsible for the administration and operations.

All other functions are outsourced to the Peregrine Group or independent service providers.

Most of the investors in the Green Oak Capital funds are institutions but there are some high net worth individuals, too. The funds are appropriate for any investor seeking absolute returns but wanting to maintain capital stability over the long term.

119120 Peregrine Sharper REPRO 4/5/11 10:54 AM Page 1

“The funds are appropriate for any investor seeking absolute returns but wanting to maintain capital stability over the long term.�

C

M

Y

CM

MY

CY CMY

K

Peregrine - Green Oak Capital (Pty) Ltd (continued) Please provide performance of the fund (including benchmarks).

Why would investors choose this fund above others?

1 year to end March %

3 years to end March (annual %)

Since launch to end March (annual %)

Green Oak Specialist

10.0

14.8

13.8

Benchmark (SARB Interbank Call)

6.0

8.4

8.7

Go Green

12.1

n/a

20.6

Benchmark (STeFI Composite)

4.8

n/a

6.0

Green Oak Capital’s funds suits sophisticated investors who are looking to extract alpha from the South African fixed income markets over the long term while maintaining an element of capital stability.

The longer running Green Oak Specialist fund has achieved positive returns for investors in over 92 per cent of the months since inception and has never lost money over any calendar year.

For further information, please contact the Peregrine Group.

Leila Kuhlenthal | +27 (0)11 722 7560 | leilak@peregrine.co.za | www.peregrine.co.za

Performance for the Green Oak Capital strategies is shown after the deduction of all fees. Past performance is no guide to future performance; values may go up or down.

Please outline fee structure of the fund.

A fixed annual management fee of one per cent per annum plus a 20 per cent outperformance fee over the hurdle rate (institutional investors).

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INVESTSA

“Green Oak Capital’s funds suits sophisticated investors who are looking to extract alpha from the South African fixed income markets over the long term while maintaining an element of capital stability.”

CHRIS HART

The holy Grail

which investment strategy works best? theoretically result in a stronger currency. The strength of the Euro over April was largely driven by expectations of higher interest rates and this conforms very well to theory. However, a currency like the Rand has behaved exactly opposite to theory over the past 10 to 15 years. Rand weakness occurs through periods of rate hiking cycles, while the Rand tends to strengthen when rates are being cut.

Chris Hart | Chief Strategist | Investment Solutions

T

o achieve investment success means being able to deal with the vagaries of the market and understanding market dynamics. This is a sometimes elusive and constantly evolving dynamic around different market asset classes and different instruments; a constant quest to score goals where the goalposts are being moved around continuously.

“Mrs Market is fickle and her mind changes regularly. This means that the winning investment strategy also changes regularly.�

What investment strategy works best? The answer is that there is no one right answer. Mrs Market is fickle and her mind changes regularly. This means that the winning investment strategy also changes regularly. And it is not necessarily clear what anyone means by a particular investment strategy in any case.

Reality also confounds theory at inconvenient times. For example, rising interest rates should

There are times when macroeconomic factors are highly influential in a market and would reinforce a top-down investment approach. There are other times when a bottom-up approach works better.

What investment strategy works best? The answer is yes! The answer is also no! The insight is understanding when a particular strategy is best.

This aberration is often found with other emerging market currencies. The reason for the anomaly is probably due to the nature of capital flows. In the developed world, yield seeking capital flows dominate, which means higher yields attract capital flows with consequent currency strength. Capital flows in emerging markets are not dominated by yield-seeking investors but rather by growth-seeking investment, which means that higher rates actually dampen investor enthusiasm.

Understanding anomalies in the market helps to keep the investor onside while trying to score the goals. Insight into market reaction means unpacking the stage of the economic cycle, the levels, the expectation of monetary and fiscal response and many other factors. This helps to understand why markets react differently to the similar sets of data. A good earnings report does not necessarily mean a positive share price reaction if good earnings have already been priced in. A bad earnings report can also lead to a positive share price reaction if too much bad news has already been accounted for.

The same goes for investment strategy.

There are times value investing is successful but there are also times when momentum investor proves to be a superior strategy. Contrarian investing is great at turning points in the market but trend followers do better when the market is trending.

INVESTSA

31

ECONOMICS

A more inclusive Budget but deficit set to swell Annabel Bishop | Group Economist at Investec Asset Management

T

he recent Budget was more expansionary, had a greater focus on income redistribution and showed less fiscal conservatism than usual.

It was expected that the budget deficit would fall from 5.3 per cent of GDP in 2010/11, to 3.2 per cent of GDP in 2013/14, as

growth strengthened and government’s counter-cyclical spending came to an end, restoring fiscal rectitude. However, there was no reduction in the deficit from the 2010/11 level until 2013/14. As a percentage of GDP, the deficit is projected to remain at 2010/11’s 5.3 per cent of GDP in 2011/12.

This means the actual Rand value of the budget deficit is set to rise significantly, to

R154 billion in 2011/12 from R142.4 billion in 2010/11, and remain at a similar level in 2012/13.

The markets were expecting a fall in the deficit instead to R134.2 billion in 2011/12 and a further marked decline to R127.4 billion in 2012/13. An additional R39 billion will now be spent on both increasing the wages of existing civil servants and employing new personal.

The deficit fails to reach the prudent level of three per cent of GDP over the forecast period (next three years) due to escalating expenditure. Despite increased expenditure

32

and borrowings, the authorities expect growth will remain well below the sustainable employment creating rate of 6-7 per cent year on year over the next three years, meaning the country’s unemployment rate of 24 per cent is unlikely to halve by 2014.

Inflation is likely to rise by at least two per cent over 2011, from 3.5 per cent year on year to 5.5 per cent year on year by year end, due also to the statistical effect of being calculated off a low base of a year ago. Real interest rates would subside materially with such a large increase in inflation if there is no monetary tightening in response – historically the MPC has always hiked in such circumstances.

We consequently expect a 50 basis points hike in interest rates at the November MPC meeting. Interest rates are unlikely to rise before November this year and the hike may be delayed until early 2012. However, no interest rate hikes would mean the authorities are willing to let real interest rates find a new, lower level in the interests of lowering the cost of doing business and stimulating growth and job creation.

Last year’s substantial Rand strength pushed down food price inflation (and overshadowed double digit administered price inflation) but is unlikely this year, particularly as it is against government policy detailed in the new growth path.

Recent currency weakness has already contributed somewhat to higher food prices, and more pronounced currency

“The markets were expecting a fall in the deficit instead to R134.2 billion in 2011/12 and a further marked decline to R127.4 billion in 2012/13. An additional R39 billion will now be spent on both increasing the wages of existing civil servants and employing new personal.” depreciation would aid the upward cycle in inflation. Internationally, interest rates are rising, along with inflation rates and South Africa is unlikely to avoid this cycle.

The expansionary nature of domestic fiscal policy, from projected higher levels of debt and debt servicing costs, to increased spend allocations and the rise in the budget deficit in 2011/12 from 2010/11’s level, means monetary policy cannot be eased further, without stimulating inflationary pressure.

Substantial Rand weakness remains a risk to the inflation outlook, with the sovereign debt crisis of advanced economies unresolved and renewed concerns over global recovery following recent natural disasters.

Taruvona Mashamhanda

What Regulation 28 means for asset/liability matching

Taruvona Mashamhanda | Actuary | Old Mutual Corporate Customisation

O

ne of the key aspects of the new Regulation 28 is the introduction of principles requiring that a fund’s assets must be appropriate for its liabilities.

This requires an understanding of the nature of the liabilities so as to be able to select appropriate assets. Focusing on funds with pensioners, pensioner liabilities consist of regular payments to pensioners for as long as they are alive, with increases according to a fund’s pension increase policy (usually with a link to CPI).

So what is an appropriate asset for this liability? An asset with cash flows that match the pattern of expected pensioner cash flows including the increases certainly meets this requirement. Trustees can employ liability driven investing (LDI) specialists to structure portfolios of assets that match the expected cash flows.

These portfolios are normally centered on bonds. Derivatives such as swaps can be included in such portfolios to increase the flexibility to aspects such as the timing of asset inflows. As the use of derivatives is now explicitly catered for under Regulation 28, the LDI specialist will be able to make greater use of derivatives to improve matching.

Is a perfect match attainable?

Trustees should be aware that they will not always be able to fully match the expected cash flows because pensioner cash flows tend to go out longer than the range of available assets. There will be reinvestment risk as the assets backing these tail cash flows will be reinvested on unknown terms.

Matching and the funding level An important consideration here is the funding level. For an overfunded fund, one approach is to employ matching as far out as the range of available assets will allow and the assets backing the tail cash flows can be invested in the longest inflation-linked instruments to provide inflation protection.

34

For an underfunded fund, this approach can lock in the underfunded position and reduce the chances of attaining a fully funded position. To get around this, matching can be employed for a limited period and the balance of assets invested in a return-seeking portfolio. The LDI specialist can structure an optimal balance between the matched portion and the return-seeking portion.

The hope is that over time, as the return-seeking portion grows, this can be used to increase the matched portion.

Many funds are already using LDI-type strategies such as cash flow matching.

With the principles introduced in Regulation 28 and the flexibility brought about by the inclusion of derivatives in the regulation, will we see an increased interest in such solutions? Probably.

ALTERNATIVE INVESTMENTS

SA’s private equity gets thumbs up

The future of the private equity industry in South Africa is looking positive following the announcement by global private equity firm The Carlyle Group, of its establishment of a team to conduct buyout and growth capital investments in subSaharan Africa (SSA).

Washington DC-based Carlyle, which has $88 billion in assets under management, is the first big United States private equity firm to open an office in South Africa and said the establishment of the SSA division further bolsters its plans for expansion into emerging markets.

Greg Summe, Carlyle managing director and vice-chairman of Global Buyout, said, “Sub-Saharan Africa is one of the fastest growing regions in the world, driven by favourable demographics, expanding domestic industries and an improving political environment. The Africa team’s expertise should be a powerful combination with Carlyle’s deep industry experience and global platform.”

Summe said the SSA team is planning to make buyout and growth capital investments in private and public companies and is targeting a range of industries including consumer goods, financial services, agriculture, infrastructure and energy.

Co-head Danie Jordaan said, “We are excited to join Carlyle, with its demonstrated ability to build thriving private equity businesses across emerging markets. As SSA gains from political and economic reforms, demand for basic services and infrastructure is dramatically increasing. The entrance of a global player like Carlyle into SSA is a testament to the region’s progress and prospects and will attract more capital and talent to the region,” said Jordaan.

New legislation

could see a surge in hedge funds assets Recently announced changes to Regulation 28 of the Pension Funds Act, which will come into effect from 1 July this year, could result in an eight times surge in assets under management in the hedge fund space.

This is according to Anton Hormann, head of Business Development at Blue Ink Investments, the fund of hedge fund manager, who says the industry, which currently manages R30 billion of local investor funds, could swell to R240 billion over the next couple of years.

One of the key changes to Regulation 28 is that both institutional and retail investors will be able to invest up to 10 per cent of their assets in hedge funds. Previously hedge fund investments were accommodated in a narrow 2.5 per cent slice reserved for other investments, including private equity. “National Treasury’s decision to allocate 10 per cent to hedge fund investments is long overdue,” said Hormann.

He added that the change is the latest in a series of regulatory developments that will result in hedge funds becoming a more attractive option for both retail and institutional investors.

“Although hedge funds remain unregulated as a product, fund managers are now required to obtain a category 2A license from the Financial Services Board (FSB). The hedge fund industry is also keenly awaiting developments from the ongoing discussions with the Association of Savings and Investments South Africa (ASISA) and the FSB on full-blown regulation for the industry. We believe regulation is essential in order to level the playing field for hedge funds.”

INVESTSA

35

BETTER BUSINESS

The succession question Are you practising what you preach and planning for the long-term future of your business?

Although financial advisers encourage their clients to take a long-term view when planning for their future, many advisers fail to start their own succession planning early enough, and never get around to putting their plans on paper.

Like the planning you do for your clients, planning the long-term future of your business needs to be an ongoing process. In fact, succession planning is as much about rearranging how you currently manage your business as it is about your final exit. A succession plan is fundamentally a long-term business continuity plan.

“A succession plan is fundamentally a long-term business continuity plan.”

What are your options?

Many advisers prolong their exit from their businesses to enjoy the incomes they have created. But if you plan sensibly, you may have other options. There are strategies other than full and final exit that will allow you to stay involved in your business. Other options include selling to an existing partner or employee, selling to a third party or closing your firm and referring your clients on.

By beginning the succession process early and having an idea of the route you would want to take, you can have more control over the outcome. Additionally, you can start to understand how certain decisions you make today may add value to your business in the long term and may ultimately affect what choices you have at the end

of your career. For example, if selling your business to an existing partner or employee appeals to you, you should consider institutionalising your practice early on.

This will allow clients to build a relationship with the business as a whole, making for an easier transition when you leave.

A well thought-out succession plan will help ensure more than financial success; it will also make you aware of the psychological and social considerations you will need to address closer to retirement.

A well-developed succession plan: • Accounts for the impact on yourself, family, employees, clients and suppliers.

• Discusses potential successors.

• Details the role you would like to play.

• Consider how well the new management or successor will match the client base and business environment you have developed.

• Discusses how you will value the business.

• Minimises tax implications.

• Clearly map out the transition process.

• Establishes a timeframe.

Succession planning requires a structured approach to prepare for and execute the successful transfer of valued clients and their assets. Concentrating on building a highly profitable, transferable business with reduced dependency on the owner is the most important aspect of building value in a practice.

Instead of waiting until the end of your career to make your business more attractive to potential buyers, begin today to make the improvements for yourself.

Implementing these strategies early will benefit your clients, your employees and yourself.

Sources: Articles by David Goad, Rebecca H Pomering and Daniel J Cunningham, Diane MacPhee, Denise Federer, Maureen Halushak

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

36

INVESTSA

BAROMETER

SA economy could top four per cent in 2011 Citadel’s chief investment strategist and Reuters economist of the Year 2010, Dave Mohr, has predicted that South Africa’s economy could accelerate to more than for per cent in 2011, as well as maintain this pace into 2012. He also forecast that inflation could exceed its official target of three to six per cent by end-2012.

Africa’s middle class on the rise According to a report by the African Development Bank, Africa’s middle class has grown by 18 per cent between 1980 and 2009/10, contributing markedly more to the continent’s economic growth. The size of the middle class is estimated at around 300 million people, or about 30 per cent of Africa’s total population of one billion.

Foreign direct investment on the rise According to the recently released 2010 UN Conference on Trade and Development World Investment Report, South Africa has featured in the world’s Top 20 of priority economies for direct foreign investment (FDI). Brics’ (Brazil, Russia, India, China and South Africa) FDI is forecast to increase to more than $150 billion throughout Africa by 2015. t arke r ’s m hing e v l i ac ss n re hoe ly ec th bullio e g r i la ,w hich ade ld, w ast dec o G ay. he p of M d over t tart e s i l l e ra t th nt a have r ce metals e p 4 s by 2 dy ciou stea eted oth pre igh. s m n i m B plu 80 h ema ins. ld r h, silver ent ga to a 19 c , go g e s i g r h d n ar en urni d on 0-ye run buil ilver ret er ’s hing a 3 ued to s v l d i S c an tin con r rea 011 Afte mance ril 2 SA’s unemployment figures increase p A r o s in perf According to the latest Statistics SA survey, South Africa’s high d r reco unemployment rate has increased from 24 to 25 per cent in the first quarter of 2011. It is estimated that over 90 000 jobs were lost in the private sector. Both the textile and banking sectors are thought to be under pressure with fears that more job losses could be on the way.

S

S Y A W E ID

Complaints to long-term ombud reach record high The ombudsman for long-term insurance received a record number of complaints in 2010, up two per cent to 9 236. In total, ombud Brian Galgut said R103 484 956 was recovered for complainants in the form of lump sum amounts.

Credit rating cut for Greece Greece’s crating rating has been cut by agency Standard & Poor’s, increasing fears about the European debt crisis and its effect on the global economy. The debt-laden country’s credit rating has been downgraded from BB- to B, with rising speculation that it could be slashed even further, effectively making the country the lowest rated in Europe.

INVESTSA

37

INDUSTRY NEWS

Appointments

André Tonkin Wealth and alternative asset management group Peregrine Holdings has appointed André Tonkin to join its capital introduction team. Tonkin will focus on the South African and international institutional market. He previously worked at Old Mutual Corporate as the market actuary responsible for creating customised investment solutions for the institutional market.

Chris Greyling

Nothando Ndebele

Foord Compass has appointed Chris Greyling as an independent chairman following the retirement of Mark Hodges. Greyling joined the board in October 2003 and has extensive experience in the financial services industry, ranging from banking to portfolio management.

He was previously CEO of Foord Asset Management (Pty) Ltd.

Nothando Ndebele has been appointed by Renaissance Capital, the leading emerging markets investment bank, as the head of subSaharan African (SSA) Research. Ndebele brings 13 years of experience in financial services, and also acted as an adviser on economic issues to the new unity government in Zimbabwe.

Board to promote

JSE Africa listings A new advisory board has been launched by the JSE to promote its Africa Board listings. The committee, which includes outgoing JSE CEO Russel Loubser, will consist of nine members from various African countries with the aim to grow the African Board from its current two listings.

Loubser said the board was established to ‘‘generally promote the business, goals and objectives of the JSE Africa Board to the main stakeholders and constituencies of the JSE Africa Board.”

38

INVESTSA

Institutional fund managers may find the Africa Board attractive as they are now allowed to allocate five per cent of their funds to the continent besides the 25 per cent foreign investment limit prescribed

by South African laws.

Since its launch in 2009 the JSE’s Africa Board has attracted only Namibian micro-insurer Trustco and Botswana-listed tourism company Wilderness Holdings.

Both are secondary rather than primary listings and have a combined market capitalisation of just under $2 billion, roughly 0,2 per cent of the total for JSE listings.

MMI finalises brand strategy,

capitalising on existing brand strengths MMI Holdings, formed from the merger of Metropolitan and Momentum, has announced that its branding strategy will retain its two existing client-facing brands within the six operating divisions. The company said this would enable it to capitalise on the existing market position of the two brands in their respective markets.

The group said MMI will not be a client-facing brand and will maintain exclusive shareholder focus. “The MMI brand will support the common values of the group that will act as the glue between the operating divisions, provide a

sense of unity and create an awareness of the greater whole for employees,” said group CEO Nicolaas Kruger.

Metropolitan will be the lead brand for the following divisions: Metropolitan Retail, Metropolitan International and Metropolitan Health (formally Metropolitan Health Group).

The following divisions will fall under the Momentum brand: Momentum Retail, Momentum Investments and Momentum Employee Benefits which will house Metropolitan Retirement Administrators.

PSG paves the way for growth PSG Group, the listed investment group that includes financial planning, fund management, retail banking and private equity, has confirmed that it expects to see further growth after releasing its full year financial results to February.

Income-dependent shareholders also received some welcome news with a final dividend of 47 cents, bringing the total dividend for the year to 67 cents, up 59.5 per cent on the 42 cents announced a year earlier.

The group said the total value of listed and unlisted investments, also known as the sum of the parts (SOTP) value, soared 76 per cent to R46,81 per share while headline earnings per share increased by 23,1 per cent to 306,7 cents.

CEO Piet Mouton said the group’s investment of 34.6 per cent in Capitec Bank has been a major contributor to its success story. “From a value perspective, Capitec constitutes more than 50 per cent of PSG’s assets and is well positioned to provide for further growth.”

First black property funds hit the JSE The first black-managed and black-held property fund Rebosis listed on the JSE on May 17. The fund plans to grow its property portfolio to R10 billion within the next three to five years as it introduces itself to a wide spectrum of investors.

“We are introducing ourselves to a wide range of investors and we want them to partake in our growth as we build our balance sheet. We have a pipeline of projects lined up which will add value to our portfolio,” said CEO Sisa Ngebulana.

Rebosis’s portfolio consists of 60 per cent

shopping centres and 40 per cent office buildings, located in Gauteng and the Eastern Cape. The group plans to diversify its portfolio into the industrial sector and geographically into the Western Cape and KwaZulu-Natal.

Four institutional investors, including Stanlib, Old Mutual, Public Investment Company and Rand Merchant, Bank had committed R860 million to Rebosis, and about half of the shares left in issue would be available to the public, added Ngebulana.

INVESTSA

39

PRODUCTS

PRODUCTS Discovery Invest now available on Astute

a single asset class. “In the past, clients would

RMB allows investors to invest in coal directly

approach the group to invest money in the equities The Discovery Invest range of products is now

market. But when the equities market is expensive,

Following the launch of Rand Merchant Bank’s

available on the Astute platform used by financial

you have a problem, because if the market

(RMB) second commodity exchange-traded note,

advisers. Astute assimilates information from

corrects, you become a victim of that correction.

TMB Coal ETN, JSE investors can now put their

companies offering life insurance, disability and

As a result, clients would suffer when the entire

money directly into coal rather than listed coal

investment products for use by financial advisers

market fell.”

mining companies.

on behalf of their clients.

“With this portfolio, we’re catering to most of our

“Until now, coal exchange-traded products across

The Astute Consolidated Client Portfolio

clients who buy into the Warren Buffett story: the

the globe have invested only in companies linked

system gives financial advisers, who have their

first rule being, don’t lose money; the second rule

to coal mining, equipment or transportation

clients’ consent, simultaneous access to policy

being, don’t forget the first rule.”

and have not offered a direct investment into coal via physical coal or coal futures,” said RMB

and investment information at life offices and investment companies.

Van der Merwe, who will manage the flexible

spokeswoman Vicki Goodwin.

portfolio, says he’ll look at managing money “The inclusion of Discovery Invest’s products

across equities, bonds, cash and property. This will

The coal ETN invests in the Richards Bay Coal

on Astute is in line with our objective to provide

be different from all SPI’s current portfolios, which

Futures contract which trades on ICE, the

advisers with the tools they need to help clients

are all Regulation 28-compliant.

head of Discovery Invest.

electronic trading platform for commodity, currency, credit

reach their financial goals,” said Peter Thompson, “In managing money across asset classes, we’ll be able to

and equity index markets.

A single unit will give an

“By partnering with Astute, Discovery Invest gives

generate smoother returns

investor exposure to one

advisers more support and greater certainty,

for our clients, and ultimately

tonne of coal.

flexibility and value for clients.”

reach our nominal return investment objective. So we

Buffett-style flexible portfolio launched by

want to restrict capital losses

Sanlam Private Investments

for clients.”

A new bespoke flexible portfolio has been launched

by Sanlam Private Investments (SPI), allowing clients to benefit from clever asset allocation, thereby reducing risk and restricting capital losses. The portfolio is the first of its kind for SPI. According to Alwyn van der Merwe, director of investments at SPI, the bespoke flexible portfolio fills a gap for clients who are only invested in

40

etfSA.co.za

INDEX TRACKING ETF AND UNIT TRUST MONTHLY PERFORMANCE SURVEY – APRIL 2011 Mike Brown | Managing Director | etfSA.co.za

The latest etfSA Monthly Performance Survey highlights the following:

Best Performing Index Tracker Funds – April 2011 (Total Return %)* Fund Name

Type

5 Years (per annum)

Satrix INDI 25

ETF

15,59%

Prudential Property Enhanced

Unit Trust

13,81%

Stanlib Index Fund

Unit Trust

12,06% 3 Years (per annum)

Prudential Property Enhanced

Unit Trust

19,88%

Satrix DIVI Plus

ETF

18,18%

Proptrax ETF

ETF

17,66% 1 Year

Satrix INDI 25

ETF

25,97%

NewFund eRafi INDI 25

ETF

19,72%

Satrix RAFI 40

ETF

18,27%

Satrix SWIX Top 40

ETF

18,18% 3 Months

Satrix INDI 25

ETF

6,66%

Satrix SWIX Top 40

ETF

5,76%

BettaBeta EWT 40

ETF

5,56% 1 Month

Proptrax ETF

ETF

7,32%

Satrix DIVI

ETF

5,81%

Satrix FINI 15

ETF

5,77%

Source: Profile Media FundsData (29/04/2011) * Includes reinvestment of dividends.

• The Satrix INDI 25 ETF, which consists only of manufacturing, retail and industrial companies, so excludes the volatile financial and mining sectors, remains the top performing index tracking fund in South Africa for the five-year and one-year measurement periods. It returned 15,59 per cent per annum for the past five years and 25,97 per cent over the last 12 months.

• The Prudential Enhanced SA Property Tracker Fund, which is a unit trust, has knocked the Satrix DIVI off the top of the performance charts for the three-year period, giving a total return of 19,88 per cent per year over this period.

• Proptrax ETF, which tracks the SA Property Index of the 16 main listed property shares on the JSE, was amongst the best performing funds over the past three years, giving a total return of 17,66 per cent per annum, but also was the best performer over the one-month period.

This recent revival in property shares, following a strong dip early in 2011, suggests that the property sector is making a comeback as new counters are listed in this sector and corporate action takes place amongst some listed property companies. A new property ETF, which tracks an equally weighted basket of the top ten property companies, the Proptrax Ten, will be making its debut on the JSE in late May 2011.

The full etfSA Monthly Performance Survey can be viewed on www.etfsa.co.za

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Snippets | THE WORLD

cabinet approved in principle planned pension reforms that will improve the pension system that is currently exhausted by the ageing population.

Cameron derails Brown’s new electoral hopes UK Prime Minister David Cameron dismissed any bid hopes of former premier Gordon Brown in becoming managing director of the International Monetary Fund (IMF). Cameron stated that Brown was not the “most appropriate person” to take over as managing director of the IMF because he failed to understand the dangers of excessive debt. He suggested the IMF look towards other countries to increase its global standing.

Commission requests Germany to pay up full pension granted under bilateral agreements The European Commission requested Germany to pay pension beneficiaries the full amount of pensions granted under a bilateral agreement if a citizen moves to another EU member state. The Commission said the freedom to move and work in another member state is an EU fundamental right, as is the right to export a pension.

Czech Government approves plan for new pension legislation According to the Labour and Social Affairs Minister Jaromir Drabek, the Czech Republic

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Royal wedding sixth biggest online event ever The royal wedding of commoner Catherine Middleton to William, future King of England had the world glued to their television sets.

According to statistics published after the nuptials, global Internet traffic peaked at 5.3 million page views per minute and was mentioned 67 times a second on Twitter.

Hungary calls for predictable economic policies Eastern Europe state Hungary has announced that predictable economic policies to improve lending and growth are needed. The new policy encourages multinational investors to plan in the long term and reinvest their profits in Hungary instead of taking it out of the country.

Greece has no choice but to reconstruct its debt Financial markets are becoming increasingly convinced Greece will have to renegotiate the terms of its public debt, recognising that its economy cannot grow fast enough to service a burden. Deputy chief economist Adolfo Laurenti said he expects loans held by the European Union, the International Monetary Fund and other governments to be restructured but not debt held by the public.

Death of Bin Laden provides positive blip to markets Financial markets reacted to news of the death of Osama Bin Laden, head of al-Qaeda, with a sharp rally in equities and a drop in oil prices.

The sentiment didn’t last long, however, with most of the gains being given up as investors soon turned their attention to other matters including speculation about possible retaliations.

Prognosis for the future of Egypt’s economy Egypt’s new finance minister, Samir Radwan, has forecast a slowdown in economic growth, saying he will be delighted if the economy achieves three per cent growth. He also forecast a $2 billion deficit this year and $8-10 billion in the next budget.

Turkey leads with fastest economic growth 2010 saw Turkey’s economy grow by 8.9 per cent, making it the fastest-growing economy in Europe after the aftermath of the global economic crisis. Turkey also did well on an international level, coming third only to Brazil and China in the G20 in terms of growth.

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China now Africa’s largest trading partner China has become Africa’s largest trading partner, making up 10.4 per cent of the continent’s total trade, according to a report published by Renaissance Capital (RenCap). Chinese trade in Africa has increased 10-fold between 2000 and 2010, compared the eightfold increase with the rest of the world.

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LIFESTYLE

I

RADISSON BLU GAUTRAIN

n the heart of Sandton’s financial and business district, subtly inspired by luxury European train travel, the new Radisson Blu Gautrain Hotel is fast becoming a convenient venue of choice for aspirational business travellers.

Spread over seven floors, the hotel features 216 guest rooms, spacious by modern standards, including standard and business class room options, as well as 20 luxury suites – all offering free high-speed Internet access. Inside, décor consists of a monochromatic colour palette, modern furniture and African teak, laid in the manner of railway tracks and sleepers which all successfully tie together the train theme.

two purpose-built boardrooms, as well as a business centre.

Perhaps one of its biggest plus points, from a pure convenience aspect, is that it is the closest hotel to the Sandton Gautrain Station which provides underground railway connections to OR Tambo Airport 35 kilometres away, Pretoria and the various areas of Johannesburg.

Additional features include gym facilities to unwind and relax, an all-day restaurant with a spacious 300 m² interior and outdoor terrace, as well as full roomservice facilities. For after work drinks or entertaining, the hotel’s top floor is home to ZAR Lounge – one of Sandton’s most exclusive party venues.

From a business perspective, over and above being a great place to meet and greet existing and potential clients, the hotel also offers small to large conference facilities. These include a flexible conference room, four meeting rooms and

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Boardroom A word of advice, however, before booking confirm that you are fact booked in or meeting at the Radisson Blue Gautrain and not its older sibling, the Radisson Blu Sandton which is a mere 100 metres away.

This error was made to the detriment of my quick and easy check-in pleasure.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Postage stamps

the world’s most expensive commodity by weight When thinking of valuable commodities, precious metals such as gold, silver and platinum are often some of the first to spring to mind; however, the most valuable commodity by weight in the world is actually a postage stamp.

Stamp collecting is generally acknowledged to be one of the most popular hobbies with an estimated 48 million stamp collectors around the world. However, while many enjoy it as a hobby it can also prove a lucrative investment for those who buy at the right price.

Benjamin Franklin Z Grill The Benjamin Franklin Z Grill, or simply known as the Z-Grill is a one-cent postage stamp worth $930 000, making it the fifth most expensive stamp in the world. Issued in 1868, the purpose of the grill was to better absorb the cancelling ink, thereby preventing its reuse. The use of grills was found to be impractical and they were soon discontinued leaving only two known examples with the infamous cancellation mark.

“There are very few stamp collectors who have ever sold their collections at a loss, making it an ideal area for investing for the long term, while gaining pleasure at the same time,” said Paul Fraser, stamp expert and former chairman of Stanley Gibbons collectables and Investments.

For those who are lucky enough to own rare stamps, they can rake in astonishing amounts. Below are examples of the top five most expensive stamps.

Swedish Treskilling Yellow The world’s most expensive stamp is called the Swedish Treskilling Yellow and weighs in at a hefty $85 billion per kilogram. It was auctioned for a record $2.78 million in 2010 and is the only surviving misprint of an 1855 three shilling stamp that was supposed to be green. The first collector to own the stamp is said to have been a Swedish schoolboy, who found it in 1885 among a pile of letters left by his grandparents.

First Mauritian stamps The first two Mauritian postage stamps issued in 1847 by the British colonial government managed to collect a sum of $2.2 million at auction and rank as the second most valuable stamp in the world.

Inverted Jenny stamp The third most expensive is the inverted Jenny stamp, issued in 1918, which contains an image of an airplane and was accidentally printed upside down. With less than a hundred printed and only a few examples remaining, the inverted Jenny last sold for $977 500 in 2007.

British Guiana One Cent Black Ranking as the fourth most expensive stamp in the world, the British Guiana One Cent Black on Magenta issued in 1856 was auctioned to John Du Pont for $935 000 and is in fact one of the rarest stamps as there was only one example ever found. The stamp is printed on low quality paper in magenta with black ink to illustrate emergency conditions.

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THEY SAID...

A selection of some of the best homegrown and and international quotes that we have found over the last four weeks.

“For over two decades, Bin Laden has been AlQaeda’s leader and symbol, and has continued to plot attacks against our country and our friends and allies. The death of Bin Laden marks the most significant achievement to date in our nation’s effort to defeat Al-Qaeda.” American President Barack Obama commenting on the death of Al-Qaeda leader Osama bin Laden.

“The (US) revision has come as a major surprise.

Although there have been rumblings in the market for a little while now, this move is a shock and we could see other agencies follow suit.”

Manoj Ladwa, senior trader at Londonbased ETX Capital, commenting on Standard & Poor’s (S&P) decision to downgrade the US’s credit outlook to ‘negative’.

“There are sound reasons for applying the limits at member level, and the intention of safeguarding retirement capital is laudable.

But serious investors need to look at ways to continually grow their portfolios and right now the smart money is going offshore.” Marius Fenwick, chief operation officer of Mazars Financial Services, commenting on investors in retirement funds having to restrict their total exposure to offshore assets to 25 per cent of their portfolio.

“Psychologically the easiest thing to do for investors is to follow the herd. This normally results in buying when prices have risen and selling when prices have collapsed.

Investors have become too short sighted and too impatient – investors’ own impatience going forward will their biggest risk.” Neels van Schaik, portfolio manager at PSG Asset Management.

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“What has transpired so far is that the extent of the damage could be far worse than I – and possibly the market – initially expected. The IMF’s initial forecast excluded the effects of power shortages and ongoing risks due to the fallout of the nuclear disaster at Fukushima, which is exactly what is happening now.” Dr Prieur du Plessis, chairman of Plexus Asset Management commenting on why the effect of the Japanese earthquake may have been underestimated.

“South Africa is not the miracle nation of 1994, but we are also not falling apart. We are a normal developing country with the aches and pains, but also the opportunities, which the term ‘developing’ implies.” JP Landman, political analyst at BoE Private Clients.

“Let me be crystal clear, we are going to be here in the UK, and this is the place that we want to succeed.” Barclays’ chief executive Bob Diamond to members of the British Parliament, despite rumours that Barclays and its bigger rival HSBC are ready to move their UK headquarters to Hong Kong or New York.

“Without rules, the international monetary and financial system is incapable of forestalling crises, financial bubbles and the widening of imbalances. Without rules and supervision, the world runs the risk of being condemned to increasingly serious and severe crises.” French President Nicolas Sarkozy, calling on a swift reform of a global monetary system that he says is so unstable it could tip the world economy back into crisis.

“We live in a situation where we have recovery and, while the recovery is taking place in many places of the world, the crisis is not over.” Pravin Gordhan, South Africa’s Finance Minister, who told fund managers of civil servants’ pension funds that the crisis is not yet over.

“I happen to think the central banks and fiscal authorities of the world have played very much into the hands of gold. It’s sending a clear message to policy makers that something is not right. If we hit $1 600 it’s sending a clear and simple message to policy makers: ‘Hey, we don’t believe you.’” Paul Walker, CEO of GFMS, speaking at the release of the annual GFMS gold survey about the decade long bull run in gold prices.

MEET THE FUTURE YOU. HE SAYS, “SMART MOvE FOR INvESTING YOUR MONEY WITH CORONATION.”

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Performing Performing Performing Performing

Equity Fund.

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Retirement Income Fund.

Immediate Income Fund.

Over 3 years, 5 years and since launch.

Coronation Top 20, Balanced Plus, Capital Plus and Strategic Income Funds 1st Quartile over 3 years, 5 years and since launch in their respective ASISA fund categories to 31 March 2011. Source: Morningstar. Coronation Asset Management (Pty) Ltd is an authorised financial services provider. Unit trusts are generally medium to long-term investments. The value of units may go up as well as down. Past performance is not necessarily an indication of the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Fund valuations take place at approximately 15H00 each business day and forward pricing is used.

Performance is measured on NAV prices with income distribution reinvested & quoted after deduction of all costs incurred within the fund. Coronation is a full member of the Association of Savings & Investments SA.

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