INVESTSA Magazine March 2015

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Introducing change for all Political risk back in the investing spotlight

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CONTENTS

Introducing

change for all Political risk back in the investing spotlight

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06

POLITICAL RISK BACK IN THE INVESTING SPOTLIGHT

10

SEVERE CHANGES AHEAD FOR INVESTORS AND FINANCIAL ADVISERS

12

RDR: INTRODUCING CHANGE FOR ALL

16

THE ROAD AHEAD FOR HEDGE FUNDS

18

BIGGER NOT ALWAYS BETTER?

22

DIVERGENCE BETWEEN THE US AND THE EURO-AREA INTENSIFIES

24

RETAIL DISTRIBUTION REVIEW: THE EVOLUTION OF THE FINANCIAL SERVICES DISTRIBUTION ENVIRONMENT

25

GROWTH COULD SHIFT FROM THE WEST TO EAST OF AFRICA

26

OPPORTUNITIES AND THREATS IN EMERGING MARKETS

27

THE IMPORTANCE OF SUCCESSION PLANNING

28

RAGING BULL AWARDS

32

ADDRESSING THE FLAWS IN A FAULTY RETIREMENT SYSTEM

THE REGULATION OF HEDGE FUNDS IN SOUTH AFRICA

NEWS

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3

From

the editor This is likely to be a year when politics is going to have a significant influence on investment markets and investors. Politics always plays a role, and it’s not always bad, though most times it is. But this year it could be the chief factor investors will have to consider when making investment decisions.

The same is true for much of the world. A recent enlightening roadshow by Sanlam Investment Management (SIM) had London-based senior portfolio manager, Colin McQueen, warn that politics was going to have an ‘unusually large effect’ on global markets, leading to increasingly volatile investments returns. Reasons he gave were geopolitical conflicts around the world, changes in governments, and elections.

McQueen had this classic line: “Given time, governments will mess things up on their own.

This year, however, politics will make them mess up sooner.”

We know we are facing a turbulent political scene here in South Africa. Writing this shortly before President Jacob Zuma’s state of the nation address, there was little doubt that whatever he said, or didn’t say, would affect investments in the country. The rand was already anticipating a negative outcome, sinking to new lows. Later there will be the Budget – that’s sure to affect markets. And so it will go on. Even investors typically not interested in politics will have to keep a close watch on what the politicians do.

On the topic, read Marc Hasenfuss’s feature on political risk. The key issues are dealt with. Sadly, it goes far beyond spluttering Eskom, which itself has become a political risk.

On a brighter note, look at colleague Vivienne Fouché’s report on the annual Raging Bull Awards (though the way things are going it might have to be renamed the Growling Bear Awards next year). As Vivienne writes, there were some surprises. But full marks to Coronation for winning the top management company of the year award for the sixth time.

To mention just a couple of the top-notch articles in this issue, Caveo’s Tebogo Molamu gives a good wrap on the upcoming regulation of hedge funds. There will be benefits for retail investors through improved access and visibility, but probably higher hedge fund fees as well.

Kelvin Blacklock at Prudential’s Eastspring Investments in Singapore analyses the opportunities and threats in emerging markets. Both abound, and his inclusion is that it’s too early to invest fully in emerging markets. His preferred region, however, is North Asia.

Until next time, keep your heads low to duck flying political sentiment.

Shaun Harris

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www.investsa.co.za Publisher Andy Mark Editor Shaun Harris | investsa@comms.co.za Managing editor Nicky Mark Copy editor Gemma Redelinghuys Content editor & editorial enquiries Vivienne Fouché | vivienne@comms.co.za Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Layout and design Mariska Le Roux Editorial head office Ground floor Manhattan Tower Esplanade Road Century City 7441 Phone: 021 555 3577 Fax: 086 6183906

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

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Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication.

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5

Political

risk Back in the investing spotlight

6

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By Marc Hasenfuss

It has been etched into investment lore that the Rothschild family fortune was cemented by the outcome of the Battle of Waterloo in 1815. The story goes that the Rothschilds received confirmation of the outcome of this historic battle ahead of other traders and investors by using carrier pigeons to bring home news that Napoleon had been defeated by the Duke of Wellington.

O

nce certain of the fact that the French threat had been disabled, the Rothschilds confidently piled into the then vulnerable British government bonds in what turned out to be a most profitable investment opportunity.

It seems, though, that this little investment yarn has been embellished over the years – pretty much to the point that the only indisputable fact remains that the Rothschilds made a profitable turn on the epoch-making skirmish.

Even if we are stretching a point, this still serves as a fine example of how to get to grips with political risk and profit from a particular outcome. No doubt investors through the generations continued to bank on large scale political developments… and there would have been punters who lost their pants believing global hostilities might not ensue in 1914 and the mid-thirties.

In South Africa, at this delicate juncture of our youthful democracy, investors will need more than a flock of carrier pigeons to get wind of possible developments in a political arena fraught with tension.

The ruling party’s dominant political position has been seriously challenged, and a politically functional Democratic Alliance (DA) and the radicalised Economic Freedom Fighters (EFF) look set to continue chipping away at the ANC’s support base.

Some might argue that a benign political environment in which a dominant ANC rules, without being seriously challenged, might offer the most stable investment environment. Unfortunately, an ongoing series of controversies and scandals have raised the hackles of even the most stalwart party supporters.

And if the ANC is desperate to retain power, then there is every chance the ruling party will take its eye off the ball in terms of governing effectively and responsibly.

Cue service delivery protests and efforts to undermine the apparatus set up to keep a check on government functions.

Let it be said that political upheaval and uncertainty does offer an investment opportunity for the stout of heart.

However, can anyone really be certain that the government’s determination to meddle in economic sectors (resources, labour broking and telecommunication) will not cause irreparable damage – particularly if there is a stubborn determination to persist with ineffective policies rather than responsibly revisit imposed frameworks?

The most recent ‘famous’ example of an investment opportunity triggered by perceived political risk would be the mid-2002 resource stock sell-off on the JSE when market watchers got wind of proposed regulations setting tough targets for black ownership in the mining industry.

The ensuing panic saw huge chunks of value wiped off the market capitalisation of resource stocks, only for the market to realise that the BEE target rumour was a tad overblown.

Investors who bought on the panic made a nifty turn as resources rebounded to reflect fundamentals rather than fallacy.

But how does one assess political risk in South Africa? Since the ANC took power in 1994, there has been a misplaced fear that the party would interfere with the economy. If anything, one might argue there has been regulation by stealth, the ruling party typically hinting at radical reform but then retreating to a more accommodating middle ground.

But the economy does appear to lack a cohesive policy framework, the enthusiasm for the well-intended National Development Plan (NDP) not always being apparent.

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What’s more, the engine (literally speaking) of the local economy – electricity supplier Eskom – is sputtering and lurching unconvincingly as politicians spin reasons for the dangerous lack of planning rather than stepping into the breach of what is becoming an increasingly crippling crisis.

As one local wit noted rather wryly on social media platform Twitter, the business plan for Eskom was rather unique: “Use less of our product, so we can go bankrupt while paying ourselves more”.

But the softly-softly approach to the economy might change. More than anything, investors would have observed the utterances at the ANC’s recent 103 rd birthday bash, where President Jacob Zuma reiterated the ruling party’s commitment to the socalled second phase of the democratic transition. This, of course, revolves around the rather ominous ‘radical socio-economic transformation’.

What exactly the ‘radical socioeconomic transformation’ actually entails is anyone’s guess.

Overall, this is not presenting an environment conducive for investment – remembering that, above all, investors crave a semblance of certainty in economic policies and business regulation.

There certainly is enough evidence of companies stashing away capital rather than investing in new capacity and new opportunities. Those that are willing to commit capital for growth are increasingly earmarking funds for African expansion or offshore acquisitions.

Zuma was quoted as saying that the second phase “represents a fundamental break with the ownership patterns of the past and the putting in place of a South Africa that belongs to all who live in it.”

He also said monopoly capital still had an unhealthy effect on the economy, adding that the stranglehold of monopoly capital on SA’s economic development must be broken.

Ironically two of the biggest ‘monopolies’ in South Africa are power utility Eskom and SAA – two entities that, despite their dominant ‘market positions’, can’t seem to wash their own faces and are constantly seeking capital infusions at the expense of the taxpayer.

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An inability to generate sufficient cash flow to keep operations buoyant creates its own problems in that international ratings agencies have not hesitated to downgrade credit ratings (as seen with SANRAL at the time of writing this article).

Downgrades, even if brushed off by the government as pedantic criticism, can increase the costs of borrowing and make life very difficult for the number crunchers at the National Treasury.

Still, Zuma contended rather scarily that it was imperative that the Competition Commission continued to address monopolistic, collusive and anticompetitive behaviour – urging this body to become even bolder in preventative and punitive measures.

the chemical side of coal-to-fuel giant Sasol, and steel behemoth ArcelorMittal – around revising pricing structures to ensure that small manufacturing businesses can profitably ply their trade.

So maybe the radical initiatives are not just political posturing.

Of course, pressing for radical economic change suggests strenuous structural re-shaping not terribly long after the government had seemingly finally exorcised the ghost of nationalism.

Obviously a ham-fisted push for nationalisation is most unlikely, but there could be more subtle initiatives to transform economic ownership.

The debate, naturally, is whether rumblings around a radical economic transformation are really just rhetoric aimed at snatching back some of the populist high ground now occupied by the EFF in its capacity as the energetic, vociferous and disruptive minority political party.

The problem, though, is that efforts to give the business environment a makeover will be executed in a brittle economic environment. Economic growth is already sluggish and could fizzle with unreliable (and don’t forget expensive) electricity supply and inflexible/expensive labour and a vulnerable exchange rate.

But there have been telling comments from both the Trade and Industry and Economic Development hub – aimed at

The JSE tells the real story. Punters are willing to pay premium prices to ‘externalise’ their investments by buying

into international stocks like SABMiller, Naspers, BAT, Richemont, Aspen or the plethora of offshore property counters.

The flip side is the steady grinding away of sentiment for local stocks – especially manufacturing companies.

The share prices in some stalwart industrial and mining counters – Afrox, Hulamin, Argent, Harmony, Kumba, to name a few – reflect modest market ratings compared with the JSE’s large international stocks.

Some may argue that the South African economy has been tested many times before, and has always showed sufficient resilience to bounce back. Adherents to that hardy philosophy will no doubt not hesitate to snap up shares where prospects remain firmly hitched to the local economy.

But there – with the Eskom debacle darkening the economic backdrop – is a sense that South Africa has tripped into dangerous territory where a stumble could cause serious long-term injury.

One might reasonably expect this year’s Budget to incorporate proposals to hike tax rates – a sure sign of panic in the political ranks.

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9

Severe changes ahead

for investors and financial advisers

By Shaun Harris

Investors are getting a good deal from the Retail Distribution Review (RDR). As written in earlier issues, the RDR proposals (comments on the proposals were open until early March) should see a much fairer deal for investors in terms of affordable, good financial advice and a more costeffective payment structure. The benefits are clearly spelt out in the RDR document – to get insurance distribution models aligned to the aims of the Treating Customers Fairly regulations.

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T

he RDR, however, is not such good news for financial advisers. Some advisers have accepted it quite happily and see future opportunities in the new regulations. Others, though, fear the cost, both in time and money, and some smaller broking firms are known to have put their business on the market or just closed it down.

Financial advisers in South Africa know all too well what happened after similar RDR regulations were implemented by the Financial Services Authority in the UK in December 2012. Barry Taylor, short-term insurance committee chairman at the Financial Intermediaries Association, quoted in sister publication RISKSA last year, says

“He tells intermediaries to change their mindsets, to change their business models, to provide good solid advice and value-added products and to face the competition of other distribution channels.”

been through that with the introduction of FAIS and the RE1 exams.

But she added that there were things advisers could learn here from the UK experience.

“We have taken a lot of learning from the UK. We don’t want to copy their mistakes. There will be difficulties, but we will survive.”

The main difficulties for advisers will be adjusting to a new payment structure that is still viable for their businesses. The emphasis is on affordable advice, but the authorities don’t want to drive advisers out of business either. The big change is that commission will be capped, and in some cases not allowed at all. However, INVESTSA has always argued that commission should go. It’s time for advisers to charge a fee for advice, just as other professionals do. Some advisers have been doing this for some time and are apparently doing very well.

One likely consequence is that more advisers will start targeting wealthier clients.

That’s expected, but might not prove to be the happy hunting ground some advisers expected. Wealthy clients tend to be very financially literate. If offered a good service they will probably happily pay a fee (though that fee will have to be negotiated and agreed upon by the adviser and client). But don’t try and fob them off. An adviser not offering good advice and service is likely not only to lose the fee but the client and the business as well.

when the regulations were passed in the UK there was a 50 per cent decline in the number of advisers. But Taylor also notes that others thrived and that there was significant consolidation in the industry.

Outlining the expected consequences of RDR, Caroline da Silva, the Financial Services Board deputy executive officer, says the intention is for the proposals to be implemented in 2016, though some parts may be put into effect earlier.

She also tries, not surprisingly, to downplay the negative consequences of RDR on advisers, saying the ‘fallout’ in the UK happened because professionalism was introduced at the same time as RDR was implemented. Da Silva says the industry in South Africa has already

Wealthy clients aside, the authorities also want financial advice extended to less wealthy people, and will probably offer concessions to advisers in this market at some stage in the future. The mainly black middle class is growing and becoming increasingly well off.

This too could prove a lucrative field to work in, not so much because of high fees but due to the large volumes of potential clients.

Some of the best advice for financial advisers probably comes from Taylor. He tells intermediaries to change their mindsets, to change their business models, to provide good solid advice and value-added products and to face the competition of other distribution channels.

RDR has been welcomed, perhaps tenuously, by both the life and short-term insurance industries. Suzette Olivier, the South African Insurance Association (SAIA) advocate, says the phased-in and transitional approach

proposed by the FSB would allow the industry time to put in plans to modify business relationships and models to implement the changes. “The SAIA supports the ultimate aim of RDR, which is to improve customer confidence in the financial services industry.”

RDR needs to be accepted by advisers. It may be a year or so before fully implemented, but the sooner financial advisers get their businesses in line with it, the better.

Another big shake-up on the horison this year is the likely implementation of a new government Bill, called the Banks Amendment Bill, 2014, giving wide-ranging powers to the curators of failed banks to dispose of and transfer assets, and leaving investors and shareholders pretty much out of the picture.

This follows the collapse of African Bank Investments (Abil) in August last year.

The surprisingly clear wording of the Bill makes the intention clear: “To amend the Banks Act, 1990, so as to expand the basis on which a curator may dispose of all or part of the business of a bank to enable an effective resolution of a bank under curatorship; and to provide for matters connected therewith.”

Further down in the document, under the heading Financial Implications for State, it reads: “The Bill will expedite the curatorship of African Bank Limited, and will thus reduce the possible financial liability to the State in the event that African Bank Limited fails.”

The Bill has been met with outrage by some commentators, who predict that investors will team up to fight the proposals, which effectively remove many of their rights as creditors.

“We are now at the complete mercy of the regulator,” says Bronwyn Blood of Cadiz Asset Management, in a report by Bloomberg.

“Most investors won’t be happy with this.

There is pressure for groups to get together and lobby, and this will probably happen in the next couple of weeks,” she says.

The Bill is likely to come before parliament in the next few months.

One possible effect of the proposals is that investors may become a little wary of investing in bank shares, many of which have proven good investments over the past few years. Most at risk are the smaller banks and other financial services organisations which offer loans. investsa

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2015

By Vi vienn e Fou chĂŠ

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RDR introducing

change for all 2015 is going to be an intensive year for industry stakeholders when it comes to legislation reforms proposed by the Financial Services Board (FSB) in its Retail Distribution Review (RDR).

J

onathan Dixon, deputy executive officer of insurance at the FSB, says the FSB has prioritised the RDR because of the belief that fair customer outcomes must be driven by correct incentive structures and business models. “We are committed to a consultative process and engaging with stakeholders.

consumer outcomes by revisiting elements of the intermediated distribution space, as well as looking at fair levels of remuneration for advisers in the investment, life and short-term insurance areas.

However, the FIA has warned against knee-jerk reactions against the RDR, as many proposals must still be debated and finalised.

We must address the risks proactively and at source. We are looking at a bigger project than was seen in the UK and Australia, where they focused only on the investment space. Here in South Africa we have included the life, risk and short-term insurance elements of the financial services arena as well.”

FIA President Arnold van der Linde says the RDR discussion paper is the most comprehensive indication of what the regulator intends for the financial services distribution environment seen by the industry to date.

Stakeholders are only too aware that while the financial reforms proposed by the RDR discussion paper aim to achieve better outcomes for the consumer, the changes will also affect financial advice businesses.

He comments, “Regulatory uncertainty is not only damaging to the industry, where stakeholders find it increasingly difficult to make investment decisions, but to the very consumer that it aims to protect. But now that the proposals are out in the open the industry can respond appropriately, and intermediaries can once again plan for their futures.”

The Financial Intermediaries Association of Southern Africa (FIA) acknowledges that the proposed changes set out to address poor

Ian Middleton, managing director of Masthead, a compliance services provider to financial services providers in South Africa,

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13

to ensure a sustainable business model going forward. The RDR proposes structural interventions to change incentives and business models where existing arrangements fail to consistently deliver fair outcomes for customers.”

Dixon says the RDR is a prominent example of this more interventionist approach to supporting the outcomesbased Treating Customers Fairly (TCF) framework, within the broader Twin Peaks model.

“The primary aim of RDR is to ensure that financial products are distributed in ways that support the delivery of key TCF outcomes; in particular, to promote appropriate, affordable and fair advice and distribution.”

The FSB sees suitable financial advice as a key element of delivering on TCF outcomes, and so at the same time, a key objective of RDR is to ensure a framework that supports a sustainable business model for financial advice. As outlined

by Dixon, the FSB clarifies certain risks to both the customer, the intermediary and effective supervision.

Dixon clarifies, “Primary concerns of the status quo relate to the fact that inherent conflicts of interest in adviser remuneration tends to distort customer outcomes, and customers do not necessarily understand the type or value of service they can expect from their financial adviser.”

Middleton says advisers who currently rely on commission-based income will need to think about how their businesses are set up, the product providers they support, their fees and on what basis they charge fees. Concerning product providers, he comments, “In the context of fair outcomes to customers, a greater responsibility will be expected of product providers regarding the advice and/or product sales of advisers who are seen as independent.”

Middleton says the FSB’s discussion paper has been a long time coming, but is in line with expectations.

says, “The FSB’s reforms will help build consumer confidence and trust in the financial services industry through greater disclosure and transparency.

Furthermore, the FSB’s proposals are consistent with the National Treasury’s policy objectives of a stable financial services sector and the promotion of affordable access for South Africans to financial advice and products. This is a positive environment for advisers.”

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Dixon says the Financial Advisory and Intermediary Services (FAIS) Act raised standards of professionalism in South Africa, but that concerns about product mis-selling and poor outcomes for customers persist, which, he says, are in part due to the current complex product distribution landscape.

“We want customers to be able to better understand the value of advice. The current framework masks this somewhat. Structural interventions are needed, and the aim is

“We believe part of the success of RDR will depend on the balance between a rules-driven and a principle-driven approach to implementing the proposals.

If the proposals are properly policed and contraventions swiftly and appropriately sanctioned, we think the chances of achieving the goals outlined in the paper will be significantly improved.”

Van der Linde concludes: “We must make changes to ensure the sustainability of financial advice-giving, offer wider protections to consumers and maintain healthy free market competition.”

A note on Twin Peaks Richard Carter, head of product development, Allan Gray, says the Twin Peaks model of financial regulation, which has been successfully adopted elsewhere, aims to: • Improve financial stability • Protect consumers • Improve accessibility to financial services • Combat fraud.

Carter comments, “The framework is called ‘Twin Peaks’ as it involves two regulatory bodies: one to regulate market conduct and one for prudential regulation and supervision. In our local context, the Financial Services Board (FSB), which currently regulates insurers, retirement funds, unit trusts and independent financial advisers, will regulate market conduct overall, with a specific focus on how firms in the financial sector conduct their business and treat their customers.

“The South African Reserve Bank (SARB), which currently regulates the banks and worries about financial system stability, will be responsible for prudential regulation and supervision (such as the solvency and liquidity of financial institutions), and will continue to promote financial system stability.

“Both will be responsible for combatting fraud. Many financial service companies which are currently regulated by either the FSB or the SARB will now be answerable to both.”

Twin Peaks will be implemented in two phases: • Establishing the two regulators and appropriate powers assigned to them through the Financial Sector Regulation Bill: expected in 2015.

• Replacing or amending legislation such as the Banks Act and the Long-Term Insurance Act to align with the framework: expected in 2016.

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Alternative investments

The

road ahead for hedge funds South African hedge fund assets reached an all-time high during 2014 and are set to show continued growth this year as new investor-friendly regulations come into effect.

A

fter the 2008 financial crisis, the G20 group of countries dedicated itself to enhanced regulation and oversight of private pools of capital, which included hedge funds. South Africa, as a member of the G20, also committed to strengthening the regulation and supervision of hedge funds.

South African hedge funds were previously accessible to institutional and high net worth individuals. The new regulations will encourage retail investors to consider hedge funds.

Despite the record high of R53 billion in assets under management last year, as measured by the Novare South African Hedge Fund Survey, this was a fraction of the total assets of collective investment schemes (CIS), which were recorded at R1.7 trillion by the Association for Savings and Investment (ASISA).

Enhanced regulation To address the regulation of hedge fund products, the Financial Services Board (FSB), together with the National Treasury and the

16 investsa

industry, embarked on a consultative process to understand the South African hedge fund landscape. This culminated in the regulation of hedge fund products under the Collective Investment Scheme Control Act. One of the main objectives of hedge fund regulation is monitoring and measuring systemic risk. Most hedge funds in South Africa operate as pooled investments, and it was decided that regulation should be in accordance with existing CIS regulation.

According to ASISA, the incorporation of hedge funds into collective investment legislation is a world first.

The proposed regulation has a tiered approach for investors to access hedge funds: retail hedge funds available to the general public, and qualified hedge funds, which will only be available to investors who meet certain requirements or who make use of a financial adviser.

investor hedge funds requiring a maximum 90-day period.

Pressure on costs However, stronger regulation is likely to place upward pressure on costs, and hedge fund managers will be challenged to contain expenses in the face of more stringent compliance and monitoring requirements.

The proposed regulations have a big focus on risk management and compliance monitoring, with regular reporting to both the registrar and investors. This will require additional resources and, in some cases, independent service providers.

Some of the reporting requirements are for at least quarterly disclosure to investors, including information on the sources of leverage employed in the portfolio, the methodology for stress testing, counterparty exposures and the total expense ratio.

Retail hedge funds will operate under stricter regulations to ensure investor protection, while qualified investor funds will be subject to less strict, but fitting, regulation with a focus on reporting and monitoring potential systemic risk, as well as adequate disclosure to investors.

Risk management will be the responsibility of managers who will be required to document and review policies and procedures at least annually. The risk management function will also need to be performed by a resource that is independent of the investment committee.

Another distinction between the different classes is the liquidity offered to investors.

Retail hedge funds will be required to offer the maximum of a calendar month’s notice to facilitate redemptions, with qualified

Accessing hedge funds Investors can either invest directly into a single manager hedge fund or a fund of funds. The former option involves its own

risks, including manager specific risks as well as operational risks. Funds of funds, on the other hand, minimise these risks by diversifying across various single manager hedge funds. One of the most important benefits that funds of funds offer is their due diligence process.

This includes in-depth research, interviewing and understanding different hedge fund managers as well as their investment styles and strategies, and operational aspects relating to the fund and the asset manager.

Funds of funds also offer the advantage of diversification. Thus, it is possible for a fund of funds investor to gain exposure to long/short funds, market neutral funds and fixed income hedge funds through one fund.

Eugene Visagie, portfolio manager at Novare Investments

Laurium Flexible Prescient Fund.

Boutique manager performance at its best.

www.lauriumcapital.com Laurium Capital (Pty) Limited is an authorised financial services provider (FSB License no. 34142). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance.

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17

not always

better?

Vivienne Fouché

I

nvestors today have a great choice of unit trust funds available to them.

Many investors choose to stick with the recognised bigger brands when it comes to selecting a fund manager. Their choices are often influenced by big budget advertising, a perceived sense of security and also a focus on past fund performance.

However, smaller asset managers argue that quality boutique asset managers should be able to offer the bigger companies a run for their money over time.

Iain Power, portfolio manager at Truffle Asset Management and Customised Solutions Services, says, “Quality boutique investment managers with experienced people, a rigorous process and sound philosophy should, over time, deliver better returns than

18 investsa

the large and mega investment managers, because of the advantages of their size.”

Performance Hardi Swart, marketing director at Autus Fund Managers, comments that when selecting a fund manager, a good performance track record is the most obvious place to start, and this consists of fund managers who have outperformed their benchmarks, peers and the market, and have delivered top quartile performance over long periods of time.

Swart says, “Past performance is no guarantee of future performance. It is our opinion that the real long-term outperformance will come from a handful of investment savvy boutique managers through

their ability to generate alpha in innovative ways. These smaller Alpha-focused houses with their emphasis on specialisation can identify and act upon real opportunities.

“A paper entitled Unit trust performance and stock return, conducted by Anderson in 2009, found that over the study period of 18 years, small funds outperformed large funds on the JSE. Large funds face illiquidity constraints and are restricted from investing in small capitalisation shares. This competitive advantage allows boutiques to take large active bets in all their best ideas (Pillay et al, 2010).”

Size matters – is less more?

Boutique asset managers argue that the bigger an investment manager grows in terms

Asset management

in the investment management industry, increasing asset size is a significant obstacle in the pursuit of generating long-term indexbeating returns.”

Echoing this, Element Investment Managers is on record as saying that, “Global and South African research has highlighted the material negative impact an unrestricted level of assets under management has on active equity investors over the long term as a result of a continually declining investable portfolio universe.”1

However, when we consider that many successful boutique asset management companies are started by gifted investors who chose to leave the more corporate world to be part of a smaller, owner-managed business, it seems that maybe this particular wheel keeps on turning. Perhaps it just depends on where in the cycle an asset manager wants to be.

1. Source: Element Investment Managers, www.elementim.co.za 2. Source: www.iol.co.za

Manager style and investment process Swart says the strategies of many of the corporate giants is to ‘stick to their guns’ by rigorously applying their investment philosophies.

“However, this bureaucratic approach to investments could serve merely as justification for extended periods of under-performance.”

He adds that, in contrast, many boutique managers do not adhere to the guidelines of traditional asset management. “These boutique houses consist of fund managers with extensive corporate background who broke away from these corporate giants in order to look for greener pastures, a flexible environment where they are able to act on their insights and make high-conviction decisions quickly.”

Outlining the company’s investment strategy, he clarifies, “Autus Fund Managers conducts detailed evaluation of listed companies and also considers technical analysis as a valuable input. Our ability to explain our thought process used to arrive at an investment decision is key. We choose to invest in a limited number of shares in our portfolios, and many of these shares will not be seen in the Top 40 index. We believe that disproportionate diversification can potentially inhibit a manager’s ability to outperform the market.” of assets under management, the more its investable universe shrinks. Power comments, “Many shares just become too illiquid and small in terms of their market capitalisation to make a difference to the overall portfolio returns. In comparison, a boutique investment manager with a smaller asset base has a much bigger investable universe.

“This translates into more potential opportunities to construct a portfolio, which is different from the index, in other words, contains numerous independent, active positions. This means the vast majority of small and mid-capitalisation companies listed on the JSE are simply not investable for many of South Africa’s large investment managers.

Size in the majority of industries is beneficial, as it brings economies of scale. However,

Rob Spanjaard, director at Rezco Asset Management, says because Rezco is a small boutique manager, it has more flexibility when buying and selling securities. “The fund favours mid- and large-cap shares over more illiquid small-cap shares. The fund also invests with a high conviction in the shares it picks. It typically has between three and seven percent of the fund in any holding, and only 15 to 20 shares in the portfolio.”2 But does less stay more?

The final word goes to Truffle’s Iain Power, who says, “Let us not forget that today some of the highly regarded large and mega investment managers started out as small boutique investment managers more than three decades ago.”

Where to invest as a boutique asset manager?

Power is a strong proponent of the South African small-cap equity market as being ‘the playground for boutiques’.

He says, “By way of example, Sephaku Holdings is a small-cap company listed on the JSE with a market capitalisation of R1.4 billion. Truffle, on behalf of its clients, owns about 9.3 per cent of the issued shares in Sephaku Holdings. This represents an investment of R130 million and equates to about 1.6 per cent of all Truffle’s investments. From a valuation perspective, the share is attractively priced at 720 cents per share (cps) as our analysis suggests an intrinsic value closer to 1100 cps. This means there is potential for more than 50 per cent upside in the share from current levels.

“Let us suppose a large manager with R100 billion of assets under management wanted to replicate Truffle’s position in its portfolios. The manager would need to buy R1.6 billion worth of shares, which is greater than the entire market cap of the company! Truffle’s R130 million investment on an asset base of R100 billion would equate to 0.13 per cent of its portfolio, which, if it appreciates by 50 per cent, as Truffle expects, would only add 0.07 per cent of return versus the 0.80 per cent for Truffle’s clients.

One should, however, bear in mind that investing in many of these smaller businesses can significantly increase the risk profile of the portfolio. It is, therefore, critical that these investments are made in the context of their effect on the total portfolio’s risk profile.

“While larger investment managers are not precluded from making an investment into the likes of Sephaku Holdings or many other small and mid-capitalisation companies, the reality is that even when they do, the investments are so small in the context of their total asset base that they become irrelevant in terms of their effect on their total portfolio’s returns.

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Barometer

HOT

NOT Index reveals drop in manufacturing activity The December 2014 Kagiso purchasing managers index (PMI), which gauges the activity in the manufacturing sector, dropped to 50.2 per cent from 53.3 per cent in November 2014 due to the business activity index and the new sales order index – two of the biggest weighted subcomponents of the index – both reporting a decrease.

Nigeria to possibly be removed from key bond index

Residential property market expected to grow The South African residential property market emerged in 2014 from one of the toughest down-cycles with property experts forecasting double-digit increases in 2015. According to Seeff chairman Samuel Seeff, the market held a good balance during 2014 between demand and supply, with a rise in demand which favoured sellers.

Increase in SA’s retail trade sales According to Statistics South Africa, retail trade sales increased by 2.6 per cent in November 2014. Retail sales increased by 2.7 per cent in the three months ended November 2014 when compared with the three months ended November 2013. This increase was mainly attributed to an increase among general dealers and retailers in hardware, paint and glass.

Improved trade conditions for SA The December Trade Conditions Survey by the South African Chamber of Commerce & Industry (SACCI) revealed that the seasonally adjusted Trade Activity Index (TAI) lifted marginally to 56 compared to 54 reported in November 2014, while the nonseasonally adjusted TAI is four points above the TAI of December 2013. This increase was facilitated by positive import volumes, new vehicle sales and better retail sales volumes compared to earlier in 2014.

s y a w e Sid 20 investsa

JP Morgan has placed Nigeria on a negative index watch and is assessing the country’s suitability to remain on its key emerging Government Bond Index (GBI-EM). The decision was made due to the country’s current financial crisis and lack of liquidity in the African country’s foreign exchange and bond markets.

Blackouts hinder SA’s economic growth According to Matthew Sharratt, economist at Bank of America Merrill Lynch, an economic quarter of continual power cuts could account for almost one percentage point of the country’s economic growth rate. This statement was made following Eskom’s announcement in January 2015 that rolling blackouts would resume across the country as the power utility continues to struggle to meet the demand.

Decline in manufacturing production in November, yet favourable year-on-year comparisons The November Manufacturing: Production and Sales report by Statistics SA, revealed that manufacturing production declined by 1.3 per cent year-on-year in November 2014 as a result of lower production within the motor vehicle, food and beverage, and glass and non-metallic mineral products division. Seasonally adjusted manufacturing production, however, increased by 4.1 per cent in the three months ended November 2014, when compared with the previous three months, and reported positive growth rates in all ten manufacturing divisions over this period.

Economic commentary

A mixed bag right now The fall in the price of oil by almost 50 per cent since June last year has offered relief to consumers the world over.

F

or South African consumers, the recent drop in the price of oil has left them with, on average, an additional R600 per month in their back pockets.

The shale gas revolution in the United States and OPEC’s decision not to reduce supply, as well as global demand dynamics, have all contributed to the drastic decline in the price of oil.

Oil imports make up about 17 per cent of total imports into South Africa. The fall in the price of oil will no doubt have a positive effect on our terms of trade. South Africa’s current account deficit will improve due to lower oil prices but the full benefits will be watered down by both the deteriorating South African economic fundamentals and the lower value of exported goods, as commodity prices decline. Each 10 per cent drop in the oil price – sustained for a full year – lowers the current account deficit by about 0.6 per cent of gross domestic product (GDP). It is forecast that the current account deficit will narrow from -5.5 per cent of GDP in 2014 to -4.3 per cent in 2015.

The current account is mainly driven by the amount of exports and imports into and out of a country. South Africans are still consuming more that they are producing, hence the deficit. Resources make up a large part of South Africa’s exports. Although striking activity has subsided for now, the extent to which these industries contribute to the South African economy will depend on

demand for these commodities and global growth.

The slowdown in the South African economy has reduced the revenue collected by the government in the form of taxes and left the government with a large fiscal deficit.

Together with worsening growth prospects, reduced electricity supply and chronic unemployment, this could help to provide ratings agencies with reasons to implement a possible ratings downgrade. Well aware of the stick wielded by the ratings agencies, the government has heeded the call to ‘get its house in order’ or face being disciplined by a downgrade. If South Africa’s debt was regulated to junk status, this would have a profound effect on both the flow of money out of South Africa and the rand’s value.

keeping inflation rates within the bank’s range of three to six per cent. The decision by the Federal Reserve in the United States to raise rates will be watched carefully by emerging markets central banks. An increase in rates could result in large outflows as the spread between US interest rates and emerging market interest rates is reduced.

Eskom’s failure to provide South Africa with a reliable electricity supply is potentially the biggest drag on economic growth. No matter how good a country’s economic policies are, an economy cannot grow if there is no electricity to facilitate trade and production. Load shedding will no doubt have a big influence on business confidence and willingness to invest in the South African economy, which will not help in alleviating the chronic high unemployment levels.

The rand has had a rollercoaster ride over the past few years, and although it has weakened considerably against the US dollar over the past two years, this has done little to alleviate the trade deficit. The rand strengthened in the short term as foreigners were net buyers of our bonds and equities in January to the tune of R200 million. The search for yield and thus emerging market exposure has strengthened the local currency. South African listed property and bonds were a direct beneficiary of this last year.

The South African Reserve Bank’s mandate is one of inflation targeting and recent falls in the price of oil will have a positive effect on

Brian du Plessis, Rezco Asset management

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Divergence between the

US and the Euroarea intensifies The increasing divergence in economic performance between the United States and the Euro-area is a dominant feature of the global economy.

T

he US economy appears to be gaining momentum, creating an average of 250 000 new jobs each month.

In contrast, the Euro-area is losing momentum, and is at risk of falling back into recession.

This divergence is also reflected in opposing monetary policy between the two major economies. The United States Federal Reserve stopped Quantitative Easing (QE) in late

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2014, while the European Central Bank (ECB) only recently announced the introduction of an extensive QE programme.

Euro-area could result in increased volatility in financial markets, especially the bond and equity markets.

Furthermore, the United States is expected to start to raise interest rates in 2015, albeit towards the end of 2015, while the ECB is likely to leave their rates at the historical low of 0.05 per cent until at least 2016. The divergence in economic performance as well as monetary policy between the US and the

Most economic analysts welcomed the European Central Bank’s decision to launch an extensive QE (asset purchase) programme in late January 2015. The programme entails ₏60 billion monthly asset purchases of both public and private sector securities, including government

Global economic commentary

bonds. The increased asset purchases will start in March 2015 and end in September 2016, unless inflation is not back up at around two per cent on a sustainable basis.

If this is the case, QE will continue. The launch of the QE programme was prompted by the combination of exceedingly low inflation (deflation), lacklustre economic performance, and recognition that the existing monetary policy was having very little impact on the real economy.

There is extensive debate on how effective QE is likely to be in the Euro-area. It is clear that the QE programme was not designed to reduce bond yields, as they are already at historical lows. Instead, the aim is to ensure that the Euro exchange rate remains extremely weak. This should lead to an increase in imported inflation, and ultimately a generalised rise in consumer inflation. In addition, it is hoped that the weaker currency will lift the export performance of the region, which will then lift the region’s overall economic growth rate.

Over the longer term, the Euro-area needs to resolve a number of key structural impediments to growth, including excess regulation, an

unaffordable welfare system, and a lack of fiscal policy coordination between the member countries. This will require a far greater involvement by the various governments in stimulating growth and reforming markets.

The ECB’s QE initiative will most likely be less effective than the US Federal Reserve’s QE programme for a variety of reasons. This includes the fact that the US economy benefits very directly from a lowering of bond yields, especially their housing markets, whereas the Euro-area relies heavily on a well-functioning banking sector to distil credit and lift growth.

Unfortunately, the banking system in the EU remains troubled and has not been effective in transmitting the ECB’s monetary policy into the real economy.

Although there are concerns about the effectiveness of QE in the Euro-area, as well as the divergence in monetary policy between the US and the Euro-area, the lower oil price should provide some support to the world economy in 2015. Obviously, this excludes the large oil exporting countries such as Russia and Saudi Arabia. According to the International Monetary Fund (IMF), an oil price of around $50 per barrel should boost world

growth by between 0.3 and 0.7 percentage points in 2015, and will largely be reflected in increased consumer activity. It will also lower consumer inflation, thereby boosting real income. A fall in the oil price acts in a similar way to a cut in taxes.

Despite the potential uplift from a lower oil price, the International Monetary Fund (IMF) remains concerned about the economic outlook for the world economy over the next two years.

According to the IMF, there is an urgent need for structural reforms in many economies.

Kevin Lings, chief economist, STANLIB

There’s only one Investment Solution In an industry riddled with jargons and complexity, we offer our clients investments they can count on, delivered with simplicity and transparency -- and we’ve been doing it for 18 years. So, when you need an investment solution, cut to the chase and go straight to www.investmentsolutions.co.za or call 011 505 6000. Follow us on twitter @InvestmentSolZA. Investment Solutions. 18 years. With confidence

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Registration number 1997/000595/06.

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Industry associations

Retail Distribution Review: the evolution of the financial services distribution environment

T

he Financial Services Board’s (FSB) Retail Distribution Review 2014 is the latest stage in the evolution of the South African financial services distribution environment. It follows on from legislation such as the FAIS Act and Treating Customers Fairly to propose far-reaching reforms to the regulatory framework.

The industry media’s initial reaction to the RDR proposals was rather cynical, with headlines such as ‘death of the insurance salesman’ quickly gaining traction. But it is disingenuous to postulate that this ongoing regulatory process will impact negatively on financial advisers.

The intention with RDR is to clearly define all aspects of financial advice and to develop appropriate remuneration models for the sustainable provision of said advice.

At the same time the regulator aims to offer better protection to consumers of insurance and investment products by limiting conflicts of interest, creating confidence in financial markets and promoting trust among consumers, product suppliers and financial advisers.

South Africa’s financial services industry is well-developed and extremely complex, so it took regulators more than 18 months to craft an RDR document which contains no fewer than 55 proposals, each open to further public debate.

Why the negative reaction? Advisers are concerned that RDR will reduce their incomes and render their practices unsustainable.

Concerns were also raised that excessive regulation could drive smaller advice practices from the industry with an unintended negative impact on the very consumers that the regulation strives to protect.

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The ‘income’ concern stems from the up-front commission versus on-going commission versus fee-for-advice debate that has raged in the life and investment space for many years. While the advice landscape post-RDR will undoubtedly be different to the one we are accustomed to, the optimal mix of fees and commissions in tomorrow’s adviser remuneration model remains up-in-the-air until the final RDR solution is thrashed out between industry and the regulator.

What can advisers expect? In the pure investment space, RDR proposes that product suppliers be prohibited from paying commission to intermediaries in respect of investment products, although this change is largely factored into the industry already.

The FSB remains open to advisers in the life investment environment receiving both as-and-when and up-front commission – limited to half of the selling commission payable up-front – and the remainder on an as-and-when basis. But these advisers face major challenges if RDR proposal JJ, which requires them to get their clients’ explicit consent for ongoing advice fees before any product transaction is entered into, is adopted.

While remuneration-related proposals look certain to elicit heated debate, there are many proposals in RDR that are broadly accepted by the industry. Proposal A, for example, deals with conduct standards for financial planning, up-front product advice, and ongoing product advice…

And proposals B through D address concepts such as ‘low advice’ distribution models, ‘wholesale’ financial advice and sales execution. Consensus on each of these definitions will be crucial, and this consistency will be the foundation upon which clear communication to financial product consumers is built.

The RDR is the starting point for a long and challenging industry debate on sustainable financial advice. Few will argue against the need for clear definitions and standards, but consensus on the FSB’s version of a sustainable model for financial advice might require concessions from both sides of the debate.

South Africa’s risk and financial advisers will be well-represented during this debate by the Financial Intermediaries Association of Southern Africa (FIA), which has already established focus groups to interrogate RDR and provide robust comment to the regulator.

RDR stipulates that ongoing fees and commissions only be paid if ongoing advice and services are rendered and that intermediaries only be remunerated once for a particular service. It also seeks to eliminate remuneration-related conflicts.

Advisers have had many years to consider the impact of changes to the remuneration models and many advice practices have already taken steps to rebalance their mix of fee and commission income and diversify their overall product offering.

Gareth Stokes, communications manager, Financial Intermediaries Association of Southern Africa (FIA)

Investment solutions

Growth could shift from the

west to east of Africa T

he fall in the Brent crude oil price from US$110/barrel to below US$50/barrel has important ramifications for oilproducing countries, and also for those that rely on revenue from other types of commodity exports.The largest African countries are heavily dependent on commodity revenue from a fiscal perspective and for GDP growth. Specifically, countries to the west of the Sahara are likely to see reduced growth prospects and intensified economic perils. Nigeria has recently seen its currency depreciate sharply against the dollar, igniting a crisis resulting in its central bank aggressively spending foreign exchange reserves to stem the naira’s precipitous fall.

This outcome has not been confined to Nigeria, as Russia, a major oil producer, is also in crisis, with its central bank in panic mode: it increased interest rates by 6.5 per cent in December 2014 and had to reverse the move with a recent two per cent cut. The smaller members of the Organization of the Petroleum Exporting Countries (OPEC), especially Venezuela, are also feeling the economic pinch from the falling oil prices and increasingly need to consolidate fiscally and seek external financing, or face default. The exceptions, of course, are Arab states with deep pockets, like Saudi Arabia.

International Monetary Fund (IMF) data shows that since the 2008 global financial crisis, the GDP growth in sub-Saharan Africa (SSA) averaged five per cent, surpassing the meagre 0.5 per cent of developed economies (G7). Economic activity in the SSA region, according to the African Development Bank, has been supported by the expansion in agricultural production, robust growth in the services sector, and a rise in oil production and increased mining activity, mainly in resourcerich countries. These fundamentals have now changed, and the heady levels of growth seen in the largest African countries might not be sustained (see table).

On a relative basis, Western African countries are likely to suffer much more from the slowdown in commodity prices and falling oil

Table: Selected sub-Saharan African (SSA) countries Rank in SSA

Country

Nominal GDP Size, US$ bn*

Commodity endowment

Location

GDP growth (2010-2014)

1

Nigeria

594

West

Oil

6.4%

2

South Africa

341

South

Diversified

2.5%

3

Angola

131

West

Oil

4.6%

4

Kenya

63

East

Tea

6.1%

5

Ethiopia

50

East

Coffee

9.7%

6

Tanzania

37

East

Various agricultural

6.9%

7

Ghana

35

West

8

Côte d’Ivoire

34

West

9

Democratic Republic of the Congo

33

Central

10

Cameroon

32

West

20

Zimbabwe

14

South

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Mauritius

13

East

Precious metals, oil and cocoa Cocoa, coffee and palm oil Vast minerals

5.1% 7.7%

Various agricultural and some oil PGMs, precious metals Diversified

8.7%

4.5% 8.1% 3.5%

*2014 IMF’s estimate Sources: International Monetary Fund (World Economic Outlook October 2014) and Central Intelligence Agency’s World Fact Book

prices than countries to the east and south of the Sahara. Ghana is already in fiscal-crisis mode, having approached the IMF for capital.

Nigeria and Angola’s economic prospects have moderated sharply due to the falling oil prices.

While East African countries will also be affected, the diversified nature of their economies could cushion the negative shock, and their economies could still grow, although at a slower rate. There are economic strains in Kenya, which has received a loan from the IMF worth US$700 million as ‘insurance financing’ to counter the shock from the economic slowdown due to declining commodity prices.

Mauritius could benefit from the potential recovery (albeit modest) in the European Union due to the positive effects of lower oil prices and the European Central Bank’s quantitative easing. According to the Economist Intelligence Unit, Europe, particularly France and the UK, accounts for nearly two-thirds of

Mauritius’s exports and a similar proportion of tourist arrivals. It also serves as a major source of investment. Economic improvement in Europe will help boost growth in Mauritius.

In addition, the government’s efforts to open the economy through business-friendly policies and diversify its growth levers will have a positive effect on growth.

Lesiba Mothata, head: market and economic research, Investment Solutions

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Investment strategy

Opportunities and threats

in emerging ma rkets

Taiwan is an example of a market we are overweight within the EM basket. It is trading at a relatively attractive 13.1 times forward earnings, combined with improving corporate profitability and strong balance sheets.

Taiwan is also an export-oriented economy with a large, globally competitive technology sector (54 per cent of the index). The market is geared to stronger US growth and continues to benefit from an undervalued currency.

I

markets. On the positive side, risk perceptions are also extremely elevated, making valuations extremely cheap, especially in markets which face the greatest challenges to corporate earnings and economic growth.

Many of these factors affected company profitability and cash flows. In an effort to maintain returns on equity (ROE) in the face of relatively weak global demand, firms increased capital spending and leverage. More recently, this has pressured free cash flows and solvency in key sectors such as basic materials, making EM companies arguably more risky investments.

Consequently, EM equity valuations have fallen to relatively cheap levels compared to their history and to developed markets. So is it time to buy EM equities?

In China, equities are cheap on traditional valuation measures at 8.8 times forward earnings (at the time of writing) compared to a long-term average of around 12 times.

However, we are concerned that investors are not being adequately compensated, given falling profit margins from rising costs, and negative free cash flow. At the same time, corporate debt levels have more than quadrupled since 2008, and are very high relative to operating cash flow. This suggests that many Chinese companies have a genuine solvency issue, making for high-risk investing.

n the wake of the Global Financial Crisis, a range of structural challenges has impacted on emerging market (EM) growth, including overvalued currencies and poor productivity in a number of countries, leading to deteriorating competitiveness.

We believe it might be too early to buy in fully.

Firstly, equity valuations have only recently fallen back to their longer-term average versus developed markets (as measured by the price/ book value differential). Secondly, EM companies (in aggregate) have not been as aggressive as US companies in responding to weaker demand by rationalising costs and improving capital discipline in order to boost ROE. Thirdly, many emerging markets have been slow to reform their capital, product and labour markets. Many still have capital-unfriendly policies or regulations that impede profits.

Long-standing issues like upholding private property rights and enforcement of contracts still likely explain elevated risk perceptions in some

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India has generated excellent returns recently (+35 per cent at the time of writing) following the promise of capital-friendly reforms by the new BJP government. Progress so far has already probably contributed to improved investor confidence and a positive inflection in the profit and investment cycles.

The external deficit and inflation have also improved visibly, which ought to allow the central bank to ease interest rates. Indian companies have historically generated above-average ROEs (profitability), and forward-looking returns could improve further.

However, at 16.8 times forward earnings, the market is already trading at a material premium to global equities. That is, a lot of good news is already priced into the market.

In conclusion, we are bullish on global equities for 2015 given that: • Sovereign bonds yield less than two per cent compared to a world earnings yield of 7.5 per cent. • The US economy is growing above three per cent and US corporate profits at seven to eight per cent. • Despite disappointing growth in Europe and EMs, falling oil prices, low interest rates and softer currencies have eased financial conditions generally, and will support growth.

Within equities, we have a preference for North Asian markets (Taiwan, Korea and Japan).

We are also overweight Europe and Eastern Europe, where valuations are most extreme.

In our view, investors ought to be selective within emerging markets. While valuations have de-rated, returns are being challenged by deteriorating growth and profits, and in some cases, the absence of capital discipline and reforms. In contrast, the markets where reforms are underway (like India) trade at premium valuations and appear less attractive.

Kelvin Blacklock, chief investment officer at Prudential's Eastspring Investments, Singapore

Practice management

The importance of

succession planning Why is it important to have a succession plan for your business?

It is quite common in our industry to see financial advisers building up a successful practice over many years and keeping their loyal clients for a long time – even into future generations. A generational legacy can apply to both the business as well as clients, as some advisers have their children coming in to the practice to help take it forward. For those advisers whose children do not join their business, the question is then what happens to their practice, their clients and the value of their business when they can no longer continue working?

Clients need continuity. They need to know that their agreed financial planning goals will continue to be pursued by whoever takes over the relationship, and that their financial plans will play out successfully.

What criteria would you look at when deciding whether or not to create a succession plan, as opposed to deciding to sell the business?

In the adviser space, the needs of clients should be paramount. I believe advisers have a moral responsibility to ensure their clients will not have to fend for themselves once their adviser is no longer there. If you think of a succession plan in this light, then one should always be in place – even if the plan is to sell the business. As for deciding between appointing a successor and selling the practice, a good place to start is to consider if there is already an obvious successor in the practice. If so, keeping the practice going may be the right decision. The adviser will then need to decide if he or she wants to retain a financial interest in the practice, or sell up entirely. This will depend on how much

financial value there is in the practice, and how the adviser can extract that value while still making sure that clients’ needs are well looked after. It is important to keep in mind that a well thought-through and implemented succession plan will enhance the value of a practice.

How do you choose a successor?

Identifying the right person to take over the running of your business can be a difficult decision. Much is at stake, and an adviser needs to be absolutely certain that their chosen candidate is capable of taking the business forward and serving its clients successfully. An adviser might have a family member or existing employee in mind: someone they already know and trust. If an internal appointment isn’t possible, then you would look for an external successor. In both instances, the adviser must make sure that their successor has the necessary expertise and experience, applies similar business practices and ethics, and places the same priority on ensuring the success of clients.

When should a succession plan ideally be created?

A practice must avoid a situation where succession planning happens only once the owner-manager passes away, leaving the executor to try to put something in place.

Unfortunately, this is what often happens, which is not in the best interests of clients or the practice. The short answer is that the sooner a plan is put in place, the better. You don’t know what could happen tomorrow, and being prepared is always the best option. Having longer to mentor a successor also means that the successor will ultimately be better prepared to take over the practice. This results in a

smoother leadership transition for both the practice and its clients.

How would you implement a succession plan?

This will include training individuals in their new roles as responsibilities shift, ensuring that current tasks don’t fall behind and, most importantly, making the process seamless for clients. It is essential that individuals key to the succession are comfortable with their new roles and responsibilities beforehand.

What are the risks to the owner-manager if a succession plan isn’t put into place?

The owner-manager may be the ‘magic’ in the business and if a successor isn’t in place, the biggest risk is that the business won’t survive losing its leader. This could mean financial difficulties if the owner was hoping to extract capital or income from the business once he or she retires. It may also be very emotional to completely cut ties with a business and client base you’ve personally built up over many years.

Dan Hugo, CE Distribution, PSG Konsult

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Raging Bull Awards

Best

unit trusts in SA

By Vivienne FouchĂŠ

As usual, the 19th annual Raging Bull Awards, held in Johannesburg on 28 January, showcased the cream of the talents of South Africa’s unit trust companies.

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Left to right: Chris Rogerson, fund specialist at PSG; Pieter Koekemoer, head of personal investments at Coronation; Nick Andrew, managing director of Nedgroup Investments

T

he Raging Bull Awards honour fund managers and management companies that provided superior returns for unit trust investors during the preceding year.

This year, there were one or two surprises with some of the awards. Before this year’s ceremony got underway, interested investors were given a sneak preview, via Twitter, to “Expect the unexpected when the top three managers are announced.”

The first two awards of the evening, the Best South African Equity General Fund and the Best South African Interest-bearing Fund, were both taken home to Kwa-Zulu Natal, having been won by Howick-based Harvard House Investment Management.

Regarding the top three companies for the coveted Top Management Company of the Year award, Coronation won for a record-breaking sixth time, while PSG entered the top three to come in second, with Nedgroup Investments third.

We invite you to peruse the winners at your leisure, while remembering these empathetic words from Personal Finance editor, Laura du Preez, before the prizegiving began: “While tonight is all about honouring the top performers, we should never lose sight of those we are serving.”

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Left to right: Personal Finance editor Laura du Preez; PlexCrown Fund Ratings managing director Ryk de Klerk; Business Report editor Ellis Mnyandu; Chris Rogerson, a fund specialist at PSG; Pieter Koekemoer, head of personal investments at Coronation; Nic Andrew, managing director of Nedgroup Investments; ProfileData managing director Ernie Alexander

TOP MANAGEMENT COMPANIES OF 2014 The unit trust management companies with the most impressive and consistent overall performance across their families of funds taking into account all factors (performance, risk-management and consistency).

For the third consecutive year (and a record-breaking sixth 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 randdenominated funds (both South African and international) with a performance history of at least five years.

PSG Asset Management, as mentioned, did themselves proud by coming in second, while Nedgroup Investments again claimed third spot overall, for the second year in a row.

Noteworthy mentions also go to Old Mutual, which won the Best (South Africandomiciled) Global Equity General Fund award for a second year in a row with the Old Mutual Global Equity Fund, as well as the Lloyd’s Multi-Strategy Fund Limited Growth Strategy Fund, which won the award for the Best (FSB approved) Offshore Global Asset Allocation Fund for a second year running.

Personal Finance, PlexCrown Fund Ratings and ProfileData are the joint sponsors of awards.

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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: OASIS

over three years in ProfileData’s offshore global equity general sub-category.

CONTRARIUS GLOBAL EQUITY FUND (IRELAND)

TOP OUTRIGHT PERFORMERS

The top performers to 31 December 2014 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.

The top performers to 31 December 2014 on a straight performance basis in asset and sector-specific Association for Savings & Investment SA (Asisa) unit trust categories (including the main multi-asset subcategories).

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 subcategory. HARVARD HOUSE BCI GENERAL EQUITY FUND 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. HARVARD HOUSE BCI FLEXIBLE INCOME FUND Best (South African-domiciled) Global Equity General Fund. The fund with the highest ProfileData total investment return ranking over three years in the Asisa foreign equity general sub-category. OLD MUTUAL GLOBAL EQUITY FUND (R) Best (FSB approved) Offshore Global Equity Fund. The fund with the highest ProfileData total investment return ranking

TOP PERFORMERS ON A RISK-ADJUSTED BASIS

Best South African General Equity Fund. The fund with the highest PlexCrown rating in the Asisa domestic equity general sub-category. SASFIN MET EQUITY FUND Best South African Multi-Asset Equity Fund. The fund with the highest PlexCrown rating and rank in the Asisa low-, mediumand high-equity sub-categories. 27FOUR STABLE PRESCIENT FUND OF FUNDS Best South African Multi-Asset Flexible Fund. The fund with the highest PlexCrown rating and rank in the Asisa South African multi-asset flexible subcategory. CLUCASGRAY FUTURE TITANS PRESCIENT FUND Best (FSB approved) 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

Shaheen Ebrahim (centre), the chairman of Oasis Asset Management, receives the Raging Bull Award for Offshore Management Company of the Year

WINNERS OF CERTIFICATES Top outright performance over three years The top performers to 31 December, 2014 on a straight performance basis in Asisa sub-categories.

SOUTH AFRICAN FUNDS • Best South African Equity Industrial Fund: CORONATION INDUSTRIAL FUND • Best South African Equity Financial Fund: CORONATION FINANCIAL FUND • Best South African Equity Resources Fund: INVESTEC COMMODITY FUND • Best South African Equity Smaller Companies Fund: NEDGROUP INVESTMENTS ENTREPRENEUR FUND • Best South African Multi-Asset Flexible Fund: AUTUS BCI OPPORTUNITY FUND • Best South African Multi-Asset Low Equity Fund: STRINGFELLOW BCI STABLE FUND OF FUNDS • Best South African Multi-Asset Medium Equity Fund: S BRO BCI BALANCED FUND OF FUNDS • Best South African Multi-Asset High Equity Fund: MET ODYSSEY BALANCED FUND OF FUNDS • Best South African Interest-bearing Variable-term Fund: COMMUNITY GILT FUND • Best South African Interest-bearing Shortterm Fund: SIM ENHANCED YIELD FUND • Best South African Multi-Asset Income Fund: HARVARD HOUSE BCI FLEXIBLE INCOME FUND • Best South African Real Estate Fund: ABSA PROPERTY EQUITY FUND • Best (SA-domiciled) Global MultiAsset Flexible Fund: OLD MUTUAL INTERNATIONAL GROWTH FUND OF FUNDS

• Best (SA-domiciled) Global Multi-Asset Low Equity Fund: CORONATION GLOBAL CAPITAL PLUS (ZAR) FEEDER FUND • Best (SA-domiciled) Global Multi-Asset High Equity Fund: CORONATION GLOBAL MANAGED (ZAR) FEEDER FUND • Best (SA-domiciled) Global Real Estate Fund: CATALYST GLOBAL REAL ESTATE FEEDER FUND • Best (SA-domiciled) Worldwide MultiAsset Flexible Fund: IMALIVEST MET WORLDWIDE FLEXIBLE FUND OFFSHORE FUNDS • Best (FSB approved) Offshore Europe Equity General Fund: TEMPLETON EUROLAND FUND • Best (FSB approved) Offshore USA Equity General Fund: STANLIB OFFSHORE AMERICA FUND • Best (FSB approved) Offshore Global Real Estate General Fund: SARASIN IE REAL ESTATE EQUITY – GLOBAL (GBP) FUND • Best (FSB approved) Offshore Global Fixed-interest Bond Fund: STANLIB GLOBAL BOND FUND • Best (FSB approved) Offshore Global Asset Allocation Fund: CORONATION GLOBAL MANAGED (US DOLLAR) FUND

Equity Fund: 27FOUR BALANCED PRESCIENT FUND OF FUNDS • Best South African Multi-Asset High Equity Fund: PSG BALANCED FUND • Best South African Interest-bearing Variable-term Fund: ABSA MULTIMANAGED BOND FUND • Best South African Interest-bearing Shortterm Fund: CORONATION JIBAR PLUS FUND • Best South African Multi-asset Income Fund: CORONATION STRATEGIC INCOME FUND • Best South African Real Estate Fund: ABSA PROPERTY EQUITY FUND • Best (SA domiciled) Global Equity General Fund: OLD MUTUAL GLOBAL EQUITY FUND • Best (SA domiciled) Global Multi-asset Low Equity Fund: CORONATION GLOBAL CAPITAL PLUS (ZAR) FEEDER FUND • Best (SA domiciled) Global Multi-asset High Equity Fund: CORONATION GLOBAL MANAGED (ZAR) FEEDER FUND • Best (SA domiciled) Global Real Estate Fund: CATALYST GLOBAL REAL ESTATE FEEDER FUND • Best (SA domiciled) Global Multiasset Flexible Fund: OLD MUTUAL INTERNATIONAL GROWTH FUND OF FUNDS • Best (SA domiciled) Global Multiasset Flexible Fund: ROOTSTOCK MET WORLDWIDE FLEXIBLE FUND OFFSHORE FUNDS • Best (FSB approved) Offshore Europe Equity General Fund: FRANKLIN EUROPEAN GROWTH FUND • Best (FSB approved) Offshore USA Equity General Fund: STANLIB OFFSHORE AMERICA FUND • Best (FSB approved) Offshore Global Real Estate General Fund: SARASIN IE REAL ESTATE EQUITY – GLOBAL (GBP) FUND • Best (FSB approved) Offshore Global Fixed Interest Bond Fund: STANLIB GLOBAL BOND FUND • Best (FSB approved) Offshore Global Equity General Fund: INVESTEC GSF GLOBAL STRATEGIC EQUITY FUND

Photos by Greg da Silva

Top performers on a risk-adjusted basis over five years The top performers to 31 December 2014 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 • Best South African Multi-Asset Low Equity Fund: 27FOUR STABLE PRESCIENT FUND OF FUNDS • Best South African Multi-Asset Medium

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Retirement reform

Addressing the flaws in a

faulty retirement system

By Vivienne Fouché

Grindrod Asset Management recently held a presentation on the topic ‘Making retirement income work: addressing the flaws in a faulty retirement system’. The speakers included Ian Anderson, chief investment officer; Paul Stewart, head: fund management; and Marc Thomas of the business distribution and development teams.

O

pening the discussion, chief executive Mark Logan said that the question, “What happens if I die too early?” is today being replaced with, “What happens if I die too late?”. He commented, “Both globally and in South Africa, there is much debate regarding the retirement system. The most important question going forward is how to have enough money for retirement.”

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Asset class outlook: Ian Anderson During his presentation, Anderson outlined the fund managers’ dilemma today as follows: “Clients want less short-term volatility. Asset class returns have been high in the past, and we don’t think this will be the case going forward. There is limited scope under current legislation to provide downside protection and

at an industry level, we are seeing an increased allocation to safer assets like cash and bonds to meet short-term objectives.

“Large fund managers are going offshore while smaller fund managers are still finding ample opportunities in South African markets. The high returns of the past 10 to 15 years have masked the risks of giving clients what they want and not what they need. Something has got to

Flaws in the retirement system: Paul Stewart

Making retirement income work: Marc Thomas

Stewart gave an interesting historic perspective on the retirement industry, leading into a discussion on common problematic themes in the retirement fund industry today. He said, “Retirees today are generally uncertain about their existence and their income security is low, exacerbated by low interest rates. Bad health can spell disaster for those without adequate health insurance and/or those with budget constraints, and retirees often need to supplement their income post-retirement.”

Thomas’s information paid particular attention to the challenges that face the individual in retirement. He said retired investors’ challenges include declining capital in the midand latter retirement years, with consequent declining assets under management for the industry; uncertainty from year to year of income payment; and the fact that capital and income are always vulnerable to annual volatility, sequence of return, timing and topup risk.

Summarising the flaws in the retirement system, Stewart listed the following: normal retirement ages are too low and retirement assets themselves need a longer lifespan; there are not enough incentives to save; there is an emphasis on saving for retirement instead of saving through retirement; members have access to their capital before reaching retirement age; there is too much complexity within the industry and not enough coherent advice.

Thomas says that Grindrod Asset Management’s income-efficient portfolios provide three important elements to provide income for investors, namely a reliable income yield, annual growth in income of close to CPI, and long-term capital growth (total return) at or above CPI to sustain income for up to 30 years. In contrast, he says, traditional portfolio management only focuses on total return.

“Trustees, consultants and asset managers are frequently unaligned, with a misplaced focus on short-term total returns. The break between preand post-retirement causes de-risking behaviour, which is not helpful – asset allocation is key.” change, and we believe that investors should not necessarily be rushing offshore.”

Moving on to what he then termed the dilemma of investors in their retirement years, Anderson said, “According to traditional modelling, clients need sustainable long-term investment returns from which to draw an income. Investment time horisons are increasing: people are living longer and longer, and previous norms of 10 to 15-year investment horisons are now moving towards 20 and even 30 years. It’s believed that the first person who will live to the age of 150 has already been born!

“Against this background, current income yields are too low and the outlook for growth in the medium term is uncertain. Inflation in South Africa is likely to remain stubbornly high despite recent oil and petrol price developments.

Increased intermediation has raised the costs of post-retirement planning.”

Anderson said that in solution, Grindrod Asset Management offers ‘income-efficient portfolios’, which focus on assets that provide regular income plus growth in that income stream over time. He said, “We’ve made capital volatility irrelevant and that’s one of the aims. The characteristics of an income-efficient portfolio, which is specifically constructed to generate income, include the following: all securities in the portfolio contribute to producing an income stream; there are no performance-based fees; and the majority of securities produce an income that grows at or above inflation over time.”

He outlined the regulator/industry’s ‘proposed fixes’ as follows: saving for longer, with compulsory savings for all employees; retirement fund reform, including an emphasis on reducing costs and choosing passive asset management over active; choosing the ‘best’ asset manager, whether active, passive or a multi-manager; and de-risking the portfolio (even though target date portfolios or life stage models may not work).

Stewart continued, “Grindrod Asset Management has outlined its own proposed solutions. We believe that investors have to get the short-term risk avoidance mentality out, and, in our opinion, assuming more risk is a better long-term strategy.

“Our proposed fixes include that all participants work together to create a defined benefit-style retirement income as a percentage of final salary within a final defined contribution retirement income; that the complexity be removed from the system, including by consolidating pension, provident, retirement annuity and preservation funds and also by removing pre- and postretirement delineations; that asset managers should manage assets for the creation of an income stream, not a capital value which is exposed to prevailing market conditions and interest rates at retirement; that costs be kept down by removing excesses from the system (for example in the spheres of advice, administration and performance fees); and that in creating a ‘one per cent total cost solution’ we recognise that going passive is not the only answer and often not the best answer.”

Thomas says, “Globally, we are seeing low yields, low returns and people who haven’t saved enough. Going forward, cash and bonds are not predicted to beat inflation, as they did in the past. And yet today the retired client is drawing more income. Costs, asset allocation and portfolio income will determine the chances of a successful retirement being sustained for 30 years.

“We, therefore, believe that the regulator is doing the right thing on costs but not on asset allocation, by proposing lower asset allocation risks than are currently prescribed in Regulation 28. Reducing risk and volatility also reduces long-term returns.”

Quoting sources including Blackrock (2013), Ernst & Young (2013) and JP Morgan (2012), Thomas also discussed the issue of ‘decumulation’ and how it is becoming a global issue in the retirement arena: ‘The challenge of decumulation has yet to be addressed: Blackrock’.

In solution, Thomas said, “This has all led to a different approach to planning and investing globally, as led by Morningstar. We need to go back to liability driven investing (LDI). It allows pension funds to match income versus liabilities. In this approach, the focused use of dividends has a significant positive effect.”

While taking pains to point out that there is no ‘silver bullet’ solution to the issues currently surrounding retirement investing, Thomas concluded the presentation by summarising Grindrod Asset Management’s approach to successful retirement planning and investing as including lower fees, the production of a reliable income, a focus on income growth and a higher allocation to growth assets.

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Regulatory development

The regulation of

hedge funds

in South Africa Hedge funds have been operating in an unregulated space at a product and manager level. They have been regarded as complex investment vehicles available only to high net worth individuals and institutional investors.

I

n South Africa the hedge fund industry is relatively small, with assets under management approximated to be R46 billion in 2013, compared to the South Africa’s Collective Investment Schemes assets under management of R1.5 trillion in the same year.

Hedge fund managers have always been regulated at a manager level (not at product level) by the Financial Advisory and Intermediary Services Act, No. 37 of 2002 (the FAIS Act).

Hedge fund managers are issued a Category IIA licence that gives them the authority to operate as discretionary financial service providers, managing hedge fund portfolios.

The National Treasury and the Financial Services Board released a proposed framework for the regulation of hedge funds on 13 September 2012 for public comment. A response document was released on 10 February 2014 and is available for viewing on the Treasury and FSB websites. Hedge funds will be regulated under the Collective Investment Schemes Control Act (CISCA).

Objectives Hedge funds can be used to improve the returns of a portfolio and tend to have a low correlation to other traditional assets. Hedge funds are designed to protect downside risk and preserve capital thus tend to perform better in bear markets. The Regulator’s main aim is to ensure that hedge funds operate in a regulated space. Regulation 28 allows for a 10 percent exposure limit toward hedge funds. The expected outcomes are for increased investor protection, prevention of systemic risk, the promotion of market integrity and transparency.

Retail Investor Hedge Funds (RIHF) and Qualified Investor Hedge Funds (QIHF).

RIHFs will be allowed to solicit investments from all investors, while the QIHFs will only solicit investments from qualified investors. Qualified investors include pension funds, insurance companies and asset managers. RHIF structures will require a person to register a company which, once approved, will operate as a CIS manager. The CIS manager will be subjected to strict requirements, a trustee to perform daily fiduciary duties and oversight of the hedge fund.

The trustee will be independent of the manager.

In consistency with the CISCA framework, there are no requirements for an independent administrator for the fund; the trustee is required to provide daily oversight on all pricing and valuations. Fund administration can be outsourced to an external administrator. The RIHF manager is encouraged to appoint an independent fund administrator.

A QIHF manager based on the draft regulations does not need to set up a company as in the retail space. The CIS manager will determine the structures, i.e. partnership, trust or company, which will need to be sound and viable. A governing body with a majority of independent members will have oversight over fiduciary duties (investments and risk management) functions of the registered CIS. The QIHF can appoint an independent fund administrator to perform the prescribed duties, and it would be the duty of the CIS manager to ensure that the administrator can fulfil the required duties adequately.

Types of funds

Prime brokers play a critical role to the hedge fund manager as they become counterparty to the hedge funds by providing them with leverage or selling securities (short selling). They facilitate the investment transactions.

The two types of hedge funds envisaged are

Before a prime broker is appointed, the CIS

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manager needs to be satisfied with the prime broker’s capabilities. A prime broker from the same banking group with the custodian may be appointed by the CIS manager subject to there being a clear separate functional segregation of duties between the prime broker activities and the custodian.

Registration period We envisage a registration period of 12 months from the time the regulations are promulgated.

This transitional period is to allow for the CIS managers to register with the registrar and adjust their respective portfolios to ensure compliance with the Regulations and Act.

Conclusion The regulation will mean that for the first time asset manager funds are regulated at a fund level. Higher administration costs are expected due to enhanced disclosure requirements and risk control measures as will be prescribed by the regulator. Based on the current draft regulations, the current structures, in other words partnerships, trusts and debentures, are accommodated. A fund might need to change its structure depending on whether it is a QIHF or RIHF.

Tebogo Molamu, operations and risk manager, Caveo Fund Solutions

Unit trusts

The theory of

risk and r eturn E

fficient market theory holds that there is a direct relationship between risk and return: the higher the risk associated with an investment, the greater the return. This is intuitive: when we choose investments that we think are more risky, we naturally expect to be rewarded with higher returns.

Unfortunately, in the real world, this simplified relationship does not exist. We have imperfect information, so we are forced to deal with perceived risk and expected return. And at any level of perceived risk, there is a range of potential outcomes.

By definition, this range widens as the risk increases, making it progressively more challenging to predict outcomes with any certainty. Your actual return could be far higher or far lower than your expectations.

Even with perfect information and analysis, taking on greater risk does not guarantee greater future returns.

The price you pay Your return is determined by the price you pay for an investment relative to its yield and relative to the price you sell it for. We believe the best definition of risk is the risk of permanently losing capital, normally as a result of overpaying. The price you pay is the most powerful determinant of both future risk and return and it is the one factor you can control at the outset.

The graph uses the South African stock market as an example of an investment that

carries a high level of perceived risk. It shows the fluctuation in the real (after inflation) price level of the market since 1960 (represented by the FTSE/JSE All Share Index, excluding dividends).

The ALSI is within a single standard deviation of its trend, as described by the grey lines, roughly two-thirds of the time.

The graph illustrates the uncertainty in the expected return from the stock market, and specifically the impact of overpaying.

An investor who invested at the peak of the market in 1969 (point A on the graph) would have taken 18 years to get his initial invested capital back, and that is only if he sold his investment at exactly the right time (point B). If he had missed this exit point, he would have had to wait a further nine years to come out even (point C).

Point D shows where the market is today. While equities should always be considered long-term investments, the market is currently expensive compared to its history. As shown in the example, if you come in at a high point and the market returns to more normal levels, you may have to wait longer than expected before your investment recovers its value.

So what should you do?

The best solution for most investors is to choose a unit trust where the investment manager can invest in more than one kind of asset, such as a balanced fund.

Managers can then avoid expensive assets in either local or offshore markets – and if everything is expensive, they can retreat to cash. This saves investors having to decide when is the best time to enter or exit the market.

Graph: FTSE/JSE ALL SHARE INDEX ADJUSTED FOR INFLATION

Source: I-Net BFA and Allan Gray research, data to 30.11.2014

Wanita Isaacs, investor education manager at Allan Gray

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NEWS Nedbank Capital offers clients expanded access to global mining research Nedbank Capital, the wholesale investment banking division of Nedbank Group, has entered into a research sharing agreement with CIBC World Markets Inc, the wholesale banking arm of the Canadian Imperial Bank of Commerce (CIBC), which will afford clients access to global research on the North American, Australasian and African mining

sectors, as well as analysis of more than 100 international metals and mining stocks around the world. According to Brian Kennedy, Group Managing Executive of Nedbank Capital, the research sharing agreement gives Nedbank Capital’s clients access to world-class research on metals and mining. He says it serves to significantly strengthen their research offering, which complements their advisory services in this important sector where they are focused on playing leading roles in the development and financing of vital resource projects across Africa.

“The agreement combines CIBC’s expansive research and analysis with the insights provided

by Nedbank Capital’s Global Markets Equity division, effectively giving its clients economic and market intelligence and in-depth sector research backed by detailed fundamental, quantitative and technical analysis.

“We are confident that by making this combination of fundamental, quantitative and technical analysis available to our clients, they will be able to view markets or sectors of interest to them from a diversity of angles.”

head of Imara Africa Securities by the panAfrican Imara financial services group.

Justin Fletcher

Imara Africa appoints new head of Securities Justin Fletcher has been appointed as the new

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Fletcher was a member of the founding executive team at Imara Africa Securities.

He entered the investment industry in 1994 as a junior trader on the JSE market floor at Kaplan & Stewart Stockbrokers and later became senior dealer for the US firm, Raymond James Stewart.

He subsequently joined O’Flaherty & Sundelson and is a former director of trading with Rice Rinaldi Securities.

Fletcher joined Imara SP Reid in 2003, initially managing a proprietary and arbitrage book before being tasked with the growth of retail, asset management and corporate business.

Nerina Visser

Nerina Visser joins etfSA.co.za Nerina Visser, former Head of Beta Solutions at Nedbank Capital, has joined etfSA.co.za

Proposed changes to the Allan Gray Equity Fund

Metrofile business continuity company expands into Mozambique Global Continuity SA – a group company of JSElisted Metrofile Holdings Limited – has expanded its geographical footprint beyond South Africa’s borders by opening an office in the Mozambique capital and largest city, Maputo.

According to Greg Comline, general manager of Global Continuity SA, the economic rebound the country is currently experiencing is mirrored by the growth of business taking place and this complements the growth requirement for clients who have operations in Mozambique. “Due to the fact that the country has experienced a tremendous amount of change over the years, we have seen a greater demand for the various services offered by Metrofile, especially business continuity planning and support.” He says that in addition to businesses in Mozambique facing similar risks to those experienced in South Africa, every

region has its own set of unique risks, such as flooding. “That is why we have based the facilities at the Metrofile Maputo site, which is well-situated above the floodplains. Since establishing the office, we have already seen an increased risk of electricity supply shortages which could ultimately disrupt business operations.”

The new office in Maputo will offer local businesses a physical work area so that a business can continue operating as normal while it recovers from the business interruption. “Businesses will be able to make use of the infrastructure provided by Global Continuity and Metrofile, to allow them to continue with daily business tasks.

The Global Continuity service offering will also complement the range of services that are currently offered to all Metrofile Records Management clients in Mozambique.”

In addition, Visser will continue to help manage the portfolios for the etfSA Retirement Annuity Fund and for a Living Annuity Fund to be launched by etfSA.co.za

The aim of the proposed changes is to enable Allan Gray to increase the fund’s longterm returns and reduce risk through wider investment opportunities. The changes also aim to lower fees and better align the fees paid with the performance that investors experience.

Comline explains that the new office in Maputo is in line with the group’s strategy to expand its current offerings to better cater for client’s requirements on the continent as businesses look to expand their operations into new regions.

Glacier by Sanlam appoints MD of International team

as a director of the holding company. Visser has several years’ experience within the South African asset management industry and has specialised over the past number of years in Exchange Traded Products.

Together with Mike Brown, founder of etfSA. co.za, Visser will be primarily involved in launching a specialised managed portfolio business, consisting only of ETP portfolios, to provide balanced mandates across all asset classes and market sectors. A Category II FSP licence has been secured for this purpose.

Allan Gray has balloted investors in the Allan Gray Equity Fund regarding proposed changes to the Fund’s investment mandate, benchmark and fees. The ballots were sent to both institutional and retail investors in the fund in December last year.

The proposed changes are; 1. Change the fund’s investment mandate to allow it to invest offshore in line with the limits of the South African-Equity-General sector. This would enable the fund to invest up to 25 per cent of its assets in global equities and a further five per cent in African equities.

2. Change the fund’s benchmark to the market value-weighted average return of the South African-Equity-General sector, excluding Allan Gray funds.

3. Change the fund’s investment management fee.

4. Change the fund’s investment mandate to allow the use of financial instruments (including listed derivative instruments).

Andrew Brotchie in the near future. Visser and Brown will also offer independent consulting services on ETPs for the issuers of such products on the JSE and other stock markets throughout Africa.

Andrew Brotchie has been appointed MD of Glacier International with effect from January 2015. He has been with Glacier International since March 2011 as head of product and investments. Prior to that, he spent over 10 years working in the international investment sphere (in South Africa, the United Kingdom, Hong Kong, Singapore and Taiwan), including roles in business development, product and investments, and managing an investment advisory firm.

Brotchie has a BA Honours in History and Politics and an MBA in International Management, both from the University of Exeter in the UK.

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Products

s&p Dow Jones Indices bolsters its South Africa factor-based index range S&P Dow Jones Indices (‘S&P DJI’), one of the world’s leading providers of financial market indices, announced the launch of the S&P Quality South Africa Index which is designed to measure high quality stocks in the South African equity market.

The Index has been licensed to Satrix, a leading provider of passive investments in South Africa, for the development of a unit trust.

The S&P Quality South Africa Index is comprised of the top quintile (20 per cent) of stocks from the S&P South Africa Composite Index, which are selected using a ‘high quality score’ that is calculated based on three fundamental measures: return on equity, accruals ratio and financial leverage ratio. Each stock in the S&P Quality South Africa Index is weighted by its quality score and multiplied by its float-adjusted market capitalisation.

Vinit Srivastava, senior director, Strategy Indices, S&P Dow Jones Indices, said that they are proud to continue to expand the range of factor-based indices in South Africa with the launch of the S&P Quality South Africa Index.

Helena Conradie, CEO of Satrix, stated that they are extremely excited to license the S&P Quality South Africa Index from S&P Dow Jones Indices. “The combination of the wellestablished Satrix brand, S&P DJI’s strong data management, as well as our combined research capabilities, makes this a natural fit for us. We believe the sustained domestic and international growth of the passive industry will remain robust. S&P DJI’s burgeoning presence in South Africa is welcome and should lead to greater efficiencies in the local industry from which investors will ultimately benefit.”

The S&P Quality South Africa Index joins the following factor-based indices already available for the country: • S&P Low Volatility South Africa Index • S&P Dividend Aristocrats South Africa Index • S&P Momentum South Africa Index • S&P Equal Weight South Africa 50 Index • S&P GIVI South Africa Index Family • S&P GIVI South Africa Composite Index • S&P GIVI South Africa Financials Index • S&P GIVI South Africa Industrials Index • S&P GIVI South Africa Resources Index • S&P GIVI South Africa LargeMid Capped Index

Metope launches new unit trust focused on listed property market Privately owned Metope Investment Managers, with more than R2.4 billion worth of assets under management, has announced the launch of its Metope MET Property Fund. The new unit trust, which focuses on the listed-property market, has been developed in partnership with MET Collective Investments.

The fund aims to provide investors with a combination of income and long-term capital appreciation. This is achieved by being invested in locally listed real estate equities and delivering long-term outperformance against the FTSE/JSE SA Listed Property Index.

As part of its investment approach, Metope uses in-depth fundamental research of the local property market and the locally listed real estate equities, as in pursuit of fund’s objective as well as relevant macro-economic factors, which enables it to identify compelling investment opportunities for delivering superior long-term returns.

The listed property sector has grown from a market capitalisation of about R14 billion in 2002, when the Property Unit Trust and Property Loan Stock JSE Indices were created, to more than R510 billion in 2014 – which continues on a positive growth trajectory. The listed property sector now makes up roughly 4 per cent of the FTSE/JSE All-Share Index, with three property shares now included in the FTSE/JSE Top 40 Index.

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The world

CUBA, UNITED STATES, SOUTH AFRICA, UNITED KINGDOM, GERMANY, SWITZERLAND

‘IC’ not ‘BRIC’?

Jim O’Neill, former Goldman Sachs chief economist and the person who coined the ‘BRIC’ acronym, says that Brazil and Russia’s ‘membership’ of the BRIC nations may expire by the end of this decade if they fail to revive their flagging economies. While the economies of Brazil and Russia are struggling, China is embracing economic change and India might have brighter prospects this decade than last. According to a Bloomberg News economists’ survey, Russia will see a 1.8 per cent contraction and Brazil an expansion of less than one per cent, while China and India are expected to grow at seven per cent and 5.5 per cent respectively.

Decades-long trade restrictions between Cuba and the US lifted New travel and trade rules between the US and Cuba have come into effect in the biggest policy shift between the two countries in more than 50 years. Although ordinary tourism is still banned, the new regulations will allow American citizens to travel to Cuba for any of a dozen specific reasons without first obtaining a special licence from the government. United Airlines moved quickly to announce plans to begin flying to Cuba from its terminals in Houston and Newark.

Oil price to increase consumer income in SA Total consumer income may increase in 2015 for South Africans if the oil price reaches $50 a barrel, which will also assist in

decreasing the inflation rate to 3.2 per cent.

Peter Worthington, an economist at Barclays Johannesburg-based investment banking unit, says lower oil prices are a big boost to household disposable income, and this will help to shore up household spending. The local petrol price has decreased about 20 per cent since June last year.

UK sees lowest inflation rate in over a decade British consumer price inflation dropped to its lowest level in almost 15 years in December 2014. Reflecting a slide in global oil prices, the Office for National Statistics reported that the rate of consumer price inflation halved to an annual 0.5 per cent in December from one per cent in November. Weak price growth will be a relief for British consumers as a boost to their spending power after years of weak wage growth. Consumer spending remains strong in Britain, and most economists believe that Britain faces less danger of deflation than the Eurozone.

Paul Hollingsworth, economist at Capital Economics, says inflation hasn’t reached its low point yet and predicts it to hit 0.2 per cent in coming months.

German growth in 2014 not so rosy at second glance The German economy grew by 1.5 per cent in 2014, driven by consumers and foreign trade, and displaying its best performance in three years. The Federal Statistics Office showed that private consumption added 0.6 per cent to growth, largely due to positive employment statistics, increasing wages and moderate inflation, which all helped to boost household

spending. The expansion will bolster the ailing Eurozone. However, economists have also pointed out that the German economy did not do quite as well throughout 2014 as the fullyear data for gross domestic product (GDP) indicates. The German economy started the year with robust quarter-on-quarter growth of 0.8 per cent. It then contracted in the second quarter, and the country narrowly avoided a technical recession, with growth of just 0.1 per cent, in the third. The Statistics Office said the economy probably grew by around 0.25 per cent in the fourth quarter.

Dismissal of Swiss bank secrecy on the cards?

Switzerland has proposed two draft laws in order to rid bank secrecy for offshore accounts and allow the automatic exchange of an account-holder’s information with foreign tax authorities.

This follows on from Swiss banks, including UBS and Credit Suisse, handing over information to the United States and paying fines for helping tax evaders.

Interested parties will have until April 21 to comment on the bill. The laws will then go to parliament to be voted on later this year. The measure could also be subject to a national referendum. Banking secrecy has been enshrined in Swiss law since 1934. Pressure to give it up mounted on Switzerland after UBS, the country’s biggest bank, paid a fine of US$780 million in 2009 and disclosed the names of American clients. Several other Swiss banks, including Julius Baer, face US criminal investigations.

About 100 more – roughly a third of all Swiss banks – are cooperating with the US Department of Justice.

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They said

A collection of insights from industry leaders over the last month

“Residential is the next big growth area for the South African property industry.”

Mark Kaplan, chief operations officer at Arrowhead Properties, predicts greater opportunity within the upper-end housing market following news of the Leonardo luxury apartment development by Legacy Hotels & Resorts Group and Nedbank in Sandton.

“More individuals are demanding investments of passion, such as luxury collectables, high-end cars, watches, boats and art. However, traditional items such as jewellery and antiques are still popular among high net worth families.”

Sheldon Halcrow, wealth manager at Nedbank Private Wealth, comments on the changing investment preferences of highnet worth individuals as observed by the private bank.

“The price of oil is a shot in the arm,” said in an interview. “But there is clearly a state of weakness in the world economy and this shot is not enough.”

IMF chief economist, Olivier Blanchard, comments on the IMF’s new forecasts downgrading its outlook for more than a dozen of the world’s largest economies, including markedly slower growth in China.

The fund now expects the world economy to expand 3.5 per cent this year and 3.7 per cent in 2016.

“In almost 35 years of reporting on, and thereafter advising on investment markets, I cannot remember the first days of the new year being filled with more uncertainty and ‘Black Swan’ events as the present. I think 2015 is going to be a tough one to make money. Preservation of assets is going to be more important than shooting the lights out.

Any advisor or fund manager who promises a repeat of historically high returns should be politely shown the door.”

Brenthurst wealth director, Magnus Heystek, comments in January on the global financial scene.

“South Africa is also the last frontier country for petroleum development, including off-shore oil and gas as well as shale gas prospects.”

South African President, Jacob Zuma, speaking on the side-lines of the 2015 World Economic Forum meeting, attended by over 2 500 political and business leaders in Davos, Switzerland.

“We haven’t seen the worst yet. I think we’ll see five times as many bad incidents as we did last year.”

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Vishal Sikka, chief executive of the Indian outsourcing giant Infosys, speaking from WEF at Davos, where executives expressed serious concern over more disruptive cyberattacks in 2015. Although Infosys has so far escaped a major attack, the giant regularly has to fend off smaller, unsuccessful efforts to penetrate the company’s network.

Hackers stole credit card information from 40 million Target customers in late 2013.

Last year, Home Depot was hit with a similar breach.

“The state-owned Industrial Development Corporation will not sell any of its holdings in listed companies to raise money to help solve Eskom’s urgent cash crisis. Getting rid of the income from its listed investments ran counter to the objectives of the 75-year-old development finance provider.”

IDC CEO, Geoffrey Qhena, responded to Barclays’ suggestion that the government could raise as much as R86 billion from the sale of direct stakes in listed companies and indirect ones held through the IDC. The IDC holds listed assets worth about R46 billion, which provide capital for the financier to fund new businesses.

“We think that black empowerment is important for everybody in SA, especially in the banking industry. Our black empowerment status is important in dealing with the South African market, and more and more clients ask what our black empowerment status is. We are ideally looking for a broad-based partner and one that is inclusive of women.”

Sasfin CEO, Roland Sassoon, commented on the growing dividend placed by the government and other clients on B-BBEE credentials on the back of loss of business from a state-owned enterprise.

“Bursts of market volatility from the current low levels are likely – and have the potential to wrong-foot investors. Stocks and bonds could fall in lock step, challenging traditional diversification. Relative value strategies and alternative investments can help.”

Ewen Cameron Watt, BlackRock Investment Institute’s chief investment strategist, outlining views from its 2015 Investment Outlook Global. The BlackRock Investment Institute (BII) anticipates that divergent monetary policies and growth trends will be key themes of 2015. A low rate environment suggests that investors will continue to stretch for yield.

You said

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

@SmallTalkDaily: “Was asked this morning what my oil price prediction was. After I predict the lotto no’s Super Bowl winner & YE corn price, I let you know.”

Anthony Clark – Networked & opinionated small-to-mid cap analyst covering a vast swathe of JSE listed & OTC stocks with focus on industrial, food & agriculture stocks.

@carlvdberg: “Things are not bought with your money. They are bought with your time which you traded for money.”

Carl van der Berg – Financial consultant with @alexforbes.

Curious about future trends and investor behaviour. Personal risk, estate, wealth and legacy planning.

@JohnK_Galbraith: “The stock market is a casino where sick human beings go to try and

strike it rich by selling and buying human labor.”

John K. Galbraith – The stock market is a machine used by the capitalist class to rob and exploit the people.

@AdrianSaville: “Economic growth & jobs are not some magical consequence. They come from one place: investment spending.”

Adrian Saville – CIO & founder @ Cannon Asset Managers. GIBS Visiting Professor; economics, finance & strategy; passionate South African, dedicated husband and dad. Ninja.

@DuncanWeldon: “Bank stress tests based on a spike in inflation & interest rates are looking less and less relevant.”

Duncan Weldon – Economics Correspondent, BBC Newsnight.

Views are my own and RTs aren't endorsements.

@KingEconomist: “Quick reminder: falling commodity prices not always sign of good times ahead. Late 20s and early 30s weren’t best years for economic growth.”

Stephen King – Chief Economist at HSBC, author of When the Money Runs Out & Losing Control. Part-time pianist.

@AnnPettifor: “Deflation a symptom of debt deleveraging & contraction of investment & incomes since ’08, made worse by austerity. Little to cheer about.”

Ann Pettifor – Analyst of the global financial system and author of Just Money: How Society Can Break the Despotic Power of Finance.

@chrislbecker: “When you look at data of very long-term commodity price trends, one

can’t be very bullish on African growth prospects in next few years.”

Chris Becker – Lead Economist & Strategist at African Alliance Securities. Contrary-minded.

Macro junkie. Investment banking in Africa.

@mark_barnes56: “The bear is a far more ferocious beast than the bull – fortunately rarely encountered around these parts ...”

Mark Barnes

@chrishartZA: “2008 institutional failure led to liquidity problems where official response was QE and zero interest rates. The real problem never sorted.”

Chris Hart – Strategist at Investment Solutions & renowned Gold bull.

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And now for something completely different

Hidden

what has been most surprising has been the simplistic way that a number of these have been excavated – with a rudimentary metal detector used by amateur history buffs.

treasures

In the UK alone, some of the greatest finds of the 21st century were discovered using simple metal detectors in farm fields known for their rich histories.

More than just fool’s gold

Over the last decade in particular, incredible discoveries of Viking hoards and Roman gold have been found in farm fields. Experts believe that a number of these treasures were linked to spoils of war, tax collections or offerings to gods that were simply hidden and forgotten about. Like the Saddle Ridge Hoard, the origins and reasons why they were stashed away and forgotten continues to remain a mystery.

There is plenty of hope for those today who are still hunting for hidden gold. Not all treasures have been discovered, with many still waiting to be found. These range from the legendary Nazi treasures from WWII, the famous Russian Tsar’s fortunes and Fabergé eggs, the treasure of the Knights Templar and the missing Kruger millions lost during the Boer War.

I

n 2013, a Californian couple who were walking their dog in their backyard came across one of the most intriguing hidden treasure discoveries in recent history.

Hidden in old tin cans was a hoard of more than 1 400 19th-century gold coins that have now been valued at over $10 million.

Named after the area that it was found in, the Saddle Ridge Hoard is considered by experts as the largest treasure trove to be found in North America.

Throughout the centuries, thousands of treasure hunters have scoured the globe in search of buried or sunken gold, often with little success. On the rare occasion, however, long forgotten treasures have been unearthed by collectors, archaeologists and even civilians who have managed to track down the final resting places of priceless artefacts and gold lost in the annals of time.

Of all the great finds over the centuries,

The billion dollar Hindu treasure Of all the discoveries in history, the most incredible of these is the discovery of billions of dollars in gold and jewels found in underground chambers in the Sree Padmanabhaswamy Temple, which is located in Kerala Province in southern India. Estimated at around $22 billion, the find has placed the temple as one of the wealthiest in the country and broken all previous world records for the most amount of hidden treasure discovered. The collection includes gold necklaces, bangles, gold bullions, bags of diamonds, gold coins, precious stones and antique jewellery and trinkets.

$22 bi llion

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For anyone who has watched Antique Roadshow, hidden treasure can easily help set a person up for retirement. But investing in rare discoveries is not as easy to do – largely as a result of most museums snatching up the pieces before they reach the auction block.

Like any rare collection, lost treasures and gold can provide massive returns to those who are able to find it. The real challenge is whether you will be able to find it before anyone else does.

The Staffordshire hoard Being an amateur metal detector enthusiast can have its rewards. This was the case for Terry Herbert on 5 July 2009, when he was searching an area of recently ploughed farmland near Hammerwich, Staffordshire with a metal detector and came across the largest ever find of Anglo-Saxon gold. The discovery and subsequent excavation over the following years uncovered a treasure trove, consisting of more than 3 500 items that predate the 9th century. Interestingly, almost all the items excavated were of military design. This includes gold and silver swords and bows, as well as a number of other military devices and weapons. The items were sold to the Birmingham Museum & Art Gallery and the Potteries Museum & Art Gallery and the proceeds of the sale were split between Herbert, the finder of the hoard, and Fred Johnson, the farmer on whose land the hoard was found.

an h t e r Mo fool’s just ld go

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