INVESTSA Magazine - February

R37,50 | February 2014

GROWTH VS VALUE INVESTING whose time is now?

Hedging your bets as the Rand weakens

3 investment trends for SA investment managers right now

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R37,50 | February 2014

GROWTH VS VALUE INVESTING whose time is now?

Hedging your bets as the Rand weakens

3 investment trends for SA investment managers right now

12 months for only R450

Alternatively send this completed form together with proof of payment to: COSA Communications (Pty) Ltd Subscription Department PO Box 60320, Table View, 7439 or fax to 021 555 3569.

CONTENTS 06

Finding value in growth spurts

10

Seeking the cutting (h)edge

14

Looking for certainty on hedge fund regulation

15

Are regulators missing the value of independent advice?

16

Trends for investment managers to watch in 2014

18

Dèja vu: A muted recovery

20

Exchange Traded Products – State of the Industry Review – Fourth Quarter 2013

24

Head to head: Peter Worthington, MARKETS AT ABSA Corporate and Investment bank / Thabo Khojane, Investec Asset Management

26

Regulation remains the over-arching challenge for intermediaries through 2014

32

MINING SECTOR REPORT – When do we start buying?

34

Profile: Johan van der Merwe, CEO of Sanlam Investments

38

RETIREMENT REFORM: THE NEED FOR GOVERNMENT AND PRIVATE SECTOR INTERACTION

40

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From

the editor What tremendous fun we are having in investment markets this year. To a large extent an overpriced JSE, ongoing economic tremors from China and the US, and the cheerful prospect of the upcoming general election, and all the shenanigans going on before it.

Some investors, our readers, might find these events a little disconcerting, even terrifying. Don’t let that happen to you. Retaining your sense of humour helps to keep these things in rational perspective, testing as it can be at times.

We explore some of the bounds of irrationality and absurdity in this issue and try and bring logic to it. I would like to mention all the articles from our many worthy contributors but, as always, don’t have the space to do so. Here are a few guidelines.

Jeanette Marais from Allan Gray asks the question: are regulators missing the value of independent advice? It’s an important topic as IFAs and the rest of the financial services industry are flooded with new proposals, well intentioned but not always that carefully thought out. Marais provides some suggestions about what IFAs should be doing about it.

Staying with regulations, Carla de Waal, head of alternative investment solutions at Novare Investments, looks for certainty on hedge fund regulation. Another important issue as the amended Regulation 28 has more retirement funds investing greater amounts in hedge funds; but still the funds (not the fund managers) are not regulated. The article explores the history of the issue and what the outcomes could be.

Peter Major, the very experienced top mining analyst at Cadiz, asks another fascinating question: when do we start buying? It’s a question on many investors’ minds. Do they continue to avoid mines or is it time to take advantage of current low prices? Major’s mining sector report gives an elementary answer.

Marc Hasenfuss offers hope for investors put off by the traditional Rand hedge shares but also worried about the declining value of the Rand. He looks beyond the obvious Rand hedges listed in London and notes other opportunities, providing a list of 10 alternative Rand hedge shares that many investors and advisers have probably not thought about before.

So onward into more exciting months in the investment world. Try and keep your cool, and your sense of humour. All the best until next time.

Shaun Harris

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

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

Copyright COSA Communications Pty (Ltd) 2014, All rights reserved.

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Finding value in

growth spurts Growth investing and value investing are two of the most distinctive and contrary investment styles used by unit trust fund managers.

By Shaun Harris

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oth are also popular investment styles and tend to outperform each other in cycles, some lasting for several years. It can be a difficult choice for investors, though much would have to do with the investor’s age and investment plans, as well as which style seems best suited to a particular portfolio.

For a number of years now, just over five years since the start of the global financial crisis, value funds have had the upper hand most of the time. One reason is because bourses around the world were initially knocked when the crisis began, offering value investors an opportunity to step in and take positions on those shares whose prices they felt had been punished too severely. Many value investors did and for those who got it right, the investments are paying off now. However, growth fund managers did come back from time to time, particularly those with investments primarily on the JSE, where Adrian Saville, chief investment officer at Cannon Asset Managers, says he has never seen “such levels of irrationality in valuations” in the 20-odd years he has been in the business.

But for most of the past five years, value managers have thumped growth managers. The question now is whether growth managers will come back in 2014.

Is this going to be their time again? It’s an almost impossible question to answer; just the question alone is full of intriguing possibilities for investors.

Much can be learnt by comparing the performance of growth and value fund managers in recent years. But first, just a few words to distinguish their respective styles. On a simple level, the growth manager is chasing share price momentum. They will chase popular, which often means expensive, stocks hoping to cash in on that momentum, paying for outrageous share price ratings that would appal value investors. The potential downside and risk is that the prices they are paying can no longer justify the future performance of the company; or worse, that the company has gone through its high growth phase, which can no longer be sustained.

Value fund managers, on the other hand, are trying to find undervalued shares with cheap share prices. Their theory is that sooner or later the rest of the market will discover these shares and they will revert to a truer value. If right, this is where the value managers cash in. The risk is that the shares remain undervalued, either because there’s some problem with the company keeping its share price undervalued, or

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because for some other reason the rest of the market does not ‘discover’ the share and so it remains undervalued. This is one of the reasons that value investors are longterm investors – sometimes they are forced to be.

Over five years the SIM Value Fund returned 150.01 per cent, beating its benchmark, the FTSE/JSE All Share index, which returned 144.53 per cent.

The Investec Growth Fund returned 112.43 per cent over five years.

funds, these being Old Mutual and Sasol.

There is clearly an overlap between what constitutes growth and value shares. It seems a contradiction but it might not be, once again depending on when the shares were bought by the funds.

Looking at fund performance is revealing.

INVESTSA used the very useful Equinox website. The comparison was between all the South African general equity funds.

Obviously there are many other types of unit trust funds in this sector.

Comparing the composition of the respective growth and value funds is also enlightening. This comparison was limited to the top 10 holdings of each fund. In both case, the funds are quite actively managed, with changes being made to the top 10 between the latest three-month fact sheets. But the Investec Growth Fund is more actively managed, with six changes to the top 10, compared to three at the SIM Value Fund. This suggests less volatility in the value fund, though not too much can be read into this as the comparison was confined to one short time period only.

Market watchers sometimes chuckle when noting that growth fund managers seem to quietly disappear and evolve into value managers during times of declining markets and uncertain economic outlooks.

But others are dedicated growth investors.

What is apparent is that both funds share the same stock at the top of their respective top 10 lists, meaning it’s the share comprising the highest percentage of the total share portfolio. That share is Anglo American. Which begs the question, is Anglo a growth or value investment?

Both, it seems: it probably just depends on when the share was bought.

The SIM Value Fund is managed by Claude van Cuyck and Ricco Friedrich, both experienced with long and successful track records in fund management.

The top growth fund on the list is the Investec Growth Fund, ranked number 62.

However, three value funds are ranked higher: the SIM Value Fund in position 47, the MET Value Fund (51), and the Stanlib Value Fund (58). Not far behind the Investec Growth Fund is its stable mate, the Investec Value Fund (68).

The funds on the list are ranked according to 12-month performance, which does not mean too much. More telling are the threeyear performance numbers, in this case absolute and not annualised. Over three years, the SIM Value Fund returned 49.36 per cent and the Investec Growth Fund 48.57 per cent.

That’s not much of a difference, even if the Investec fund was helped a little by a lower total expense ratio, 1.20 per cent against the SIM fund’s 1.62 per cent.

You are not going to hear any investors complaining about a lower total expense ratio. However, the point is that if the funds were ranked on three years instead of 12 months, the Investec Growth Fund performed better than the second- and third-ranked value funds.

Five-year return figures were not available on the list but they were on the latest fund fact sheets. These showed the difference that a longer time period, and the full length of the global financial crisis (at least so far), made on performance.

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Other shares are also common to the top 10 holdings of the growth and value

Market watchers sometimes chuckle when noting that growth fund managers seem to quietly disappear and evolve into value managers during times of declining markets and uncertain economic outlooks.

This would apply to the Investec Growth Fund, which is managed by Richard Middleton. He has a long history in growth investing, having previously led growth investment strategies at Stanlib.

Middleton is probably the chief reason why the Investec fund is leading the growth pack.

It seems that, over time, value share investments become growth shares. If the value investor makes the right selection, the undervalued share will become a growth share when the rest of the market discovers it and the share is re-rated.

That is about when the growth investor starts to chase it.

Unless investors have strong convictions about growth share prospects, they should probably avoid over-committing to a growth fund. Conditions in 2014 remain quite bullish for many shares in the JSE Top 20 but those ‘irrational valuations’ have to end at some time. It would be more sensible to include both a growth and value fund in a portfolio. That way the investor has two styles that are contrary and contra-cyclical, affording the benefit of getting the best of the respective styles.

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Franklin Resources, Inc. is a global investment management organization operating as Franklin Templeton Investments. This material does not constitute investment advice or an invitation to apply for securities. Investors should seek professional financial advice and obtain a full explanation of any proposed investment before making a decision to invest. Investments involve risks. The values of investments can go down as well as up, and investors may not get back the full amount invested. Š 2013 Franklin Templeton Investments. All rights reserved.

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Seeking the cutting

(h)edge Rand hedge stocks will naturally become a central theme in investment conversations when the Rand has weakened by over 30 per cent to the Dollar in around three years.

By Marc Hasenfuss

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hile the Rand has previously shown a determination to regain lost ground, investors won’t be able to disregard the fact that a fractious (pre-election) political climate, increasingly volatile labour relations and unrecoverable energy costs are not terribly conducive to nurturing growth in SA’s industrial – or even light manufacturing – segment.

Not surprisingly local companies, like Nampak, Ellies, CIL, Tiger Brands, Zeder and RCL Foods, have in recent years been trekking into (sometimes) higher risk African markets in a bid to latch into higher growth opportunities. In times of economic turmoil in SA – and we can even go right back to the dark years of apartheid – SA investors have always been in a fortunate position of being able to hedge Rand weakness.

Currently investors, without having to tap their offshore investment allowance, can invest in a multitude of stalwart JSE listings that earn the bulk of their keep in economies outside SA. These would include SABMiller, the old Liberty International (now split between Intu and Capital and Counties), Richemont, Anglo American and BHP Billiton; all of which hold primary listings on the London Stock Exchange (LSE). More recently there has also been the secondary listings of global giants like British American Tobacco and commodities giant Glencore Xstrata on the JSE. Other large JSE listings like Aspen, Investec, MTN, Naspers, Steinoff International, Old Mutual, Sasol, Remgro and Bidvest either earn substantial chunks of profits in hard currencies or hold significant operations offshore.

It’s not always the case – at least not looking at the market valuations of Steinhoff or Anglo American – but investors tend to have to pay a rather steep premium for the privilege of investing in the so-called default Rand hedge stocks. Of course, there may be a better time to buy the large Rand hedge shares, especially with the market seemingly in two minds about the condition of the world economy, especially in the US and China.

What INVESTSA is postulating, however, is that there are a slew of alternative Rand hedge or lesser-known stocks that might be worth investigating as insurance against a brittle local economic prospects. Some offer 100 per cent offshore exposure through operations or interests located in other geographies, while others offer hard currency earnings flows by virtue of their service or product range.

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Here are 10 hedge alternatives worth considering.

Distell It’s possible to see this perennially profitable liquor brand cocktail as an alternative to SABMiller. Unfortunately, buying into Distell, trading at a fairly heady price:earnings multiple, won’t be a cheap round. Distell already earns a whack of hard currency by exporting its top wine brands, pushing its cider ranges into Africa and trading a lucrative global niche for the well-known Amarula cream-based liqueur. But it has only recently ventured properly into international brands by acquiring the Bisquet cognac brand and, more recently, the Burns Stewart whisky business. Former SABMiller executive, Richard Rushton, was recently appointed CEO of Distell and most expect the new boss to quickly fortify the group’s international presence.

Reinet Investments The Rupert family’s specialist investment vehicle certainly has its critics, but the company has competently pulled through some tricky economic times with its value greatly enhanced. Admittedly a decision to retain a five per cent stake in British American Tobacco helped loads. Recent moves to lighten up on the BAT stake and a strong hint at paying a maiden dividend at the end of the current financial year might suggest the newer investments, almost all international ventures, gathered by Reinet are ready to start kicking in.

Trencor Back in the late eighties and early nineties, container management group Trencor was one of the most popular Rand hedge stocks.

A strategic hiccup in the late nineties saw sentiment dissipate as management refocused on the profitable container management core. Today Trencor is the biggest shareholder in California-based Textainer, the world’s largest container management company.

At last count Textainer was chugging along just fine, which is great because Trencor’s shares often offer an attractive discount on the underlying container business and large Dollar-based debtor’s book.

Mediclinic International Aside from its well-known healthcare brand in SA, the private hospital group owns the Hoogland hospital chain in Switzerland.

But it’s not really Swiss patience in seek of top-class care that might drive sentiment for Mediclinic. The company has pushed quietly into the Middle East, and the possibility of making forays into fast-growing African economies (Angola, Kenya and Nigeria) is surely part of the growth subscription.

Mix Telematics This vehicle-tracking and fleet management company recently sought an American Depository Receipt (ADR) listing on the NASDAQ, accompanied by a fundraising exercise that was well supported by international investors. A sizeable chunk of revenue is already earned in a variety of 12

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international markets, and you can bet your bottom Dollar the global market exposure will continue to grow in the years ahead.

Brait Not an obvious candidate as a Rand hedge since its main holding is a major stake in Pepkor, the clothing retailing conglomerate that operates the Pep and Ackermans chains.

Yes, there is international exposure through UK-based specialist retailer, Iceland. Few punters realise the global reach of Pepkor’s business – that spans fast-growing markets in Eastern Europe as well as Australia. And don’t discount the chances of Brait pushing its other major investment, Premier Foods, into African markets.

Sun International What could be more South African than gaming group Sun International? The bulk of earnings are still derived from large casinos in Cape Town, Gauteng and Durban; but recent moves into South America (most notably Chile and Panama) signals some serious global ambitions. A smart punter might back a rationalisation of Sun’s smaller casino operations in SA, and a concerted push into attractive (and under-serviced) South America in the next five years.

Santova Logistics Picking micro-cap companies that have global ambitions is always a tricky exercise.

So many promising small cap companies

have fallen in pursuit of global ambitions over the years: Toco, Intervid, Blue Financial Services, LeisureNet (to name a few). At this juncture, Santova seems to be steaming profitably into international waters, and at the interim stage to end August almost a third of its operating profits were being generated outside SA. It could be one to watch in the years ahead.

Africa Considering that most African contracts are settled in hard currency, it is perhaps not such a stretch to deem companies scrambling for African business as hedged against the Rand.

In this respect, investors should watch the respective endeavours of cement producer PPC, agribusiness Zeder, packaging giant Nampak and infrastructure services provider Consolidated Infrastructure Group. All of these companies could earn the bulk of their revenue from African markets outside SA within five years.

Property The international real estate market looks so much less brittle than it did at the end of 2008 when the financial crisis played havoc with values and investor confidence. These days, Rand hedge-seeking investors on the JSE are spoilt for choice, being able to select from the customised offerings of Redefine International, Rockcastle, Investec Australia Property, New European Property Investments (NEPI), MAS Plc and Tradehold.

Unit Trusts

Retirement Funds

Offshore Investments

Alternative investments

thus remaining outside the regulatory fold.

This would essentially maintain the status quo and limit the growth potential of the industry, which is clearly not an ideal outcome from a regulatory perspective.

Looking for certainty

on hedge fund regulation

S

outh Africa has been at the forefront of strengthening regulatory oversight in financial markets, with the focus in more recent years on the regulation of alternative investment pools such as hedge funds. The overall objectives are investor protection and boosting the savings rate in South Africa. Behind the scenes, various groups representing investors and hedge funds have had several positive interactions with the Financial Services Board (FSB) and the National Treasury in this regard.

on how the regulatory process proposed during 2012 will differentiate between the proposed classes of hedge funds accommodated under CISCA. This is important, because the way regulation is implemented will have a significant impact on how the industry develops. We would suggest that the starting point should be to establish the optimal outcome for investors and then look at how best to facilitate this from a regulatory and industry standpoint.

Hedge funds under the spotlight

Currently, it is understood that there will be two classes of hedge funds under CISCA: retail hedge funds, where the regulator would determine eligible assets and limits of exposure; and restricted access hedge funds or, alternatively, qualified investor hedge funds, where there would still be registration and disclosure requirements from the hedge fund manager’s side, but the manager would have more flexibility in determining the mandate. Investors would have to meet certain requirements before being allowed to invest in this class. The hedge fund sector is relatively small and some question whether there are sufficient assets to support splitting the industry into two proposed classes of funds.

Hedge funds in South Africa came into the regulatory spotlight in early 2011 when legislation governing investment limits on certain asset categories in retirement fund investments, Regulation 28 of the Pension Funds Act, was amended to explicitly include a reference to this category of assets. In September 2012, the FSB and the National Treasury published a draft framework for the regulation of hedge funds in South Africa, proposing regulating these funds under the Collective Investment Schemes Control Act (CISCA). The public was given the opportunity to comment on the framework, which is yet to be implemented. The National Treasury included the taxation of hedge funds in the February 2013 Budget Speech and the Taxation Laws Amendment Bill, released in the second half of 2013.

However, the budget review and draft bill introduced uncertainty, with no clear guidance

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Two proposed classes

A second scenario is that most hedge funds would opt for the retail class in the hope of capturing investments, including from larger institutions like pension funds, which may be inclined to select the seemingly more regulated retail hedge fund class.

However, schemes under this scenario would be costly to set up, leading to consolidation as smaller funds battle to sustain their businesses. Fewer hedge fund strategy possibilities would mean less potential for risk diversification and fewer sources of alpha.

This, combined with more costly structures, could lead to diluted performance.

A third possibility The third, blue sky scenario, is where hedge funds successfully transition into a parallel fund set-up where new hedge fund ‘lite’ unit trusts are rolled out to capture a whole new market among investors who have, until now, only had the choice of long-only unit trusts. At the same time, pension funds and other institutional investors could continue to invest in hedge funds with broader, more flexible mandates, offering suitably differentiated sources of alpha so that proper risk-diversified portfolios could be constructed for the benefit of fund beneficiaries.

Under this scenario, financial market innovation and the development of alpha-producing or risk-reducing strategies would continue to be encouraged and supported by qualified investors. This approach is arguably the best outcome to help South Africans boost their long-term savings portfolios, channelled through the appropriate retail or qualified investor routes within a regulated framework.

Possible consequences of this approach If this happens, one possible outcome is that larger, institutional investors (currently representing the majority of assets) would have their hedge fund managers overseeing private pools of money in segregated accounts,

Carla de Waal, Head of Alternative Investment Solutions at Novare Investments

Allan Gray

Are regulators missing the value of

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

W

ith the regulatory spotlight firmly focused on how investors have been prejudiced by some of the workings of the financial services sector, are regulators underestimating and forgetting about the value that good, independent advice can actually bring to the table?

A number of different themes playing out in both proposed and finalised legislation and regulations in the financial services industry appear to beg the question: will independent advice survive the changing environment?

There is the theme of the benefits of passive versus active investing, the theme of fees and costs, the interwoven themes of disclosure and transparency, and the theme of conflicts of interest. There is also the theme that services and investment solutions should be more standardised.

These themes (and other factors) have led to a crisis of confidence in the value of advice particularly, but by no means limited to, advice that is entangled with distribution.

The context In both South Africa and the UK, these themes and other pressures have resulted in a massive consolidation of the financial advice industry. In SA, the start of the financial crisis and the enactment of FAIS prompted an initial wave of advisers leaving the industry,

independent advice? and given the current environment consolidation is expected to continue.

Paradoxically, these very factors and themes should be adding weight to the importance of good independent advice, not detracting from it. However, the retirement reform proposals from Treasury, the most far-reaching of all potential regulatory changes, give little recognition to the importance and benefits of advice. In fact, many investors in lower income groups may find good advice harder than ever to come by as the proposals could result in costlier face-to-face advice, and less in-depth, but more economical advice delivered over the Internet.

Nevertheless, Treasury is concerned about the lack of assistance and advice given to retirement fund members reaching retirement. It is well aware that too many retirees choose inappropriate products and are unable to support themselves adequately. The decisions retirees make often fail to account for the rise in the cost of living and the possibility that they will live for a long time. Accordingly, Treasury is proposing the introduction of default annuities.

The responsibility would lie with the trustees to identify a suitable annuity option for members, one that passes certain tests on fees and design. While there is certainly logic in a default annuity option, it is not a one-size-fitsall game and what is suitable for one member may not suit another.

A new value proposition In response to all these changes and regulatory pressures, perhaps it is time for advisers to redefine their value proposition.

Some suggestions that have been mooted, and which some advisers have already implemented, include: • No commission • Charge a fee for service – agreed upfront with your client • Classify advice into different categories with different price tags • Focus on holistic financial planning.

One thing is for sure – there is now a greater need to defend the value of advice and lobbying regulators has become more important than ever. Advisers help investors make sense of complexity and products available and, in so doing, better equip investors to match an investment to their needs and to react (or not) when things change. Most importantly, they help investors to manage themselves with discipline, identifying and understanding how their emotions can lead them astray in the investing process.

Source: Sanlam Benchmark Survey 2013

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial 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.

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Asset management

Trends for investment managers

to watch in 2014 T

he US will continue to dominate the direction of investment markets globally in 2014, including that of South Africa.

That was the view put forward by Johan van der Merwe, head of Sanlam Investments at the end of last year.

He noted that the talk and actions of the US Federal Reserve will have a marked effect on the business of investing in the New Year. For Sanlam Investments, Van der Merwe noted that the 2014 priority list includes Africa, passive investing and the South African retail market.

He added that investment managers who have an emerging market bias will find it difficult to sidestep the quantitative easing (QE) juggernaut. “We know that QE tapering is on the table and have already witnessed the ripple effect of its announcement on emerging markets. But we are limited with regard to the steps we can take to mitigate the inevitable fallout.”

Van der Merwe singles out three trends that South African investment managers can leverage over the next few years: passive investment, savvy retail investors and a focus on Africa.

“Passive investment will continue to take off locally, especially in a low income and return environment where the cost of managing funds becomes an issue.” In fact, he states that this belief was borne out of the company’s decision to fully acquire ETF provider Satrix in 2012.

He says the second trend is the rise of the financial services consumer and the potential for investment managers to tap into a more savvy retail investor. Lastly, Van der Merwe notes that Africa is once again top of mind for international investors and will continue to remain a huge focus in the current year.

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Active vs passive remains a point of debate Sanlam Investments may feel that passive investing is set to be one of the big trends over the next few years but that doesn’t mean that the active versus passive argument is going away any time soon. Van der Merwe believes firmly that there is a role for both active and passive investing.

play an important part in the market, as they offer products that complement passive or index funds in very positive way. A blended active plus passive approach to investing can potentially bring protection against downside risk and create higher returns during strong equity markets.”

Sanlam’s group economist Jac Laubscher stated last year: “The more prevalent passive investment is, the more scope there will be for mispricing shares, ironically creating greater opportunities for active management and undermining the case for passive management.

Bekker notes that the difficult part is identifying those active funds that offer downside protection and upside participation, while at the same time combining these active funds with the passive managers to give optimal portfolio structures to the investors.

“Although it does not say so explicitly, it appears that the National Treasury is propagating greater use of passively managed portfolios in managing retirement fund assets, in the expectation that fund members will enjoy higher net returns because of lower investment fees, to the benefit of their retirement capital,” said Laubscher.

Clearly, there is a place for both forms of investment in the marketplace; but with possible legislative reform appearing to favour the passive investment vehicle, it will be interesting to hear if the views of active managers change as the year progresses.

He added that in the long run, lower economic growth implies lower profit growth and lower returns on investment, leaving the possibility of investors, including the passive variety, being worse off than with active management.

Windall Bekker, partner at Rezco Asset Management, concurs with Laubscher that we cannot simply look at passive investing for retirement but notes that there has to be a place for both. “Active managers do

Johan van der Merwe, Head of Sanlam Investments

Barometer

HOT SA future African Internet leader A report by global consulting firm McKinsey revealed that South Africa and Morocco could become leaders in driving growth of the Internet in Africa. The report predicts that economic growth on the continent will increase dramatically over the next decade as a result of the Internet’s contribution.

SA outperforms African counterparts when it comes to reputation South Africa has maintained its 36th position in the 2013 Anholt-GfK Roper Nation Brands Index, an annual survey of 50 countries regarded as playing important roles in international relations, trade and flow of business, as well as in cultural and tourism activities. The survey revealed that South Africa outperformed its counterparts in Africa and the Middle East in terms of reputation.

Ease of doing business in SA steady The World Bank’s 2014 report titled 'Doing Business: Understanding Regulations for Small and Medium-Size Enterprises', which judges countries on criteria that measure the time, cost and hassle involved in doing business, ranked South Africa 41st out of 189 economies around the world.

South Africa received points for its tax reforms, improving its ranking to 24, and remained a strong performer when it comes to protecting investors (10).

NOT SA GDP slows more than expected for SA third quarter Statistics South Africa data revealed that South Africa’s economic growth slowed more than expected in the third quarter of 2013 by reporting a 0.7 per cent quarter-onquarter increase in the third quarter, after increasing by 3.2 per cent in the previous quarter. This slower growth was attributed to a reduction in manufacturing after weeks of strikes in the automotive sector.

Decade low consumer confidence The FNB/BER consumer confidence index (CCI) improved marginally to -7 in the fourth quarter of 2013, having plunged from +1 during the second quarter of 2013 to a decade low of -8 index points in the third quarter of 2013.

However, consumer’s rating for the outlook for the national economy deteriorated to the lowest level since the first quarter of 1993.

German economy slows Despite a strong pickup in both corporate investment and government spending, the German economy slowed in the third quarter of 2013 according to data released by the statistics office. Europe’s largest economy expanded by a modest 0.3 per cent for the third quarter, down from 0.7 per cent in the second quarter.

Progress made by SA, yet more still needs to be done As South Africa celebrates 20 years of democracy, a recent report by US bank Goldman Sachs titled ‘Two Decades of Freedom: What South Africa is Doing With it, and What Now Needs to be Done’, highlight the country’s economic and social milestones since 1994, as well as the challenges that remain to be tackled. While the macro fiscal and monetary balances have improved, reporting that gross domestic product (GDP) has almost tripled from $136 billion to $385 billion, the current account deficit remains high and labour uncertainties continue to unsettle the market.

s y a w e Sid

African oil-rich countries to see growth, yet possible higher deficits too A poll conducted by Reuters showed that oil-rich African countries will benefit from robust economic growth in 2014 but that weaker crude prices could send budget deficits higher. The survey shows GDP in Nigeria, Africa's top oil producer, increasing by 6.8 per cent, Ghana, a rising crude producer, experiencing a growth of 7.5 per cent and Angola, Africa's second biggest producer of oil, growing 6.5 per cent in 2014.

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Dèja vu:

a muted recovery

We came into 2013 expecting a low-growth year and, at about 1.8 per cent, so it has proved. Will 2014 see more of the same, or will it stand out for the economy posting a vigorous performance?

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Economic commentary

A

s much as we would like to see 2014 be ‘The Year’, it remains difficult.

Yes, growth ought to be higher than 2013’s sub-2 per cent, but not by much. Although the global recovery is gaining momentum, the domestic economy still faces various headwinds.

With reduced fiscal drag and Fed policy to remain stimulatory, growth in the US should continue to improve. The same applies to the Eurozone, which is finally emerging from recession. In Japan, the economy is benefitting from monetary easing, a sharply weaker currency and moderately expansionary fiscal policy, while activity in China is showing more signs of stabilising. Slowly but surely the rebound in global growth is strengthening and becoming more even.

This is a favourable picture for local exporters, some of whom would also have become more competitive given the weaker Rand.

In addition to the prospect of better export volumes, production also stands to profit from less costly local products finding favour over more expensive imports. Still, aside from these positive developments, various factors should limit GDP growth to not much more than 2.5 per cent in 2014.

investment. A decent dose of new capital expenditure also seems unlikely when many industries are still unable to fully utilise the large capacity created during the 2004 - 2008 boom. Then firms invested a whopping R180 billion in nominal terms, taking their capex to a peak of 16 per cent of GDP in 2008. Given relatively long depreciation cycles (except in the case of fast-changing technology), the subsequent correction was harsh. In 2010, investment fell to 12 per cent, a level not that different from where it's at today.

Given the adversarial labour relations environment (particularly in the case of mining and large-scale manufacturing), and lingering uncertainties about the direction key aspects of economic policy is going to take, it’s doubtful CEOs will suddenly become more upbeat.

Despite strong balance sheets, unless business confidence improves, growth in real private sector fixed investment will remain sluggish.

The year starts with many consumers already over-extended and under pressure from little, if any, jobs growth, income growth only slowly outpacing inflation and lenders limiting access to unsecured credit. That consumer confidence remains low despite a strong stock market and climbing house price inflation is therefore telling. These factors combined imply continued modest growth in real consumer spending.

Neither is there much in the way of potential policy triggers to give the economy a nudge.

South Africa has a huge current account deficit.

And even if it narrows somewhat, as it should, higher global funding costs, less easy US liquidity conditions, a muted domestic growth outlook and the risk of some political upheaval around the time of the election, are all factors that will make it difficult to continue attracting the necessary foreign savings to finance the shortfall. As such, the Rand ought to remain relatively weak, to some extent preventing CPI inflation from dipping much below the top end of the three to six per cent target band this year.

This isn’t an environment in which the central bank would be able to provide a ‘kicker’ by further relaxing monetary policy.

Restrained households mean one less catalyst for stronger domestic corporate fixed

Fiscal policy is equally bound. Had we started the year with a smaller budget deficit,

the Treasury could have reduced taxes or accelerated spending. Now, at around 4.2 per cent of GDP, the deficit is still large and the Treasury, rightfully, is committed to reducing it further to help preserve the country’s BBB sovereign rating. As the government tightens its belt, it’s imperative we don’t see any more delays in public corporations addressing the infrastructure bottlenecks that still exist.

All told, exporters and local firms supplying cheaper alternatives to costly imports should be bright spots in an otherwise uninspiring domestic demand environment. Consumer spending will remain under pressure for the reasons highlighted, but also because the government is now focused on curbing its large wage bill. Companies face several challenges, but the impact of a confidence booster must not be under-estimated. Given this backdrop and with South Africa vulnerable to a sharp slowdown in foreign capital inflows, there’s no better time than the present for policymakers to accelerate structural reform.

Unshackling supply will certainly lift the country’s long-term growth. In the NDP we have the plan. It now needs implementation.

Ettienne le Roux, Chief Economist at Rand Merchant Bank

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Exchange traded products – state of the industry review

Fourth quarter 2013

2013 turned out to be a better year than expected for stock markets; not only locally, but globally as well.

Top 10 ETPs in 2013 One-year total return

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he MSCI index for world developed stock markets rose by 24.8 per cent in US Dollar terms last year, and by an even more impressive 53.3 per cent in Rand terms. Not surprisingly, offshore investments were hard to beat last year and the four top performing ETFs on the JSE in 2013 were DBX Tracker Funds, covering global developed markets.

The best performing local index tracker in 2013 was the Satrix INDI 25 (for the second year running). As the graph shows, the spread of the top performing ETPs is quite wide. In all, 32 out of the 80 index tracking ETPs and unit trusts available in South Africa were able to outperform the 20.67 per cent total return of the FTSE/ JSE All Share index in 2013. Who says you can’t get alpha returns by using index tracking passive investments?

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etfsa.co.za

Snapshot of the ETP industry in South Africa (end of period) Total market capitalisation (Rm) Percentage growth

2008

2009

2010

2011

2012

2013

16 443

27 534

33 334

40 059

47 770

62 975

31%

68%

21%

21%

20%

32%

Number of ETFs listed

17

23

26

30

38

40

Nymber of ETNs listed

-

-

4

16

20

23

17

23

30

46

57

63

Total ETPs listed Source: etfSA.co.za / JSE;

etfSA.co.za Awards for top performing passive retail funds – 2013 A) Fund of the Year DBX Tracker MSCI USA ETF: 60.83 per cent return in 2013 Coming out tops for the year in the performance stakes for passive index tracker funds is the DBX Tracker USA ETF, which tracks the performance of the top 600 listed US companies.

B) Best Long-Term Fund Satrix INDI 25 ETF: 28.83 per cent per annum return for the past five years The Satrix INDI 25 ETF, which tracks the FTSE/ JSE Industrial Index of 25 top listed companies on the JSE, remains the long-term champion.

This fund also appears at the peak of all collective investment schemes for longer investment periods of seven to 10 years.

C) Most Promising New Fund NewPlat ETF Only listed in May 2013, this ETF does not yet have a performance history, but has raised over R11 billion in new capital on the JSE over the last seven months, making it the biggest capital raising exercise on the local stockmarket for some years.

D) Most Innovative New Fund PrefTrax ETF Launched in mid-2012, this ETF tracks a portfolio of 19 of the largest listed preference shares on the JSE. As interest rates start rising in South Africa, and elsewhere in the world, investment products that provide a variable rather than fixed interest rate return, will come into prominence.

E) Worst Performing Fund in 2013 Investec Gold ETN: (34.59 per cent) decline in 2013 The value of this fund declined by close to 35 per cent in 2013 as the US Dollar gold price fell in international commodity markets.

Unlike NewGold ETF or the Standard Bank Gold-Linker ETN, which reflect the Rand

price of gold, and were therefore partially protected by Rand depreciation (falling by only 11 per cent in 2013), the Investec Gold ETN offers exposure predominantly to the US Dollar gold price.

Market capitalisation of the ETP industry in South Africa As at 31 December 2013, the market capitalisation of the 63 ETPs, listed on the JSE, was R63 billion, an increase of 32 per cent on the market cap of R47.8 billion as at the end of 2012. As the table shows, the growth in market capitalisation over the past six years has been very consistent and the passive exchange traded product industry in South Africa now appears to have reached sustainable momentum.

New capital raised in 2013 Not all of the market capitalisation growth in 2013 was from the rise in market prices.

New listings and issues of new shares by existing ETPs (exchange traded products are open-ended, like unit trusts, and can create or redeem units to accommodate market demand), helped raise new capital investment of R11.87 billion in 2013. The success of the industry in continuously attracting new capital is also a sign of growing momentum in the passive investment industry.

Absa Capital was the most successful management company (Manco) in raising new capital investment in 2013. It raised a net amount of R10.5 billion in new capital, the bulk of this for the NewPlat ETF, listed in May. Deutsche Bank raised R1.3 billion in new capital for its DBX Tracker ETFs and Satrix R316 million for its various ETF products.

funds (ETF), exchange traded notes (ETN), asset backed securities and depository receipts.

The section on ETNs is entirely new and defines an ETN as “a listed, non-bespoke, unsubordinated, uncollateralised debt instrument, which represents a contractual obligation made by the issuer to pay the holder a return which is linked to the performance of one or more shares or bonds, an index, an exchange rate or commodity and are backed by the creditworthiness of the issuer”.

The JSE has stated that as ETNs are investment products, they fit best in Section 19 for specialist securities, rather than debt instruments, derivatives or other sectors of the listing requirements. The ETN is a long-term instrument and the maturity date of the notes must be a minimum of five years after the date of issue. The roll-over into a new issue of notes after maturity date is reached is, of course, likely.

The JSE has further stipulated that, in future, both ETFs and ETNs can be issued only by banks or regulated entities acceptable to the JSE to ensure that issuers of these products have sufficient expertise and capital resources to issue ETPs. In the case of an ETN, the credit rating of the issuing company is important as there is no obligation on the issuer to have 100 per cent physical backing for the notes in issue. An ETF does have full physical holdings of assets to back its liabilities to shareholders and the creditworthiness of an issuer is less important.

Industry developments New listing requirements for exchange traded motes The JSE has recently published, for comment, a review of Section 19 of its listing requirements.

Section 19, ‘Specialist Securities’, now covers warrants, structured products, exchange traded

Mike Brown, Managing Director, etfSA.co.za

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Global economic commentary

GDP growth figures in the US, EU and UK in recent weeks have helped reinforce the sense of a global recovery.

Global outlook

2014

G

iven the sustained pickup in US economic growth (three per cent GDP growth is possible in 2014), it was not too surprising for the Fed to begin tapering in December.

It also ensures a message of continuity between Bernanke-Yellen as the Fed leadership transitions at the end of January – with further tapering expected throughout 2014. Global equity markets continued their upward trajectory in November and through December. The strong global bull run includes most industrialised countries, with only emerging markets failing to respond to the continued US Fed’s monetary stimulus.

A number of global developed equity markets hit all-time highs during December, with the US Nasdaq index hitting a 13-year high.

By late December, the S&P 500 hit levels approaching 1 850, while the Dow easily surpassed 16 000 and was fast approaching the 16 500 mark. The UK’s FTSE is now hovering around the 6 750 range, while the Nikkei has powered through the 16 000 level given the Abenomics stimulus.

US markets have been leading the pack most of the year and did not fail to inspire once again in December – with the S&P 500 closing out the year with a 29 per cent gain (before dividends). Despite the European Union being in a recession earlier this year, the indices have recovered much ground after lagging the US gains earlier in the year. With the Euro hitting 1.37 to the US$, the MSCI

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EMU Index gain slightly exceeds 30 per cent in Dollar terms for 2013.

The Fed’s continued emphasis that tapering did not equal tightening does help ensure a somewhat relaxed bond market. However, the great bond bull market is clearly over; after some 20 years where rates have consistently declined from the high teens, seen during the Reagan/Volcker days of taming inflation in the early 1980s. As US rates begin to rise we’re likely to see reduced mortgage lending (due to new Congressional rules) and a stronger Dollar. For the first time in over a decade, the US benchmark bond index (Barclays Aggregate) declined in a calendar year, by approximately two per cent.

Most US bonds are expensive given that interest rates are being held artificially low by the Fed’s massive $85 billion a month bond-buying programme. When the Fed tapering begins, we expect to see the 10-year Treasury yield move higher – from 2.7 per cent to around 3.5 to four per cent, but not much higher. By contrast a fuller priced equity market does not mean it is necessarily overpriced. The differentiation between huge equity inflows versus bond flows is significant with bond inflows at its lowest levels since 2008.

Despite higher PE ratios in the US and European markets, the consensus remains that low rates will help support equity markets for some time to come and no bursting of any bubble is imminent. Positive

Corporate earnings continue to be healthy – not always due to top line growth. Following five years of the Great Recession, it is clear corporations have become far more efficient and increasingly dedicated to cost savings.

Sadly for new hires, this means a mostly jobless recovery is on the cards. Investors are also increasingly moving back into European equities. In particular, US fund managers are taking increasingly bullish bets on the Eurozone’s sluggish recovery speeding up. An example of this is the disclosure that the value of shares in Europe’s 10 largest listed banks held by US funds, has increased by 40 per cent since June 2013.

US real estate prices continue to show double digit growth as compared with 2012 prices, across most states. Household formation has revived, helping to boost demand for homes and spurning residential construction.

Housing starts are now approaching one million starts a year – last seen prior to the 2008 financial crisis.

Although emerging markets have recovered somewhat from their earlier losses this year, it remains a huge laggard to the global equity bull market. An eventual rise in US yields due to the tapering by the Fed will likely put further pressure on depreciating emerging market currencies that harbour both a large current account deficit and fiscal deficits. But export-oriented players based in emerging markets will likely see a boost to their bottom line due to the currency effect.

While global equity markets are likely to continue to show progress in 2014, we expect returns to be more muted and for emerging markets to outshine the more developed markets. Emerging markets will likely begin retracing their previous highs during 2014 and 2015, as it becomes clear there are no great catastrophes affecting China, India, Brazil or Russia.

Anthony Ginsberg Director, GinsGlobal Index Funds

Growth managers

Electus:

the best of growth and value

W

e begin by analysing the different characteristics of shares held by typical global growth and value funds. In our opinion, global growth funds target high quality businesses, showing positive growth and momentum but place limited emphasis on the underlying valuation of the business.

Global value funds on the other hand do not necessarily target quality business, nor are they interested in growth or momentum but what is key for these managers is the attractive valuation of the business.

The reason we refer to global growth and value funds is that both these styles are possible internationally as there is such a large global equity investment universe. Most of the fund style analysis has been done in the USA where there are several thousand investable shares, enabling US growth and value fund managers to clearly define their investment styles and share universes. We have a very different situation in South Africa, where the realistic investment universe for a mid-sized fund manager is approximately150 shares and, from a market cap perspective, the investment universe is extremely skewed towards the large cap shares.

Our Electus best-of-both-worlds investment philosophy takes the quality characteristic from growth funds in combination with the valuation characteristic of values funds and hence our investment philosophy of investing in high quality businesses at attractive valuations.

High quality businesses and how to identify these opportunities Our focus is on high quality business models and we differentiate between good quality business models (high returns on invested capital) and poor quality business models (low returns on invested capital).

To better understand the importance of return on capital invested, we make a

few comparisons across some very simple business case studies. Firstly, let’s assume that two businesses were started a year ago, each with the same amount of initial invested capital of R100.

The first business (Company A) provided a profit to shareholders of R10. The R10 profit, compared to the initial R100 invested to start the business, would provide a 10 per cent return on capital.

The second business (Company B) provided a profit to shareholders of R20, and hence a 20 per cent return on capital invested.

Clearly, if you were the investor providing the initial R100, you would rather earn a 20 per cent return on capital – making Company B a better investment than Company A. Now let’s assume that these businesses listed on the stock market and both decided that a Price:Earnings (PE) multiple of 10 was appropriate for their businesses. This would mean that Company A would be valued at R100 (10 PE multiple x R10 profit) and Company B would be valued at R200 (10 PE multiple x R20 profit). If you had R10 to invest at the end of year one, you could buy 10 per cent of Company A or five per cent of Company B. In both cases, based on last year’s profit, that would entitle your share of the profit to be R1 (10 per cent of R10 in Company A or five per cent of R20 in Company B). If Company A was able to redeploy its profits in years two to 10 and continued to earn this same return on capital of 10 per cent, at the end of the 10-year period, assuming all profits were paid out as a dividend and based on your 10 per cent shareholding in Company A, you would be

entitled to 10 per cent of the accumulated profits of R160, which is R16.

If Company B was able to redeploy its profits in years two to 10, and continued to earn this same return on capital of 20 per cent, at the end of the 10-year period – assuming all profits were paid out as a dividend and based on your five per cent shareholding in Company B – you would be entitled to five per cent of the accumulated profits of R520, which is R26.

From this we see that although Company B started with the same amount of capital as Company A, due to its ability to compound far higher returns on capital, its profits for the 10-year period were far superior to these of Company A. So even though you owned only five per cent of Company B (rather than 10 per cent of Company A), your dividend entitlement would have been R26, which is 63 per cent more than the R16 of Company A, proving the benefits of investing in high quality businesses with high returns on invested capital.

Richard Hasson, Co-head of Electus boutique at Old Mutual Investment Group

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Head To Head Impact of US Federal Reserve tapering its economic stimulus programme

Principal, Markets at Absa Corporate and Investment Bank, a member of Barclays

Peter Worthington

What should South African investors expect to see when the US Federal Reserve begins to taper its economic stimulus programme?

After considerable volatility in response to shifting expectations about the taper’s introduction, the actual midDecember announcement of the first step of the taper (a reduction in bond purchases by $10 billion to $75 billion starting in January) was received very calmly by South Africa’s financial markets. Although the Federal Reserve will remain data dependent in implementing the taper, we expect it to continue to reduce the pace of its purchases by $10 billion at each upcoming FOMC meeting before taking a final $15 billion step down in October to conclude the programme. We do not expect any active efforts by the Fed to shrink its balance sheet aggressively by selling securities and we do expect continued efforts by the Fed to persuade the markets that it is committed to keeping interest rates low for some time after the taper is concluded.

What impact will this have on South Africa and do SA investors have a reason to worry?

The calmness with which the taper was initially received suggests that as a concept at least it had by that stage been fully priced in. Nonetheless, the taper does mark the beginning of the end of a cycle of unprecedented monetary easing and therefore augers a world – sooner or later – of tighter liquidity and higher interest rates, which is bad news for risky assets in general. South Africa

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is one of the ‘Fragile Five’, a group of countries that includes Brazil, India, Indonesia and Turkey, which are thought to be particularly vulnerable due to their high current account and fiscal deficits and high degree of integration into the global financial system, with large foreign holdings of their domestic bonds. South Africa has some relative strengths: chiefly a very low rate of open FX exposure in either corporate, government or household balance sheets, but its current account deficit remains relatively wide and stubbornly persistent, despite a big exchange rate depreciation.

The looming new era of tighter global liquidity ought to spell further downward pressure on the Rand and upward pressure on interest rates. Of course, markets have already anticipated this and moved accordingly and relatively smoothly, while stronger global growth is clearly a positive support to South Africa’s economy. But the big risk for investors is a sudden dislocation in the Rand, which pushes inflation sharply higher and necessitates rate hikes from the SARB at a time when growth is floundering. This is not our base case scenario but it certainly is a material risk.

Is there any way investors can take advantage of this change?

We have experienced such big swings

and roundabouts in South African financial markets as a result of tiny shifts in US news (and by implication indications about the taper and eventual US rate hikes) that it’s very hard to be categorical.

However, once rates start to rise in the US, South African bond yields will probably increase. If the currency weakens further, those equities that are Rand hedges will outperform.

Investors should watch the economic data and market pricing carefully and form their judgements appropriately, according to their risk appetite.

Investors with a low risk tolerance will want to be very defensively positioned against Rand volatility and interest rate rises.

What are the biggest challenges investors will face in 2014?

The biggest challenges for investors will be how to navigate the considerable uncertainty and potential market volatility. Also, although political risk in South Africa is fairly low overall, the upcoming general elections in the second quarter of this year could generate either positive or negative surprises.

Pricing in the election outcome and its potential impact on policy settings is very tricky.

South Africa has some relative strengths: chiefly a very low rate of open FX exposure in either corporate, government or household balance sheets.

Managing Director of Investec Asset Management

T habo K hojane

The JSE continues to gain steadily. What is driving this growth and do you think local markets are fully valued?

Since the market bottomed in early 2009, the JSE has delivered above-trend real returns. In our view, the domestic market is now fully valued, particularly certain areas of the industrial sector. On the back of a depreciating Rand, US Dollar returns from South African equities have disappointed, but the market remains expensive – not just relative to developed markets but also to other emerging markets.

Do you expect this performance to continue?

Equities remain our preferred asset class; however, investors must tone down their real return expectations from the domestic market over the medium to long term. At current valuations, the market can simply not deliver the same level of real returns to which investors have become accustomed over the last four years.

Our preference is for global equities over domestic equities, as they are not only more attractively valued, but they also have better earnings growth prospects. There are areas in the domestic market that have lagged and therefore offer good value, such as resources.

What should South African investors expect to see when the US Federal Reserve begins to taper its economic stimulus programme?

South Africa and other emerging markets have been beneficiaries of the stimulatory monetary policy in developed markets, particularly the US’s programme of quantitative easing. We

have seen significant inflows into the South African bond and equity markets over the past two years and any process of tapering could see a reversal of these flows. The biggest question around tapering is whether US and developed market growth can be sustained if quantitative easing dries up. If the answer is yes, investors in South African and international equity markets could continue to see decent returns over the medium to long term. If that is not the case, we would probably see a return to quantitative easing.

What impact will this have on South Africa and do SA investors have a reason to worry?

Yes, the biggest concern is that tapering could result in a reduction in flows to South African bond and equity markets. Our short-term interest rates in real terms are not high relative to other emerging market countries, so it is unlikely that we would attract flows seeking to benefit from the carry trade. This, coupled with our current account and budget deficits, would put significant pressure on an already vulnerable Rand.

Is there any way investors can take advantage of this change?

In our view, the best way to take advantage of this is to diversify offshore, given that international markets offer more compelling valuations and protection from a weaker currency. In terms of domestic investment, selective stock picking over the medium to long term will be critical, as the JSE – particularly specific industrial large caps – is expensive.

Now is not the time to buy the index. Given how much uncertainty there is, portfolio

managers will need to adjust portfolios as market conditions change.

What are the biggest challenges investors will face in 2014?

Globally, the big question is how global macroeconomic policy, especially monetary easing, will play out. In SA, we are concerned about sluggish economic growth.

With retailers under pressure and banks reporting a tough trading and lending environment, it is clear that the domestic consumer is struggling. This clouds the outlook for the JSE, particularly those sectors sensitive to domestic demand.

Where can investors expect to get the best returns?

Given low interest rates, the expected real returns from interest rate sensitive assets like cash, bonds and listed property are low. The only asset class that we believe will provide investors with a decent real return is the equity market, but careful stock selection and active management will be critical. As previously stated, our preference from a relative valuation perspective will be for global equities rather than domestic stocks.

South Africa and other emerging markets have been beneficiaries of the stimulatory monetary policy in developed markets, particularly the US’s programme of quantitative easing. investsa

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Industry associations

Regulation remains the over-arching challenge for intermediaries through 2014

T

his year marks the 10th anniversary of the implementation of the Financial Advisory and Intermediary Services (FAIS) Act of 2002. FAIS and its accompanying regulations have forever changed the financial services landscape by encouraging professionalism among advice givers and extending far-reaching protections to financial services consumers.

South Africa’s risk and financial advisers have largely embraced the regulatory framework that has unfolded over the past decade, despite the costs associated with compliance. And they will continue to support negotiated and sensibly implemented regulatory interventions over the coming 10 years. Regulation stands out as the over-arching challenge for intermediaries in 2014, with at least three game changers on the immediate horizon. The first of these is the restructuring of the macro-framework for financial regulation.

The National Treasury will introduce a twin peaks model of financial regulation as South Africa’s response to the 2008 global financial crisis. This structure sees the Reserve Bank being responsible for prudential regulation and the Financial Services Board (FSB) in charge of market conduct regulation. It appears that the FSB will emerge from the restructuring with a new name and a wider remit.

From an intermediary perspective, there are risks that important regulatory initiatives are put on hold while the twin peaks restructuring takes place. The Financial Intermediaries Association of Southern Africa (FIA) will do what it can to keep the various discussions on

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track while allowing the regulator the space to implement the twin peaks model effectively.

Amendment Bill, in particular the demarcation of medical schemes and insurance business.

The second game changer for 2014 is the Retail Distribution Review (RDR), which seeks to clarify key concepts in the intermediary space, including the definition of intermediary services and remuneration for financial advice. The FSB is expected to publish its RDR discussion paper in the first quarter of 2014, from which point broad and collaborative discussions will kick off. The RDR will undoubtedly be the biggest challenge to FIA members through 2014 and the organisation will have its hands full ensuring fair outcomes for both risk and financial advisers.

The FIA looks forward to 2014 as an opportunity to engage with the regulators to ensure that risk and financial advisers’ interests are appropriately represented.

We will play a leading role in the RDR discussion and ensure, through TCF, that product suppliers take joint responsibility for product failures, product training and good service. The intermediary has a vital role to play in South Africa’s financial services sector. There is a great opportunity in communicating the value of the advice that our risk and financial advisers give to the broader consuming public.

The pending Treating Customers Fairly (TCF) regime is the third game changer this year. The financial services industry is already familiar with the six principles-based outcomes set out in TCF and it is clear that the National Treasury and the FSB will keep these principles top of mind when creating new, or amending existing, legislation.

We therefore encourage all stakeholders across the industry to trumpet the value of good financial advice message at every opportunity. To this end, the FIA has already adopted ‘Building a Future in Financial Services’ as its 2014 theme.

The risk and financial advisers who make up the FIA membership are legislated under FAIS and have also signed an FIA Code of Conduct, so we believe that treating customers fairly is already built into their respective practices. Even so, TCF will present new challenges to financial services providers and brokerages in the new year. We will address these as they arise.

Other issues that will occupy the industry in 2014 include bedding down the recently introduced binder regulations (short term) and obtaining clarity on the Medical Schemes

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

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Investment strategy

The Futuregrowth investment philosophy and process

Wikus Furstenberg, Portfolio Manager at Futuregrowth Asset Management

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The preparation of the traditional slow-cooked South African potjie is one way of illustrating the Futuregrowth investment philosophy and process.

W

hen we prepare fund returns for our valued clients, we do not believe it is possible to take short cuts to achieve sustainable returns.

We consistently and actively seek alpha by tapping into as many different potential sources as we can, mainly of an interest-bearing nature. This can prove challenging considering that we are entrusted to manage over R130 billion in assets.

The returns delivered by the Futuregrowth Yield Enhanced Bond Fund, our flagship fund, clearly illustrate the success of our philosophy and process. Its strong performance, which extends

across many years, interest-rate cycles and market-moving events, is the combined result of the optimal use of different components.

The processes can be broadly categorised under two main groups: interest rate strategy and credit asset selection. Each of these offers sources of alpha which we balance carefully in order to reach the best possible outcome.

Under interest rates we would consider the best mix of interest rate-bearing asset selection (cash, variable rate, fixed rate and inflationlinked bonds), duration size and yield curve position that, once combined, will drill down to stock selection. However, being 100 per cent right all the time is not possible due to the volatile nature of interest rate markets.

Bringing better balance, and therefore more stable and consistent alpha, to the table requires the careful blending of the second group, namely credit assets. Although a topdown view of the credit market is not ignored, the success of this process depends critically on a detailed bottom-up analysis of those non-government borrowers to whom we are prepared to lend money.

The process of asset selection requires a variety of different skill sets. This includes

broad economic and sector analysis, an intimate knowledge of the particular business that requires funding, and legal input to ensure that, as lenders, we have the best possible protection in case of default. This is best accomplished where we source the deals ourselves, the majority of which are in the so-called unlisted market. Our ability to source rare and unusual finds in the unlisted market is a significant source of alpha generation.

The broader investment community is becoming increasingly aware of the importance of the appropriate combination of environmental, social and governance factors (ESG) when considering investing.

Although it has always been an integral part of our investment process, especially where we originated investment opportunities ourselves, we continue to further enhance this particular aspect of the process. This is true for the whole investment process, in that we never assume that everything is perfect and we keep looking for better ways to generate sustainable returns for our clients.

Lastly, we pride ourselves on offering our current and prospective clients a great deal of choice while they are deciding what outcome best fits their specific risk profile. To return to

the potjie analogy: for those who like their meal a little spicier, we can add that extra flavour to suit their appetite. For those with a more sensitive palate, we can fine-tune the ingredients to create a milder dish. In essence, by mutual agreement we would devise a recipe or mandate to match their needs.

However, it is very important to note that whatever their choice, it will feed off the universal Futuregrowth investment process.

And finally, as with any good chef, we constantly monitor the success of our methodologies to ensure an edifying and highly satisfying outcome.

The author is grateful to Tamara Burnell and Marilyn Gates Garner for their contributions.

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Ask us how your clients can benefit from Itransact’s new low cost Exchange Traded Fund (ETF) retirement annuity. www.itransact.co.za www.itransact.mobi 0861 432 383 Itransact is a licensed financial services provider Invest SA 2014.indd 1

Keep it simple.

09/12/2013 11:28 AM

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Morningstar

Volatility

is more insidious than you think The field of behavioural finance has aptly documented how fear and greed cloud our better judgment. In the world of finance that means buying funds after huge spikes in performance (greed) and selling when the fund suffers big losses (fear). It’s also interesting to note that being aware of this phenomenon doesn’t immunise you.

Why investors typically experience poor returns with highly volatile funds It’s common for investors to look at past performance when selecting funds. But instead of focusing on the level of a fund’s historical returns, investors should pay more attention to the variability of those returns. In other words, the journey is more important than the destination. The bumpier the ride, the more likely we are to make poor decisions.

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pouring into the fund and, by year end, AUM reaches $72.4 million; just as the fund’s performance is peaking. The fund eventually reaches $118 million in AUM only to see performance drop off a cliff. The fund experiences double digit losses from 2000 to 2002 just after the majority of new investors have just arrived. After getting stung by these heavy losses, investors then run for the hill. In a final cruel twist of irony, the fund begins outperforming again (2003 to 2006) after many investors have already fled.

The chart demonstrates how menacing volatility can be. This example from the US shows how a fund with a 10-year annualised return of 15 per cent can deliver a terrible investor return. An investor return is a way of measuring a fund’s returns that places more weight on periods where a unit trust has more money invested in it and less weight on periods when less money is invested. After all, what good is a fund’s excellent return if no one is there to experience it?

When you add it all up, the fund’s stated 15 per cent annualised return translates into a 1.46 per cent annualised loss for the average investor.

The lesson here is to be mindful of volatility. Unfortunately there’s no hard rule for how much volatility is too much. The answer depends on each individual’s risk tolerance and circumstances. But be honest with yourself about how much you think you can handle and know that the more volatile your portfolio the more prone you’ll be to making poor decisions.

In this example, Fund A returns a whopping 34.9 per cent in 1998 and 120 per cent in 1999. However, the fund’s asset base is just $5.2 million at the end of 1997 and $9.9 million at the end of 1998. Throughout 1999, money starts

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

Practice management

What role does the

savings market play in your practice?

M

y daughter’s friend approached me recently and asked if I would help him start to save. A young second-year commerce student, he earns income from a number of part-time jobs in the hospitality industry. “How much were you thinking?” I asked. “About R200 per month,” he replied.

As professional financial planners, the question we should be asking is: what is our role in creating and supporting the holy grail of the elusive culture of saving? The truth is that most ‘upmarket’ financial planners have decisively moved away from the savings market towards the investment market, where prospects have already built up their wealth and are looking to fine-tune the deployment their accumulated capital.

contributors to large global capital. We also face the reality that those people who have saved for themselves and their loved ones are also securing growing inter-generational wealth for their children and extended family. This extends to an improved quality of education and healthcare, as well as a relatively comfortable retirement for more of our citizens.

This move is strategically correct; the usual business imperatives of efficient cost recovery and profit are met. The move also allows a limit on the number of clients that can be properly served while at the same time earning sufficient revenue to maintain the planners’ own selected lifestyles. However, elite financial planners also have to operate in the savings market.

The second reason we need to become involved arises from enlightened self-interest.

Let me explain. Last year, over 600 000 new recurring premium endowments and almost 200 000 new recurring premium RAs were sold in the industry. So almost R3 billion in fresh new savings plans was commenced by some one per cent of all South Africans.

These new savings plans join the existing book of billions invested primarily by the large life companies for the benefit of millions of South African savers. They are the raw material for a professional financial planner.

When a client with some wealth consults with a financial planner operating in the investment market, mostly they arrive with investments that were the product of regular monthly contributions to retirement funds, endowments and with-value life policies.

Firstly, social solidarity in contributing to the build-up of the nation’s savings is essential. Our consumer-led economy is not sustainable. To be a successful nation, the economic mix in South Africa must inevitably consist of raw material exports, manufacturing and investment in infrastructure. All of these extensions to our economy rely on capitalintensive businesses. Obviously, this capital can be sourced externally, but at what cost to South African jobs and businesses which, at best, will be relegated to second-tier

Looking forward, the financial planning industry faces the loss of the primary tools that fuel the accumulation of clients and funds in this savings market. It seems that, following international trends, the South African authorities may ban insurers from funding face-to-face independent financial advice in the savings market by means of regulated commission. If this happens, where will the raw material for sophisticated investment planning come from? It cannot be the unit trust industry. The take-up of recurring

contribution unit trusts is miniscule in relation to the billions mobilised by the endowment and RA markets. The average contribution by those 600 000 new savers is R450 per month and the current commission averages about R1 400. Will these excited new savers still be there if, instead of the commission being funded by the insurer’s shareholders on a voorskot basis, they were required to invest R1 400 upfront for a financial plan?

If commission is outlawed, it will no longer be commercially viable to spend hours persuading a reluctant breadwinner to set aside a monthly amount to protect loved ones against the financial costs of dying, becoming disabled or securing retirement funding. It would seem that we will all need to search for ways to continue to stimulate savings among the people we already influence: our client’s friends, children, extended families and their employees.

My daughter’s friend is generating about R4 per month in fees. Charity, so they say, will have to begin at home.

Gavin Came, BCom LLB CFP®, Consultant, Sasfin Financial Advisory Services

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When do we

start buying?

Very seldom in the history of the South African stock exchange has the question: when should we start buying mining shares? been asked so desperately. And with good reason, too.

P

erhaps only once in these past 115 years has our mining and resource index been so low relative to the industrial index – and that was in 1998. But even then, the environment seemed much less despondent than now. Yet how could that be? Was the environment and outlook then less gloomy than now?

By the end of 1998 almost all of the world’s stock markets had suffered major falls, with many like South Africa dropping 50 per cent and more in less than four months. Almost all commodity prices had been falling steadily (and dramatically) since 1980, with many like platinum, coal, base metals, ferrochrome and manganese at 150-year lows in real

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terms in 1998. Oil and gold were trading at their second-lowest levels in 100 years. In addition, by the end of 1998, people thought the Asian crisis was going to bring down the rest of the world’s markets. Today we all know that didn’t happen. In fact, virtually the opposite happened. South Africa’s Resource Index (RESI) ran up 140 per cent in 1999: over double the INDI’s 60 per cent return.

And most world markets rebounded – from between 40 to 200 per cent (South Africa's ALSI 40 rebounded 80 per cent in 1999 alone). Is that likely to happen again; how likely is it; and if so, how soon?

Mark Twain’s famous saying, “History may not always repeat itself exactly. But the new tune

certainly rhymes with the previous” is very true.

Peter Bernstein’s fabulous book of the 1990s, Against the Gods gives wonderful examples and optimism when it comes to investing with many what-goes-around-comes-around and reversion-to-the-mean case histories.

Considering that the JSE’s RESI has never fallen so hard and so quickly against the INDI as it has these past five years certainly means we are currently looking at something highly resembling a Black Swan event. The RESI has now fallen 72 per cent relative to the INDI in barely five years. Only once in maybe 100 years has it underperformed by so much, so continuously and that was from 1985 to 1999: a 15-year process. We are now in the accelerated, nano-second age.

Mining sector report

Thankfully our pleas have been heard and help is on the way: at least on a relative basis. For people brave (foolish?) enough to continue buying INDIs and avoiding RESIs, judgement time is near. The INDI is currently on a 23 PE, its second highest level ever, whereas its 55-year average is 12. The INDI’s earnings growth is finally tapering off and the RESI’s earnings growth has finally bottomed and turned up. As we said – share prices do follow earnings: on both an absolute and relative basis. However, the relative changes in performance of the INDI and RESI are not likely to be as dramatic as we’d like (as in 1973 and 1999), because there are mitigating forces at work today in both indices.

For those, let’s concentrate on the RESI.

We all know that share prices are driven and held in place by earnings. Not hot air. Earnings! And we’ve had pretty unprecedented earnings performance these past few years with the INDI’s EPS rising 100 per cent since mid-2010 and the RESI’s EPS falling by an unprecedented 50 per cent since mid-2012. The result is that, as an investment, the INDI has now returned 33 per cent per annum for the past five years and the RESI has returned zero per annum for the past six years. So where are Mark Twain and Peter Bernstein now? Where is this reversion to the mean?

RESi vs INDI

Normally earnings would rebound immediately and strongly in the RESI when the Rand loses 20 per cent like it has over the past year and metal prices remain fairly constant (as they have the past six months). But that was traditionally. This time is a lot different. Since the South African Government and unions nationalised the mines a few years ago, increases in earnings are no longer passed onto shareholders to repay them for their investment as was the case pre-2003 (and in Academia/Capitalism 101). Nowadays, increases in earnings are immediately channelled into increased wages and benefits and for all additional and growing social and labour plans, taxes and royalties. Shareholders are no longer near the top of the distribution list but are firmly consigned to the lowest level.

Shareholders receive dividends only after all the other entities are full. Which isn’t very often. Not an inviting future at all for current and prospective investors in mining shares; and especially South African ones at that.

But the market is a self-correcting mirror of reality most of the time. Thankfully the JSE’s RESI is not fully dependent on local operations any more. On the contrary, the RESI is now over 60 per cent outside South Africa (now you know why our Indi has performed so well). Even more encouraging, SA’s gold and

platinum mines, which are the most nationalised of all South Africa’s listed companies, are barely 10 per cent of the RESI today. It is those local precious metal mines that benefit the most from the weakened Rand because the majority of their costs are South African based. Granted, with double digit wage, supplier, electricity and other local cost increases, the traditional advantage of Rand-based costs is not nearly as beneficial as it was during the past 120 years.

But let’s move onto the macro factors because that is what is going to be the ultimate decider.

The macros in favour of SA’s RESI vs the INDI going forward are many. Commodity prices, despite still selling above their mean Dollar prices (of the past 100 years) at least seem to have found a floor, with some base metalstrading below their long-term averages and gold and platinum trading 36 per cent below their highs of a few years ago. Copper and iron at 30 per cent below their highs. And coal, manganese, chrome and other base metals at nearly 50 per cent below their +30 highs of the past few years. As encouraging as this is, world growth seems to be slowly but consistently firming and rising and demand for commodities/metals seems to be strong enough to at least maintain current price levels for the coming year. With most mining companies having tremendously cut capex and even operating costs these past 18 months, earnings are set to grow even if commodity prices don’t. And the RESI’s current 18 PE, though high compared to its 55-year average of 12, is based on bombed-out trough earnings, whereas the INDI’s current 23 PE is based on peak earnings.

Granted, these aren’t quite the same overpowering macro reasons we saw in 1999, when the RESI rebounded with a 140 per cent gain. But these are certainly good enough to justify an increasing investment weight in a sector that has had no net gain for the past seven years versus a sector that has had five continuous years of 33 per cent per annum return. It’s elementary, my dear Mr Watson, as Sherlock Holmes used to say. Elementary.

RESI eps vs INDI eps

Peter Major, Mining Consultant at Cadiz

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Johan van der Merwe CEO of Sanlam Investments

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Profile

You have been the CEO of Sanlam Investments for more than a decade.

What have been the biggest challenges and achievements over this time?

When I joined Sanlam Investments, it was an underperforming business that lacked confidence. Firstly, we addressed the investment philosophy and adopted a value style of investing. As a company you have to be grounded by your philosophy, since it is your anchor during market turmoil and volatility. Investment management is a people’s business, and it was of the utmost importance to attract and retain the best talent in the industry.

We tried to create a conducive environment for investment businesses to flourish within an entrepreneurial environment. We now have a confident business where the team has credibility with its peers in the market.

Ours is a very dynamic industry and we have to adapt rapidly to its circumstances, trends and regulations. Regulation, in particular, has had a profound effect on the industry as a whole. Sanlam takes the issues around treating customers fairly (TCF), conflict of interest, Solvency 2 and other regulatory changes very seriously. I believe that at Sanlam, the fair treatment of customers is embedded in the culture of the company.

You recently announced a repositioning of the South African investment business into two client-facing businesses – Sanlam Investments: Institutional and Sanlam Investments: Retail. What is the rationale behind this?

Without clients, we don’t have a business.

It is therefore important to put the client at the centre of everything we do. This is not something new, but it is sometimes easy to pay lip service to client-centricity and a different kettle of fish to actually live it.

With the structural changes introduced, I believe we have enhanced our ability to be more focused on clients’ needs, expectations and demands.

There has been a big increase in the number of employers and pension funds looking to de-risk their pensioner liabilities. This has come either in the form of liability-driven investment solutions or full insurance outsourcing.

Where do you foresee the best value for investors in 2014?

The global economy is struggling to overcome the economic challenges thrown up by the sub-prime crisis in 2008. Although governments of developed countries have thrown trillions of Dollars at the problem, world economies are still struggling to shake off recession or lacklustre growth.

Investors have become used to doubledigit investment returns, but going forward, anaemic global growth rates and low real interest rates are expected to dampen returns. I believe investors will have to carefully consider where they want to invest and will have to take on more risk than they did in the past to increase the potential of achieving higher returns.

If you had R100 000 to invest, what would you do with it (excluding Sanlam products)?

I would split my investment 30/70 between Africa and offshore. Africa is an awakening giant and I see a lot of upside on the continent over the next 10 years. Offshore equities present more value at the moment than South African equities and I would invest the remainder in a global equity fund.

How do you strike a balance between your personal life and your work schedule?

How has changing customer behaviour impacted on the way clients invest?

It is impossible to have continuous balance between my work schedule and personal life. My work schedule demands certain responsibilities which I have a duty to meet. It is, however, important to always strive to get back to balance in order to be most effective at what you do, be this at work or at home.

It is an age-old phenomenon that customers are driven by greed and fear. This has the effect that they almost inevitably get their timing of the market wrong. Increased ‘short-termism’ and chasing of fads has meant many clients have invested in the wrong products at the incorrect point in the cycle.

Sport is a very important part of my life and I try to train five or six times a week.

I still compete in masters’ swimming and enjoy measuring up against the best in the world. My family is very important to me and I try to attend most of my children’s sporting events and concerts. I also plan the family holidays meticulously. investsa

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RA season

Low cost,

penalty-free retirement annuity The retirement annuity industry is receiving a serious shake up with the introduction of low cost index-based flexible and penaltyfree retirement annuities.

T

he retirement annuity Itransact was first to market when it launched its low cost exchange traded fund (ETF) retirement annuity portfolios in May 2013 consisting of three risk adjusted Regulation 28 retirement annuity portfolios which are aimed at answering National Treasury’s discussion documents on retirement reform that highlight the historically high cost of retirement products, particularly life assurance RAs. The portfolios cover the main asset classes such as domestic cash, bonds, property, equities and commodities and foreign equities.

By now, it is old news that Treasury has questioned why product providers do not bring down costs by using index-tracking investment portfolios as opposed to the traditional and more costly retirement products available, some of which are loaded with confiscatory penalties that kick in when you have to stop paying premiums

due to personal reasons or wish to transfer to another retirement annuity. These penalties are often realised by the product provider taking it from your investment growth, thereby undermining your expected investment returns.

Itransact has lead the way for low cost Regulation 28 portfolios which solely use ETFs, providing investors with advantages they previously did not enjoy such as low total expense ratios (TER) and low product platform costs. One of the most notable advantages of low cost ETFs is the fact that they are known to regularly outperform actively managed unit trust funds. According to Morningstar (August 2013) 61.25 per cent of active managers who invest in general equities did not beat the FTSE/JSE TOP 40 SWIX index over a five-year period.

Costs are the main culprit for destroying potential retirement returns. Many investors

Key benefits of the Itransact ETF retirement annuity portfolios: • Choice between cautious, balanced and growth RA portfolios • Low total expense ratios – average is 0.35 per cent per annum • Platform fee may be as low as 0.45 per cent per annum (dependent on investment size) • Online reporting and daily portfolio return analysis • Stop or start your premiums when it suits you • No penalties whatsoever • Affordable entry levels – R300 per month for debit orders and R5 000 for lump sums.

Costs exclude VAT The Itransact RA is perfectly suited for investors who are looking for product simplicity and transparency and who are no longer interested in expensive investment managers who fail to beat their benchmarks.

GENERAL EQUITY SECTOR Average total expense ratio (TER)

do not realise the impact that costs have on their returns. Consider the below table.

1.54%

Average one-year return

17.38%

Total expense ratio as a % of return

8.86%

SWIX & TOP ETFs Average total expense ratio (TER)

0.36%

Average one-year return

20.03%

Total expense ratio as a % of return

1.80%

Source: Morningstar (August 2013) returns are after costs

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Lance Solms, Director at Itransact

Regulatory developments

Regulatory developments:

putting the client first

Simpler products Expressly paying for advice will focus the client’s mind on the value received; more investors are likely to use online tools to educate themselves and invest directly. This would compel the industry to simplify not only its product range, but also its products.

Increased transparency Investors will need ready access to all relevant information, in particular investment style, return prospects and the fee impact. Providers who are transparent on these aspects are likely to attract more customers.

Lower fees Informed investors are likely to focus on fees, the most predictable element of their future return. Increased awareness of the fee impact should increase price competition.

Standardised reporting To facilitate fair price comparisons, the industry would have to standardise charges and disclosure. Interestingly, the UK debate on fee disclosure picked up considerably ahead of the commission ban.

I

n its 2011 Global Fund Investor Experience report, Morningstar awarded South Africa a C-, the second worst grade among the 22 participating countries. A particular point of concern was the use of sales incentives and contests. These undesirable practices encourage advisers and brokers to oversell high-fee products and, consequently, promote unnecessary switching (churn). Neither serves the interest of the client.

Although South African regulators have acknowledged the problem locally, in part through the Financial Advisory and Intermediary Services (FAIS) Act and the Treating Customers Fairly (TCF) campaign, they have yet to ban the practice. National Treasury’s retirement reform papers, however, underline its intent to protect consumers from high fees and biased advice, with the Retail Distribution Review promising to do just that. This is not a campaign against financial advice. Quite the opposite: in a world of disengaged savers, advisers can play a pivotal role in retirement planning by protecting clients from their own knowledge and behaviour gaps, and helping them achieve a higher retirement income.

The knowledge gap manifests when investors earn a return that is lower than the market or index return. The lower return arises from high fees, excessive trading costs and underperforming fund managers. The behaviour gap manifests in the difference between the fund’s and the investor’s return.

The difference grows if investors engage in market timing and switching, usually on the basis of past performance. Empirically, this

lowers the investors’ returns by up to two per cent per annum. Recall that each 1% increases your final pension by approximately 30% over a working life.

Advisers should promote rational rather than emotional investment decisions. But in this they must act as consultants not brokers and be paid for the advice they provide, not the products they sell. This advice should be informed and objective and the fee should reflect the time, effort and skill applied. Such a model does not preclude that advisers are still paid by the asset manager from the client’s investment; it simply means that this fee is paid at the instruction and discretion of the customer, at a realistic level, and irrespective of the product chosen.

More insightful advice 10X Investments believes that banning commissions will improve the quality and relevance of advice. Once the incentive to sell a particular product is removed, advisers will confront the essential question: what does my client really need? On investigation, they will find that the answer lies in principles – on investment style, asset allocation and investment costs – rather than products.

Less choice In response, we would expect the investment industry to reduce its product range. The excessive choice evident today serves advisers much more than investors. This would fall away once the fee model changes and the fund manager focuses on the investor’s rather than the adviser’s needs.

Winners and losers Informed investors are unlikely to be swayed by a familiar logo and a large marketing budget. The likely winners will be low-cost index managers and (more expensive) active managers who can point to a proven process and track record.

The middle ground, home to high fees and indifferent results, is the section of the market whose brokers and advisers presently earn an undeserved living off disengaged investors. They are unlikely to prosper in an alternate industry model that does not permit incentives.

It is inevitable that a commission ban would force a reduction in the number of brokers and advisers; by implication, lowering the cost of investing will lower the income of service providers. The survivors will be the ones who add real value to their clients; those who fill their knowledge and behaviour gaps and improve their savings outcome. Clients will always be willing to pay for that.

Steven Nathan, Chief Executive Officer of 10X Investments

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Retirement reform

Retirement reform: the need for government and private sector interaction Discussion on retirement reform in South Africa started in earnest in 2004 after the release of the National Treasury’s first discussion paper in December 2003.

A

lmost 10 years later, the concept of retirement reform is finally moving on from deliberations to detailed consultation on how it is to be implemented. Much of the implementation detail still needs to be ironed out and it is clear that certain compromises will need to be made along the way.

However, it is also clear that the government embraces the merits of compulsory preservation and annuitisation, and is serious about ensuring that savers get good value for their money from the system. It has hopefully been learnt from the recent redrafting of Regulation 28 of the Pension Funds Act that the real challenge lies in implementing such reforms.

The evolution of retirement reform Retirement reform is, however, neither new nor unique to South Africa. Otto van Bismarck is credited with initiating the first modern State-funded pension system, which he introduced in Germany in 1889. At that time, pensions were paid from age 70.

The first major reform was in 1916, when the retirement age was dropped to 65. In the UK, the Old Age Pension system was introduced in 1909 with a retirement age of 70. This was also later reduced to age 65 because it was felt too few people were benefiting from the system.

Chile is regarded as a pioneer in later modern retirement reform: in 1980, it converted a State-run pension system to a compulsory one that is privately operated.

In 1992, Australia introduced a compulsory superannuation system that is frequently reformed. Changes are also being introduced in the UK through ‘auto enrolment’, whereby employees are automatically enrolled in private pension plans to top up the Statefunded system.

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Current thinking Most current thinking on retirement reform was influenced by a report entitled, ‘Averting the old age crisis: Policies to protect the old and promote growth’, that was issued by the World Bank in 1994. Almost 20 years ago, the World Bank warned of a looming pension crisis resulting from an ageing population in the developed world and changing social norms in the developing world, where family-based systems would be unable to support the elderly in future.

In that report, the World Bank put forward its famous three-pillar model and recommended that countries reduce reliance on Pillar 1 (essentially a pay-as-you-go Statefunded pillar) and focus on policies to pre-fund pensions liabilities through Pillar 2 (occupational schemes) and Pillar 3 (voluntary top-up savings).

Even then, the recommended plan was to reduce reliance on governments in looking after the aged through a pay-as-you-go system, and increase reliance on the private sector to pre-fund pension liabilities.

This theme continues. In 2011, BBVA Research issued a report entitled, ‘The unavoidable role of private pensions in retirement income systems’. Unsurprisingly, this report concluded that all over the world, governments had no alternative but to rely on the private sector to help reform their pension system.

to establish a State-run fund (the National Savings Fund) and make it compulsory for all working people to contribute to it. Compulsory membership is not new and the Australian/ Chilean experience has demonstrated that, if properly implemented, a compulsory system can work well.

While the future of the National Savings Fund remains unclear, it is pleasing to note that the government is working with the private sector to address the structural failings of the current system.

Individuals generally do not appreciate the importance of saving for retirement until it is too late. Experience around the world clearly shows it is the government’s responsibility to force people to save. The private sector, in turn, needs to focus on making efficient longterm savings vehicles available to savers to meet their needs.

South African retirement reform today When South Africa began its retirement reform journey, it was clear the system was failing, simply because too few people participated.

Also, the reported success rate then was less than 10 per cent. Unfortunately, not much has changed since then. At that stage, the government’s preferred solution was

Allan Wood, Head of Institutional Business, Investment Solutions

NEWS Investec SA private bank and wealth receives top honours in Geneva Investec has been recognised by London’s Financial Times Group as the Best Private Bank and Wealth Manager in South Africa, at the fifth Annual Global Private Banking and Private Wealth Management (PWM) Awards, hosted in Geneva late 2013. It was the first time in the event’s history that South Africa was invited to join the survey and welcomed into the global private banking and private wealth management spotlight, with Investec first to place its brand on the award’s nameplate.

According to Yuri Bender, editor in chief at PWM, a part of London’s FT Group, the panel of judges is particularly keen to cover developing and newly industrialised countries, and to identify the best banks servicing new sources of wealth. “As a relatively new member of the high-profile BRICS grouping, they were naturally drawn to include South Africa in the annual awards.

“Investec Private Banking, Wealth and Investment was judged favourably due to its

Henry Blumenthal, Investec’s Head of Wealth and Investment (left); Yuri Bender, Editor In Chief, PWM (right) clear development strategy, in addition to healthy inflows. This is one of the few banks to actually lay down what its brand stands for in relation to customer experience. This brand is strong not just on home turf, but also has some recognition in the handful of key foreign markets on which the bank focuses,” Bender added. Ciaran Whelan, global head of private banking, and Henry Blumenthal, head of Wealth and Investment, received

the award as Whelan said, “Winning this award is a testament to our core value of outstanding client service and supports our ‘One Bank’ philosophy. It demonstrates how working together not only benefits us, but our clients as well, by providing them with access to an integrated onshore and offshore banking offering, stockbroking, portfolio management and wealth management services.”

Momentum Asset Management wins Africa Equity Fund award Momentum Asset Management’s Momentum IF Africa ex. South Africa Equity Fund won the Africa Equity Fund under $50 million award at the second annual AfricaAM Performance Awards (2013).

The fund was also the runner up and was highly commended in the broader Africa Fund under $50 million category, which took into account all Africa funds. Out of 26 categories, six highly commended accolades were awarded in acknowledgement of the fund being close to winning and therefore deserving of a special mention.

Fungai Tarirah, head of Africa investments at Momentum Asset Management, said that the African market currently offers a number of attractive return-generating opportunities in industries including the provision of financial services, the production and supply of consumer goods, infrastructure development (road, rail and ports) and import substitution (local production stimulus).

“Having strong brands that command market share, while maintaining clean balance sheets and generating free cash flow, are also important considerations. Continuing to apply these principles will be central to achieving consistent investment performance in inefficient markets,” concluded Tarirah.

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Fungai Tarirah

Eskom Pension and Provident Fund (EPPF) teams up with Maitland Maitland has been appointed to provide Eskom Pension and Provident Fund (EPPF) with its investment administration and management platform, which will offer EPPF greater efficiency and day-to-day management of its assets.

EPPF, one of the largest defined benefit pension funds in South Africa, manages more than R96 billion on behalf of approximately 88 000 members, pensioners and beneficiaries. A portion of EPPF’s assets are managed in-house, but it also employs a number of external fund managers. The appointment of Maitland introduces changes to the EPPF’s asset administration and it will enable EPPF to improve its efficiencies.

Sbu Luthuli, CEO of the EPPF, said that they are focused on providing maximum returns for their members and, therefore, efficiency

Werner du Preez

is an important enabler. “In Maitland, we have found a partner that truly understands this, which puts us in the strongest possible position to deliver the best returns with greater efficiency. Through Maitland’s solution, funds can take advantage of all the benefits of the multi-manager approach without the huge administrative burden.”

According to Andre le Roux, head of business development at Maitland, accurate and consistent daily pricing and unitisation are some of the key challenges faced by pension funds across the globe. “Some market solutions simply do not pass the transparency, member protection and cost reduction tests that regulators and trustees have set for the benefit of pension fund members. However, Maitland can provide the answer to this and the ideal solution for the administration and accounting of complex asset portfolios typical in the multimanaged pension fund environment.”

Claudie Groenewald

RE:CM announced new business development appointments Value-based asset manager, RE:CM, announced the appointments of Werner du Preez, Claudie Groenewald and Moeniera Mohamed, to bolster the firm’s business development capabilities.

Du Preez has joined Tim Tyson as a business development manager (BDM) for the Gauteng and KwaZulu-Natal regions, following five years at Allan Gray in a similar role. He completed his BCom (economics), BCom honours (investment management), MCom (money and banking) degrees and Certified Financial Planner qualification, all through the University of the Free State.

Claudie Groenewald has been appointed as a BDM for the outlying Western and Eastern Cape regions. She joined RE:CM

Moeniera Mohamed

in September 2013 after working with Absa Investments for eight years, where she held the position of business development consultant. Groenewald holds a BCom (economics) degree from Potchefstroom University, a national diploma in financial markets and a Certified Financial Planner qualification through the University of the Free State.

Moeniera Mohamed joined RE:CM in September 2013 as an internal business consultant and will be assisting the four BDMs with managing and developing relationships with IFAs and their support staff, training IFA support staff on business processes, products and resolving queries. Prior to her new role at RE:CM, Mohamed spent nine years at Allan Gray in different client servicing roles. She has a diploma in wealth management (NQF Level 6).

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Products

Sanlam RA

aims to improve savings behaviour Sanlam has launched a new retirement annuity (RA) that tangibly rewards long-term commitment to retirement savings. The Cumulus Echo RA is a first of its kind in South Africa and is a direct attempt from Sanlam to counter South Africa’s serious savings crisis. The Cumulus Echo RA rewards long-term savers with a bonus when they exit the product (the longer the investment period, the higher the bonus), has among the lowest fees of any RA in South Africa for 25-year plus saving terms and offers quality investment choice.

Tiaan Fourie, product actuary at Sanlam, says annual research by Sanlam showed that the vast majority of South Africans cannot afford to retire because they either started saving too late for retirement or they did not keep up with their contributions until retirement. “To help address this problem, Sanlam has taken a completely fresh look at retirement annuities and developed a product that rewards people who stick to their retirement plans.”

Absa launches first easily accessible protected investment products The corporate and investment banking division of Absa Bank Limited, member of Barclays, made structured commodity and equity investment products accessible to all advisers and investors via the Momentum Wealth Platform. Both the Diversified Commodity Protector and Global Equity Protector provide full capital protection, without forex risk, making them safe for inclusion in either cautious or balanced portfolios.

Ryan Sydow, head of retail distribution at Absa, says that making these products available through the Momentum Wealth Platform means that “for the first time in South Africa two Absa products, a diversified commodity and a global developed equity product, are easily available to the average adviser or investor”.

Given that most cautious portfolios should contain 22 per cent foreign equities and most balanced portfolios 24 per cent foreign equities (Absa Wealth’s current asset allocation view), the Global Equity Protector provides local advisers and investors, most of whom

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are underweight offshore equities, a long overdue opportunity to safely up weight the foreign equity content of their portfolios.

Similarly, most cautious portfolios should contain three to five per cent commodities and most balanced portfolios five to eight per cent commodities. As such, Absa’s Diversified Commodity Protector, which guarantees a minimum return, provides South African investors with a safe platform on which to access commodity investments and diversify portfolios. This is quite different to having equity in commoditylinked companies, like BHP Billiton, which offer different risks and benefits.

According to Sydow, “Both the Diversified Commodity Protector and the Global Equity Protector are targeted at the discerning customer looking for long-term investments offering low risk with potential for high yield, while providing diversification into assets traditionally quite difficult for South African investors to access. Momentum Wealth Platform was chosen given its strong position in the independent financial adviser market and because it is one of Absa’s key partners in the investment space.”

The Cumulus Echo RA pays out a bonus, the Echo Bonus, when savers exit the plan. “The Echo Bonus is an additional amount of money a client will receive when their retirement plan matures or is terminated. The size of the bonus depends on the duration of the investment as well as the proportion of contributions made relative to what the client agreed and planned to invest at the outset.” He says the bonus harnesses the power of compound interest. “We invest a growing portion of the fees deducted from the client’s plan in their chosen investment funds, and these earn interest in line with normal investment growth. The longer the client invests in the product, the bigger the portion of these fees that can be invested and ultimately paid out as the Echo Bonus.”

To ensure strong investment performance, the Cumulus Echo RA offers a comprehensive range of investment options from the country’s leading asset managers including Sanlam Investment Management, Allan Gray and Coronation.

According to Fourie, the Cumulus Echo product range consists of the Cumulus Echo RA and the Cumulus Echo Pension/Provident Preserver. It offers flexibility through a contribution ‘holiday’ facility of up to 12 months and no deduction of alteration charges from the fund value when clients stop or reduce their contributions. It further offers affordable minimum contributions and the option to switch money between investment funds up to four times a year free of charge.

The world

GLOBAL, IRELAND, INDIA, CROATIA, PORTUGAL, FRANCE, SPAIN, PAKISTAN, AFRICA, US

New Global Agency emerges to meet the needs of the globe The Portuguese Refugee Council (CPR), Care Ratings of India, Global Credit Ratings (GCR) of South Africa, Malaysia Rating Corporation Berhad (MARC) and Brazil’s SR Rating are joining forces to launch a new global agency. According to these organisations the collaboration is being developed as the world’s three big agencies, Moody, Standard & Poor’s and Fitch, which currently dominate the credit rating business, no longer meet the needs of the globalised world.

by implementing reforms in five areas which the organisation tracks. In the past year, Croatia implemented reforms in the areas of starting a business, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. According to Rita Ramalho, lead author of Doing Business, World Bank Group, the surge of regulatory reforms in Croatia in the past year is a testament to its commitment to supporting the business environment for local entrepreneurs.

Portuguese Government plans to reduce corporate tax rate

Ireland set to exit EU-IMF bailout Ireland will exit the EU-IMF bailout in a strong position, having successfully passed its final review of an 85 billion Euro bailout. Having requested an international bailout in November 2010, the Irish economy is emerging from its worst recession in 70 years. German chancellor Angela Merkel pledged to work closely with Ireland to improve funding mechanisms for the economy, including access to finance for small and medium businesses.

India entices foreign banks by setting new rules India has introduced a set of new guidelines for foreign banks to open more branches within the area in an effort to put them on an equal footing with local banks. These guidelines aim to extend the country’s financial service products to the 65 per cent of its population that does not have access to a bank account. According to the Reserve Bank of India the overseas banks will be permitted to set up wholly owned subsidiaries with a minimum capital of five billion Rupees ($80 million) and a capital adequacy ratio of 10 per cent.

Croatia improves business regulatory environment According to the World Bank Group, between June 2012 and June 2013, Croatia has improved its business regulatory environment

Portugal plans to reduce the corporate tax rate from 25 per cent to 23 per cent in 2014.

Paulo Núncio, Portugal's State Secretary for Tax Affairs, says that in doing so the government will be able to significantly improve the country's competitiveness. According to Núncio, the reform aims to boost investment and will place Portugal among the top competitive companies in the EU, which is a key element in the economic recovery of the European country.

French Government’s pension reform bill rejected The French Government’s attempt to change its pension reform bill was rejected by both left and right wing parties as well as the French President’s own Socialist Party (PS). According to the PS, the draft legislation had been modified beyond recognition compared to the version adopted earlier by the National Assembly, while French Social Affairs and Health Minister, Marisol Touraine, reiterated that both justice and funding was removed from the draft.

Spain’s investment-grade rating stabilises Due to improved exports and progress in reforms, Spain’s investment-grade rating is being upgraded from a BBB rating to ‘stable’.

Spain has improved its policy track record, reducing the chances of the country losing its investment-grade rating.

Pakistan to borrow an extra $2 billion for bailout The International Monetary Fund (IMF) revealed that Pakistan’s $6.7 billion bailout package is insufficient and a further $2 billion is needed. To raise the additional capital, Pakistan plans to borrow $500 million from different sources, including the Overseas Private Investment Corporation (OPIC), the UK’s Department for International Development (DFID), the Islamic Development Bank, as well as by floating a Eurobond, usually a short- to medium-term bond, with a coupon interest rate that goes up or down in relation to a benchmark rate.

Financial shock warning for African countries African countries have been warned by the International Monetary Fund (IMF) that they are becoming more vulnerable to global financial shocks as their reliance on foreign investors grows. These countries have previously relied on cheap and abundant funding from international investors, but have been instructed by the IMF to anticipate increasing funding costs, as banks gradually move away from unparalleled accommodative policies. According to Lamido Sanusi, governor of the Central Bank of Nigeria, larger emerging economies such as India and South Africa will feel the impact of tighter monetary policies in the USA more than frontier markets such as Ghana and Nigeria.

US employment increases despite federal shutdown Despite the US Government shutdown, US employers added more than 200 000 jobs to the economy during the month of October, which suggests that the economy is more resilient than imagined. According to analysts, the US economy might be able to sustain its improvement, and they note that recent job gains and modest pay increases may encourage more spending.

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They said

A collection of insights from industry leaders over the last month

strong contributors to relative return.”

Allan Gray analyst, Seema Dala, explains why its Allan Gray Orbis Global Equity Feeder Fund has rebounded considerably since January this year.

“We have experienced very strong capital inflows by investors happy to take advantage of the relaxed exchange controls.”

Global Flexible fund manager of PSG Asset Management, Henno Vermaak, comments that a growing demand by individuals for offshore equities enabled the company to establish its own dedicated global fund earlier this year.

“While banks remain wary of lending, the debt capital markets are on fire.”

Absa Capital principal, Anand Naidoo, says that while many corporates remain wary of lending from banks, they have no such qualms about approaching debt markets and keeping investment bankers busy.

“Consumer spending has been losing momentum for some time and is expected to remain under pressure over the coming months. This largely reflects a moderation in income growth, a sharp slowdown in the growth of unsecured credit, a lack of job creation, falling consumer confidence, and a rise in the cost of living, including the cost of petrol (which is not part of the retail sales data), electricity and education.”

Chief economist of Stanlib, Kevin Lings, says that the sharp decline in retail sales growth indicated consumers were under increased strain as the festive season edged closer.

“Favourable base effects in growth in the M3 money supply, stemming from a conspicuous slowdown in M3 money supply in the fourth quarter of last year, should bolster further growth prints in the sector in the fourth quarter of 2013.”

Economist of Standard Bank, Sibusiso Gumbi, comments that credit growth declined as expected by the market, despite the household credit growth improvement for the first time in four months.

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“Low periods in the economy are usually accompanied by pessimism and doubt as the subsequent recoveries are often slow to build, but then they pick up over a sustained period.”

Equity strategist of Old Mutual, Graham Bell, commenting on the fact that although a global growth recovery would take time, local equities could still perform in a risky economic climate.

“As with any asset class, investors must do their homework. Learning about the market, genres, history, trends and artists is a must and assessing how it would fit in a broader asset allocation is critical.”

Curator of Sanlam’s art collection, Stefan Hundt, explains that unlike most traditional asset classes such as stocks or bonds, little transparency is associated with art trading.

“Stock picking within most regions has accounted for the overwhelming majority for the fund’s outperformance since yearend, which has also been the case since the inception of the fund. In particular, stocks in North America and Asia ex-Japan have been

“The decision of which index to track is dependent on the overall asset allocation of the fund per asset class and the blend of managers and styles within each asset class.”

CEO of DIBANISA, a boutique of Old Mutual Investment Group, Craig Chambers, says the decision of whether to include a passive strategy into an investment is dependent on the trustees of a retirement fund and its appointed asset consultant.

“The international evidence of the performance of active bond managers is even worse than for equities. As the Vanguard research highlights, over a 15-year period, 100 per cent of active funds underperformed their benchmarks in three categories.”

Head of equities at Prescient investment management, Eugene Chemaly, says that international evidence of both equities and bonds highlight that active managers as a whole are poor decision-makers, failing to beat their benchmarks across markets and asset classes.

“There were 1 025 Rand-denominated unit trusts at the end of September, double the number 10 years ago.”

CE of the Association of Savings and Investment of SA (ASISA), Leon Campher, reveals that while South African unit trusts have positively transformed the way South Africans invest, their numbers have grown to a perplexing excess.

You said

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

@nntaleb: “The second biggest modern confusion: mistaking variability for risk.”

Nassim N Taleb

@pietviljoen: '“Even the worst cynic knows that international bankers would not mislead their clients by giving them a deceptively rosy picture.” Really?'

Piet Viljoen – investor, dad, cyclist, art collector, the Cape of Good Hope.

@richardbranson: “When you are running a business, the most powerful advertising asset you have is yourself.”

Richard Branson – Tie-loathing adventurer and thrill seeker, who believes in turning ideas into reality. Otherwise known as Dr Yes at @virgin!

@Andile_Khumalo: “Absa has set aside R215 million this year to fund small businesses that would otherwise not be able to raise traditional finance w/ banks.”

Andile Khumalo – Chief investment officer of MSG Afrika Investment Holdings.

Founder of @MyStartUpSA.

@zamarcashton: “’Greed discovery’ is the process by which a vastly and unnecessarily complicated financial system is exploited by expert insiders.”

Marc Ashton – Editor of Finweek magazine, entrepreneur and trader.

@chrislbecker: “My view that African consumer market

may be developing into major bubble. It’s currently funded

by QE-fuelled inflows, which is unsustainable.”

Chris Becker – Global market strategist @etmanalytics. Cofounder @Mises_SA. Economics.

Markets. Liberty.

@Investor_Quotes: ‘“An important key to investing is to remember that stocks are not lottery tickets.” Peter Lynch.’

Investment Quotes – Quotable quotations from major investors for inspiration, motivation and insight.

@MebFaber: “Anytime an asset class is at the highest valuation in past 30 years, probably not a great time to be buying.”

Meb Faber – Founder and CIO

of Cambria Funds. Author Shareholder Yield and The Ivy Portfolio.

@robtfrank: “18-year-old tech millionaire Nick D’Aloisio says of wealth: ‘I'm too young to appreciate the value of it.’

Smart man.”

Robert Frank – CNBC Wealth Reporter, because the rich will always be with us.

@Mercedarians: “Tencent Chairman Pony Ma Huateng warns that the company’s valuation is ‘too high and too scary’.”

Vector Equilibrium – The market exists to serve you, not to guide you. Financial Engineering. NCFP. Quant.

Contrarian. Trading Journal.

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And now for something completely different markets like India and China. This creates a perfect opportunity for those wishing to invest in this market. However, it is important to bear in mind that the reality of buying and selling diamonds is not simply dictated by the principles of supply and demand.

Shining bright like a diamond

investing in the diamond market

D

iamonds, the gems that have symbolised love and marriage for decades, attract wealthy investors as a commodity investment with potentially high returns. With the recent sale of the Pink Star diamond fetching a record $83 million at an auction in Geneva, investing in the diamond market may not be such a bad move for those looking to diversify their portfolio.

Weighing almost 60 carats, the oval-cut stone mounted on a ring is believed to be the largest known fancy pink diamond and has the record for the highest price for a diamond or jewellery item. The diamond has been renamed the Pink Dream by winning bidder

Isaac Wolf, a diamond cutter from New York.

Until recently, diamonds weren’t considered the best choice of alternative investment for a variety of reasons, including a lack of price transparency, a liquid trading market and the difficulty in establishing uniform standards of quality among stones. However, in the wake of the 2007/2008 recession, many rich investors have been diverting a portion of their capital into non-monetary and highly portable assets, such as diamonds.

With a decline in the global production of quality diamonds, a shift is starting to take place with the supply not being able to keep up with the demand, especially from emerging

As a potential investor, it is important to understand the basic principles that underpin diamond investments; price transparency, quality assurance, transaction costs and liquidity. Each of these can affect the purchase and return on diamonds, so potential investors need to educate themselves about these before buying and trading in gems.

A $100 000 diamond ring has more investment potential than a $1 000 ring, with a relatively lower cost selling more expensive pieces; as the value goes up, seller’s margins come down, very much like the real estate market. However, contrary to popular belief, rarer diamonds are actually harder to sell than medium quality diamonds (with no visible imperfections or obvious discolouration).

Cut and quality also affect your diamond investment. Despite round brilliant cut diamonds being the most profitable and resaleable, approximately 90 per cent of these are poorly cut or have a number of imperfections. If you are looking at investing, most jewellers recommend buying a non-traditional ideal cut diamond that will fit into the new GIA and AGS best cut standards.

If in doubt about what to buy, it is best to speak to a professional jeweller. They will be able to tell you whether the investment diamond you intend buying is worth the money you plan on paying for it.

- Notable diamonds sold with a hefty price tag -

The Graff Pink – $46 million

The Orange diamond – $35.5 million

Considered as one of the world’s great diamonds and more importantly as the second-most expensive diamond sold, the exceptionally rare pink stone was sold at Sotheby’s for an incredible $46 million. The diamond weighs 24.78 carats and has a rare pink colour. Initially expected to sell for only $27 million to $38 million, the spectacular piece was bought by London Bond Street-based jeweller, Laurence Graff, who called it The Graff Pink. The diamond was sold by celebrity jeweller, Harry Winston, around 60 years ago and since then this diamond has been in a private collection.

Wittelsbach diamond – $25.52 million

The recent sale of The Orange diamond, auctioned in Geneva, Switzerland, fetched an incredible 32.6 million Swiss francs ($36 million). The sale of The Orange diamond broke the per-carat record for any coloured diamond at a public auction.

Weighing in at 14.82 carats, it is considered the largest fancy vivid orange diamond to go up for sale at an auction.

One of the most expensive diamonds in the world, known as the Wittelsbach diamond, was sold at Christie’s in London. Originally from India, the diamond was given as the wedding dowry of a Spanish princess famous from the Infanta Margarita Teresa painted by Velazquez in 1664. The magnificent piece, with a rare sky blue colour, was bought by Laurence Graff.

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tell you you’re going to meet your soul mate in the next year? And then the specifics come.

He will be dark, average height, blue or brown eyes. A lawyer or a fireman who enjoys cooking and you’re going to have 2 kids and a Labrador.

No, a Dalmatian. And then you spend the next few years waiting for a dark, average height, blue or brown-eyed lawyer or fireman who enjoys cooking, snubbing all other potential suitors. And we all know how that story ends.

Investing is a bit like that. It’s easy to get distracted by popular opinion. Which is why we find it best to ignore it, no matter how good it sounds. And it’s a philosophy that has worked very well for our clients over the last 39 years.

Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

Allan Gray Proprietary Limited is an authorised financial services provider.

KINGJAMES 27514

E ver been to those fortune tellers, the ones who