InvestSA Magazine March 2014 by COSA Media

R37,50 | March 2014

Saints vs sinners PROS AND CONS OF INVESTING WITH A CONSCIENCE Retirement reform costs:

the devilâ&#x20AC;&#x2122;s in the detail

Sweet temptation:

should you spice up your portfolio with commodities?

S U B S C RIBE R37,50 | March 2014

INVESTSA MARCH 2014

Saints vs sinners PROS AND CONS OF INVESTING WITH A CONSCIENCE

CONTENTS 06

Saints and sinners

COMMODITIES FUNDS: Down but not out

Hedge fund managers: the benefits of diversification across styles

Investing from within the Fragile Five Club

Unpacking the challenges facing investors in Russia

Head to Head: Michael Prinsloo, Alexander Forbes Financial Services, Head: Best Practice, Research & Product Development and Craig Aitchison, Old Mutual CORPORATE, GM of Customer Solutions

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The Rand continues its descent, boosting returns for offshore investments

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Profile: Bernard Fick, Chief Executive, Prudential Portfolio Managers

Financial Services Sector Regulation

Retail: An underperforming sector on the brink of change?

UNIT TRUSTS: Stick to a long-term plan to handle a bumpy ride

News

Retirement reform costs:

the devilâ&#x20AC;&#x2122;s in the detail

Sweet temptation:

should you spice up your portfolio with commodities?

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From

the editor We seem to be settling into the higher interest rate environment. It wasn’t raised by much, but the effect has been widely felt. Even the effect on retirees’ savings is ambiguous. Normally a rate hike is positive for retired people, who tend to have most of their savings in fixed-income products. They earn more interest and the savings pool becomes more valuable. But that has changed, according to Glacier by Sanlam. Retirees have shifted their investments towards more diversified portfolios, which have less fixedincome investments and more equities. Glacier’s conclusion is the effect of the rate hike on retirees is yet to be seen. Kanyane Matlou, an analyst with Coronation Fund Managers (well done on its top place at the Raging Bull awards), shows how SARS Governor, Gill Marcus, was painted into a corner on her rates decision, in a fine analysis in his economic commentary article. But I – and this is the conspiracy theorist in me – think there was more to the decision. Marcus is known for her intelligence and fierce independence but I suspect she was forced to follow orders; from Number One, the less-intelligent and less-independent president, who wanted interest rates raised for reasons known only to him. Atlantic Asset Management, masters of fixed-interest investing, say the rate hike was about fear; fear of the unknown. To me, fear is a signal to look around for buying opportunities, so perhaps at least one good thing has come out of higher interest rates. Two major contributions in this issue come from Investment Solutions following a tour to emerging markets countries. CIO Glenn Silverman writes about investing in Russia, where politics and economics are more interwoven than in other BRICS countries. This is as a result of the absolute rule of President Vladimir Putin, which Silverman describes as ‘the return of the Czar’. I found it fascinating reading as my knowledge of Russia is limited to what I’ve read in books by master spy writer John le Carré. Investment Solutions teammate, chief strategist Chris Hart, provides a good breakdown of investing from within the Fragile Five club, lumped together because of their large twin deficits. South Africa is a member of this dubious club. In a delightful piece, Gavin Came, consultant with Sasfin, looks at sugar and shirts, pondering the financial adviser versus the investment manager. The comparison revolves around ‘assisted shopping’. Make sure you read the last line. As always, Marc Hasenfuss provides a well-written look at saints and sinners. Cast your conscience aside and (hopefully) make money by investing in the seven not-so-deadly sins. Now I’m off to ponder my sins until the next time.

Shaun Harris 4

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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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Saints Sinners and

By Marc Hasenfuss

Investing with a clear conscience is certainly a growing fad worldwide. You canâ&#x20AC;&#x2122;t begrudge a vegan for not wanting to hold shares in poultry group Country Bird Holdings; and it would be rather hypocritical for a staunch member of a temperance society to hold shares in beer giant SABMiller.

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ong before ‘ethical investing’ came into play in mainstream asset management, there were already customised portfolios that steered clear of vices like tobacco, liquor and gambling, and entertainment companies that dabbled in pornography. Sometimes even commodity shares have been disregarded due to a perceived inhumanity around working conditions. Companies manufacturing arms and ammunition or involved in distributing products to the defence sector might also be shunned. Interestingly, many of the ethical funds have done awfully well in meeting their mandates – a few, I seem to recall, with market-beating returns. But I’m not here to argue for or against the merits of ethical investing. What I am hoping to highlight is that, when it comes to long-term investment returns, it’s ironic that quite often it seems the ‘sinners’ appear to be taking a lot less risk for greater rewards than the ‘saints’. The well-known Vice Fund, a mutual fund in the United States, has pretty much become the benchmark for sin sector investment. In the five years since 2009, the fund’s unit price has more than doubled from $12,56 to $28,82. Locally, investors would have scanned the phenomenal gains – not to mention sumptuous dividends collected – in beer giant SABMiller and cigarette kingpin British American Tobacco (BAT). Both BAT and SABMiller have more than doubled their share prices over five years. For the purpose of defining ‘sin’ businesses, there are three categories where the investor without a conscience can dabble. These are the liquor sector, the gaming industry and tobacco. All three are traditionally defensive by nature, meaning that even in times of economic stress, as seen recently between late 2008 and mid-2010, these businesses tend to see their bottom lines markedly less ravaged than other listed companies. There is a handful of investment virtues that set so-called sin businesses apart from other listings on the JSE. One of the key criteria in weighing up a long-term investment is whether the company in question can deliver sustainable cash flows. Cash flow, need I remind, is the life blood of any business. Now a good number of sin businesses on the JSE are renowned for their reliable cash flows. Cash flows keep the balance sheet lubricated, which allows such companies to chase deals and pay dividends. Sin businesses also tend to hold brands that are fairly easy to defend against new competition. Either the brands are so well entrenched that it would cost a competitor an enormous push in capital expenditure to compete viably, or because regulatory matters preclude new competitors from entering the market, which is the position with the South African casino sector. Sin businesses also tend to have pricing power, often because their offering has a captive or addictive customer base which needs its fix no matter what the price.

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An alternative flutter on Sun International can be taken through Grand Parade Investments, which has exposure to the GrandWest casino and holds its own very profitable limited payout machine (LPM) operations.

into global markets via Bisquet cognac and Scottish Leader whisky are probably behind the more spirited sentiment. The market has also acknowledged that Distell’s highly profitable cider business (Savanna and Hunters) is eminently exportable – especially with the recent appointment of experienced international campaigner Richard Rushton (formerly of SABMiller) as CEO. Outside its recently acquired global brands and ciders, Distell also owns some of the best-known liquor brands in South Africa and abroad: Fleur du Cap, Nederburg, Amarula, Klipdrift and Durbanville Hills. The business is a great converter of profits into cash flow, and decades of conservative management have built a well-fortified balance sheet. Remgro and SABMiller are currently the major shareholders – albeit seemingly aloof from one another at this point. Just imagine if Remgro and SABMiller co-operated in helping to drive Distell into international markets? TSOGO SUN If bigger is better, then Tsogo Sun – South Africa’s largest casino group – offers investors a formidable casino presence across the country. The footfalls through Tsogo’s multitude of casinos is impressive, especially the Suncoast complex in Durban. Big profits, big cash flows, big dividends and limited risk. Investment conglomerate Hosken Consolidated Investments (HCI) offers an alternative entry into Tsogo Sun.

For those feeling able to toss off the weight of ethical matters, INVESTSA presents the seven not-so-deadly sins. BRITISH AMERICAN TOBACCO Smoking is a dying habit? Absolutely right. No one will dispute the health issues around tobacco use, and few will dispute that future generations will not treat smoking as a fashionable habit. But for the time being, emerging markets are picking up the slack from more health-conscious developed markets. And even when cigarette smoking is on the wane, large tobacco companies like BAT (which owns leading brands like Kent, Dunhill, Lucky Strike and Pall Mall) have considerable pricing power to ensure that decent margins compensate for any falls in volume sales. BAT is also in the enviable position of not having to invest too heavily in future capacity, which might explain the generous dividends that have been paid out in recent years. In fact, one might argue that BAT’s biggest investment over the last few years has been buying back its own shares. We only have to read the JSE SENS feed every morning to see the daily notification of a buy-back by BAT of another parcel of its own shares. For those wanting to put a filter on their exposure

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to BAT, there is a BAT-lite option via Reinet investments, which retains a small chunk of BAT shares that is still meaningful in that company’s overall value proposition. SABMILLER While many may argue that the earnings multiple on what is now the second-largest brewer in the world is a tad demanding, there’s an operational toughness inherited from its South African roots that probably justifies a bit of premium froth on the share price. Beer is a great defensive product (after all, when the going gets tough, people drink harder don’t they?). It’s relatively cheap to produce and it sells in great volumes. SABMiller distributes well-known global brands (Millers, Coors, Fosters, Peroni, Pilsner Urquell and Grolsch) from the United States to Australia and Eastern Europe to Africa. The X-factor in the brew is China, where competition is currently capping margins. However, if the margin pressure was released, then profits on this populous market could be huge. DISTELL The share price of Stellenbosch-based Distell has also recently moved into what might be deemed expensive territory. But recent shifts

SUN INTERNATIONAL There may be worries over the exclusivity arrangement for Sun International’s profitspinning GrandWest casino in Cape Town that are hindering sentiment at the moment. But there are some exciting offshore gambles in choice South American markets that make this well-managed company a good long-term bet. An alternative flutter on Sun International can be taken through Grand Parade Investments, which has exposure to the GrandWest casino and holds its own very profitable limited payout machine (LPM) operations (as well as the Burger King master franchise for South Africa). PHUMELELA Some punters may regard this tote operator as a bit of a dark horse on the gaming scene. But Phumelela is slickly run (by the super-sharp Rian du Plessis), churns very convincing cash flows, holds a meaningful offshore horse racing presence and has a couple of interesting new gaming avenues in the form of sports betting and limited payout machine operations. NIVEUS This is quite an enticing mix of limited payout machines, electronic bingo and liquor (the company controls wine and brandy specialist KWV). Limited payout machines and electronic bingo are no longer viewed as the poorer cousins of casinos. Admittedly, these alternative gaming platforms don’t spin the same profits as casinos, but the return on capital is attractive since no huge development costs need to be incurred to set up shop.

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own but not out By Shaun Harris

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The past year has been a taxing time for commodity shares, as well as for the fund managers who invest in these troubled any of the investments relate to mining, where production has stocks. It has also gone down and expenses have gone up. been a taxing time for investors in these It’s an uncomfortable picture but there might just be a glimmer of light at the end of funds, shares and the mine shaft. This could be the year that commodities, both investments like shares exchange traded and physical commodities ranging from gold to soya, hit the bottom and hopefully products, drawing on tostartcoalto recover. There is some evidence that their resources and this is already happening. Which means it’s the right time to start buying commodities. patience.

Or it should be. It’s difficult to call the bottom of a cycle; sometimes value and prices just keep going down. And investors are rightfully wary. Money has been lost, investments are being sold.

“Resource companies have underperformed the broad market substantially since 2009,” says Piet Viljoen, chairman of value-based asset manager RE:CM. “This poor relative performance has caused many investors to sell their resource shares. Sentiment towards these companies has also soured somewhat. In 15 years we’ve come full circle.” Viljoen explains why, in 2009, when mining stocks were the market darlings, RE:CM held very few, and why it now is very heavily exposed to certain mining companies. Let’s look at an investment and there are many that illustrates this point. The Investec Gold exchange traded note (ETN) was the worst performing fund in 2013, according to Mike Brown, MD of etfSA.co.za, in his latest Performance Survey to December 2013. The value of the fund declined by 34.59 per cent in 2013 as the US$ gold price fell in international commodity markets. Unlike the NewGold exchange traded fund (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 in the US$ gold price. That’s a huge whack for investors, losing a third of their money in a low-cost product driven by a great variant like the gold price. No wonder many started selling their investments. But perhaps they should be buying. Another investment, this time an equity resources fund, underscores this point. The Old Mutual Gold Fund has been the worst performer in its category, losing 30.17 per cent over 12 months and 33.74 per cent over the past three years, the absolute – not annualised – figure. Looks like a fund to bail out of, doesn’t it? On the contrary, this is probably one of the funds to buy. There have been management changes and the fund is now run by Michael Schroder, one of the top fund managers with vast experience. He spent several years with Anglo American as an operations manager before joining Old Mutual Investment Group SA (OMIGSA). His skill has no doubt helped performance but there’s more that explains its recent very strong recovery. Schroder details some of this in his latest commentary on the fund. “During the third quarter of 2013, the gold price recovered somewhat after the mayhem it experienced in the second quarter. However, US$1 330 per ounce, up 11 per cent, is still below the cost for most miners to dig the metal out of the ground.” That’s only part of the bad news. Schroder goes on: “By and large, the industry is loss making and all efforts are now targeted at cutting overhead costs, exploration expenditure, investment in projects and high-cost operations.” But here’s that glimmer of light. “This fund’s defensive positioning paid off

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commodities industry. Widespread strike action has in many cases crippled production, wage settlements have been much higher than inflation and have added to costs, as have electricity prices. On top of this, as Reserve Bank Governor Gill Marcus recently noted, the weak Rand has not yet been exploited by the mining industry to increase exports. Yet many commodity shares are showing strong signs of recovery potential. Look at a few of the shares in the Old Mutual Gold Fund top 10 holdings, which are also held by most of the commodity funds. Gold Fields, Anglo American and AngloGold Ashanti were knocked last year but are now showing early signs of recovery. AngloGold Ashanti is the best example of this. Over the past year the share price has lost 46.8 per cent. But it has gained 9.2 per cent in the past six months and recovery has accelerated in the past month. The price:earnings ratio on the share, 4.09 times, is cheap. The forward ratio, 17.69 times, indicates that better times are expected, according to AngloGold Ashanti’s recent third quarter earnings report. It says gold production is up by 12 per cent from the previous quarter, corporate costs are down by 26 per cent and exploration costs by 30 per cent, and the all-important cash flow has increased by 128 per cent over the previous quarter. This is a share price, and mining company, that is recovering. It’s worth buying now while the earnings multiple is still low; if the forward rating proves correct, it will be an expensive share later in the year. All that it needs to put the cherry on the top is a sustained improvement in the gold price, which is unfortunately always difficult to forecast, and increased demand for gold from the large importers like India.

during the third quarter as the return of 15 per cent superseded that of the metal as well as both key indices, the Gold Index and the All Share Index. Year to date, the fund has massively outperformed its FTSE/JSE Gold Index benchmark, but that is no joy when it has in fact fallen by 25 per cent. The key concern, namely the fear that the gold price might have entered a bear market (after having risen for 10 consecutive years), is keeping supply

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and demand pretty tightly balanced at the moment. We will keep our eyes open for undervalued companies that would benefit if the metal recovers,” Schroder concludes. That’s what investors should be doing as well. The undervalued companies, reflected in their share prices, are out there. They just have to be pinned down. But complicating matters, apart from the vagaries of international metal markets, are the particular South African conditions in the mining and

This is our opinion. But it’s also the opinion of some of the experts, like Viljoen, one of the most contrarian investors, who is buying certain mining shares now; and Peter Major, mining consultant at Cadiz, who wrote a feature in the last issue of INVESTSA titled, ‘When do we start buying?’ Read it again. His argument and style of writing is impeccable. And his conclusion on whether to buy mining shares? “It’s a Sherlock Holmes three-pipe answer – ‘elementary’.” Of course, mining shares and commodity shares in general are high risk investments. But they can spice up the satellite portion of an investment portfolio, particularly if the investor has a special and informed interest in a certain commodity.

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AS WELL AS OUR LONG-STANDING PHILOSOPHY IN PRUDENCE AND CONSISTENCY, HERE ARE TWO MORE REASONS FOR YOU TO INVEST WITH US: Our Inflation Plus Fund and Global High Yield Bond Fund of Funds have won best performance certificates at the Raging Bull Awards*. To invest in one of our award-winning funds speak to your Financial Adviser or visit www.prudential.co.za

*Best performance in the ASISA categories of SA Multi-Asset Low Equity and Global Interest-Bearing Variable-Term, for the three years to December 2013 on a straight performance basis. Collective Investment Schemes (unit trusts) are generally medium-to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to future performance. Unit trust prices are calculated on a net asset value basis, which is the total book value of all assets in the portfolio divided by the number of units in issue. Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Commissions and incentives may be paid and if so, would be include in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used. All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates. A fund of funds unit trust may only invest in other unit trusts, all of which levy their own charges that could result in a higher fee structure for these portfolios. investsa

Commodities

Pick a commodity

Big wins possible with selective strategy Commodities have taken a beating, but investors who box clever could be well positioned to take advantage of a comeback in 2015, perhaps sooner.

olatility and uncertainty caused by strike action could cloud near-term perceptions and performance, suggesting that commodity sector supporters will be looking for gains two to five years out. The good news is that in some cases those gains could be sizeable. Commodities have underperformed the All Share Index for four years. After a long period of under-performance, sector rotation can be expected. The time to buy is now, because share prices will discount the effects of firmer commodity prices about 18 months in advance. A strategic view and a selective approach are necessary. Strategic factors suggest that weak spot prices for most commodities are unsustainable. A reviving world economy is clearly good for commodities. Another positive is Chinese urbanisation. Another 500 million people will move to the cities in the next five years, bolstering demand for housing, roads, cars and appliances. Iron ore demand is down, however. Chinese steel-makers have taken old plants out of production to be replaced by efficient mills using clean technology. Supply should rebound by 2015 as new mills come on stream but will likely not be enough to meet increased demand, pushing up prices – positive scenarios for South Africa’s iron ore exporters. Gold demand is not underpinned by industrial demand. Prospects are therefore more problematic. Some strategic factors suggest caution, including a firming global

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rates cycle and the prospect of US energy self-sufficiency – developments that may be good for the Dollar and bad for gold. High production costs at many local mines also complicate the task of picking gold mining winners. Platinum prospects are positive on a twoto five-year view, despite labour unrest. Reviving world car sales, Chinese carbuying, Chinese concerns about pollution and the need for catalytic converters are all positive for platinum. Oil is difficult to call. New oil and gas discoveries and upcoming US oil selfsufficiency could depress prices, but turmoil in the Middle East may have the opposite effect. Among non-mining commodities, fertiliser has promising potential on any strategic view. Food security is top priority for African policymakers. Many parts of Africa are fertile, but crop yields are low. Food scarcity is a worry. Food demand will certainly rise. The challenge is to raise yields on existing arable land and put relatively unproductive, perhaps arid land under the plough. In all scenarios, fertiliser has a pivotal role. Strategic factors argue in favour of increased portfolio commitments to commodities. But even on a tide of stronger world growth, not all commodity ‘boats’ will rise at once. We’ll see volatility and uncertainty. A selective approach is needed; strong nerves may be required.

Imara is an independent, Botswana-listed investment banking group that prides itself on objective decision-making in the service of its clients. The company is mid-sized and has offices in Angola, Botswana, South Africa and the UK and associate offices in Malawi, Mauritius, Zambia and Zimbabwe. Imara has also partnered with Chapel Hill Denham in Nigeria, Sterling Bank in Kenya, Namibia Equity Brokers and Mac Capital in Dubai. The group is an active participant in Africa’s financial markets and maintains extensive research coverage of regional equities. Imara provides a range of specialised financial products and services that can be broadly categorised as: • Asset management (institutional and private client) • Corporate finance and advisory services • Securities • Trust and administration services.

Chris Botha, Senior Fund Manager at Imara Asset Management South Africa

Returns, year after year Imara Asset Management maintains a successful track record and reputation as a provider to the smaller provident/pension fund market and focuses on the high net worth and mass afďŹ&#x201A;uent private client market. Asset Management | Corporate Finance | Securities | Trust Services

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Alternative investments

Hedge fund managers:

the benefits of diversification across styles Hedge funds as a group encompass a diverse range of strategies; as an investor, it is important to differentiate between these.

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n this article, we will look at just one investment strategy, equity investing, and discuss how two different hedge fund managers, Manager A and Manager B, navigated the domestic equity market over the last year.

Performance discrepancies over 2013

The graph indicates how the FTSE/JSE All Share Index (ALSI) over the 2013 calendar year has been driven by a small handful of Rand hedge stocks like Richemont, Naspers, SAB, BHP Billiton and Sasol. This graph also shows the broad resource sector having underperformed the industrial and financial sectors. The magnitude of this underperformance has varied widely within the sectors themselves. Within the resource sector, the share prices of certain resource stocks have increased whereas others have declined. BHP Billiton (+14 per cent) and Impala Platinum (-26 per cent) are two examples of this. The graph highlights this performance disparity within the overall domestic market. The key point the graph makes is that the last year has been a stock picker’s market, where managers who have correctly called the few performing stocks have been richly rewarded. This is reflected in the return numbers for both Managers A and B. Over 2013, Manager A was down 6.2 per cent while Manager B returned 16.3 per cent. This is a significant difference in performance and the knee-jerk response could be to question the benefit of remaining invested with Manager A. Shouldn’t we make use only of Manager B? Manager A and Manager B have very different investment styles – each of which has a place. Manager A has a value bias and can at times be contrarian Over the last year, this style has led Manager A to invest in cheaper stocks, which has led to investing in (but not limited to) resources companies. The manager has also sold shares of companies that they felt were expensive, only to watch them become more expensive. A few of these shares were the market darlings as shown in the graph. Is the manager a poor stock picker? We would argue not. The majority of the difficulty that the manager felt this year wasn’t due to stock selection but rather sector allocation. So is the manager making poor sector selections? Again we argue not, as market timing and stock/sector rotation is very difficult, if not impossible to get right 100 per cent of the time.

SOURCE: Citadel Asset Management and I-Net-12 months ending 31 December 2013 ALSI up 20.6% over 2013

Once you overlay Manager A’s value orientation on these extremes and shifts in the market, you can begin to think that a negative return of 6.2 per cent is very respectable. Manager B runs their fund on a more conservative basis Manager B’s portfolio tends to be less concentrated with regard to individual stocks and sectors. They also tend to be less value orientated than Manager A and are not as quick to sell performing shares. In addition to this, the team uses fewer financial instruments relative to Manager A, which means their portfolio gearing/ leverage is lower over time. Over the course of 2013, the overall leverage of Manager B’s fund has been less than half the leverage used by Manager A. Lastly, Manager B has avoided the resource sector. All of these factors can explain their 16.3 per cent return.

volatility experienced in our clients’ portfolios and, in so doing, smooth clients’ return profiles over time. We focus on remaining objective, making rational decisions about the structure and composition of our hedge fund solutions and selecting managers with a proprietary investment edge. We aim to help our clients enjoy the benefits of style and strategy diversification.

The key point the graph makes is that the last year has been a stock picker’s market, where managers who have correctly called the few performing stocks have been richly rewarded.

Diversifying across managers is important when it comes to hedge funds We believe that different managers with various styles and portfolio construction methodologies deliver diverse levels of performance during different points in the market and economic cycles. Simply put, a well-considered combination of hedge fund managers is like an ‘all-weather tyre’. It is therefore important to stay the shortterm course and maintain investments across managers who have a proprietary investment edge, to reduce the overall

Brendan Jack, Alternative Investment Analyst at Citadel Wealth Management

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Barometer

HOT

NOT SA not improving its competitive performance

se k rai d Ban l r o W ast forec

ba s g lo

The World Bank’s Global Economic Prospects predicts that global gross domestic product will expand 3.2 per cent this year, up from 2.4 per cent last year, due to advanced economies beginning to pick up pace. This is the first time in three years that the World Bank has raised its forecast for global growth.

SA wine exports reach record volumes Total South African wine export volumes increased by 26 per cent to 525.7 million litres in 2013 when compared to the previous year. Exports to the UK rose by 21 per cent, Germany by 24 per cent and Russia gained 18 per cent in 2013.

The GIBS Dynamic Market Index 2014, which is based on hard data and measures the performance of 133 countries between 2006 and 2012, revealed that South Africa has done very little to improve its political, social and economic institutions since 2006, thereby hampering its efforts to attract foreign direct investment when competing with more dynamic markets, such as Botswana and Mauritius, which have performed better on the index.

Credit demand from SA private sector slows Data from the Reserve Bank showed that growth in credit demand from South Africa’s private sector slowed to 6.14 per cent in December 2013 from 6.98 per cent in November.

Economic risks According to a report by ratings agency Standard & Poor’s (S&P), domestic banks face downside risks to the South African economy in 2014, weighing on their credit projections and causing continued negative outlooks.

Airline profits remain strong The January 2014 Business Confidence Survey by International Air Transport Association (IATA), a quarterly survey of airline CFOs and heads of cargo, revealed that growth in cargo volumes is expected to pick up over the next 12 months at rates not seen since mid-2010, which reflects recent improvements in world trade growth and increases in business confidence.

Southern AfricaN mining received top spots Eight countries in southern Africa, including South Africa, have been placed among the top 20 most exciting African jurisdictions according to the Mining in Africa Country Investment Guide publication. The eight countries are split into two groups, namely those that offer a low-risk environment with proven geological potential, and those that offer greater risk yet less exploited mineral resources. It was reported that despite South Africa having had a volatile few years with labour disputes and falling production, the country continues to dominate African mineral production.

s y a w e Sid 18

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Average house price increases, but slowly The FNB House Price Index revealed that the average house price for 2013 increased year on year by 6.8 per cent from R835 480 in 2012, to R891 976 for 2013. While the index remained higher than levels of a decade ago, with the real price average for 2013 42.6 per cent above the real average price for 2003, the 2013 average real price was still 18.5 per cent lower when compared with the last decade’s real average price peak reached in 2007.

Chris Hart

Chris Hart, Chief Strategist, Investment Solutions

Investing from within the

Fragile Five Club S vulnerability that manifests mainly in the weakness of their currencies. The Rand (nominal effective exchange rate), for example, weakened by 18.4 per cent in 2013 and has slumped further in 2014. However, the JSE has risen to fresh alltime highs in Rand terms. Bonds have weakened on prospects of higher inflation and fears that interest rates might rise as a consequence. This is a typical market reaction to macroeconomic imbalances affecting the currency.

weaker Rand despite weaker global stock markets. But not all sectors will be strong. This scenario will be unkind to sectors such as financials, which do not have Rand-hedge characteristics and will fall in sympathy with global markets. The Rand-hedge industrials will probably hold up in Rand terms but not in Dollar terms, as they are already quite expensive. These were the momentum stocks of 2013. The Rand-hedge and Rand-leverage resources will probably be the winners, as they are the cheapest part of the JSE at the moment.

It is important to note that none of the Fragile Five faces sovereign bankruptcy and there is no prospect of a Greek-style meltdown. In Greece’s case, the sovereign was essentially bankrupt and required a bailout from the European Union and other global agencies such as the IMF. It was also a special case. It was participating in a common currency and did not have the tax base to meet its obligations in the form of political promises to its electorate. In the case of the Greek crisis, there was no place to hide regarding its financial markets, as all asset classes were hammered. The country’s stock market lost more than 90 per cent from its 2007 peak to the low in 2012. Greek bonds fared similarly and property was also sold down significantly, pushing the banking system into insolvency.

However, there is never simply a single factor at work. Last year, the Fed escalated its QE programme to monthly asset purchases of $85 billion. The 2014 intention is to taper this amount and the Fed planned to begin doing so at the end of January. In 2013, the massive QE programme signalled ‘risk-on’ and this was reflected in global equity markets, which ended the year at record levels. The tapering decision has resulted in weaker equity markets. However, the risky currencies of the Fragile Five weakened in 2013 during this period of risk-on when they should have strengthened. Financial markets will probably remain in a ‘risk-off’ mode while the Fed tapers, which implies the Fragile Five’s currencies will experience accelerated weakness.

This means that under the scenario of Fed tapering and financial markets moving to risk-off mode, the Fragile Five’s currencies are expected to come under even more severe pressure. The dogs of 2013 might end up the winners of 2014.

The Fragile Five do not face a similar fate. The deficits reflect a high degree of

In South Africa’s case, the JSE will prove an appropriate haven for protection against a

outh Africa’s trade and current account deficits widened significantly during 2013, creating a twindeficit problem, while government finances reflected a persistently wider deficit. Numerous countries have this same problem; but five countries, namely India, Indonesia, Brazil, Turkey and South Africa, have unusually large twin deficits. Dubbed the ‘Fragile Five’, this dubious distinction has important investment implications.

It is essential to understand that while the Fragile Five are not countries facing a sovereign default, they have developed macroeconomic imbalances. This means their financial markets will be volatile, but there will be assets that will provide protection and opportunity. However, assets such as bonds and non-hedge shares will carry danger for the investor. The key is to understand how the different asset classes and instruments behave when the currency becomes the most important driver of financial-market performance.

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Economic commentary

En route to an early interest rate hike

The start of 2014 saw a continuation of industrial action as workers at the world’s three largest platinum producers (Lonmin, Impala Platinum and Anglo Platinum) embarked on a strike.

ogether with a general emerging market sell-off, concerns around the tensions in the country’s platinum belt drove the Rand to a five-year low against the US Dollar. The past two years also saw significant challenges on the labour relations front, which in turn had adverse effects on GDP growth (it is expected to register in the vicinity of two per cent for 2013). Looking back on 2013, the Rand depreciated markedly on the back of waning risk sentiment as the US Federal Reserve (the Fed) announced a reduction in the scale of asset purchases under quantitative easing (QE). However, despite the currency depreciation, CPI inflation breached the six per cent target for only one quarter, thanks to limited exchange rate pass-through given the subdued growth environment. While the passthrough experience may have been limited over the past year, we are of the view that the Rand’s sustained weakness will likely be reflected in higher CPI inflation going forward. The South African Reserve Bank’s Monetary Policy Committee left interest rates unchanged throughout the year, but the bank remained torn between rising inflation and weak growth. However, the weaker Rand has put to rest any chance of further rate cuts, with the Reserve Bank sounding increasingly hawkish in recent meetings and finally raising interest rates by 50 basis points at the end of January. Meanwhile, the external environment showed an improvement in 2013, led by a recovery in US GDP and a return to positive growth in the Eurozone. Given these developments, as well as the weaker Rand, it is disappointing that South Africa’s current account deficit widened during the year. The country’s appetite for imports remains high, especially against a backdrop of

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weak domestic growth. South Africa’s lack of competitiveness is also an impediment to the adjustment in external imbalances – a weaker exchange rate and improving external growth can only do so much in an environment of elevated unit labour costs. The consumer had a challenging year with credit extension remaining sluggish, employment struggling to take off and indebtedness staying high. However, positive wealth effects and interest rates were supportive, explaining the varied experience within household spending. Growth in services and non-durables remained subdued, while semi-durables and durables grew at a robust pace. These latter categories are more import-intensive and their strong growth does not bode well for the current account. While investment by parastatals (mainly Eskom and Transnet) has held up over the past two years, investment by the private sector has been muted. Though concerns over nationalisation have dissipated, numerous proposed legislative changes related to the mining sector are the new source of uncertainty. The somewhat subdued household demand outlook is likely to add to reasons for the private sector to hold off on investing, at least in the short term. After running countercyclical fiscal policy since 2009, the need for fiscal consolidation has meant that the government has limited room to grow spending. The Minister of Finance has announced an expenditure ceiling, which puts a lid on government spending and its contribution to GDP. However, the three-year wage agreement struck with public sector employees comes to an end this year, posing a risk that unions may ask for a higher wage increase than the CPI plus one per cent currently in place.

While a higher real wage increase would elevate government spending, the adverse effect it would have on the budget deficit probably outweighs any positive effect that it would have on GDP. 2013 also saw only one sovereign credit rating downgrade of South Africa early in the year, with all three ratings agencies subsequently maintaining their respective ratings, though they continue to voice previous concerns. Fiscal consolidation is still taking a while to materialise; government policy is not always clear and the growth outlook is not particularly encouraging. South Africa has seen tough times over the past few years. On a few fronts (such as the current account deficit) it is difficult to see a further deterioration from current levels. However, this does not mean that a major improvement in the South African economy is imminent. While we expect GDP growth to pick up in 2014, it is likely to pale in comparison to most emerging markets. It may take a couple of years before the growth needed to address the country’s challenges is achieved.

Kanyane Matlou , Analyst, Coronation Fund Managers

Events assets, meaning that cronyism is a real issue. The blurred line between politics and economics, along with Putin’s supreme control, makes investing in Russia very complicated. So, without a good handle on the local politics, in many of the key sectors, the investor needs to be most cautious regarding investing. It probably explains then why the mighty Gazprom, the largest (and cheapest) conventional gas producer in the world, with massive reserves, trades on a mere 3x multiple. The likes of Gazprom and many of the key State-owned enterprises, which make up some 50 per cent of the market cap of the Russian stock market, trade on very low multiples. The overall Russian market consequently looks cheap.” It was also made clear to Silverman and Mothata during their visit that decisions at the State-owned enterprises were often taken for geopolitical reasons, rather than on pure commercial merit, with the cronyism previously referred to being a real factor.

icer (left) and Chief Investment Off Glenn Silverman, IS of Market and Economic Research ad He ta, tha Mo iba Les

Unpacking the challenges facing investors

in Russia I

nvestment Solutions recently held a media round table in which they discussed a site visit to Russia undertaken by chief investment officer, Glenn Silverman, and head of market and economic research, Lesiba Mothata, as part of visits to South Africa's BRICS partners. The visits had the clear objective of determining whether BRICS was just a jumble of letters or if there was an underlying economic case for closer ties between the five members of this emergingmarket group, and what lessons South Africa could take from each country. Silverman comments that the Investment Solutions interest stemmed from a wish to better understand the global bigger picture. “We expected to find that the BRICS countries (Brazil, Russia, India,

China and South Africa) would possibly be a key dynamic to global investment flows. However, on the contrary, we believe that we remain the recipients of policy made in the United States, which is still the key global economic driver.” Silverman says this key partner in the BRICS alliance is one of the richer countries in natural resources, yet not easily accessible for investment without strong government connections. Politics are interwoven with economics in Russia, which poses a number of challenges when considering investing there. Silverman adds that although this was not particularly unusual for emerging markets in general, and the BRICS countries more specifically, “In Russia’s case, the intrusion is even deeper. President Vladimir Putin has absolute control, especially over strategic

Silverman’s advice to those considering an investment in Russia: “It is too large and geopolitically important a country to be ignored. There are always opportunities for judicious stock picking. But Russian stocks require a specific and large Russian ‘discount’ factor, and a more in-depth knowledge of the country, before doing so, because basic property rights are often violated. “I believe that investing in countries or companies with deep resources, in other words an asset play, like Russia, Brazil or even South Africa, has some merit, but in the current environment, investors want growth, and will pay for this. This is more evident in India. And because growth is in short supply in Brazil and Russia, a lower market rating is applied to them. In the case of Russia, a further corruption/risk discount applies.” Russia has a GDP of US$2 trillion (ranked eighth in the world) and a market capitalisation of $874.7 billion (ranked 15th in the world). Of the four countries visited, Russia has the smallest population at 142 million (ranked 10th in the world). It has a rapidly ageing population, with 22.6 per cent of females and 13.8 per cent of males above 60 years old. Its fertility rate of 1.64 is well below the 2.1 replacement ratio. This means Russia faces some real long-term demographic challenges. It is losing almost one per cent of its work force, almost 900 000 people, every year. Few other countries face such a demographic headwind, says Silverman. “It is important, though, to recall that Russia has been a world superpower on more than one occasion. It has a powerful military, along with the world’s single largest stock of nuclear weapons. That makes it a country that cannot be ignored, taken for granted or easily challenged without consequences.” investsa

Global economic commentary

Markets

taking a breather … and then? With 2013 ending with constantly rising stock markets, it was not surprising that early 2014 would see a likely global sell-off.

he recovery in US real estate prices and wealth vis-a-vis the stock market, as well as low inflation, allowed the Fed to begin tapering at a rate of $10 billion a month.

By mid-January, the Fed announced a second round of tapering, bringing the prior $85 billion a month bond-buying programme down to a level of $65 billion a month. We expect continued Fed tapering, which will hamper portfolio investment flows into emerging markets, unless rates rise significantly in these nations. However, rate increases are not likely in the best interests of local businesses. We expect a significant increase in inflation in emerging markets in 2014, along with rate increases to try to fend off panic selling of emerging market currencies. Those emerging markets with large twin deficits are under severe pressure given the fickleness of hot portfolio flows. Emerging market bonds were one of the brighter spots in recent years for US and European investors to pick up significant yield. However, these short-term flows have been reversed in earnest as of the past two months, given the

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likelihood of higher rates in the US. The recent pullback is, in many ways, a healthy sign for global markets, which require a breather after 2013 gains reached 29.6 per cent for the S&P 500; 26.8 per cent for the MSCI World Index 54.5 per cent for the MSCI Japan Index; and 24.1 per cent for the MSCI EMU (European) Index. US markets have led the pack throughout 2012 and 2013, with improving economic sentiment showing in hiring levels, which have averaged over 150 000 new hires per month over the past year. It’s expected that the average could rise closer to 200 000 per month later this year. Interest rates remain low in the US despite the Fed tapering, with the current 10-year Treasury yielding less than 2.8 per cent. Mortgage rates, although higher than a year ago, remain historically low, at levels of around 4.5 per cent on a 30-year fixed rate. This, coupled with the US tax incentive to purchase property and deduct the mortgage interest against personal income tax, bodes well for an improving housing sector throughout much of 2014. With Bernanke’s departure at the end of January, we expect new chair Janet Yellen

to continue the tapering policy he has set in motion. It is likely that by year-end 2014, no further Fed bond buying will occur and the taper will be complete. This will be the true test for the market as Fed stimulus and support will have effectively been withdrawn for equity market investors. 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. European-wide equities may, however, be held back by the strong Euro hitting 1.37 to the US$. The MSCI EMU Index gain for 2013 was an impressive 27.9 per cent in US$ terms for 2013. Despite elevated 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 GDP growth figures in the US, EU (including Spain, Germany and Ireland) and UK in recent weeks have helped reinforce the sense of a global recovery. Most US bonds remain expensive given that interest rates are being held artificially low by the Fed’s massive bond buying programme. The differentiation between huge equity inflows versus bond flows is significant, with bond inflows at their lowest levels since 2008. US investors are also increasingly moving back into European equities. The Fed will remain in easy money mode until such time that unemployment drops to 6.5 per cent, being currently at 7.0 per cent. The accommodative European Central Bank under Draghi also seems to be in no rush to raise rates or worry about inflation, which is almost non-existent in the Eurozone overall. In fact, deflation is a real concern for Draghi at present. While global equity markets are likely to continue to show progress in 2014, we expect returns to be much more muted. Despite the negative sentiment currently surrounding various emerging markets, their weaker currencies provide their exporters with a significant competitive advantage. We expect emerging markets to rally within the next 12 to 18 months and believe the recent sell-off has been overdone.

Anthony Ginsberg Director, GinsGlobal Index Funds

Industry associations

Risk profiling:

more questions

than answers encapsulated in the legislation, particularly where risk profiling is concerned. The workgroup agreed that the ombud, in delivering on matters pertaining to poor or inadequate financial advice, frequently categorises complainants as aggressive, moderate or conservative without taking into account the relevant and material factors an adviser may have considered during the first meeting. For example, a 60-year-old investor is considered by the ombud to be conservative, mainly based on age, with the ombud concluding that such a person should be invested in a guaranteed or low risk investment, ignoring the fact that this investor still has a 25-year investment horizon.

hat is risk? What does risk profiling entail? And is it possible to ‘shoe box’ a consumer based on his or her response to a series of questions? These are just some of the issues that South Africa’s investment advisers wrestle with on a daily basis. Why the confusion? The Financial Advisory and Intermediary Services (FAIS) Act and its accompanying General Codes of Conduct (Codes) set out what is required by financial services providers and intermediaries. The process they should follow to provide appropriate advice is documented in section 8(1)(c) of the code, but the term ‘risk profile’ is not defined. Risk profiling practices in the financial advice space have therefore been informed by practices in other markets as well as the risk profiling practices developed by various financial services product providers. The result is far from ideal. Uncertainty over the definition of risk profiling and the lack of suitable tools to determine an holistic profile of consumer risk led to the formation of an Advisers’ Risk Profiling Workgroup, which met for the first time in Pretoria on 22 January 2014. Attendees included representatives from the Institute of Behavioural Finance, the Financial Intermediaries Association of Southern Africa (FIA), the Financial Planning Institute (FPI) as well as a select group of compliance experts and financial advisers. This workgroup – in consultation with other industry stakeholders –

aims to facilitate a change process to ensure that advisers provide appropriate advice to their clients. What is the problem? The law requires that advisers conduct a proper financial needs assessment and risk profiling exercise with each of their clients to ensure that the product solutions suit their unique set of circumstances. But confusion around what risk profiling entails is causing major headaches for advisers. According to Anton Swanepoel, FAIS expert and spokesperson for the Advisers’ Risk Profiling Workgroup, the following issues are indicative of the confusion and incorrect application of risk profiling: • Many of the available risk profiling tools are fundamentally flawed. • Risk profiling questionnaires which categorise investors as conservative, moderate or aggressive are misleading and flawed and should be abolished. • The FAIS Ombud can work only with the evidence provided. If financial services providers submit flawed risk profiling questionnaires, they should expect a poor outcome. • The FAIS Ombud should consider all three elements of risk profiling as defined by FinaMetrica and the Institute of Behavioural Finance and should not only focus on the client’s risk tolerance. A study of recent FAIS Ombud determinations points to inconsistent interpretations of the terms and concepts

If advisers are persuaded to give advice according to the ombud’s application of risk profiling as documented in the determinations, investors will not have sufficient capital over the long term, because low risk investments generally do not outperform inflation over time A sound definition of risk profiling is a good starting point to address the problem. FinaMetrica and the Institute of Behavioural Finance say that a risk profile includes three components, namely required risk, risk capacity and risk tolerance. This concept is expanded on in a white paper titled ‘Best Practice Risk Profiling – the Art and Science’. The workgroup agreed that the current situation is untenable and prejudicial to both adviser and client and it has undertaken to improve the definition of risk profiling and create a best practice process for dealing with it. Going forward, the focus will be on serving the interests of clients, which will automatically mitigate advice-related risk in advisers’ practices.

Gareth Stokes, Communications Manager of the Financial Intermediaries Association of Southern Africa (FIA)

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Head To Head Impact of legislative changes in the institutional arena

Alexander Forbes Financial Services, Head: Best Practice, Research and Product Development

M ichael P rinsloo Over the past few years, which legislative changes in the institutional arena have had the most impact so far?

enforcement, should have a significant positive impact on the outcomes for savers in South Africa.

The issuing of additional regulation, directives and circulars has changed the industry to one that is quite tightly regulated compared to the past. Recently the Financial Services Laws General Amendment Act amended 11 pieces of financial legislation, and the Taxation Laws Amendment Act changes the retirement provision landscape; some of these changes are far-reaching, albeit new.

Which do you believe was the most necessary proposed legislation in the financial services industry? Why?

The tax changes form part of the wider retirement reform process undertaken by the National Treasury. This wider process includes improved governance, a focus on costs and preservation. We think this process will ultimately have the biggest immediate effect on stakeholders in the institutional space. However, given its earlier start, FAIS has possibly had the biggest impact so far. There are also a number of significant changes underway with the imminent arrival of the Twin Peaks legislative framework, POPI, TCF as well as the FSBâ&#x20AC;&#x2122;s review of intermediary remuneration. We have not yet seen the full introduction of the Twin Peaks model of regulation or the outcome of the Retail Distribution Review, so the impact of these is unknown, although both are expected to be significant. Treating Customers Fairly and POPI are gaining momentum and taking up significant time and resources as companies prepare for full implementation. Do you agree that all of these changes and proposed changes to legislation were necessary? We believe that these existing (and planned) regulations, together with effective

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Macroeconomically, FICA and other anti-money laundering-type legislation which paved the way for our trade and integration into the global economy were critical to ensuring healthy investment into South Africa, so these are important. For individual consumers, FAIS has probably been most noticeable in professionalising the industry, but we must also include more intrusive oversight by regulators. It is likely that moving forward, TCF will play a large role. Specifically in the institutional space, the retirement reform process will be a key force in the future and, given the poor actual outcomes experienced, is probably necessary in some form. How does this impact on retirement fund administrators, consultants and investment managers in 2014? The above interventions have influenced advisers and product providers to revisit their business models and invest time and money to make sure they operate appropriately. The recent policy and regulatory changes have also resulted in an increased cost of doing business. How does this impact on the clients themselves? It is hoped that these changes will improve protection for clients. We believe that the existing (and planned) regulations set out above, together with their effective enforcement, should have

a significant positive impact on the outcomes for savers in South Africa. It could also have the effect of driving up overall charges in the industry or reducing returns to shareholders and investors or both. However, the real impact is unknown and remains to be seen. The trick will be to implement it in the most pragmatic way to achieve the bulk of the intended benefits while minimising unnecessary cost. Do you think further regulation is required within the financial services industry? If so, what? Any further measures should be considered in light of the already significant compliance cost burden, which ultimately gets passed on to members and investors. Many of the interventions described are in their infancy and we would suggest that time is allowed for the full effect of these interventions to become apparent. If additional changes are considered, we suggest that a principle-based approach to regulation can improve outcomes significantly over the long term in a more cost-effective way. The current predominantly rules-based approach does add complexity and increases the cost of implementation (both direct and indirect). An example of this is Regulation 28, which is still predominately rulesbased and sometimes difficult to interpret and apply. Finally, a more targeted approach in dealing with problem funds or providers, enforcing the existing regulation rather than further increasing the compliance cost burden for all funds, will possibly yield the desired results.

Old Mutual Corporate, GM of Customer Solutions

C raig A itchison Over the past few years, which legislative changes in the institutional arena have had the most impact so far? The life industry regulatory landscape is changing as a result of new and pending legislation such as the Financial Advisory and Intermediary Services Act (FAIS), a Twin Peaks model of financial regulation, the Retail Distribution Review (RDR) and the Treating Customers Fairly approach (TCF). The fair treatment of customers is the common theme. FAIS has had a positive impact in the industry thus far by ensuring that customers receive advice that is fair and appropriate. The RDR could have a big impact. Similar legislation introduced in the UK last year led to financial advice becoming less accessible and affordable to customers, and many financial intermediaries closing up shop. Do you agree that all of these changes to and proposed changes to legislation were necessary? Legislation needs to be updated to keep pace with the industry, which is dynamic, and respond to emerging issues. The recent and pending changes in legislation are focused on increasing consumer protection and modernising how the industry is regulated. This should give consumers greater confidence in financial services, but may also increase the cost of doing business. Some more detail on the aims of the anticipated and implemented legislation: • TCF will help customers understand the features, benefits, risks and costs of the financial products, and minimise the sale of unsuitable products. • The RDR aims to ensure that remuneration and incentive structures do not cause intermediaries to put personal interest

ahead of customers. Through the RDR, the FSB envisages that distribution models will support key TCF outcomes and ensure that the same principles are consistently applied across the financial sector. • The Twin Peaks model will simplify the regulatory framework and result in only two regulators: the Reserve Bank of South Africa (SARB) as the prudential regulator will be mandated to ensure that financial services institutions are sound; the FSB, as the market conduct regulator, will focus on protecting customers. • FAIS aims to regulate the advice and rendering of intermediary services to clients. This has resulted in greater professionalism among the intermediaries. Which do you believe was the most necessary proposed legislation in the financial services industry? Why? TCF is the most necessary proposal as it will drive a mind-set change across all providers in the way customers are treated. This will help improve the perception of financial products that can be misunderstood by customers. There are positive benefits for the industry; providers may benefit from improved retention as businesses that treat customers fairly are likely to retain their customers. How does this impact on retirement fund administrators, consultants and investment managers in 2014? Although TCF will be reflected in future Twin Peaks legislation, it is already being implemented incrementally. The companies in the financial sector will need to ensure that they protect the needs of the customers throughout the value chain from product development and promotion of the product/ service to after-sales service. We expect that the regulatory changes are going to

be a challenge for smaller companies and this could lead to further consolidation of retirement fund administrators, consultants and investment managers. How does this impact on the clients themselves? The anticipated regulatory changes aim to improve the level of consumer protection for clients. The Twin Peaks regulatory approach separates the prudential and market conduct, ensuring that attention is given by regulators to the protection of clients and their assets. TCF will enable product providers to act in the best interests of their clients. Clients should benefit from improved communication and education. Do you think further regulation is required within the financial services industry? If so, what? South Africa has a strong financial regulation framework that has enabled us to survive during the 2008 global crisis. What the industry needs is to implement the up and coming legislation and better enforce the current regulations. Companies are investing in their systems to ensure compliance with TCF, Protection of Personal Information and other regulations. The medium and high income market in South Africa is well penetrated and we have currently the highest insurance penetration rate of 13 per cent on the African continent. The growth areas in South Africa are more in the lower income end of the market for retail and small and medium enterprises in the institutional arena. These markets that have room for growth are very price sensitive and therefore we do think further regulation is required as this will further push costs.

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Morningstar

The Rand continues its descent,

boosting returns for offshore investments Foreign funds dominate while domestic property funds lag and resources funds struggle to stay in the black Returns on offshore assets were buoyed in 2013 as the Rand continued its multi-year descent. Meanwhile, soaring returns from developed markets such as the US and Japan helped offshore fund categories to double digit returns on the year. Resourcefocused funds were barely able to squeeze out a positive return as the price of oil was flat and gold was down nearly 30 per cent, according to performance numbers released by Morningstar South Africa. The best performer among the 25 ASISA categories that Morningstar calculated performance for was the Global Equity category, which saw a gain of 52.2 per cent for the year. Many offshore categories produced similarly impressive results, including the Global Multi-Asset categories – High Equity (45.8 per cent), Flexible (43.3 per cent),

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and Medium Equity (39.3 per cent) – and the Regional Real Estate category (37.8 per cent). Returns were driven by booming stock markets around the world. In particular, the US and Japan, two of the world’s largest economies, had stand-out years. US stocks surged as easy monetary policy and improving economic fundamentals helped the S&P 500 return nearly 30 per cent, its best year since 1997. Japan was also a stand-out performer with the Nikkei 225 index posting its best return (56.7 per cent) in four decades. Returns were driven by a depreciation in the Yen, which helped large Japanese exporters such as Sony and Toyota. Also, investors were encouraged by Japanese Prime Minister Shinzo Abe’s plans for massive policy spending to kick-start the economy. Returns from foreign categories were turbocharged by the depreciation of the Rand. A depreciating Rand is a boon to South African investors buying unit trusts that invest abroad, since these funds must sell Rand in

order to buy assets denominated in foreign currency. When these foreign-denominated assets are eventually sold, fund managers buy back the Rand at lower prices and profit from the trade. The Rand’s 20 per cent depreciation on the year added roughly that same amount to foreign fund returns in 2013. The Rand is now down nearly 40 per cent since late 2010. The top three performing funds in 2013 all benefited from these underlying currents and posted eye-popping returns: Allan Gray Orbis Global Equity Feeder Fund (78.2 per cent), Old Mutual Global Equity (74 per cent), and Sanlam Global Equity (67.8 per cent). Meanwhile, funds that invested here at home had more muted but still attractive returns. The two biggest categories, South African Equity General and South Africa Multi-Asset High Equity enjoyed returns for the year of 19.3 per cent and 18.1 per cent respectively. These performances slightly bested the return of the FTSE/JSE

All-Share SWIX, which reported a 17.8 per cent return. Fixed income funds generally sat at the bottom of the list posting midsingle digit returns. Right at the bottom of the chart was the South African Equity-Resources category, squeaking out a 0.8 per cent return for 2013 as oil treaded water on the year and gold pulled back 27 per cent. The worst performing funds were those which focused exclusively on investing in gold companies: Investec GSF Global Gold (-43.8 per cent), Old Mutual Gold (-31.9 per cent), and Stanlib Gold and Precious Metals (-21.2 per cent).

David Oâ&#x20AC;&#x2122;Leary, CFA, MBA, Director of Fund Research, South Africa, Morningstar South Africa

2013 Calendar Year Fund Performance (ASISA Categories)

Name

December

4th Quarter

2013 Calendar Year

No. of funds

Global EQ General

4.5

10.9

52.2

Global MA High Equity

4.4

8.6

45.8

Global MA Flexible

3.9

9.2

43.3

Global MA Medium Equity

4.5

9.2

39.3

Regional EQ General South African EQ Industrial

4.7 4.1

11.0 6.7

37.8 32.7

11 7

Wwide MA Flexible

3.1

7.4

32.6

Global MA Low Equity Regional IB Short Term

3.9 4.0

6.2 5.9

31.5 26.1

7 5

Global RE General Global IB Short Term

2.6 3.1

3.3 5.8

23.4 23.1

7 5

South African EQ Mid/Small Cap South African EQ Large Cap Global IB Variable Term

1.2 3.3 3.3

4.3 5.1 4.8

20.1 19.8 19.5

9 21 5

South African EQ General South African EQ Financial

2.7 2.6

5.2 7.1

19.3 18.8

134 8

South African MA High Equity South African MA Flexible South African MA Medium Equity

2.3 2.2 2.1

4.5 4.7 4.0

18.1 17.8 15.8

114 79 54

South African MA Low Equity South African RE General South African IB Short Term South African IB Money Market South African IB Variable Term

1.6 1.6 0.5 0.4 1.1

3.2 1.6 1.4 1.3 0.5

12.2 9.1 5.6 5.1 1.1

93 27 30 29 23

South African EQ Resources

1.5

0.7

0.8

Source: Morningstar Direct

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Practice management

Of sugar and shirts: pondering the financial adviser versus the investment manager fully understands the volatility, the task is to place the funds with the most appropriate asset manager. FAIS, of course, has had a huge impact on the asset class selection. Fearful of repercussions, financial advisers have erred towards the more conservative balanced funds rather than pure equity or specialist funds.

financial adviser

ent investamger man

y wife and I were in a supermarket when I spotted the proverbial ‘little old lady’ reaching for a pack of sugar. Having just put sugar in our basket, I knew that the pack she had picked up was more expensive than the other brand. I also knew that ‘sugar is sugar’ and brand differentiation generally has nothing to do with quality, so it’s only about price. I showed her the other cheaper brand and replaced the one in her trolley. She thanked me profusely and went on her way. On reflection, what I had just done is not dissimilar to my activities as a financial adviser. Financial advice at one level is assisted shopping. In a much more complex financial services environment, our task is to select the most appropriate financial product or service for our client, drawing on our extensive skills and industry experience and naturally avoiding conflicts of interest. There is another broadly equivalent assisted shopping service provided by upmarket image consultants. These advisers analyse the industry you operate in, your target audience, your

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skin and hair colouring, and your body shape, (‘portly short’ in my case). They then assist you to identify appropriate work and business clothing to suit these attributes. Immediately, we could now ask: what is the role of the manufacturer of clothing in the transactions discussed? The answer is: none. A clothing factory in Goodwood in Cape Town could manufacture a huge range of purple and yellow shirts for a targeted broad market, but the image consultant may never select one of these for their client. Does it mean that yellow and purple shirts should not be made? The answer is absolutely not, unless of course the shirts don’t sell at all. In a similar way, the role of the financial planner is to analyse the needs of the client and provide the most appropriate product, ranging from risk to short-term and long-term investments. In the investment world, the financial adviser is not an asset or investment manager – their role is to determine an appropriate asset mix in relation to the clients’ required returns and time horizons, putting the resultant asset mix to the client and discussing the anticipated volatility. Once the client

Whether this conservative position limiting risk, even for younger clients with many decades to go to retirement, is good for the client remains to be seen over time. So what of the role of the asset manager? Well, their role is to put the product on the shelf. The asset manager generally is in no position to identify whether their fund is good for every client, and indeed it would be most unfortunate if asset managers were to attempt to offer a one-size-fits-all offering. The job of determining whether the ‘purpleand-yellow’ fund is good for a particular client is the task of the financial adviser, who has undertaken a proper needs analysis. I sat bolt upright in bed that night. “What if the little old lady was a stage two diabetic, short-sighted and had actually been looking for flour, not sugar? Did I have an obligation in terms of the Assisted Shopping Services Act?”

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

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Bernard Fick

Chief Executive, Prudential Portfolio Managers

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Profile

You have been the chief executive of Prudential Portfolio Managers for four years. What have been the biggest challenges over this time? On the back of consistently competitive longterm investment results, we have managed to grow our assets under management from around R80 billion in 2008, to nearly R160 billion at present. At the same time, our staff numbers grew from around 75 to 140. Dealing with this growth and the transformation from a small, private business to a larger and more recognised company has arguably posed the most challenges to us (not only myself). We have had to work very hard developing and investing in the best possible people, systems and processes to ensure that our controls environment could cope with this growth. This is so we can continue to provide complete comfort to our clients that their assets remain protected, while continuing to deliver our same high standards of client service. Personally, I think my main challenge has been (and remains) to ensure that our investment team and processes are not distracted by the increasing business-related demands that naturally follow from business growth. Every hour that an investment manager spends worrying about a non-essential business issue is one less hour during which they could have been thinking about an investment opportunity for their client portfolios. Has the global financial crisis of 2008 had any lasting impact on the way clients invest? The most obvious change we have observed has been a return to multi-asset portfolios in which the investment manager takes responsibility for all asset allocation decisions. The extent of the volatility in equities and developed market government bonds in the 2007/8 period reminded investors about the important role that active asset allocation can play in overall portfolio management. Also, the onerous requirements of the Financial Advisory and Intermediary Services Act (FAIS) have resulted in many individual financial advisers moving their clients’ assets to multiasset portfolios (solution funds) that target a medium-term investment outcome defined in relation to inflation and leave the asset allocation decisions to the investment manager. Where do you foresee the best value for investors in 2014? As long-term investors who are sceptical about

anyone’s forecasting ability, we tend to steer away from making short-term forecasts of asset price movements. However, taking a three- to five-year view, it appears to us that, despite 2013’s strong performance, equities in some developed markets are attractively priced – principally some European markets, the US and select Far Eastern equity markets. So we still favour offshore equities (and to a lesser extent local equities) over cash and short-dated fixed interest instruments. You’re a keen mountain biker; when did you last fall off a bicycle? My most recent mishap was in the Wines2-Whales Race in November 2013, a beautiful route through the Elgin-Hermanus area. Fortunately only my pride got hurt, purely as result of my partner giggling behind me. I enjoy mountain biking as it’s a great way to stay fit and we are spoilt with great places to ride. I’m a bit more competitive in golf than I am in cycling. Which charities are close to your heart and how do you support them? My wife and I support an orphanage in Kayamandi, outside Stellenbosch. She commits more time and energy to this; my support is mainly financial. We also occasionally serve as foster parents for newborn babies during the first three months of their adoption process. Again, Liezel does most of the hard work during the days. I try and help out in the evenings and do some night-shifts over weekends so that she can catch up on some sleep. If you had R100 000 to invest, what would you do with it (excluding Prudential products)? I’d invest it in balanced unit trusts portfolios, with high equity exposure, managed by stable investment teams that have proven their ability to follow a consistent, valuationbased investment philosophy.

How do you strike a balance between personal life and your work schedule? Our family lives in Stellenbosch and the Prudential main office is in Claremont. The 50-kilometre commute serves as a natural separation between work and private life. It does mean that I leave for the office pretty early (I’m normally at my desk around 06h30), but then I try to be home by 17h30 to spend time with our children.

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Winners of Raging Bull Awards SA (ASISA) unit trust categories (including the main multi-asset sub-categories). Best South African Equity General Fund. The fund with the highest ProfileData total investment return ranking over three years in the ASISA South African equity general sub-category. MAZI CAPITAL MET EQUITY FUND (A1) Best South African Interest-bearing Fund. The fund with the highest ProfileData total investment return ranking over three years in the ASISA South African interest-bearing short-term and variable-term sub-categories and the South African multi-asset income sub-category. CORONATION STRATEGIC INCOME FUND (A)

Best unit trusts in SA The 18th annual Raging Bull Awards was held in Johannesburg on 30 January. The awards honour fund managers and management companies that provided superior returns for unit trust investors during the preceding year. TOP MANAGEMENT COMPANIES OF 2013 The unit trust management companies with the most impressive and most consistent overall performance across their families of funds taking into account all factors (performance, risk-management and consistency). For the second consecutive year and a record-breaking fifth time overall, Coronation Fund Managers was named South African Management Company of the Year. The award is given to the unit trust management company with the most consistent overall risk-adjusted performance across a suite of five or more Rand-denominated funds (both South African and international) with a performance history of at least five years. Pieter Koekemoer, head of personal investments at Coronation, says, “We are honoured to be named the best South African management company for a second consecutive year. At Coronation, creating long-term value for our clients is our primary focus. This is a commitment that is supported

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by the top quartile performance achieved across our entire flagship fund range over meaningful periods, namely five years and more.” For the second consecutive year, the awards also saw Allan Gray being awarded the secondbest management company of 2013, with Nedgroup Investments collecting the certificate for third place, based on the performance of their funds over five years to the end of last year. Personal Finance, PlexCrown Fund Ratings and ProfileData are the joint sponsors of awards. Offshore Management Company of the Year. The overseas-domiciled management company with the best overall risk-adjusted performance across sectors consisting of a suite of five or more non-Rand-denominated funds with at least three years’ history (also a winner in 2013): LLOYD’S

TOP OUTRIGHT PERFORMERS The top performers to 31 December 2013 on a straight performance basis in asset and sectorspecific Association for Savings and Investment

Best (South African-domiciled) Global Equity General Fund. The fund with the highest ProfileData total investment return ranking over three years in the ASISA global equity general sub-category. OLD MUTUAL GLOBAL EQUITY FUND (R) Best Offshore Global Equity Fund. The fund with the highest ProfileData total investment return ranking over three years in ProfileData’s offshore global equity general sector. CONTRARIUS GLOBAL EQUITY FUND (Ireland)

TOP PERFORMERS ON A RISKADJUSTED BASIS The top performers to 31 December 2013 on a risk-adjusted basis in the asset allocation and real estate sectors, plus the largest other ASISA sectors based on market capitalisation. The PlexCrown system, which incorporates risk-adjusted returns and consistency of performance, is used to rank funds for these awards. Best South African Equity General Fund.The fund with the highest PlexCrown rating and rank in the ASISA South African equity general subcategory. MARRIOTT DIVIDEND GROWTH FUND (R) Best South African Multi-Asset Fund. The fund with the highest PlexCrown rating and rank in the ASISA South African multi-asset low-, medium- and high-equity subcategories. PRESCIENT POSITIVE RETURN QUANTPLUS FUND (A1) Best South African Multi-Asset Flexible Fund. The fund with the highest PlexCrown rating and rank in the ASISA South African multi-asset flexible sub-category. 36ONE MET FLEXIBLE OPPORTUNITY FUND Best Offshore Global Asset Allocation Fund. The fund with the highest PlexCrown rating and rank in ProfileData’s offshore global asset allocation flexible and prudential sectors. LLOYD’S MULTI STRATEGY FUND LIMITED GROWTH STRATEGY

Some choose not to follow their passion. The accolades we’ve won over the years are proof that we do. Success follows passion.

Focus Leads to Performance The Raging Bull Awards recognise excellence in the collective investment or unit trust industry in terms of top outright performers, best risk-adjusted performers and the best unit trust management companies. STANLIB has been uniquely structured to offer the advantages and commitment of a franchise investment operation with the strength and efficacy of a large investment house. This structure allows the asset manager to select the best talent available and create an environment where talent can thrive and evolve. STANLIB Asset Management Managing Director Ben Kodisang said, “Receiving awards as prestigious as the Raging Bulls is testament to the investment excellence our team is focused on and the passion with which we deliver on our investment promise to clients. We believe diversity, together with individual focus, create sustainable growth and investment excellence. With a stable investment team and enhanced performance, we remain focused on our investment goals and believe our positive trajectory will continue into the future.”

10211 Compliance number: D9672R

For more information on STANLIB funds or the Raging Bull Awards, please contact STANLIB or visit our website. Alternatively, tune into CNBC Africa at 19h30 on DSTV Channel 410 and watch our Fund Managers comment on markets and funds on Investment 360.

STANLIB was awarded the following accolades at the Raging Bull 2013 Awards: STANLIB Bond Fund - Best South African Interest-bearing Variable Term Fund – Victor Mphaphuli STANLIB Global Property Feeder Fund- Best (SA-domiciled) Global Real Estate Fund – Keillen Ndlovu STANLIB Multi-Manager Global Bond Fund - Best Offshore Global Fixed Interest Bond Fund on a Riskadjusted Basis – Kent Grobbelaar STANLIB Global Bond Fund - Best (FSB-approved) Offshore Global Fixed Interest Bond Fund on a Riskadjusted Basis – Paul Hansen

www.stanlib.com STANLIB is an Authorised Financial Services Provider Collective Investment Schemes in Securities (CIS) are generally medium to long-term investments. An investment in the participations of a collective investment scheme in securities is not the same as a deposit with a banking institution. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from STANLIB. Commission and incentives may be paid and if so, would be included in the overall costs. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Liberty is a full member of the Association for Savings & Investment SA (ASISA). The manager is a member of the Liberty group of companies.

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Top performers on a riskadjusted basis over five years The top performers to 31 December 2013 on a risk-adjusted basis in the asset allocation and real estate sectors plus the largest other ASISA sectors based on market capitalisation. SOUTH AFRICAN FUNDS

WINNERS OF CERTIFICATES Top outright performance over three years The top performers to 31 December 2013 on a straight performance basis in ASISA sub-categories. SOUTH AFRICAN FUNDS • Best South African Equity Industrial Fund: SIM INDUSTRIAL FUND (R) • Best South African Equity Financial Fund: NEDGROUP INVESTMENTS FINANCIALS FUND (R) • Best South African Equity Resources Fund: NEDGROUP INVESTMENTS MINING AND RESOURCE FUND (R) • Best South African Equity Smaller Companies Fund: NEDGROUP INVESTMENTS ENTREPRENEUR FUND (R) • Best South African Multi-Asset Flexible Fund: 36ONE MET FLEXIBLE OPPORTUNITY FUND • Best South African Multi-Asset Low Equity Fund: PRUDENTIAL INFLATION PLUS FUND (A) • Best South African Multi-Asset Medium Equity Fund: 27 FOUR BALANCED PRESCIENT FUND OF FUNDS (A1) • Best South African Multi-Asset High Equity Fund: REZCO PRUDENTIAL FUND (A) • Best South African Interest-bearing Variable-term Fund: STANLIB BOND FUND (A) • Best South African Interest-bearing Short-term Fund: INVESTMENT SOLUTIONS INCOME FUND (A) • Best South African Multi-Asset Income Fund: CORONATION STRATEGIC INCOME FUND (A)

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• Best South African Real Estate Fund: NEDGROUP INVESTMENTS PROPERTY FUND (A) • Best Global Multi-Asset Flexible Fund: RE:CM GLOBAL FEEDER FUND (A) • Best Global Multi-Asset Low Equity Fund: CORONATION GLOBAL CAPITAL PLUS (ZAR) FEEDER FUND (A) • Best Global Multi-Asset High Equity Fund: CORONATION GLOBAL MANAGED (ZAR) FEEDER FUND (A) • Best Global Real Estate Fund: STANLIB GLOBAL PROPERTY FEEDER FUND (A) • Best Regional Interest-bearing Shortterm Fund: ABSA POUND STERLING INCOME FUND • Best Global Interest-bearing Variable Term Fund: PRUDENTIAL GLOBAL HIGH YIELD BOND FUND OF FUNDS • Best Worldwide Multi-asset Flexible Fund: CORONATION OPTIMUM GROWTH FUND (A)

OFFSHORE FUNDS • Best Offshore Europe Equity General Fund: TEMPLETON EUROLAND FUND • Best Offshore Far East Equity General Fund: ORBIS SICAV ASIA EX-JAPAN EQUITY FUND • Best Offshore USA Equity General Fund: LLOYD’S INVESTMENT FUNDS LIMITED NORTH AMERICAN FUND • Best Offshore Global Real Estate General Fund: OASIS CRESCENT GLOBAL PROPERTY EQUITY FUND (IRELAND) • Best Offshore Global Fixed-interest Bond Fund: STANLIB MULTI-MANAGER GLOBAL BOND FUND • Best Offshore Global Asset Allocation Fund: CORONATION GLOBAL MANAGED (US DOLLAR) FUND

• Best South African Multi-Asset Low Equity Fund: 27 FOUR STABLE PRESCIENT FUND OF FUNDS (A1) • Best South African Multi-Asset Medium Equity Fund: PRESCIENT POSTIVE RETURN QUANTPLUS FUND (1) • Best South African Multi-Asset High Equity Fund: OLYMPIAD MET MANAGED FUND OF FUNDS (1) • Best South African Interest-bearing Variable-term Fund: ALLAN GRAY BOND FUND • Best South African Interest-bearing Shortterm Fund: NEDGROUP INVESTMENTS CORE INCOME FUND (B) • Best South African Multi-asset Income Fund: SAFFRON MET OPPORTUNITY INCOME FUND (A) • Best South African Real Estate Fund: OASIS PROPERTY EQUITY FUND (D) • Best Global Equity General Fund: • OLD MUTUAL GLOBAL EQUITY FUND (A) • Best Global Multi-asset High Equity Fund: INVESTEC GLOBAL STRATEGIC MANAGED FEEDER FUND (A) • Best Global Multi-asset Flexible Fund: RE:CM GLOBAL FEEDER FUND (A) • Best Worldwide Multi-asset Flexible Fund: FOORD FLEXIBLE FUND OF FUNDS (R) OFFSHORE FUNDS • Best Offshore Far East Equity General Fund: ORBIS SICAV ASIA EX-JAPAN EQUITY FUND • Best Offshore Global Real Estate General Fund: OASIS CRESCENT GLOBAL PROPERTY EQUITY FUND (IRELAND) • Best Offshore Global Fixed Interest Bond Fund: STANLIB GLOBAL BOND FUND • Best Offshore Global Equity General Fund: FRANKLIN GLOBAL SMALL-MID CAP GROWTH FUND

10222 Compliance number: 3DR068

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Regulatory developments

Financial Services

Sector Regulation

A revision of the Financial Services Sector Regulation has been in the planning since 2007 and culminated with the release of the policy paper, ‘A Safer Financial Sector to serve South Africa Better’ by the National Treasury in 2011.

he intention behind the document is premised on the fact that South Africa needs a stable financial services sector to achieve sustained economic growth and development. Financial inclusion and consumer protection are also stated goals of the policy paper. The National Treasury came up with a two-pronged approach in this paper to help stabilise the sector. The first phase separates the regulation of prudential and market conduct. The second phase seeks to harmonise financial sector regulation and legislation. It is an important imperative as the financial services sector accounts for a huge proportion of South Africa’s GDP. Further, a lot of the money held within this sector is meant to provide for the vulnerable in our society, namely the aged. In 2013, another paper was released, entitled ‘Roadmap for Implementing Twin Peaks Reforms’. In December 2013, the National Treasury released the draft Financial Sector Regulation Bill, 2013, which begins the first phase of implementing the Twin Peaks model of financial regulation. Members of the public have until 7 March 2014 to submit comments. The draft bill establishes the two regulatory authorities envisaged in the initial policy paper released in 2011. The prudential authority will be focused on the safety and soundness of

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financial institutions and the market conduct authority will be focused on the manner in which financial institutions conduct their business and the fair treatment of financial customers. The draft bill also provides for the co-operation between the regulatory authorities and other financial regulators. It seeks to empower the regulator while maintaining transparency and accountability. It seeks to mitigate a financial crisis, provide for administrative penalties, establish the Financial Services Tribunal to hear appeals, provide for regulations and codes of good practice, and provide for transitional provisions. The draft bill will achieve its aim through the following mechanisms: • The South African Reserve Bank (SARB) is mandated to promote stability within an agreed policy framework and establish the Financial Stability Oversight Committee (FSOC), whose function it is to co-ordinate the monitoring and response to systemic risks and a financial crisis. • The Market Conduct Authority (the FSB) will be responsible for promoting the integrity of financial markets, consumer education and financial inclusion. • The Council of Financial Regulators (CFR) will co-ordinate the regulators, across different sectors, on issues of stability, legislation, enforcement and market outcomes.

It is the hope of the legislation that by having a regulator devoted to market conduct, this will support a comprehensive and proactive approach to ensuring that customers are treated fairly and have access to financial products and services that are affordable. We hope that it is implemented and applied effectively taking all stakeholders into consideration. Further, it is now hoped that the SARB (prudential authority) will be able to better monitor financial institutions and react to systemic risks. At this stage we can all contribute to the quality of the legislation by providing the National Treasury with commentary on the draft bill.

Carla Letchman, Competency Specialist at the Financial Planning Institute (FPI)

Retirement reform

lower income retirement market, which will be created through forced annuitisation, is able to benefit from advice, where appropriate, and that capped charges do not make advising this market uneconomical.

Costs, costs, costs

aving been in progress since the mid-2000s, South African retirement fund reforms still have a way to go before all stakeholders in the industry agree with the proposals being considered by the government. In fact, human nature being what it is, it is more realistic to remember that you can’t please all of the people all of the time, and acknowledge that the best we can hope for is that a broad consensus is eventually reached in the greater interests of those six million or so members of South African retirement funds on whose behalf the reform processes are being discussed. To recap In mid-July 2013, the National Treasury released its latest retirement reform paper on the topic of charges in South African retirement funds. The lengthy paper was delayed quite considerably compared to other papers in the series, which tackled issues such as preservation, annuitisation and the tax treatment of retirement funds. The delay is understandable given the complexity and sensitivities of the topic and the paper certainly makes for sober reading. The Treasury found that South African retirement funds are expensive in a global context. It argues that the reasons for this are: • There are too many small funds which cannot benefit from economies of scale. • Preserving benefits on retrenchment and resignation is voluntary.

• Fund membership is not compulsory for all employees. • Lower paid members have relatively more expensive risk benefits. • Active management is more popular than passive management but also more expensive. The Treasury shows that annual recurring charges of two per cent of assets under management can reduce a member’s retirement benefit by some 40 per cent over 40 years of employment. The Treasury also found low levels of fee disclosure and a tendency to shift from upfront charges to recurring charges, the impact of which is arguably less visible to members. Intermediation in the form of financial advisers was also found to have unintended consequences in terms of increasing the complexity of fund designs and escalating costs.

The Treasury has made the case that the advice provided to members by intermediaries may be biased by the compensation that is available to them. To avoid this perception, intermediary remuneration should be aligned with members’ interests so the members are comfortable that they are in a position where they are always receiving independent advice. Passive investments are an area where substantial cost savings can be achieved. However, we must also be cognisant that retirement fund trustees now have a dual fiduciary requirement: to be mindful of costs and to act in the members’ best interests. All investment management fees should be assessed relative to the actual value that they deliver. There is no sense in paying active management fees to largely track an index, but conversely, there is also no sense in sacrificing demonstrated excess returns only to save on fees. Auto-enrolment has been floated by the Treasury as a necessary step to achieving cost reduction. A shift to auto-enrolment will allow the industry to access the 14 million or so employed South Africans, more than doubling the number of members and bringing in necessary economies of scale. The concept of a default fund has been loosely suggested for those employers who do not specify a retirement fund option. Immediate concerns do come to mind around the practicalities of centrally administering this fund. A sub-optimal outcome would be for employers to view the default as an excuse to not have to provide a retirement fund, especially if that default is riddled with administrative issues. With all this being said, creating a cost-effective retirement system is ultimately a function of broader market economics, social upliftment, enhanced financial literacy, social security and economic stability, which will all be vital to the success of the proposed initiatives.

Our view Overall, the message from the Treasury is encouraging. Costs are hampering the retirement fund industry and cost-efficiency must be improved. However, the devil will be in the detail when it comes to implementing the proposals. The planned shift towards umbrella fund arrangements must be executed with care to ensure that employers still have the desired level of control and access to the investment options they want, at appropriate levels of cost. Care must be taken to ensure that the new

Daniel Acres, CEO, Prescient Life

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An underperforming sector

on the brink of change? The retail sector, characterised by its competitive environment, maturity and essentially defensive nature, is an industry that relies heavily on the macroeconomic environment of the countries in which it operates to achieve the growth that investors search for.

here is an unsurprising correlation between the poor performance of the retail industry in South Africa, as illustrated by annual retail sales growth figures that have declined from nearly 10 per cent in 2011 to 4.2 per cent in November 2013, and the consistent decline of macroeconomic indicators such as consumer confidence and disposable income growth since mid-2011.

lending, which puts additional pressure on credit sales growth, has resulted in the downward trend we see in our retail sales growth figures. Ultimately, the only time we will see an improvement in the retail sector as a whole will be when we see an improvement in consumer confidence, and that will happen only when we see a South African economy focused on putting more disposable income into the hands of more South Africans.”

Rob Spanjaard, director at Rezco Asset Management, comments, “The reasons for the embattled retail sector over the past couple of years can be largely attributed to a South African economy, which has been struggling to put money into the hands of South African consumers. Since mid-2011 we have seen a steady decline in the annual GDP growth from 3.8 per cent to the most recent levels around the two per cent mark, as well as only a small improvement in employment levels over the same time period.

Stanlib retail analyst, Theresa Heath, concurs: “Consumer confidence, which is a good indicator of propensity to spend, is very low. We don’t see much evidence of, or prospects for, meaningful job creation, which is crucial in refuelling the consumer’s spending power.”

“This, coupled with the implementation of a stricter regulatory environment on unsecured

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Retail in 2014 Looking further into this year, it seems unlikely that the trend of poor retail sales growth figures is about to turn around. Heath says, “We believe 2014 will be another tough year for the consumer, with many of the tailwinds enjoyed over the last few years abating, such

as the level of real wage growth, extension of social grant payments, unsecured credit and rising cost pressures, some of which are driven by the weaker Rand.” Spanjaard adds, “The addition of further possible rate hikes during the year combined with the stricter credit regulations on unsecured lending implemented at the end of 2012, which have already put strain on credit sales of retailers, will in most likelihood result in greater underperformance on the retail sales growth front.” Heath says, “While retail valuations have come off their highs, to varying degrees, we think that there is further risk to the downside, given the weak sales growth outlook. Credit retailers have been punished particularly hard, and while this may start to look overdone, it’s difficult to identify catalysts that will see their fortunes reverse in the near term.” Opportunities for investors For investors wanting to enter into some

Retail feature

like ‘showrooming’, where customers try on merchandise in-store but make the final purchase online. Landlords, in turn, are coming to terms with ‘shoppable windows’: touch screens mounted on regular shop fronts that enable passers-by to browse and buy from an online inventory of a retailer who no longer needs to rent the floor space or physically stock the merchandise.” Chang and Bagg say that these changes in shopping behaviour, which of course lies at the heart of the retail industry, are helping to create new business models for brands and consumers. It is easy to postulate that those retailers, both globally and locally, that adapt their business models to changing consumer needs will be the ones that will prosper in economically tough times. We can anticipate that, going forward, there will no longer be too much room for retailers to remain defensive in nature: those that add innovation and technological advances into their business models will be the ones that soar and which, in turn, will ultimately offer investment opportunities. Back to the present But this arguably lies in the future for much of the retail sector. Is it a sector offering investment opportunities in the present? Prosaically, Spanjaard comments that the positive correlation between retail performance and the economic environment means it is a good, relatively low-risk building block for anyone trying to gain exposure to the general growth of an economy.

retail sector investment, there are still pockets of opportunity for outperformance during 2014. Spanjaard clarifies, “The challenge lies in trying to attain earnings growth through the targeting of a more resilient higher LSM consumer, or gaining exposure to markets beyond the borders of South Africa, where growth prospects are more exciting and where currency translation gains are a possibility in light of our weakening Rand trend.” He says Woolworths, with its more specific client base, international exposure and a growth-orientated strategy into Africa and its Australian operations, appears to be poised for growth above what the market in general is likely to produce. “Its higher LSM South African target consumers are likely to maintain their spending patterns despite a struggling economy and a more restrictive credit environment.” Heath adds, “Within the consumer space, we continue to see the higher income consumer as relatively better positioned, although it

looks as though this consumer’s discretionary spending is starting to get squeezed.” Into the retail future with higher LSM consumers? Interestingly, these same higher LSM consumers, who may lie at the heart of some of the retail investment opportunities of 2014, are also likely to change the face of the retail industry over time by their growing insistence on linking technology to customer service.

“This general exposure to the economy, combined with the assumption of a clever allocation of assets within the retail sector to those companies offering above average returns, may offer an attractive investment opportunity, especially for someone looking to create a well-diversified portfolio. Despite a retail sector that is not yet showing signs of turning the corner, there are still opportunities within the sector that will offer the investor the opportunity for outperformance.”

Trend-spotters Deon Chang and Raleen Bagg say that the rise of online shopping, which of course occurs particularly among higher income consumers, is proving to be one of the most significant game changers for the retail industry. “It is not only changing consumer behaviour, but also the value chains of the retail industry. The initial dilemma of providing either an on- or offline service has now evolved into servicing a more complicated hybrid shopper. Retailers are now grappling with problems

Vivienne Fouche, Content Editor, InvestSA

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Unit trusts

Stick to a long-term plan

to handle a bumpy ride 40

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If financial advisers are serious about building wealth for their clients, they need to develop a long-term strategy with appropriate products that ensure maximum time in the market rather than trying to time or beat the market on short-term movements.

o says Alan Ehret, head of retail distribution at Stanlib, who notes, “Here is an interesting statistic that financial advisers might want to consider for their clients: if an investor had been invested in the JSE All Share Index from 1 January 1999 to 31 December 2013, they would have enjoyed an annualised return of 19 per cent. If a client had missed the best 25 days, the return they received would have been almost 10 per cent less than had they stayed invested. If they missed the best five days, they would have lost about 2.5 per cent of the total return over the period.” Johannesburg-based Laurium Capital, co-founded by ex-Deutsche Bank’s Murray Winckler and Gavin Vorwerg, has just celebrated the first anniversary of its unit trust fund. The unit trust fund follows on from Laurium’s success in managing or advising several hedge and long-only funds investing in sub-Saharan Africa. Vorwerg comments, “While a one-year anniversary is still obviously early days for a long-term investment vehicle, we are very pleased with our unit trust fund’s results so far. The Laurium Flexible Prescient Fund follows our fundamental investment philosophy. Clients can now access the team’s skills in stock selection, disciplined portfolio construction and risk management processes, to achieve superior risk-adjusted returns over time in an FSB-registered and regulated unit fund.” Sticking to your investment guns While the ’time in the market’ mantra is often repeated, some financial advisers are being hard-pressed to convince their clients to stay the distance at the start of 2014 when equity markets are hitting record highs and talk of stock-market ‘bubbles’ is circulating in mainstream media. Ehret says it is important for financial advisers to remind clients that markets go through cycles. Jeanette Marais, director of distribution and client services at Allan Gray, says one of the factors to consider when choosing a unit trust is how much variability your clients can handle in their returns.

How you live tomorrow depends on how you invest today. Laurium Capital is an independent and owner managed boutique asset manager.

www.lauriumcapital.com

Laurium Capital (Pty) Limited is an authorised financial services provider. (FSB License no. 34142)

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suited to investors with a long-term investment horizon, who are comfortable with short-term stock market fluctuation and are prepared to take on a risk of capital loss.” Costs: still the elephant in the room? Ehret says that costs and the bashing of active managers and their fees have been a popular pastime in South African business media, but it is important for investors to recognise that costs have been actively coming down over the last decade and that the industry continues to identify ways to bring costs to clients down. Vorwerg adds, “We believe in charging performance fees if a fund returns more than an appropriate benchmark. In this way, the manager is incentivised to generate performance rather than simply gathering assets. If the performance fees are well constructed and clearly communicated, then in our experience clients are happy to pay the manager for good returns.” According to Ehret, “This incessant focus on fees has meant that many investors are not even prepared to adjust their asset allocation across unit trusts because they are afraid to incur costs in the process. Some asset managers – ourselves included – don’t charge for investors to move their funds, which means advisers and clients can react to market conditions as they change.” While many argue that this focus on fees and low-cost index tracking products robs the industry of innovation and skill, Ehret believes that it also presents an opportunity. “We are currently in the process of developing low-cost unit trust retirement annuity products which should meet client demand,” he says.

“However, if an investor can stay invested through the ups and downs, they can benefit from the higher growth potential of the investments that fluctuate more. Drops in value are only on paper unless you disinvest at that time. Selling an investment after it has lost value locks in the loss and is the reason so many investors experience lower returns than the funds in which they are invested.” A balancing act According to data from the Association for Savings and Investment South Africa (ASISA), the local investment landscape saw a record move into what the organisation broadly classifies as ‘South African MultiAsset’ products, which saw R110 billion in inflows over the previous 12 months. Ehret agrees this is a sign that investors are moving away from specialist offerings and focusing on more balanced-type funds as a way for investors to get broad market exposure without being exposed to the ebbs and flows of individual sectors. “In the unit trust market, we have seen strong growth lately, specifically in the balanced fund space," he says, adding

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that he expects further consolidation of unit trust offerings in 2014. Laurium Capital is also firmly committed to the long-term flexible asset allocation mandate, with its investable assets including equity, fixed interest, listed property and money market instruments. Vorwerg comments, “We chose this category as we believed that it was the one best suited to applying our alternative asset management mind-set in a long-only environment. Over time, we expect that the fund will have 80 per cent equity exposure on average, as this asset class outperforms other asset classes over the long term.” Marais comments, “Typically, balanced or multi-asset funds have less variability of returns than equity-only funds, as they are invested in a range of assets, including more stable assets that tend to reduce the risk of dramatic differences in returns. Balanced funds aim to create long-term wealth more steadily, by taking on less risk of market fluctuation and capital loss than equity funds. Most equity fund fact sheets will clearly state that they are best

Clients, of course, demand returns and Marais says that looking at the range of returns funds have earned in the past will give an indication of best and worst case scenarios. “While it is important to understand variability, it is equally important not to use variability to predict future performance. Ultimately you need to make sure that your fund’s objective, long-term return potential and the level of fluctuation you can expect marry up with the level of risk and variation in returns your clients are comfortable taking on.”

Alan Ehret, Head of Retail, Stanlib

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W e’ve all been there. That familiar feeling that you are the only one in the world not having fun. The only one stuck wrestling with Pythagoras and Newton’s Law of ‘Where Will I Ever Use This In Real Life?’ while everyone else is out there. You try to focus, add, multiply but the only real maths that’s happening is your attention being divided by the sound of laughter and soccer balls. It’s called distraction. And it’s the enemy. That is why, for the last 39 years we’ve ignored it. We pay no attention to trends, hype or popular opinion and stick to our tried and tested investment philosophy. And it has worked very well for our clients. Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

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NEWS JSE welcomes Arqaam Capital to the South African Market Arqaam Capital, the rapidly expanding specialist emerging markets investment bank, chose South Africa as the base for its African investment and advisory business. The specialist emerging markets bank opened an office in Johannesburg and gained a seat on the Johannesburg Stock Exchange (JSE) as the JSE’s first new member in three years. Based in the Dubai International Financial Centre (DIFC), Arqaam facilitates investment, trade and finance between and into emerging and frontier markets; and successfully executed this strategy in the Middle East and North Africa. The South African business will drive its expansion into African markets with an initial focus on Ghana, Kenya and Nigeria. Arqaam will offer local and international clients South African equity products backed by in-depth research reports of businesses across multiple markets. The bank’s local offer will expand into derivatives and bonds. The banking licence issued by the JSE is the first to be issued in three years and shows the JSE’s recognition for the need for a bank such as Arqaam in the South African market. Nicky Newton-King, CEO of the JSE, says that they are excited to welcome Arqaam Capital as the newest equity member of the exchange. “Not only is Arqaam Capital well respected for its proven track record of success in emerging markets across North Africa and the Middle East, it is also the first brokerage to join the JSE from the Gulf region. We see their membership as another step in strengthening the JSE’s relationships with financial market players in other emerging markets.” Riad Meliti, CEO of Arqaam, adds that they were delighted to join the JSE and to enter the South African market. “Our plan is to replicate the emerging markets model that has seen such success in our Dubai office. By drawing on South Africa’s world-class

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skills and investment infrastructure, Arqaam will expand to include multiple business practices and become a hub from which we can participate in the African Growth story.” Ross Abbott, head of the South African business at Arqaam, says that they have expanded into South Africa to meet overwhelming demand from clients for investment opportunities in South Africa and Africa. “Our office will be staffed predominantly by South Africans who are deeply familiar with this market.”

With a 20-strong research team based in Lebanon and supported by in-country analysts, Arqaam can compare investments across countries and regions as opposed to focusing on only one country. “Our extensive universe of coverage across MENA and subSaharan Africa provides a less localised view of a particular industry. This differentiates us from most other South African operations. Arqaam currently covers 42 African companies and our strategy is to expand this to 125 companies across the continent by the end of 2014 adds Abbott.”

Prescient Balanced Quantplus renamed Prescient Absolute Balanced Fund The Prescient Balanced QuantPlus Fund was approved by the FSB but now has a new name and will be called the Prescient Absolute Balanced Fund. The change in name aligns the fund more closely to the investment strategy that it has followed since inception. The portfolio aims to invest in a diversified range of assets that can deliver real returns over time, while also having a keen focus on managing capital losses in the portfolio.

Wessel Oosthuizen

Prescient has followed an absolute return mind-set in managing this fund, which consequently has maintained a conservative profile in terms of capital losses as Prescient has employed protection strategies to limit drawdowns occasionally. Over time, the fund has protected investors well against market losses, particularly when the market has fallen aggressively. The new name will reflect this style more correctly and hence Prescient believes the name change is appropriate. There will not be any change in the management style of the portfolio going forward.

Michele Ongley

Advocate Wessel Oosthuizen, CFP, has been appointed general manager for the Centre for Professional Development, a subsidiary of the Financial Planning Institute of Southern Africa (FPI). Over the past 12 years, Oosthuizen has been involved with the FPI in various capacities. He currently serves as the director of the Centre for Financial Planning Law at the University of the Free State Law Faculty. He also served on the Certification Committee of Financial Planning Standards Board (FPSB), to develop, maintain and review international competency, ethics and practice standards for the global financial planning profession. Oosthuizen will primarily be responsible for the professional development of members.

Gerhard Klinger

10X Investments (10X) welcomed two new additions as the organisation continues to expand. Michele Ongley has been appointed to head up Institutional Business Development at 10X, having held the same position in her previous role at Investment Solutions. With more than 20 years’ experience, Ongley’s focus will be to engage with trustees and companies to create awareness of 10X’s simple, low-fee model. Gerhard Klinger has been appointed as 10X’s employee benefits specialist, having recently left Allan Gray as its employee benefits specialist and the head of its group retirement annuity division. Klinger has over 20 years’ industry experience at leading organisations such as PricewaterhouseCoopers, Alexander Forbes and First National Bank.

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Products

Bidvest Bank brings forex to your doorstep Bidvest Bank launched an online foreign exchange ordering system that brings foreign banknotes or card-based foreign currency to your doorstep, a first in the South African market. Computer-empowered consumers using the bank-to-home delivery option need never go to a bank branch again for foreign currency. Japie van Niekerk, managing director at Bidvest Bank, says that as foreign currency specialists, Bidvest is committed to constant innovation to ensure forex transactions are as consumer friendly as possible. “Early adopters picked up this new feature on our web page early in December 2013 and were quick to place orders. Reaction could not be more positive. It is a quick and convenient service.” Bidvest Bank clients simply go to www. bidvestbank.co.za and click on the online

forex icon. They then follow a five-step process: 1. Register and log in using their unique login details. 2. Insert travel details plus currency type and value. 3. Check the Rand value and exchange rate as reflected on the screen – forex commission and the delivery charge (where appropriate) will also be shown. 4. Select a payment option (electronic funds transfer, credit card payment or payment via some debit cards). 5. Decide whether to collect the currency from the nearest Bidvest branch (listed via a drop down menu on the screen) or have the currency delivered. The system invites users to check transaction details and verify that they are correct. It then sends the customer an SMS or e-mail confirming that the order is being processed and payment is awaited. As soon as payment is confirmed, a further notification is sent that

the transaction is going ahead and forex will be available within 48 hours. Clients can choose foreign banknotes, have a currency value loaded on to a Bidvest Bank World Currency Card or opt for a combination of card-based currency and cash. In the initial phase of the new service, the only currencies for home delivery are US Dollars, Euros and British Pounds. “Those who are not clients of Bidvest Bank can also use the online service, but first have to enter personal details on the system (name, ID number and home address). FICA documentation has to be produced before the bank can hand over foreign banknotes or a loaded World Currency Card,” says Van Niekerk. “At this stage, the service is targeted only at individual travellers. A corporate version of the service is in development and will be launched in due course,” concludes Van Niekerk.

Investors given access to global markets through Sanlam iTrade The online trading platform, Sanlam iTrade, has launched a new offering to allow South Africans to trade on all major global markets – including Wall Street, the Nasdaq 100, Australia and Brazil. The service is offered via Sanlam Private Investments UK in London, SPI Direct, and gives investors the chance to trade in spreads and Contracts For Difference (CFD) on indices, foreign exchange, commodities, individual shares and bonds. Gerhard Lampen, head of iTrade, says the time is ripe for South Africans to diversify their investments offshore. “While the global picture is likely to remain rocky this year, there are definitely some interesting prospects for investors. In my view, the US is the safest place to invest right now. While growth is low, this region is recovering much faster than the UK and offers very good possibilities. Emerging markets still have the potential for strong growth, but they remain a very risky prospect indeed.” “Rand hedging will be key for South African investors if, for instance, the US proceeds with tapering to the end of 2014. While local investors often believe that stocks such as Anglo American and Billiton provide enough of a Rand hedge, the truth is that they are still quite exposed to emerging market selloffs,” says Lampen. The new offering allows investors to trade on global markets 24 hours a day from Sunday at 23h00 to Friday 21h15 (UK time). Investors can find more information by clicking on the ‘Trade Global CFDs’ link on www.sanlamitrade.co.za.

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The world

CHINA, SOUTH AFRICA, BRITAIN, ICELAND, TURKEY, INDIA, EUROPE, FINLAND, AZERBAIJAN, GERMANY

China allows more private banks

MINT countries – the new BRICS

The China Banking Regulatory Commission will allow three to five private banks to be set up this year in an effort to further open the banking sector. The commission will gradually relax restrictions on foreign capital entering the domestic banking sector and conducting Yuan business.

Mexico, Indonesia, Nigeria and Turkey have been identified by economist Jim O’Neill as emerging economic giants under the collective acronym of being the MINT countries. O’Neill also originally identified the BRIC countries of Brazil, Russia, India and China, which South Africa has now joined. The MINT countries have economic advantages that include their geographical positions, which give them easy access to other countries’ resources, as well as the fact that for at least the next 20 years, they are all going to see a rise in the number of people eligible to work relative to those not working.

Investors confident about investing in South Africa The individual wealth of the average South African has increased from R45 650 in 2000 to R123 000 in 2013. This is according to Andrew Amoils, a senior analyst at New World Wealth, who says the growth is due to stable asset ownership, a functional banking system and a free and independent media system. Amoils says investing in property and other assets in South Africa is appealing to investors as there is no struggle over ownership rights. Economic recovery set for Britain After remaining stagnant for the past three years, Britain’s economy is showing signs of strengthening in 2014. Wages have been set to rise faster than price increases, bringing relief to households. Neville Hill, economist at Credit Suisse, says one of the main reasons to be optimistic is the shift in corporate mood as the recovery stretches across most sectors and sources of demand. Iceland banks urged to write off debt Iceland banks have been urged to write off debt to help the economy gather pace. Fridrik M Baldursson, an economics professor at the Reykjavik University, says Iceland’s banks will need to continue writing off corporate and household debt to help sustain its economic recovery. The Financial Services Association estimates that since suffering a banking collapse in 2008, Iceland’s banks have written off about $2 billion in debt.

Turkey needs to increase shortterm interest rates Traders in the Turkish markets say short-term interest rates need to increase by three to four per cent to relieve pressure on the sliding currency. A corruption scandal in the Turkish Government, which shook the market in December 2013, may delay a tightening of monetary policies that would stop the Lira from plummeting and stabilise inflation. The US Federal Reserve has also started cutting its monetary support of emerging economies, including Turkey, and encouraging investors to do the same. Foreign investors invited to restore Indian rail network Foreign investors will soon be invited to restore India’s rail network to the mighty system it once was. Government sources say the call for foreign investors will mark the opening of one of the country's last Statecontrolled industries. Existing passenger and freight network operations will not be open to foreign investors, but ownership of new services in suburban areas, high speed tracks and connections to ports, mines and power installations will be granted to investors. India’s government is hoping to attract up to $10 billion in foreign investment over the next five years.

Europe’s shares on the road to recovery Investors who prefer to invest in developed markets rather than emerging markets have helped European shares recover strongly. European markets plummeted in May last year but, in 2014, shares have risen to levels not seen since the summer of 2008. José Manuel Barroso, the European Commission president, says 2014 will be the year the Eurozone finally puts the worst behind it. Historic challenges affecting Finland Finland, a stable AAA-rated economy and the Euro area’s best-rated member, is gaining debt and losing jobs, even as the region is on the mend after its worst economic crisis on record. The Research Institute of the Finnish Economy reports that Finland was at least half a decade behind Spain and Portugal in matching pay with productivity as it dropped behind southern Europe in boosting exports. 2014 declared the Year of Industry in Azerbaijan Azerbaijan, a neighbour to Iran, has declared 2014 the Year of Industry. The order is set to accelerate industrialisation of the country and turn it into a strong industrial centre. 2013 saw Azerbaijan receive a record amount of public investments. GermanY pension reform German Chancellor Angela Merkel's new coalition’s planned pension reform is estimated to cost €60 billion from 2014 through to 2020. It will include providing mothers with a more substantial pension and allowing employees, who have worked for more than 45 years without claiming unemployment benefit for more than a short period of time, to retire earlier. According to German’s draft law, pension insurance contributions should remain stable at 18.9 per cent of gross wages and rise to 19.7 per cent only in 2019.

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They said

A collection of insights from industry leaders over the last month

rational and the market is not. But when they do not beat the market, they claim it is because the market is pricing assets irrationally.” Chief economist of 10X Investment, Steven Nathan, argues that there is a clear tradeoff between passive and active investment. A passive style gives certainty of performing in line with a benchmark at low cost; while an active style offers the potential of superior returns, but with increased risk. “We’re in the top 10 in Africa; we’ve got to get to the top five. Trading and investment banking very much has an African focus now.” Head of Absa Capital, the Johannesburgbased investment bank of Barclays Africa Group, Stephen van Coller, discusses why Barclays’ South African unit investment bank plans to extend brokerage, equity trading and other services into the rest of the continent as part of a two-year plan to boost profit.

“The right to own anything in South Africa is firm and this gives investors confidence and a will to buy anything from property to other assets in the country without worrying about ownership.” Senior analyst of New World Wealth, Andrew Amoils, comments on the growth of South Africans’ individual wealth, which is attributed to a higher gross domestic product (GDP) per capita than other African countries, as well as a functioning banking system and stable asset ownership rights. “Risks are incredibly high as we enter a new and alarming phase of what is looking more and more likely to become an emerging market. If we see further Rand losses, then a spiral out of control may become possible.” Currency strategist of Rand Merchant Bank (RMB), John Cairns, comments that despite rate hikes, emerging market currencies will still remain under pressure. “Anything that is interest rate-sensitive will get investors nervous. Companies producing basic products might provide some comfort, and there could be a case made for

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investing in sectors where spending is not discretionary like healthcare and private education.” Chief economist of Stanlib, Kevin Lings, commenting on the fact that the interest rate hike will focus investor minds on valuations on the JSE, and that further hikes will require a realignment of investment decisions. “You have to recognise that those are just some of the many companies in the market; they are not the market.” Chief investment officer of Cannon Asset Managers, Adrian Saville, comments that investors should do more research and not just follow the herd when it comes to the well-understood and larger companies. “If you give yourself strict criteria on stock selection, you’ll lose out on opportunities.” Portfolio manager of Vestact, Byron Lotter, discusses why investors should remain open-minded and consider a wide range of factors when deciding how to invest. “When they (active managers) beat the market, they claim it is because they are

“We can’t really explain the increase, but mining investment, by its nature, is longer term. More investment does depend on how soon the US and European economies improve.” Economist at Nedbank, Johannes Khoza, discusses Nedbank’s biannual capital expenditure project listing, which revealed that mining sector investments increased in value to R33.5 billion last year, compared with R16.4 billion in 2012. He says the increase could be in anticipation of higher commodity prices in the future. “The greatest challenge facing all investors is the massively skewed playing field caused by quantitative easing and super loose monetary policy.” Senior portfolio manager of Coronation Fund Managers, Neville Chester, discusses why the ability to generate decent returns for clients is becoming incredibly difficult. “Of course the Dollar is still the most important currency in the world, so everything the Federal Reserve does will have a psychological impact if not a real impact. Emerging markets will not be unscathed.” Executive chairman of Templeton Emerging Markets Group, Mark Mobius, comments that despite the current rout of emerging markets, he plans to remain firmly invested in emerging markets in the coming year.

You said

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

@MarkMobius: “India is one country where I think we could see some positive surprises in 2014. #emergingmarkets #India” Mark Mobius – Investment adventures in emerging markets.

@ATmag1: “Tshabala: Faster economic growth means people have more cash to spend & invest & therefore they need more banking & insurance products.” African Trader mag – African Trader is a pan-African business magazine. You'll find it in African airport lounges and on African airlines. Our Internet presence is a work in progress.

@ShaunleRoux: “I'm thinking 2014 may just be the year we find out how ‘defensive’ the expensive growth stocks are.”

Shaun le Roux – Market watcher, equity fund manager, Cape Town. Tweeting in my own capacity.

@FinanceTrends: “As an individual trader or investor, you have an advantage. You can trade smaller stocks w/ no great impact on their price. More nimble.” David Shvartsman – Founder/ editor of the blog, Finance Trends Matter. A trader's view of global markets and trends. Follow the money.

@devinshutte: “Since midDecember till end of December 2013, Top 40 saw a rally of almost 4 000 points in only 15 sessions!” Devin Shutte – Half broker, half human, all heart. MD of Newstrading.

@davidshapiro61: “New Year's message: don't make the mistake of taking a negative stand on the stock market just to be contrarian.” David Shapiro – Stockbroker, cartoonist, road runner and doting grandfather. I also follow Arsenal but try keep that a secret.

@WayneMcCurrie: “It is definitely the time for valuebased investing – see Piet Viljoen – no investment style works consistently and should adapt – but value now.” Wayne McCurrie – Portfolio Manager, Momentum Wealth.

@GrahamGersbach: “France is debating whether it needs an official partner for their president. SA debating how many wives a president can have.” Graham Gersbach – DA

councillor for ward 92, Ekurhuleni. Liberal, federalist. Finance oversight committee. Rangers, Highlands Park Ipswich Town, Brighton and Charlton.

@AdrianSaville: “30-year bull market in bonds has to be close to exhaustion. Surely what goes down must go up?” Adrian Saville – CIO and founder @ Cannon Asset Managers. GIBS visiting professor; economics, finance and strategy; passionate South African, dedicated husband and dad. Ninja.

@chrishartZA: “While the JSE has run hard and is expensive, there are big valuation differentials that have developed.” Chris Hart – Strategist at Investment Solutions and renowned gold bull.

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And now for something completely different

Other valuable notebooks and letters Francis Crick’s DNA's double-helix structure letter

An investment worth taking note of

Adding rare notebooks to your investment collection

any great leaders throughout history have studiously jotted down their thoughts and ideas in notebooks. Today, these notebooks are worth more than their weight in gold, as the wealthy and those wishing to add collectibles into their investment portfolio scramble to get hold of the sought-after works. While rare notebooks and letters may not necessarily seem like the go-to investment choice for those wishing to diversify their portfolio, they can provide an exceptional return on the investment. The Codex Leicester, a one-of-a-kind Leonardo Da Vinci notebook, is probably the best example of how a rare notebook can provide a better return than some of the most sound investment solutions in the market. Bill Gates, Microsoft founder and billionaire, stepped beyond the realm of computers into the world of rare books in 1994 by purchasing the Codex Leicester for a whopping $30.8 million. To this day, it remains the most expensive manuscript ever sold. Thanks to the supply and demand laws that underpin the collectibles markets, the value of the one-ofa-kind Da Vinci journal would be even greater if its value was measured today. The Codex Leicester was written around 1508 and is one of 30 or so similar books produced by Da Vinci

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across his lifetime. Within its 72 loose pages are around 300 notes and detailed drawings rendered in chalk and brown ink, alongside Leonardo’s famed ‘mirror writing’, in which he wrote from right to left instead of left to right, so that his notes appear normal when reflected in a mirror. In 1980, 14 years before Gates bought the Codex Leicester, American oil tycoon Armand Hammer, president of Occidental Petroleum Corporation, bought the rare notebook for $5.1 million. At the time, this was the highest amount ever paid for a manuscript – the previous world record having been set by the sale of a Gutenberg Bible – the first major book printed with movable type in the West – for $2 million in 1978. In the 14 years between Hammer owning the rare manuscript, before passing it on to Gates, it had grown in value by 13.66 per cent per annum. Since then, the manuscript has been loaned to various institutions for public display and one of its most famous drawings, Anatomical Man, was used as one of the first Microsoft backgrounds. In the meantime, the Codex Leicester’s ever-rising value is testament to the proven bankability of the world’s rarest books and manuscripts as tangible assets.

A 60-year-old letter by Nobel Prize-winning biologist Francis Crick to his son, which detailed his discovery of the double-helix structure, recently sold at a New York auction for a record price of $6 million. The sale represents the highest amount ever paid for a letter. The proceeds from the sale were split between Michael Crick and the Salk Institute for Biological Studies in California, where the elder Crick worked until his death in 2004 at the age of 88.

Nirvana frontman, Kurt Cobain journals The private notebooks of the infamous musician were sold to a New York publisher for $4 million in 2002. The journals included sketches, letters, handwritten drafts of lyrics to Nirvana’s best-known song ‘Smells Like Teen Spirit’ and a chronicle of his personal life. The notebooks detail his drug addiction and depression that accompanied his fame after the 1991 release of Nirvana’s breakthrough album, Nevermind. Cobain died of a drug overdose at the age of 27 in 1994.

Albert Einstein’s letter to God In 2012, Albert Einstein’s handwritten letter to God was sold online for just over $3 million, only 10 minutes after the famous letter’s eBay auction opened. The letter, sent to Jewish philosopher Erik Gutkind shortly before Einstein’s death, references several philosophical and theological themes including religion and tribalism. It also expresses Einstein’s belief that God does not exist. The letter was previously sold at an auction in 2008 for $400 000.

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