InvestSA Magazine May 2014 by COSA Media

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Investing in

listed property prime, sublime or not the right time?

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Alternative investments: more than meets the eye

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Investing in

listed property prime, sublime or not the right time?

CONTENTS 06

Property in play

Listed property still attractive despite rising rates

Alternative Investments

Betting on boutiques

The role of boutique managers in generating returns

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Investors will hope that’s what asset managers and other investment professionals are doing in these markettrying times. Even with clever investment decisions and a sound portfolio it’s not getting any easier trying to save enough for a comfortable retirement.

Layout and design Mariska Le Roux

Another good market analysis is by Paul Kaplan, director of research at Morningstar, who makes the revealing observation that the zerosum game that is equity investing is not confined to traditional asset management, but strategic beta strategies as well. The latter, he points out, rely on “willing losers”. Marc Hasenfuss provides his usual top-notch feature, this time looking at the listed property sector and pondering whether it’s a good time to buy. His views more or less tally with the insider look at listed property by Albert Arntz, portfolio manager of the Prudential Enhanced Property Tracker Fund, who concludes that listed property is still attractive despite rising interest rates. I look at boutique asset managers and try to weigh up whether they are able to consistently outperform the large managers, and whether it’s worth backing them for this reason. I was happy to read that professional investor Fatima Vawda, MD of 27four Investment Managers, provides more valid reasons on the role of boutique managers in generating better returns. Vawda is a quality analyst and investment manager whom I used to work with on a magazine I once edited. What I suppose could be considered a controversial look at hedge funds is penned by Chris Veegh, head of consulting at 10X Investments, who questions the hedge fund hype. It’s a very different view to that of Kim Hubner of Laurium Capital in last month’s issue, who felt hedge funds in South Africa attract the best talent and, as a robust industry, deserve the attention of investors. Veegh quotes extensively from Simon Luck’s book, The Hedge Fund Mirage. On hedges, this is also the month when the May Queen does her spring clean (as fans of Led Zeppelin will know). Maybe we should all do an unseasonal spring clean.

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Editor Shaun Harris | investsa@comms.co.za

May Day has come and gone, apparently not making trade unions any happier (it’s an unhappy job), nor our sorry bunch of communists masquerading under the misleading banner of the SA Communist Party. That aside, it’s an important day on the international calendar. It’s like celebrating what you have achieved in the past working year and making resolutions, or contemplating revolutions, for the year ahead.

There’s some good advice and analysis on that important topic in this issue of INVESTSA. As usual, every article is well worth reading, but here are a few that deserve a special mention, like Lisa Myers’s analysis of the equity investment opportunities in Europe, spotting the value opportunities over there. She should know, being the executive vice president of the Templeton Global Equity Group.

Shaun Harris

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Property in play By Marc Hasenfuss

Every portfolio, it is widely held by wizened market watchers, should contain a slab of listed real estate counters. But is now the time to be dabbling in real estate scrip â&#x20AC;&#x201C; surely not?

t seems fairly obvious that later this year Reserve Bank Governor Gill Marcus will have little choice but to hike interest rates again â&#x20AC;Ś and perhaps once again before Christmas. The way property counters work is that the property portfolio is carefully geared so that rental streams are sufficient to service interest

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payments and ensure investors (or linked unit holders) get a decent distribution. Higher yields eventually feed into capital gains as the underlying properties become more valuable. Simple. But often this delicate balance can be disrupted, and often a rising interest rate cycle (as seen in the late nineties) can dismiss listed property to the dog box. Some older readers may

remember the mid to late nineties when financial institutions fell over each other to sell off their property holdings. Of course, when the going is good in property, then the going is really good. Indeed, from about 2009 until the beginning of 2013 â&#x20AC;&#x201C; when many other classes of equities were still struggling through the

wake of the global financial crisis and other specific operational challenges (like the Eskom-induced energy costs) – property stocks certainly provided investment portfolios with strong capital gains over and above the traditional yield considerations. In fact, so scintillating was the outperformance of real estate counters on the JSE that the last two years have, in fact, seen a mini-boom in new property listings. A good number of small and mid-sized property companies have floated on the JSE. These would include Arrowhead, Vividend, Rebosis, Synergy, Ascension, Delta and Tower, as well as a handful of offshore property companies like Rockcastle, GoGlobal and MAS Plc. Most recently a residential property development company, Vision International Holdings, has signalled its intention to list on the JSE’s AltX market and township property developer Safari enjoyed a strong JSE debut – moves that surely suggest a rather accommodating market. Still, some observers have argued that the days of easy pickings in the property sector are over. Arguably, quite a lot negative can be read into recent decisions by small property companies like Fairvest and Ingenuity to walk away from proposed acquisitions. But in truth these are small in the context of the ongoing acquisition activity in the property sector, which has seen

specialist (and streetwise) investment counters like Trematon and Hosken Consolidated Investments (HCI) tilting at it. In addition, the fact that sizeable contenders like Investec Property (market capitalisation: R5 billion) and adventurous property development play Attacq (market capitalisation: R12 billion) chose to list in 2013 perhaps speaks volumes about how robust the property sector is, and its ability to ride out a tighter interest rate market. For cynical investors observing the market rush over the last 30 months, it would normally be easy to dismiss the flurry of new listings as opportunists hoped to ‘move and shake’ while the relatively benign interest rate environment existed and even cash in on local investor’s desire for yield.

Perhaps it was real estate stalwarts Redefine and Growthpoint clashing last year for control of Fountainhead (the owner of the Blue Route Mall in Cape Town) that officially kicked off the consolidation process. But in recent weeks, an almost inevitable consolidation really started to grab hold. Firstly, empowered property counters Rebosis and Delta pounced on fellow BEE real estate company Ascension – a most interesting development that could well trigger a three-way merger and create a powerful black-owned property contender, with a market capitalisation big enough to draw institutional shareholders to the enlarged offering.

Certainly the chance to make hay while the sun shines was taken by most new listings, most of which have amassed market capitalisations of between R1.3 billion to R5 billion after some industrious dealmaking on the acquisition front. Now the billion Rand question is whether bigger listed counters will start assimilating smaller ones; the more financially muscular contenders hoping to snatch well-priced opportunities to enhance their overall yield.

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Consolidation holds a number of attractions for smaller property entities. Firstly increased liquidity (or tradeability) in the shares of a larger merged entity should benefit the market value, and if scrip is sought after it becomes so much easier to make new acquisitions using well-rated paper. The consolidation or bulk-up game also makes sense, as capital available to smaller market capitalisation property counters is not exactly in abundance. The larger values and diversified rental streams of a larger property entity should offer some leverage with financiers in terms of more attractive borrowing arrangements. Other recent consolidation deals have seen Vukile Property Fund taking an influential stake in retail property-focused Synergy Income Fund, while quietly snaffling a major stake in Fairvest Property (in conjunction with corporate cousin MICC). Last month Arrowhead, the brainchild of South African property legend Gerald Leissner, snapped up 34.5 million Dipula B-linked units (representing 22 per cent of Dipula’s B-linked units) from Investec Asset Management. This follows hard on the heels of Arrowhead bidding to buy out Cape Town-based property company Vividend Income Fund. What was quite telling about Arrowhead’s thrust at Dipula is that Leissner noted quite openly that, “It is not Arrowhead’s objective to become a hybrid company by owning property

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directly and holding, for the long term, shares in other property companies. Arrowhead will only acquire an investment in other property companies with the objective of converting the investment into physical property over time.” The market is currently abuzz with talk of further consolidations, and the sheer number of possible deal-making equations is enough to bring a grin to the face of the most clinical investment banker. Perhaps it is time to stop fretting about a downward tweak in yields if the interest rate cycle continues to spin upwards. Perhaps it is time to look at individual property counters, especially the higher yielding smaller contenders that are being overlooked by risk averse investors. The only issue is that those punters, hoping to buy an under-valued property counter and exiting on a higher takeover/merger offer, might need to temper their enthusiasm. To date, most large property companies chasing smaller counters have used their scrip as currency – in events that, so far, have looked like earnings-enhancing deals. But this means if punters are going to play the consolidation game in the local property sector, you still need to hold an unwavering belief that the property sector fundamentals can hold through what will be tougher trading times for the foreseeable future. Whether the consolidation push will eventually end in a mega merger that creates a R50 billion plus real estate counter

to rival market leader Growthpoint remains to be seen. For those willing to dabble in corporate moving and shaking, the most audible whisper on the market is that recently listed property company Tower is – at the time of writing – the odds-on favourites to be swallowed up by a larger contender. Use it … don’t use it. In the meantime, those with a penchant for leftfield developments might find it worth watching the intentions of investment companies Hosken Consolidated Investments (HCI) and Trematon Capital Investments. HCI – via its various investments (but most notably Seardel) – has a sprawling property portfolio and has recently started developing niche shopping centres. HCI does nothing in half measures (ask any casino sector executive that scoffed at HCI’s initial gaming thrust five years ago), and could become a factor in a consolidating property sector. Trematon – which owns Club Mykonos Langebaan – is much more subtle than HCI, but has various irons in the real estate fire. Definitely worth watching is its gradual push into the residential property sector, which may even see a separate listing in the medium term and then a rapid trek along a largely unchartered acquisition trail. Interesting times indeed.

10233 Compliance number: 3DR068

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Listed property

However, the negative impact of higher interest rates is less severe than generally perceived, since it can be mitigated by several factors: • Listed property companies have downside earnings protection in the form of contractual lease agreements with built-in escalations. In total, less than one-third of their property portfolios are typically re-let every year. This portion of their portfolios is exposed to potential declines in market rentals, but the rest of the portfolios’ rentals grow contractually by around eight per cent per annum. • A relatively high proportion (over 70 per cent currently) of total listed property company debt is effectively fixed rate. • Our listed property companies have significant foreign property holdings, which aren’t affected by the rate hike. • Rising interest rates undermine the feasibility of new property developments. A reduction in the supply of new space helps protect the rental income of existing commercial properties.

Listed property still attractive despite rising rates

Despite January’s surprise interest rate hike by the South African Reserve Bank and the potential for further increases going forward, listed property remains an important part of investors’ portfolios, for both its diversification benefits and its relatively attractive return prospects over the long term. 10 investsa

t’s true that since May 2013, when United States Federal Reserve Chairman Ben Bernanke introduced the idea of gradually withdrawing the Fed’s supportive monetary policy with a view to eventually raising interest rates in the US, interest rate-sensitive investments like bonds and property have been under pressure across most emerging markets, including South Africa. Rising interest rates do present negative headwinds to SA-listed property, such as higher debt funding costs and slower growth in consumer spending. At the same time, property companies face persistent operating cost pressures and fundamentals in office property are weak, with high secondarygrade office vacancy rates. Without improved economic growth and labour market conditions, the demand for office space will remain subdued.

Meanwhile, compared to prospective bond and cash returns over the next five years, total returns from SA real estate investment trusts (REIT) look attractive. REITs currently have a robust distribution growth outlook of around seven per cent for 2014, based on several factors including recent yield-enhancing acquisitions, greater use of financial leverage, the boost provided by the weaker Rand to foreign property holdings, and the still-strong growth experienced by dominant shopping malls and well-located industrial warehouses, among other factors. Combine this with the current one-year forward distribution yield of around eight per cent, and we arrive at an estimated total return of around 10 to 13 per cent per annum from REITs over the next five years. This return projection already assumes some de-rating of listed property and a slowdown in distribution growth. So although investors should likely expect listed property returns to be lower over the medium term than the exceptional levels experienced during the falling interest rate cycle, Prudential does expect this asset class to continue producing attractive returns compared to bonds and cash. Combined with its relatively low correlation to equities (0.33 per cent over the past five years), this makes a persuasive case for including listed property in a well-diversified portfolio over the long term.

Albert Arntz, Portfolio Manager of the Prudential Enhanced Property Tracker Fund

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Alternative investments

An in-depth look

at alternative investments The financial services industry typically separates investments into two areas: traditional and alternative. Gyongyi King, Chief Investment Officer, Caveo Fund Solutions

12 investsa

raditional investments include asset classes such as equities, bonds and cash. In contrast, an alternative investment is much harder to define and the classification of whether an investment is

alternative or not can vary enormously. They can include investments in real estate, hedge funds and private equity as well as physical commodities and art. Broadly speaking, an alternative investment is an investment in an asset or strategy that has less liquidity; is difficult to replicate and therefore establish a benchmark for performance; has valuation challenges and little return history to analyse. The attraction of alternative investments is that they are usually very good diversifiers for an investorâ&#x20AC;&#x2122;s portfolio, enhancing the overall risk/return profile for the investor. There is often very little correlation between movement in the traditional assets such as equities and the return generated by an alternative investment. If we use hedge funds as an example, a hedge fund is a portfolio strategy that uses traditional asset classes, such as equities, but invests them differently compared to the traditional equity manager. In the example of equities, traditional equity managers

require large capital-raising efforts initially and then intense investment research. The success of an alternative investment lies in the individuals and their experience. Some of the challenges that manifest themselves in this product set are complexity and lack of information, liquidity and structure. Complexity and lack of information: Alternative investments, by their very definition, seek out non-normal investment opportunities. The available information on the products, the exact nature of the investment mandate and how it is implemented is opaque. This is, however, potentially a portfolio opportunity at the same time, as it is exactly this type of information premium that many alternative managers are trying to extract. Put simply, if it was easy and there was a vast amount of information available, there would be many participants and the potential would be diminished. Liquidity: Due to the unique nature of many alternative products, and the specific areas of capital markets that they seek to exploit, product liquidity becomes a major aspect of the product design, and a key factor that investors need to assess. While some equity-

centric hedge funds offer 14-day liquidity, other products are subject to three-month notice periods. On the other end of the scale, private equity and agriculture products may have terms of seven years or more. Structure: Significant strides have been made over the last few years on the structural and regulatory front. These are no longer a specific challenge, but the investor needs to be aware that the structural environment remains more complex than in traditional asset classes. Extra care needs to be taken when assessing the legal nature of the structure, the limitation of liability within the structure and the specific domicile. Hedge fund and private equity options remain the most easily accessible alternative investments, and as the regulatory environment continues to mature, additional access points will emerge. Trade finance, agriculture and infrastructure options remain highly viable opportunities, although structural impediments make these extremely difficult to access for all but the larger and more sophisticated institutional investor.

Common vision drives

R97 million investment in new schools normally position themselves around a benchmark. Ultimately, while the performance relative to this benchmark might be positive, the portfolio relies on positive equity market movement to increase its value.

A hedge fund, on the other hand, has a number of additional tools that enable the manager to extract value. At the very base level, they are not tied to a benchmark and are able to invest only in those positions where they believe there are opportunities. It is possible to generate positive returns when equities or markets are downward trending. Even in normal upward trending markets, the small flexible nature of the hedge fund, and use of derivatives and other tools, can reduce downside risk and generate a smoother return path for investors.

This deal is the fourth of its kind for the Schools Investment Fund, a fund established by the Public Investment Corporation (PIC), the Government Employees Pension Fund (GEPF) and Old Mutual to address the shortage of affordable schools in South Africa. The dual objective of investors in this R1.2 billion fund is to finance infrastructure and education-related requirements and deliver a commercially acceptable return to investors.

A number of asset managers offer alternative investment opportunities. The key assessment is whether the firm has the capability to manage the alternative strategy they are pursuing. The strategies are generally resource intensive and, in the case of private equity for instance,

he first school will open in January 2015 in Soshanguve and the two schools will ultimately accommodate a combined 3 310 learners a year.

Lala Steyn, Asset Manager of the Schools Investment Fund, Old Mutual Investment Group

The Old Mutual Investment Group and its investment partners recently concluded a R97 million deal to fund the development and operations of two new lowfee independent schools.

The Schools and Education Investment Impact Fund of South Africa (Schools Investment Fund) is a development impact fund that seeks to provide a commercially acceptable return on investments in independent low-fee paying schools. The fund finances infrastructure requirements for upgrading existing or building new schools, as well as providing finance for education-related needs such as early ď&#x192;

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Alternative investments What the investment partners have to say: “This deal brings to 16 the number of schools currently being financed by the fund. While endeavouring to contribute towards South Africa’s developmental objectives, the initiative also gives careful consideration to the deal structure in order to ensure these investments generate economic returns for the clients on whose behalf we invest.” Dr Daniel Matjila, the chief investment officer, Public Investment Corporation “What is most pleasing about this investment is that it will directly impact on the lives of the people in Soshanguve, including our own members and pensioners’ children. We also recognise that a successful economy requires an educated workforce. Quality education is a potent weapon against generational poverty.” Joelene Moodley, acting principal executive officer, GEPF

childhood development, skills training and education materials and services. The fund’s target market is households that earn less

14 investsa

than R235 000 a year (2014) and it partners with school/education operators who have a good track record in the provision of quality education to this target market. The other investments in the Schools Investment Fund’s portfolio are with: • Curro: To finance affordable Meridian schools, presently located in Pretoria, Rustenburg and Pinehurst; and for the Northern Academy School in Polokwane. • BASA: To finance the renovation and expansion of Soweto-based BASA Protea Glen Primary School and the development and operation of the BASA Protea Glen High School. • Royals Management Company: To finance the development and operations of four schools – two existing schools in Pretoria expanding to double their current capacity, while two new sites have been identified in housing estates in Gauteng and Mpumalanga. What is significant about the prestige deal is that it brings together a diverse group of experts united by a common vision of creating affordable quality schools that cater for underprivileged learners. The schools will be built and managed by the newly established Barnstone Education Management Company,

whose executive management team members – Pierre Tredoux, Thana and Robby Pienaar and Jannie Fourie – all possess specialist skills required for the successful management of affordable independent schools. Pierre Tredoux is the executive director and a founder of the Barnstone Group, a company that has advised many of South Africa’s leading organisations on business strategy and organisation design. In 2011, the Barnstone Group conducted a business skills training academy for young black graduates who were struggling to secure meaningful employment. Following this experience, Tredoux engaged in a partnership with the educational specialists of Prestige College Hammanskraal, Thana and Robby Pienaar, who are the principal and the CEO respectively. While Prestige College will not form part of this deal, the new schools will carry the Prestige brand and will replicate the school’s ethos and successful educational model. The fourth member of the executive management team, Jannie Fourie, has extensive experience in property and business development. This investment further demonstrates that in order for us to deal with the challenges of providing quality basic education as a nation, the public and private sectors need to work together.

Private equity

for the public good Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA)

Private equity, broadly defined as a long-term, alternative asset class in which fund managers raise third-party funds to buy assets that are held privately, is well established in South Africa.

he industry, now accounting for about R130 billion in assets under management, is being increasingly recognised for its positive influence in institutional portfolios. For investors in the private equity asset class, long-term rewards are pleasing and consistently above benchmark returns for JSElisted equities, with a clear recovery since the 2008 financial crisis. The RisCura-SAVCA South African Private Equity Performance Report to the end of September 2013 shows that investments in this asset class provided an annualised return of 22.2 per cent net of fees, over a 10-year period. This was slightly higher than the total return of 20.8 per cent generated by the JSE All Share Index over the same period, and keeping up with the 21.7 per cent yielded by the JSE Shareholder Weighted Index (SWIX). Private equity also has clear benefits for the investee companies. The 2013 SAVCA-DBSA Economic Impact Survey identifies a number of areas where private equity partners bring value to the companies in which they invest. With intellectual and financial support, there is capability to expand. This is evidenced by boosted revenues, job creation, entry into new product lines and the establishment of new

offices, branches and facilities, both in South Africa and elsewhere. More broadly, private equity contributes towards the more efficient use of capital in financial markets as investors concentrate on opportunities where there is scope for genuine growth and expansion. Private equity fund managers seek out investments where they can make a sustainable difference and offer hands-on, strategic direction through their active value management approach. They ensure that the expansion and development of the investee company is sustainable and built around long-term objectives, and that financial resources are used optimally. At an even broader level, private equity funding can help develop industries, countries, regions and continents. For example, in narrowing the funding gap by working with the providers of other forms of capital such as debt, mezzanine, project and grant funding, private equity is playing a significant role in financing major infrastructure projects in Africa. Private equity also contributes to uplifting the environmental, social and governance (ESG) credentials in investee companies, consistent with the worldwide trend in which ESG factors are becoming a priority for investors in all asset classes. Private equity fund managers are well positioned to deliver on this thanks to their hands-on and strategic involvement with their investees. ESG considerations include issues such as examining supplier networks to ensure environmental and social considerations

within these broader arrangements are acceptable. In South Africa, this extends to BEE considerations such as the promotion of small black businesses in the value chain. The 2013 SAVCA-DBSA Economic Impact study shows that a sample of respondents reported their South African and worldwide employment levels rose by 40 per cent post-private equity partnerships. At fund level, investments into macro-environmental projects such as renewable energy are increasing. Private equity investment has also had a notable impact on corporate governance. The Economic Impact Survey indicates that 70 per cent of investee respondents singled out improved corporate governance as one of the benefits of having private equity partners. In South Africa, the growing investor appetite for this alternate asset class is helped by recent legislative changes that allow a private pension fund portfolio allocation of up to 10 per cent in private equity. Also, South Africaâ&#x20AC;&#x2122;s Government Employee Pension Fund, the largest pension fund in Africa, is a firm believer in the varying roles that private equity, as a well-regulated industry, can play in its exceptionally large portfolio. Interest in private equity on the continent is growing and international fund managers are attracted by the growth trajectory of Africa, seeing it as a highly appealing emerging market region. We can expect to see rewarding allocations from local, regional and global institutional investors to South African private equity over the next few years.

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Betting on

boutiques By Shaun Harris

ollowing overseas trends, boutique asset management companies have branched out, offering unique services to investors looking for a little more than the standard offering from most of the large asset managers.

One of the most notable developments in the South African investment management industry over the past decade has been the rapid rise of boutique asset managers. 16 investsa

Of course, the large managers donâ&#x20AC;&#x2122;t agree with this, arguing that they can provide the same services as a boutique manager and at a lower cost due to their economies of scale. However, thereâ&#x20AC;&#x2122;s little doubt that the boutique managers do provide a special service that often results in outperformance. Only 20 per cent of general equity funds have beaten the FTSE/JSE All Share Index over the past five years to the end of February, says Bradley Preston, a portfolio manager at Mergence Investment Managers. The

actively managed funds that do beat the index do so because they offer investors compellingly different exposures to shares than do the large managers. A large fund, due to its size, is virtually forced to become an index tracking fund as it maintains similar holdings in the top shares as does the index. A small asset manager does not have to do this and can have completely different exposures depending on the portfolio manager’s convictions. A boutique asset manager does not necessarily have to be small, but generally they are. Some large managers could be considered boutique because they provide unique services. But being small and having fewer assets under management lends itself to providing boutique asset management services. Five funds that fit the boutique tag are identified by Patrick Cairns in an article on Moneyweb. These are the Nedgroup Investments Entrepreneur Fund, PSG Equity Fund, 36ONE MET Equity Fund, Old Mutual Global Equity Fund and Momentum Africa Equity Fund. These funds have less than R2 billion assets under management, except for the Old Mutual fund which has R4.1 billion assets under management. However, Cairns notes that this is small in a global context. The competitive advantages of a boutique asset manager include the ability to steer well clear of an index tracking exposure and being able to take large exposures on individual stocks. This carries additional risk, but if the fund manager gets it right, it will result in outperformance. Preston argues that a boutique manager should be small. “This is important, because for active managers to do something very different to an index, they must be nimble, able to change positions substantially without heavily affecting the prices of the underlying shares, and they must be able to take fair-sized stakes in small and mid-cap counters,” he says. He goes on to point out that small and mid-sized shares outperform because they are the least efficient parts of the market. “They are less scrutinised and less saturated. And so those funds able to play in this space have the best chance of generating superior returns.”

A boutique asset manager does not necessarily have to be small, but generally they are. Some large managers could be considered boutique because they provide unique services. Wierzycka, introduced unit trust funds to the retail investment market charging just 0.4 per cent in fees. Interviewed by Hilton Tarrant on Moneyweb, Wierzycka said since launching the funds, more than 3 000 investors had invested nearly R1 billion in the funds. Reaction from the rest of the industry to the low-cost funds was mixed. “We have seen some of our competitors slash costs, not to the same level that we are offering index tracking and savings products being marketed at 0.4 per cent, but I have seen some products being marketed at 0.49 per cent and 0.6 per cent.”

Another advantage is found among the asset managers who are highly active, bottom-up stock pickers. “Research indicates that active management is most effective when it is done purely on the selection of stocks based on valuation and company fundamentals, and gives little or no regard to macro factors,” he says.

Wierzycka says there has also been quite a lot of criticism “and a lot of our competitors are saying that it cannot be done at the price that Sygnia is doing it at. But we are actually doing it very happily; we are way above our breakeven point for the retail platforms. So I certainly think it’s a business model that has legs.”

In many cases, boutique asset managers come at a higher cost, but not always. The five funds mentioned above come at total expense ratios (TER) ranging from 1.73 per cent to 2.06 per cent. However, late last year, the Sygnia Group surprised the industry when chief executive, Magda

Generally boutique managers, due to their nature of investing, carry higher risk. But for some managers one of the special services they will offer is lower risk levels than the larger asset managers. They will do this by constructing portfolios that combine lower risk assets, like bonds and

money market funds, and will still offer a real return. Similar portfolios can also be constructed to limit client losses in market downturns, often employing derivative instruments to cap losses. Boutique asset managers are also increasingly being drawn into retirement fund investment portfolios. Wierzycka says the emphasis is on costs, with the National Treasury introducing tax-free savings accounts. “Their conclusion is that we are exorbitantly expensive and that the South African financial services industry is exorbitantly expensive. So what they want to see – and they’ve done a huge amount of analysis on this – is the impact of costs on the final amounts of money that you have available at retirement. There are some phenomenal statistics that they have quoted in terms of how much a one per cent fee means and what a difference it makes over a 40-year saving time horizon.” Boutique managers are also being selected by retirement funds because of their record of outperformance, and because they can provide investments outside the norm. For instance, Wierzycka is a specialist in hedge fund investments, an asset class that retirement funds are actively seeking out.

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Boutique investment necessarily charge higher fees although they may well offer varying fee structures and scales. The South African equity space in particular is very crowded, so managers are not going to prejudice themselves through a premium cost offering. It is quite probable that total fees may be higher for some boutiques that charge performance-related fees and have managed to significantly outperform the market and their peers by generating sizeable income from their outperformance, thereby giving the impression that they are charging higher fees relative to their underperforming peers. In terms of whether a boutique asset manager can offer a competitive advantage when compared to bigger institutional managers, it depends on the set-up of both the boutique and the bigger institutional managers. Boutiques are often able to make quicker investment decisions because they don’t have committee structures to work through and because they don’t have large teams of analysts who all need to have a view that is expressed in the portfolio.

The role of boutique managers in generating returns

he goal of structuring any retirement portfolio should be to have a blend of managers who excel at delivering consistent performance to their clients and tapping into a variety of sources of alpha. What retirement fund trustees and consultants should try to do is identify where the manager’s true skill lies and then appoint mandates to managers which capture the best skills of that manager. Each aspect of the overall portfolio should be managed by the manager most skilled in that area so that, holistically, the portfolio is tapping various sources of return in the most optimal way. This could be through the use of boutique managers, large institutional managers or a combination of both. It all comes down to which mandates are the most appropriate to allocate for the fund, based on their liability profile, and then which managers are most skilled to manage those mandates. In this manager selection process, however, it is vital to make sure that all operational and compliance requirements are in place so that clients are in no way exposed to the risk of an administrative, operational or compliance failure.

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A boutique manager could be classified as any asset manager with an investment team smaller than 15 professionals and assets under management below R20 billion (although this size of assets would always be a moving target) and not having the ownership of a larger financial institution. Boutique managers also tend to offer a more focused product offering that speaks directly to their skills. There has definitely been an increase in the number of asset managers in South Africa over the past decade, with most of these starting as boutiques and some having become more established houses. Over the past decade, there was a definite need for some new players to enter the market to provide differentiated offerings. There was also a need for new companies to emerge to diversify the ownership of financial services firms and make ownership in the sector more representative of the demographics of South Africa. The industry still has a long way to go in levelling the playing fields in a post-apartheid South Africa. Contrary to a popular perception, in my opinion, boutique asset managers do not

That is not to say that this happens at all institutional managers but it can be a trap for the bigger institutions if the businesses are set up in this manner. Smaller asset managers can afford to be more nimble and opportunistic in their stock picks and play outside the large cap universe.

27four is a leading, independent multimanager that offers a comprehensive range of multi-manager product solutions to cater for the varying needs of South African and global retirement funds, as well as individual investors. The company was recently honoured in both this year’s Raging Bull and Morningstar Awards for the performance of its two unit trust portfolios (Best South African Multi-asset Medium Equity Fund, the 27four Balanced Prescient Fund of Funds and Best South African Multiasset Low Equity Fund, the 27four Stable Prescient Fund of Funds).

Fatima Vawda, Managing Director, 27four Investment Managers

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HAVASWW-D63104/E

Asset management

Pockets of opportunity

in Europe and emerging markets

Maintaining the right mix or balance of assets in a portfolio to achieve a desired goal can be a challenge, particularly when the markets are constantly shifting.

n the equity side, European stock valuations remain attractive today despite the market’s strong 2013 performance. Emerging markets could be the next pocket of opportunity. In early 2014, there seemed to be a few more areas of concern than we saw in late 2013. There has been some questioning of the stability of the US economic recovery and, of course, worries about prospects for emerging markets. That said, we are still finding plenty of reasons to be optimistic about the global equity outlook this year and we are still finding values. When considering the US economic recovery from the 2007–2009 financial crisis, we believe the US feels pretty stable, considering the revival in the housing market, the improvement in household incomes, the deleveraging on the private sector side, and the impressive amounts of cash US corporations have on their balance sheets. That being the case, US valuations have come up, and while we still like the United States, as value investors we feel more strongly about European equities. European equity markets also performed well in 2013, but according to our analysis, Europe appears generally more compelling than the United States in terms of where earnings are, where margins are and the amount of catch-up European companies continue to do in relation to the United States. We have been particularly interested in European financials on the equity side for a number of years, starting when this was considered quite contrarian. While not as inexpensive as they were a few years ago, we think there is still plenty of value in European financials, as some European banks are still trading below one times book value. Additionally, cash on balance sheets is

20 investsa

generally high for many companies, both inside and outside the US, and we think many companies may funnel some of that cash into technology. As we look at technology, on the hardware side, PCs and desktop technology are ageing. While PC sales have fallen due to rising sales of tablets and other devices, we have seen a lot of data suggesting that we should see some PC replacement coming through. And, as companies become more cloud based, it should bode well for companies engaged on the software and service side. We also continue to like pharmaceutical companies, which have re-rated to some degree over the past year or so – that is, awarded a higher earnings multiple – but we believe they still do not fully reflect secular tailwinds ahead such as ageing demographics in many countries, the implementation of the Affordable Care Act (Obamacare) in the US, and growing numbers of healthcare users in emerging markets. In some cases, we’ve been shifting our focus from large pharmaceutical stocks to biotechnology and healthcare equipment companies. Lastly, energy is an area that’s been fairly contrarian. Yet our analysis shows that oil service companies are being penalised for – as reflected in their valuations – near-term supply and demand dynamics without consideration for numerous long-term trends, which we believe could support sustained growth of oil services. More deep-water discoveries, the shale revolution and fracking, oil sands and the increasing importance of national oil companies all portend a higher concentration of oil services over time. When we look at allocations, our equity and fixed income teams discuss the respective asset classes from a bottom-up perspective, with a view to how rich we believe the opportunity sets

are in the respective markets. We think the ability to move freely between asset classes as the opportunities and/or risks present themselves through an active, unconstrained approach is key. On the equity side, we continue to be enthusiastic about what we’ve seen in Europe. However, as emerging markets have come down over the past couple of months, we believe they could be the next pocket of opportunity for us as Europe turns the corner and its recovery matures. However, we also believe it’s critical to be stockpickers in emerging markets, as not all fundamentals are equal. The markets are what we might call bifurcated, and so are the potential opportunities.

Lisa Myers, Executive Vice President, Templeton Global Equity Group, Franklin Templeton Investments

Barometer

HOT

NOT

Business confidence remains low

The RMB/BER Business Confidence Index (BCI), a survey covering the five most cyclical sectors of the economy, fell by two points to 41 in the first quarter of 2014. The reading of 41 indicates that six out of 10 respondents are unhappy with prevailing business conditions. Business confidence has also been in the net negative territory for a year now.

SA economy slows

Fund raises money for renewable energy The Africa Renewable Energy Fund has raised $100 million (R1.1 billion). The fund, targeting small and medium-sized independent power projects in sub-Saharan Africa producing between five and 50 megawatts, will invest between $10 million and $30 million in each project. The African Development Bank (AfDB), which has contributed $65 million of the $100 million raised so far, hopes to raise $200 million by the end of 2014.

While South Africa ended last year with a smaller current account deficit than expected – 5.1 per cent of gross domestic product in the fourth quarter of 2013, compared with a revised 6.4 per cent shortfall in the previous three months – the narrowing was driven by the biggest tumble in imports in four years. The South African Reserve Bank quarterly report said that spending in the economy meanwhile contracted to levels last seen during the 2009 recession.

Number of African millionaires increases According to the 2014 Knight Frank wealth report, the number of multimillionaires in Africa will grow at a faster rate than anywhere else in the world over the next 10 years. It forecasts that Africa will produce 2 858 high net worth individuals – those with US$30 million or more in net assets – by 2030.

African consumers spend the most A total of between 60 and 90 per cent of African consumers expressed a strong desire to buy more things every year. This is according to a report from The Boston Consulting Group, which polled 10 000 people in eight of the continent’s largest countries, including South Africa. This was higher than averages in Brazil, China and India, and twice the percentage in developed nations, and can be attributed to rising affluence on the continent.

South Africa’s manufacturing output rises Statistics South Africa reported that the country’s manufacturing output rose 2.5 per cent year on year in volume terms in January 2014 after a revised 2.8 per cent in December last year. Factory production increased 0.5 per cent month on month and 3.4 per cent in the three months to January when compared with the previous three months.

s y a w e Sid

South AfricaN wine production to drop South Africa’s harvest of grapes for wine production may fall 4.7 per cent this year from a record crop in 2013. This is according to a US Government report which said that farmers would probably produce 1.42 million tons this season compared with 1.49 million tons harvested last year.

Airline cargo business picks up, but fuel prices put pressure on financial performance IATA’s latest quarterly Cargo Market Analysis for the first quarter of 2014 reported that positive cyclical developments in business conditions have helped airline cargo business experience a pick-up in air freight demand, but that high jet fuel prices and weakness in yields continue to place downward pressure on financial performance.

investsa

Economic commentary

The importance of

stable policy and

politics on the Rand

There is always much talk about the volatility of markets, but these days investors should be concerned about the volatility of economies. In particular, expectations about US economic growth have shifted dramatically, so by the time you are reading this, the US economy may be looking somewhat stronger.

ince one of the major drivers of the Rand at this stage is expectations around global liquidity, this is very important to South Africa. And as this has been driven by the US Federal Reserve (the Fed), liquidity ultimately depends on the expectations for the US economy. One of the ways in which these expectations filter through to the local consumer can be seen in the movement of interest rates. Following the January rate hike – which was a surprise to most of the market – the forward rate agreements (FRA) started to price in further rate hikes of 200 to 300 basis points. Since then, the South African Reserve Bank has been very emphatic that this expectation is overly aggressive. At this juncture, it looks like the Reserve Bank will hike by less than the FRA market is pricing in. This is partly due to the tepid growth outlook – growth could easily be weaker than the 2.8 per cent that the Reserve Bank has forecast. However, a very moderate rate hiking cycle is ultimately dependent on a Rand that doesn’t weaken much beyond its current levels. At R11 to the dollar, further hikes of only 50 basis points are eminently plausible. In contrast, if the Rand was at R12 to the Dollar, the Reserve Bank might have to do a bit more. With so many of the factors that drive the Rand outside the control of the South African authorities, it is imperative that the parts they do control – policy and politics – are seen as stable in South Africa. Therefore, the national elections and subsequent cabinet appointments will

22 investsa

be keenly watched by rating agencies and investors alike. In general, it will be interesting to see how the ANC reacts to the election outcome. While it seems unlikely that the ruling party will get below 60 per cent of the vote, the economic proclivities of the parties they lose the most votes to could have a knock-on effect on future policy. If they lose votes to more left-wing policy parties, this could inspire some more populism. However, if they lose more votes to the DA, it could pull economic policy closer to the centre. The overall composition of the cabinet will also be closely watched as it will give a guide as to which factions are in control. A key driver of market sentiment, and thus the Rand, will be who the president will name as finance minister after the election. There has been much talk of the current minister Pravin Gordhan being replaced. He has committed to rein in the budget deficit by controlling spending, so the market will be keeping an eye on whether a new minister will follow through with this commitment. Other appointments of particular importance are the ministers of trade and industry, labour, public enterprises and health. With the National Health Insurance being such a topic du jour, the current health minister, Aaron Motsoaledi, has committed to a very sensible implementation of a national health programme, which requires the beefing up of capacity in the public sector before imposing it on the private sector. If he is not reappointed, it could have implications for policy.

While emerging market economies – especially those with current account and fiscal deficits, such as South Africa – will undoubtedly be vulnerable to global developments, it can ill afford to blame the US if its economies have hiccups. The root cause of the vulnerability is domestic. The South African Government has run large fiscal deficits since 2009 that have fuelled the current account deficit. South Korea and Mexico have much smaller current account and fiscal deficits. Their currencies have been virtually flat against the US Dollar in the last two years. In contrast, South Africa’s currency is down 25 per cent in the same period. Therefore, reducing the source of vulnerability by reining in the budget deficit is vital. It is imperative that South Africa ensures its own house is in order by providing stable policy led by credible institutions. If not, the currency (and government bond yields) will remain exposed.

Nazmeera Moola, Economist and Strategist at Investec Asset Management

KINGJAMES 29318

THE FURTHER YOU TRAVEL, THE MORE OPPORTUNITIES YOU’LL FIND. With a yearly round trip that stretches over 16 000km, the grey whale has one of the longest migrations of any mammal in the world. The journey is taxing, but they undertake it to find the most favourable conditions for welcoming their progeny into the world. Like us, the grey whale knows that to get the best results, you often have to go a bit further. This is why, together with our global asset management partner Orbis, we give you access to investment opportunities beyond the 1% of the global equity market represented by South Africa. We know that the choices out there can be overwhelming, so we’ve narrowed down the options to what we think are the most favourable offshore investment opportunities, in the Orbis Global Equity Fund. If you share the grey whale’s attitude towards the future, call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

(iii)

(ii)

(iv)

(i)

(v)

Artist’s impression.

(vi)

Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. Commission and incentives may be paid by investors to third-party intermediaries and, if so, would be included in those investors’ overall costs in investing in the Fund. Subscriptions are only valid if made on the basis of the current prospectus, which is available upon request from Allan Gray Unit Trust Management (RF) Proprietary Limited, a member of the Association for Savings & Investment SA (ASISA). A schedule of fees and charges and maximum commissions is also available on request. Allan Gray Proprietary Limited is an authorised financial services provider.

investsa

201 4 rch Ma uar y to Jan

Exchange traded products industry review: First quarter 2014 The market capitalisation of all exchange traded funds (ETFs) and exchange traded notes (ETNs) listed on the JSE totalled R84.6 billion at the end of March 2014.

t the end of 2008, the market capitalisation of the ETP industry was only R16 billion, with 17 ETFs listed on the JSE. Now there are 40 ETFs and 27 ETNs listed in South Africa, making a total of 67 products in all. The 32 per cent per annum compound growth in the market capitalisation of the domestic ETP industry over the past six and a quarter years has been impressive, but still reflects a passive investment industry that is significantly smaller than the actively managed industry in South Africa. However, if the 30 per cent plus growth rate is maintained, the passive industry will continue to make up ground on the more established active management industry. The growing number of index tracking unit

24 investsa

etfsa.co.za trusts that have been launched in recent times is of some significance. In past months, three new index tracking unit trusts have been introduced by Sanlam, under the Satrix brand, and two by Sygnia, for the first time providing passively managed products to the retail public. Recently some hot air has been wasted in the debate about whether unit trusts trackers are better than ETP index trackers or vice versa. The crux of the matter, and this is reflected worldwide, is that traditional asset managers usually provide passive tracker products in unit trusts or mutual fund format, as this suits their management systems and valuation models as well as their transaction platforms (LISP), while exchange traded products are developed by investment banks, whose systems typically support exchange traded instruments. The same divide is apparent in South Africa. To date, ETPs have been mainly issued by banks – Standard, Absa, Nedbank, Grindrod, RMB and two offshore participants, Deutsche Bank and BNP Paribas, whereas index tracking unit trusts have been issued by asset managers such as Old Mutual, Sanlam, Momentum, Sygnia and Gryphon.

New capital raised on the JSE January to March 2014

Issuer

Net new capital raised (R)

Absa Capital

193 476 347 739 200 000

NewPlat ETF NewGold ETF

(532 000 000)

NewRand ETF

(114 758 708)

Deutsche Bank

540 420 000

DBX MSCI USA ETF

169 110 000

DBX MSCI World ETF

161 850 000

DBX FTSE 100 ETF

118 480 000 90 980 000

DBX Eurostoxx 50 ETF Satrix

(1 051 750 000)

Satrix 40 ETF

(650 000 000)

Satrix RESI ETF

(150 100 000)

Satrix FINI ETF

(134 400 000)

Satrix DIVI ETF

(96 650 000)

BNP Paribas

Guru ETNs Standard Bank

Far more productive than arguing about the various merits of supporting structures, it would be much more pertinent for the issuers of passive products to combine their efforts to promote the benefits of passive management techniques, either blended with active products, or as an alternative to such products. New capital raised The first quarter of 2014 was a busy period for new listings of ETPs and for additional capital raising by existing ETP products. The dominant new issuer on the JSE was BNP Paribas, which listed four of its Guru ETNs in February 2014. The Guru strategy takes a fundamental approach to stock selection by assessing the profitability, prospects and value of companies, using various filters and modelling techniques to provide an interesting blend of active stock selection to determine the indices, which are then passively tracked. The BNP Guru ETNs, listed on the JSE, cover the Asia, World, European and USA markets. ETNs typically divulge only the total value of share capital authorised when listing and so the Guru range of ETNs was launched with a total market capitalisation of R20 billion. Deutsche Bank issued a number of new securities for the DBX Tracker funds, covering Europe, the USA, the UK and the World markets, raising some R540 million in the first quarter of 2014.

20 000 000 000*

102 152 000

Africa Palladium ETF Other Total

(48 835 500) 19 735 462 847

Source: etfSA.co.za / JSE (31 March 2014) * Authorised share capital

Absa Capital delisted R532 million NewGold securities and also fully delisted the NewRand ETF, accounting for a capital repayment of R114 million. These capital reductions were offset by R739 million raised by the issue of NewPlat ETF securities. Satrix delisted over R1 billion of its ETF securities, probably reflecting a large institution reducing its exposure to the South African equity market by selling off its liquid Satrix ETF securities.

on the JSE were able to outperform the All Share index over this period. The wide variety of All Share Index-beating ETPs is of interest. Trackers of physical commodities, agricultural products, tradable equity sectors like financials and resources, as well as some ‘smart’ ETFs, such as the Equity Momentum and Shari’ah ETFs, all produced excellent returns. The wide choice of index tracking ETPs offers ample opportunity to provide alpha-type performance from passive tracker funds, using such products in balanced or mandated portfolios.

The overall impact was a net capital raise of R19.74 billion for the first three months of 2014. Investment performance - first quarter 2014 After the good equity market performance in 2013, with the All Share index up by 20.7 per cent for the year, the first quarter growth by 5.02 per cent was a promising start to the New Year. Many JSE-listed ETPs recorded even better returns, led by the Standard Bank Corn-Linker ETN, which grew by 17.31 per cent over the period. In total 17 of the 62 listed ETPs

Mike Brown, Managing Director, etfSA.co.za

investsa

Global economic commentary an impressive year to date return of 9.4 per cent (end February). Emerging markets largely show negative growth in US$ terms over the past year. This is mostly due to the BRICS in particular being out of favour. Russia’s incursion into Crimea, along with negative economic data emanating from Brazil and China, has not helped. The Fed tapering and the prospects of higher US interest rates has also led to a flight out of riskier emerging markets – the promise of higher Treasury yields has led to a severe outflow from emerging market bonds in particular. This has left many developing nations with depleted foreign reserves as well as weakened currencies. The so-called Fragile Five countries that run large twin deficits (Turkey, Brazil, India, South Africa and Indonesia) have been most hurt. South Africa currently has lost slightly more than 20 per cent over the prior year, breaching the psychological 11:1 barrier against the US$ earlier this year.

Buying opportunities

in emerging markets

Global equity markets, as represented by the MSCI World benchmark, mostly powered ahead in February and through mid-March, recovering all losses experienced earlier in the year.

S economic data continues to improve, with unemployment figures at multi-year lows of just 6.7 per cent. New Federal Reserve chairman, Janet Yellen, has signalled possible rate rises by mid-2015. These more aggressive interest rate forecasts are backed up by economic forecasts, indicating an earlier tightening of the US labour market. The Fed has cut its end of 2014 unemployment rate forecast from 6.5 per cent down to 6.2 per cent. The rate-setting FOMC continued to taper its monthly asset purchases by another $10 billion in March – reducing the bond buying stimulus to $55 billion. Since the previously mentioned 6.5 per cent unemployment threshold is likely to be breached prior to interest rate hikes, the Fed has moved away from this measure. While US 10-year Treasury rates continue to hover around 2.7 per cent, markets are expecting an increase. Mortgage rates have already risen on the 30 year to approximately 4.5 per cent. Global bond markets and the European bond market both surprised investors year to date with returns of 2.8 per cent (in

26 investsa

Dollars) and 2.9 per cent respectively (Euros). US equity markets are up 25 per cent year on year to the end of February, slightly surpassing the globally developed market benchmark (MSCI World), which returned 21.7 per cent over the same period. Continued improvement among many of the weaker European countries’ GDP growth prospects has helped push equity markets in the region to new recent highs. The MSCI EMU Index gained 4.8 per cent in February alone, pushing the index up 23.7 per cent over the prior one-year period. Pressure is increasing for the European Central Bank (ECB) to act, given that its balance sheet continues to contract, which is an effective tightening of monetary policy. European property markets have also shown encouraging growth, posting a 6.7 per cent gain in February. The Citigroup BMI Index is now up 10.9 per cent over the past 12 months. In comparison, the US REIT Index gained just 6.2 per cent over the prior year, but has shown

The out-of-favour emerging markets mask the progress made by many developing nations in liberalising their economies, including Colombia, Chile, Peru and others. Prospects in Mexico are far improved from just two years ago, with the new president showing a willingness to open up the economy to further foreign direct investment, including in the oil and resources sector. We still believe China will succeed in growing close to the 7.5 per cent rate projected, based on positive data emerging on electricity and railway transportation usage. However, muted Chinese demand for resources will hamper other emerging economies from benefiting from the prior boom conditions they enjoyed. The Chinese Government has increased regulation on the shadow banking system, which could moderate credit issuance, increase borrowing rates and slow economic growth in 2014. Globally we believe central banks will remain accommodative and equities will perform well. We expect Europe and Japan to possibly outperform the US due to more favourable valuations there. While emerging markets remain out of favour, we believe it is a terrific buying opportunity currently, given low valuations across the MSCI EM Index.

Anthony Ginsberg Director, GinsGlobal Index Funds

Industry associations

Financial planners’ remuneration

s t s o C

Value

vs Over the past few years there has been much debate about financial planners' remuneration.

e have seen regulators the world over implement some form of remuneration change, mostly involving the banning of commission on investment products. We expect a discussion paper to be released by the Financial Services Board (FSB) in May this year regarding South Africa’s own Retail Distribution Review (RDR). While no one can deny that measures that reduce the costs for the consumer are good, we must be careful not to throw the baby out with the bath water. We cannot consider only the cost side of the coin: we also need to consider the value of financial advice. There have been many studies regarding the value of advice. Research conducted by Morningstar, entitled Alpha Beta and now… Gamma and released in September 2013, has quantified the value of advice. The paper found that by making good financial planning decisions, an investor could increase their eventual income in retirement by 28.8 per cent.

The financial planning decisions are analysed below and working with a CERTIFIED FINANCIAL PLANNER® professional can add value to an investor.

What are the financial planning decisions? Total wealth allocation Total wealth allocation not only considers an investor’s aversion to risk, but also their risk capacity. When working with a CFP® professional, they will identify the client’s goals

and current and future financial position. Based on this, they will be able to develop an investorspecific investment strategy.

payment of tax, a CFP® professional will use their tax knowledge to guide an investor to the most tax-efficient product solutions, based on their individual position and needs.

Dynamic withdrawal strategy Liability relative optimisation The rule of thumb for withdrawing from investments is that a retiree should draw four per cent of the initial portfolio and then continue to increase this amount with inflation each year. However, drawing a fixed amount does not make sense when investment returns are not uniform and rise and fall with the markets. A CFP® professional would agree a monitoring strategy with an investor and annually review the income that they are drawing to ensure maximum growth in the portfolio. Annuity allocation There have been many articles and opinions written about which annuity choice would be better – a fixed annuity or a living annuity. The reality is that each retiree is different and has different needs. A CFP® professional would be able to consider the various needs of the investor such as income required, the need to leave a legacy and estate planning considerations to implement a tailor-made solution for a retiree.

Inflation is a large risk to an investor. By incorporating liabilities such as inflation into the asset allocation decision, and not just expected return, greater income can be generated. When individuals have health problems, many of us might Google information, but we would ultimately approach a doctor for a diagnosis if we were really concerned. Likewise, when considering important financial decisions, an investor should seek assistance from a CERTIFIED FINANCIAL PLANNER® professional to help navigate the financial solutions and make intelligent financial planning decisions. Working with a professional adviser could add up to 29 per cent in final additional income during the retirement years.

Asset location and withdrawal sourcing This simply means ensuring the most taxefficient allocation of assets to various product solutions, and ensuring that the income is drawn in the most tax-effective manner. While no one can completely escape the

David Kop, CFP®, Head: Membership and Corporate Relations, FPI

investsa

Head To Head

Offshore investing VS local asset allocation

Joanne Baynham David Christie Head of International Portfolio Product Specialist, Ashburton Management, MitonOptimal Investments Given the current fall in the Rand, do you believe that there are still opportunities in offshore investing? JB: There is no doubt that the Rand has had a pretty rocky start to 2014 and we would be inclined to think that now is not the time to go offshore â&#x20AC;&#x201C; especially after the currency has depreciated by 2.3 per cent since the start of 2014 and by 35 per cent over the last three years. However, we

28 investsa

would disagree based on two major factors. Firstly, we think the Rand has further to depreciate, based on improving economic conditions in the US and deteriorating fundamentals in South Africa, such as a large current account deficit and a significant funding gap that relies on foreign flows to balance to our books. Secondly, and more importantly, we think offshore offers better investment opportunities than local stocks and bonds.

DC: Absolutely, the Rand depreciation should not detract from decent value in the offshore arena. Emerging market currencies have all taken a bit of a beating of late. You should look past this and invest where you feel you’ll get the return in base currency. Therefore it should be a question about where the fair value in the markets is at present and less about the Rand depreciation: that should be the sweetener. Given that offshore investing is largely a long-term investment, what time frames are advisable? JB: The time frame for any local investor to allocate their money to offshore investments, in our opinion, is a minimum of five years. Given the volatility of the Rand, this should never be seen as a short-term investment decision. It is our view that everyone should have some exposure to offshore assets in their portfolio, but if an individual has short-term cash needs, such as annuity income, the portion allocated to offshore should be only what is not needed to generate cash flow. An investor does not want to suddenly need the money. The Rand has been known to appreciate very strongly on a short-term basis and if cash is needed in a hurry, the possibility of realising Rand losses is that much higher. DC: We talk to cycles and those cycles for us are a minimum of three years but ideally longer, so from five to seven years would be a good time frame. The longer the better; that wonderful term ‘compound returns’ springs to mind. In your opinion, in which asset classes could you currently find offshore investment opportunities and which asset classes would you currently avoid? JB: In terms of offshore opportunities, we still believe that global equities are the best asset class to be invested in, even after the terrific run we have seen in the markets since the bottom of the market in March of 2009. This view is based on attractive valuations and improving economic fundamentals in large parts of the developed world economies. We do concede that valuations are no longer as cheap as they were, but relative to cash, which yields virtually nothing, and bond markets that are at 30-year lows in terms of yields, equities remain the most attractive asset class out of those three. Having been lukewarm on alternative investments for a number of years, we also think this asset class is looking attractive, especially in the ‘long/short’ space. Stockpickers should be able to take advantage of stocks that are expensive (shorting opportunities) and those that still offer value (going long), five years into the current bull market. We continue to dislike developed market government bonds, as yields are far too low for the risks an investor is taking, especially after a 30-year bond bull market. DC: Our preference right now would be for equities – they offer decent value over the medium to long term and are well-priced, certainly, over bonds and cash. With cash, you’re getting a negative return after inflation, so that constitutes risk. You could also look at the high yield bond space but keep in mind that you’re taking on significant risk to

attain that yield. Valuations in equities in developed markets are not too far stretched and offer fair value. In which shares and markets that aren’t accessible in South Africa do you currently see offshore investment opportunities? JB: In terms of specific equity opportunities not accessible in South Africa, we like biotech stocks, information technology counters and casualty insurers, all of which we access via funds that are sector specialists in these areas. DC: The offshore universe is huge and extremely diverse. The US offers good value as balance sheets in corporate America look healthy. We also like the emerging consumer; those stocks not necessarily listed in emerging markets but that play into the emerging consumer through the large global stocks. The emerging country currencies have been under pressure so this makes the decision to buy into an emerging market a delicate one. What is your comment on investing in other emerging markets? JB: Within our portfolios, we currently have a neutral allocation to emerging market equities relative to the MSCI World Index. This is despite the fact that valuations of emerging market equities relative to developed markets equities appear very attractive. Despite being a ‘known known’, we are concerned about slowing growth and large debt problems in China. We believe this will continue to make investors shun emerging market opportunities, specifically those countries that rely on China for export demand: South Africa being a good example. However, in the same breath, we do know that that emerging market investments are suitable for South African investors, as they offer quite different investment opportunities from those found on the JSE. Not all emerging markets are equal. Large parts of the universe have healthy current account surpluses, strong cultures of saving and strong GDP growth. We particularly like companies that sell to the Asian consumer because the growing middle class is still in the ascendancy. Share prices have fallen, which makes these companies more attractive than they have been for a while. We remain wary of emerging markets that have large funding gaps and are beholden to the kindness of foreign investors to support their bond markets, like Turkey, Brazil and India. DC: There is nothing wrong if you’re after a specific sector or stock. The only real issue is understanding the risks inherent in emerging markets. As mentioned above, currencies would be one of those risks. Others to mention would be efficiencies of markets, liquidity, corporate governance and so on. Are there any investors for whom offshore investment right now is not advisable? JB: The only investors who should not invest offshore are those who have short-term local funding needs. DC: Any investor who has a short-term time horizon, I think, would need to stay away and perhaps look at bank instruments. The same goes for investors looking for quick gains – one could get lucky and time it correctly, but we believe in ‘time in the market’ not timing the market. When investing in equities and bonds, you need to be disciplined and have patience. You can find more than enough diversification – you would need to tie this up with your investment objective and your risk appetite.

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Investment solutions bordering Russia to its west. Russia feels militarily self-confident enough to assert itself; securing its naval bases in the Black Sea was critical for the country – mission accomplished. In addition, Putin’s popularity in Russia has rocketed following his actions. At the same time, Russia’s financial and economic position has deteriorated fairly substantially since 2008, when it invaded Georgia. Oil prices have not risen further, its then-huge strategic oil reserve has significantly diminished, its fiscal position has deteriorated and is forecast to soon go into deficit, and it is barely registering any economic growth. That means sanctions, and the threat of them may have a greater effect now than would have been the case back then.

Crimea crisis brings challenges for the BRICS

The tensions in Europe over Crimea’s decision to become part of Russia, and its subsequent annexation by Russia, may not appear to have immediate relevance.

owever, South Africa is a member of the five-nation BRICS bloc, and the outcome of this crisis may indeed have long-term implications for the country’s foreign policy and even its economy. An understanding of history is vital if we are to have any perception of these countries and what drives them. Following on from a recent Investment Solutions visit to the BRICS countries, our diagnosis involves a concept we have developed, known as a ‘national scar’. This refers to something so drastic or scarring in the history of a country that it essentially drives policy-making. For example, South Africa’s national scar is obviously apartheid. Russia has, over its history, either attacked or been attacked by every one of its neighbours. Even today, Russia feels it is critical to project its military might and to have defensible borders. The Soviet Union was an attempt to market communism globally and also to provide its heart, Mother Russia, with secure borders, namely with buffer countries between it and its potentially hostile neighbours.

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The USSR collapsed after the fall of the Berlin wall in 1989. From then and until the Russian debt default and currency devaluation in 1998, the country suffered a devastating depression far worse even than that experienced by the US in the Great Depression of the late 1920s and early 1930s. These two recent defining events in its history left Russia weakened economically and militarily. Russia began its recovery process from the debt crisis with the presidency of Vladimir Putin, who took power in 2000. The recovery was helped by the rapidly rising price of oil, Russia’s key export along with gas. Russia enjoyed a military recovery as well, invading Georgia, which had supposedly been under some form of Western protection, in 2008. We describe the Putin period as the ‘Return of the Czar’, as Putin, like the Czars in precommunist Russia, is effectively sitting above the law and the constitution. Russia today seeks to protect its perceived national interest, this time in Ukraine and Crimea. Ukraine is a large and strategically important country

For the US, this is a challenge to its superpower status, but there is little direct immediate effect, though there may be some long-term consequences. For the Europeans, with greater economic ties and a significant dependence on Russian oil and gas supplies, the recent events are far closer to home and more concerning. The EU was meant to do away with European warfare and potential bloodshed, and the current Crimea situation brings these risks, along with memories of the Cold War, back to mind. South Africa and Russia’s other BRICS countries face a real quandary. Do they stick together at all costs, whether morally defensible or not? When we look at South Africa specifically, the country has small but growing economic and other links with Russia. There is, for instance, talk of Russian involvement in South Africa’s nuclear programme. Also, we import 90 per cent of our wheat from a combination of Ukraine and Russia. If full sanctions were to be imposed by the West on Russia, it would almost inevitably also affect commodity prices. That could unintentionally prove to be a positive for South Africa and Brazil, in the form of higher prices. The BRICS partners may have to face some important choices or responses. These events are worth monitoring over the coming weeks and months because of the potential economic and possibly political implications for the BRICS members, and also for the world.

Glenn Silverman, Chief Investment Officer, Investment Solutions

Investment strategy

Asset allocation key to

successful investing in volatile markets The aftermath of the global financial crisis exposed vulnerabilities in individual asset classes that reacted to changing market conditions. This put the spotlight on asset allocation as an investment strategy, which has proven to be robust and successful in the current cautionary environment.

esearch indicates that asset allocation produces 92 per cent of the return, with only two per cent resulting from market timing and six per cent from stock picking. To deliver returns, fund managers should be actively managing the tactical asset allocation of funds based on the relative valuation of the major asset classes, combined with in-depth analysis of the investment environment. An asset allocation strategy involves allocating the assets on a predetermined, mathematically established basis. For example, the long-term allocation to achieve a growth rate of inflation plus five per cent might be 60 per cent equities, 10 per cent property and the rest in cash and fixed income assets. How these percentages are determined is based on long-term capital market assumptions and the fund’s long-term risk tolerance levels. It is this philosophy that enabled us to defend clients’ capital through the worst of the financial crisis. As signs of financial turmoil began to surface in the markets, the calculated asset allocation strategy was maintained, and we did not only focus on the effects of market shocks. The decisions made were rational in terms of what the outcomes were going to be, and with the compression of interest rates, we anticipated two things: property would run and value fund managers would perform well. As part of our commitment to this process, we ensured that funds were structured accordingly. The asset allocation process that Southern Charter has been implementing since the company’s inception has allowed the funds to achieve market-beating performance in

very difficult conditions. As a result, Southern Charter was runner-up in the Best Fund House: Small Range category and also won the Best Aggressive Allocation Fund award for the Southern Charter MET Growth Fund at the recent 2014 Morningstar awards. Southern Charter also won two 2013 Raging Bull awards for both our medium and high equity multi-asset class funds. The key to an asset allocation investment strategy is to stay the course and trust in the numbers. It’s not the daily or nightly movements that we should be concerned with, but rather the overall mix of the portfolio over the long term. The following guidelines are essential to establishing an effective asset allocation strategy.

record of delivering above-average results. Putting these managers in place ensured that we had the skills and resources to create growth in a market where growth was very hard to find. Understand the big picture Market moments do not take place in isolation and understanding how certain market elements will be affected is very useful. It’s very important to understand in which direction interest rates are moving when there is going to be a change of direction, and the magnitude of that change to assess and address the effects this could have on a portfolio. Use scenario planning and probability to understand the global macroeconomic picture

Be well diversified Diversification is the key to spreading investment risk. Even if equity is delivering very attractive returns, remaining 100 per cent in equity, at 50 per cent more risk than a portfolio which is largely equity (70 per cent), does not make sense. It’s important to balance your investments with your risk profile. Make use of passive investments

The use of tabled, systematic probability formats is important in stopping investors from overly focusing on any one indicator and potentially adopting the wrong strategy. Our style of strategic thinking uses scenario planning to access a complex financial situation by using a set of mostly leading indicators as flags regarding possible scenarios being faced. This allows us to minimise the risk and avoid being hampered by our cognitive limits.

Investors and managers tend to forget the potential of passive investments. Where active managers may struggle or fail to beat the index in a particular asset class on a consistent, sustainable basis, we use a costeffective index fund. Investment style is crucial As the 2008 crisis unfolded, we realised that the protection of a value-style investment manager was necessary, with a top-down approach, which takes macroeconomic conditions into account, and a consistent track

Mark Thompson, Investment Strategist and Co-fund Manager, Southern Charter

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Morningstar

Strategic beta strategies rely on willing losers

n most professions, a success is a positive gain for society: a cured patient, a new building, a technological advance. With investment management, it’s different. Assuming that we define investment success as outperforming a market index, winning can come only at the expense of someone else’s loss. It all comes down to simple maths. The first assumption is that the market, as a whole, consists of the portfolios of all investors. It then follows that if some investors are beating the market, others must be lagging. This is a classic zero-sum game. And it holds true not only for traditional active management, but for the new breed of strategic beta indexes. While there is no universal definition of what constitutes a strategic-beta index, a defining characteristic is that they use weighting schemes that differ from market capitalisation-based indexes. Their portfolio weights are based on criteria such as fundamental measures of size or quantitative measures of risk. In market-cap-weighted indexes, trading activity tends to be low unless securities are being added or removed from the index. There’s no need to trade to maintain market-cap weights. However, with strategicbeta indexes, trades must be made to maintain the prescribed weights. Securities that rise in price need to be sold and those that fall need to be purchased. This pattern of selling winners and buying losers is called contrarian trading. In a recent research paper titled ‘The Surprising Alpha from Malkiel's Monkey and Upside-Down Strategies’, research affiliates founder Rob Arnott and three co-authors

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presented the results of a study of various smart-beta weighting schemes applied to US and other equity markets. In addition to the smart-beta schemes, they created portfolios using their inverses. For example, in addition to the standard lowvolatility scheme of weighting each stock in inverse proportion to its historic volatility, they created a high-volatility portfolio in which each stock is weighted in direct proportion to its historic volatility. Then, just to make things even more interesting, they created equally weighted portfolios of stocks selected at random. They found that all of these schemes – strategic beta, inverted strategic beta and randomly selected portfolios – outperformed market-cap weighted portfolios of the same stocks. So in the end, it is not the weighting scheme itself that matters, but rather the successful execution of a contrarian trading strategy.

to reason that the willing losers are those investors who habitually buy securities in response to price rises and sell in response to price declines. As long as these investors are in ample supply, there are opportunities for professional managers who follow contrarian strategies to take advantage. Investment products linked to strategic-beta indexes provide a simple means of doing so. This is not to say that all strategic-beta products are created equal. Low costs are essential to their future success. In particular, the costs of rebalancing away from market cap-based weights need to be kept low. It's also important that smart-beta strategies be scalable. That way, there are ample shares available for the funds to hold, and for willing losers to sell.

Arnott has rightly called those on the other side of these contrarian trades ‘willing losers’. If some investors are selling their winners and buying losers, there must be other investors making the opposite trades to accommodate them. So who are these willing losers? Many individual investors suffer from poor timing and poor planning, and as a result, they often buy too late and sell too soon. At Morningstar, we quantify this phenomenon for funds by comparing a fund’s official rate of return over a given period to what we call the ‘investor return’. The latter is the Dollarweighted return based on what the fund’s net assets were during each month of the period. Generally, investor returns trail the official returns. We view this as evidence that fund investors chase performance. It stands

Paul Kaplan, Director of Research, Morningstar

Practice management

Building a moat

changes in anticipation of RDR-type reforms. Such inaction may seem justified, given that many financial planners have built up very successful businesses over some years. They thus resist the need to change or be told what to do by a regulator perceived to be hostile. We believe that another, more productive approach could be to reframe the hostile lens through which regulatory change is seen. Warren Buffett says that ideally he will invest in businesses that have a moat around them. By moat he means something that provides a business with a real competitive edge, ideally a barrier or barriers to entry, deterring competition.

The optimal business strategy for challenging times:

Building a moat or predicting the future?

s irrational as it is, predicting the future is something people try to do all the time; whether it be the stock market, the weather, the election or the rugby score. The clients of financial planners probably think, secretly, that their financial adviser should be able to predict the future. Financial planners themselves would probably like to be able to predict the future, not only for the benefit of their clients, but also to protect the future of their businesses. This is of particular relevance given the challenging times in which financial planners find themselves.

As the authors of a recent paper entitled the ‘Brave New World of Wealth Management’1 put it: “Most owners recognise that the business is becoming significantly more challenging. New clients are harder to find, operating costs – and employee compensation in particular – are increasing and regulators are becoming more hostile.” While this is a description of the wealth management industry in the US, it is just as apt for South Africa. Till now, the Financial Services Board (FSB) has tended to look to the UK and Australia

for regulatory regime guidance. The problem is that seemingly similar regulatory reforms in the UK and Australia appear to be diverging in direction. The Australian FOFA reforms are backtracking under political pressure. Proposed changes like clients having to opt-in every two years, mandatory transparency of adviser charges and a ban on volume payments are now falling away. In contrast, the UK RDR reforms appear as though they are being enforced with all the intent with which they were formulated. It is probably safe to bet on South Africa ending up somewhere between the UK and Australia. In South Africa we have already seen changes in line with the UK, such as increased levels of business compliance, more onerous qualification requirements and greater fee transparency. But other changes, such as distinguishing between ‘independent’ and ‘restricted’ advice in the UK, and first mooted by the Treasury in South Africa in a white paper in 2006, have still not been finalised. Against an uncertain future, research according to Core Data Research indicates that 54 per cent of South African advisers are not making

Warren Ingram, a previous Financial Planner of the Year, commented recently that he sees regulation as the source for developing a moat for financial planning businesses. He says that the more onerous the regulation, the bigger the moat gets around those financial planning businesses that are able to respond to it first and in a cost-effective manner.2 In the UK, requirements such as higher qualifications, a shift from commission-based to fee-based remuneration and the importance of having documented processes in a business have seen a significant fall-out of financial planners from the industry. Rich pickings remain for those who have been able to step up to the plate. In South Africa, therefore, financial planners would be well advised to bank on the fact that regulation is providing their business with this proverbial moat, and to think about how they can benefit from this. The next challenge would be to create additional moats for their business: in particular, moats over which they have control, such as a unique value proposition, a profitable client base, an effective service promise and a distinctive brand. That way, trying to predict the future will remain the folly of competitors who, if South Africa follows trends in the UK in any material way, will over time cease to exist. 1.Hurley, M. et al, ‘Brave New World of Wealth Management’: Opportunities, Competition, Demographics and Growth Conundrums, Fiduciary Network, April 2013. 2.Ingram, W. Presentation to Fundhouse Practice Management Programme, July 2013.

Rob Macdonald, Chief Operating Officer, MitonOptimal South Africa

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Ahern

Chief Executive Officer: PSG Asset Management You have been CEO of PSG Asset Management since March 2013. What have been your biggest challenges so far? There were two challenges that stand out among the many that all asset managers face. The first was to get the PSG Asset Management brand out there. The PSG Group and our adviser networks are very well known in the market, but an exciting challenge was to make sure that investors become fully aware of the investment team at the Asset Management company. The second challenge, which is closely tied to the first, was to ensure that our funds are available for investors on as many of the well-known platforms Linked Investment Service Providers (LISPs) as possible. The South African asset management industry became increasingly concentrated in the past few years, with a few large and familiar names dominating portfolios and platforms. At the same time, platforms have started moving from completely open architecture to a more guided approach, which means the number of front row seats, so to speak, has been reduced. We have made great progress with this challenge, and it has had to do with lots of knocking on doors, telling people about us, and at the same time keeping the platforms abreast of developments. Has the global financial crisis of 2008 had any lasting impact on the way clients do business? I would say the biggest impact has been a protracted aversion to risk, which means that many investors missed out on the market recovery. This was partly due to the reality of their experience – people tend to view a poor investment experience as being a lot more painful than the pleasure they feel

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when things go well – but also because the equity markets tend to discount well ahead of any real economic recovery. Investors who, for instance, waited for concrete evidence that the US economy had started turning will already have missed out on the juiciest gains in certain stocks by the time they have this information. There are several biases at play with this behaviour of favouring so-called lower risk asset classes even when you have quite a long-term horizon. These included ‘recency’ (letting 2008 skew your perception of the future during the coming years); ‘pessimism bias’ (under-estimating the odds of something going right, understandable when the crisis also led to uncertainty about jobs and other aspects of life); and ‘risk perception bias’ (attempting to avoid one risk, but unintentionally exposing yourself to another). The last one is quite applicable, as many people took their money to safer assets, only to miss out on growing their wealth for the long term. We have to remember that, ultimately, the investor remains a human being, full of beliefs and biases. This is where a good financial plan and a good adviser can really help to keep clients on track. In addition, investing with a manager who focuses on risk in the same way as the client can help to align interests. Where do you foresee the best value for investors in 2014? The markets are dynamic, so opportunities are always arising. It is probably easier to say where we don’t see value right now. We think bonds and listed property are still too rich for our liking, but that may change throughout the year. We are concerned about the valuations of certain of the well-known large cap South

African industrials. However, we can still find opportunities on a selective basis within the local market, and one of our advantages over the mega players is that we can invest both within and beyond the large cap segment of the market. We are also seeing value in certain offshore shares, an area we have looked at on an integrated basis, from South Africa, since 2006. What topics do you like to write about on your blog, www.ahern.co.za, and how often do you get to write these days? I enjoy writing and the blog started as a way to keep my hand in when I took a career break in 2011. I write about whatever comes to mind. Topics can range from health, food, yoga, investments, parenting, travelling, my outlook on life, anything really. To answer the second part of the question, I have blogged exactly twice since starting this job. Please describe your attempts – overall – to keep some sort of work-life balance going. I recognise that I just cannot get to exercise as often as I want, so I make an extra effort to follow a healthy diet. I do have a weakness for good coffee and white wine, so there is a balance right there. As far as exercise is concerned, I do Iyengar yoga (a rather precise style which can be excruciatingly challenging) and I walk in the mountains with my dogs and my tazer gun. My Kindle, audiobooks, some good music or a paperback are all ways I try to switch off. I have a great group of friends, and have lots of fun with my daughter. I think the more realistic you are about the fact that you can have it all, just not at the same time, the more accepting you can be of the pace of this industry.

Profile

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Retirement reform

Retirement savings:

Investment challenges posed by Regulation 28

olicymakers aim to use regulation to protect the investor. For this reason they tend to have a natural bias towards assets that are less volatile over shorter term periods. An unfortunate consequence of this protective bias is that, in the current environment – contrary to the intended outcome – the regulations are constraining investors in assets that presently have less attractive long-term capital appreciation prospects and a significant probability of not protecting the real value of their capital over the short term.

The limits set by Regulation 28 of the Pension Funds Act on the maximum percentage holdings in various asset classes for pension, provident, preservation and retirement annuity funds may have unintended consequences on the value of an investor’s retirement portfolio. 36 investsa

We believe that, in the prevailing economic climate, Regulation 28 poses at least two challenges to the protection of the real value of an investor’s capital. Fixed interest instruments are implied to be permanently less risky than equity instruments The first challenge is that, in a Regulation 28-compliant portfolio, investors may hold

Asset Class

Limits prescribed by Regulation 28

Cash

Up to 100% of the portfolio

Bonds

Up to 100% of the portfolio

Listed and unlisted property

Up to 25% of the portfolio

Listed equity (local + foreign)

Maximum of 75%

Other assets

No more than 15% in a combination of ‘other assets’, subject to:

Alternative investments like private equity, hedge funds and

• •

Up to 10% in private equity Up to 10% in hedged funds

other assets not specifically defined in Regulation 28.

•

Up to 2.5% in ‘undefined assets’.

Foreign

No more than 25% in foreign assets, regardless of asset class (as defined by the prevailing South African Reserve Bank’s limitations).

up to 100 per cent in local fixed interest instruments, but may not ever hold more than 75 per cent of the portfolio in equities. At present, most fixed interest yields are at their lowest in decades, largely as a result of global Quantitative Easing (QE) programmes. However, these investment advances will soon have to be repaid, which will inevitably result in declining bond values and will hurt investors in these assets if they acquired them at such low yields (high prices).

During 2013, the FTSE/JSE ALSI Total Return Index generated a 21.43 per cent gain, while the MSCI ACWI Index (a proxy for global equity markets) returned 52.38 per cent in Rand terms over the same period. Returns in the latter were largely driven off low price:earnings multiples. As a result, investors who had limited exposure to foreign equities suffered a substantial opportunity cost. South Africa still has significant twin deficits and a major portion of local equities are held by foreign investors.

Fixed interest instruments may be less volatile than equities, but we feel that the risks associated with fixed interest investments are now far greater than those of a strategic medium- to long-term equity investment.

A sustained foreign sell-off would not bode well for local stocks. In addition, many foreign companies can be acquired at much more attractive multiples than their local counterparts. We thus believe that offshore equities are likely to continue to outperform local equity in Rand terms.

Local equities are implied to be less risky than offshore equities

optimising investment outcomes. However, financial advisers should consult with their clients to see how to mitigate the effects that the restrictions in Regulation 28 may be having on their portfolios. An over-exposure to so-called ‘safe’ assets could lead to capital losses over the short term and an under-exposure to socalled ‘risky’ assets could lead to a significant opportunity cost by missing out on appropriate exposure to assets which currently have good real return prospects. The possibilities offered by alternative investments should be factored in.

Implications for local investors The second challenge is that, in a Regulation 28-compliant portfolio, investors may hold up to 75 per cent in equity instruments, but are restricted to no more than 25 per cent of these in foreign companies.

We believe that some of the core principles behind Regulation 28 remain pivotal and should not be dismissed. For example, the benefits of diversification are fundamental to

Adriaan Pask, Chief Investment Officer: PSG Wealth

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Retirement reform

Endorsing a gradualist approach to retirement reform

achieved over a long period. But we also acknowledge that the future investment environment might be tougher. In our view, the biggest contributor to retirement fund members not experiencing good replacement ratios at retirement is not high charges or low returns – it is the lack of preservation and savings. National savings are currently mired near the 15 per cent mark of South Africa’s gross domestic product. The Treasury is currently looking at the introduction of a compulsory preservation vehicle, which will have a huge impact on decreasing charges over time. There is an urgent need to address the lack of financial literacy among South African consumers. People are living much longer and retiring earlier, and therefore need to save more from an earlier age to ensure enough income in their golden years. Preservation and compulsion need to be part of the education process. We also need to educate consumers on the vital importance of regularly comparing retirement products.

The South African retirement fund industry has come a long way since the first discussion paper on retirement reform was issued by the National Treasury almost 10 years ago.

he number of retirement funds has decreased dramatically, there have been significant enhancements in savings product design, and costs have been lowered markedly to improve retirement outcomes for fund members. While there is no doubt that regulatory reform is necessary, the industry has not waited for government reform to be finalised. Over the past few years, it has devoted considerable energy and resources to reforming from within, creating a more competitive environment to the benefit of fund members. Costs have decreased as a result of consolidation in the industry and the growth of umbrella funds, competition, technological advances and greater efficiencies, not to mention the rising popularity of passive investment strategies. For example, 10 years ago, there were around 13 000 retirement funds registered with the Financial Services Board. This number has been reduced to about 3 000. In a few years’ time, we may well be down to a few hundred funds. This will lead to further cost reductions due to economies of scale, as well as improved governance.

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For over 30 years, Sanlam Employee Benefits has conducted research in the retirement fund space, releasing these results every year at our Benchmark Symposium. We have consulted with global experts in this field, including the architect of the ground-breaking Chilean system, José Piñera. Chile has been called the global laboratory of pension reform, and we have drawn from the reform experiences in this and other countries which have gone down similar paths.

The retirement industry needs the assistance of the South African Government in this regard, and we commend Finance Minister Pravin Gordhan’s announcement during his 2014 Budget Speech on the government’s intention to introduce legislation for a new tax-preferred savings vehicle later this year. What is required now in the retirement fund industry is certainty on what the future regulatory environment is going to look like. We believe slow and steady change is better than major disruptive change. If reforms are implemented too hastily, they could damage the very industry they are trying to reform. The government should set the boundaries with a cleverly designed ‘light touch’ regulatory approach rather than intrusive regulation, and create the necessary conditions for increased competition in the industry. Such a gradualist approach is far more likely to succeed in reforming our current system to ensure the future financial well-being of South Africans as well as the viability of the retirement fund industry.

We are in full agreement with the view of the Treasury that we need to work towards a more efficient retirement fund industry and ensure that this translates to fund members in the form of lower fees and charges. Sanlam Employee Benefits has been reporting charges levied on retirement savings to the industry at each of our annual Benchmark Symposiums since 2010, and we believe charges have come down over the four years across the industry. Fortunately the industry has generally delivered very well in terms of investment returns earned by fund members, with significant inflation-beating returns being

Dawie de Villiers, CEO of Sanlam Employee Benefits

Regulatory development

Behind the hedge fund hype “If all the money that’s ever been invested in hedge funds had been put into treasury bills, the results would have been twice as good.”

his is the opening line from Simon Lack’s exposé of the hedge fund industry, The Hedge Fund Mirage*. His overall conclusion: the hedge fund hype is just that – self-promotion and distortion on a grand scale, from an industry that rewards owners far more than investors.

comment: “In 2008, the hedge fund industry lost more money than all the profits it generated during the previous 10 years.” 2008 epitomises the industry’s existential failure. This was the year that the industry should have shown its true mettle by at least preserving capital. Instead, it posted a return of -23 per cent.

Three things irk the author: poor reporting conventions, disappointing performance and high fees. Hedge funds are not unique in this regard – the investment industry in general scores low on all three – but he sees hedge funds as being the worst. To illustrate this point, Lack argues that the industry’s historical results are inflated not just by ‘survivor bias’ but also by a ‘self-selection bias’ – managers choose if and when to report their results. As a result, this selfselection bias greatly exaggerates the industry’s historical performance.

This did not stop the industry paying itself total fees estimated at $36 billion that year. In fact, based on the sumptuous 2-and-20 pricing model, the author estimates that US hedge fund fees totalled $379 billion between 1998 and 2010, versus the real investor profit (above the risk-free rate of two per cent) of only $70 billion. Investors take the risk, managers take the return.

Another distortion, he says, is the use of time-weighted returns. This is the investment industry standard, but it only really serves investors comparing well-established funds. Academic research confirms that it is easier to do well when managing little money. A small, successful beginning – the premise for most enduring hedge funds – can lay the foundation for an impressive long-term track record (even though this far exceeds the actual average investor experience, based on the moneyweighted return). Much of the industry’s exceptional (and muchvaunted) returns were earned in the early years. However, little real money shared in that success. The results for more recent in-flows – the bulk of the money under management today – have been modest and even disappointing. This is illustrated by another ‘shock and awe’

What may have seemed like easy money for a niche industry in 1998 has become hard work. Today, $2.5 trillion and more smart minds chase the same opportunities, which has made it harder than ever to uncover mispriced assets consistently. Unfortunately, this is the time our regulators have bought into the hedge fund hype. Per the updated Regulation 28, pension funds may now invest 10 per cent of assets into hedge funds (2.5 per cent per fund), to improve diversification. This is a four-fold increase on the previous limit.

diligence and diversification? Is this not a tacit admission that such funds are inherently complex and opaque? And that it is well beyond the competence of the average trustee to select appropriate funds? In that case, are the higher prudential limits really all that prudent? The characteristics of hedge funds defeat the Treasury’s desired retirement reform outcomes: simple products, transparent charges, portability, low fees (possibly with an outright ban on performance fees) and, underlining all this, the fair treatment of customers. In the right context, with the appropriate oversight, alternate asset classes no doubt offer an opportunity to diversify. However, in the context of a defined contribution retirement fund, they must also satisfy other criteria: low trading costs, low concentration risk, low counter-party risk, high liquidity, transparency and simplicity. These requirements effectively disqualify hedge funds. *Simon Lack, The Hedge Fund Mirage – The Illusion of Big Money and why it’s Too Good to be True, published by John Wiley & Sons, Inc. 2012.

Tellingly, the accompanying memo recommends that hedge funds should be accessed by way of funds of funds. “Accessing hedge funds or private equity funds through a fund of funds structure provides a valuable extra layer of due diligence and diversification.” Even ignoring the associated extra layer of cost, this statement begs the question: why do alternate asset classes require special due

Chris Veegh, Head of Consulting, 10X Investments

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NEWS

New equity fund: passive

rates for active management from awardwinning asset manager REZCO Asset Management, winner of four collective Raging Bull awards since 2008, including its Prudential Fund as well as its Value Trend Fund, recently announced the launch of its third fund, the REZCO Equity Fund, offering an actively managed fund at a passively managed fee. Rob Spanjaard, investment director of REZCO Asset Management, clarifies, “With all the debate about whether active managers can consistently outperform the market over time to justify their management fee, we have taken the approach that, should we merely match the market, we will charge a passive management fee, but should we create absolute return above the market (benchmark), only then will we charge a performance fee. “Our new REZCO Equity Fund was launched on 31 March 2014 in the ASISA South African Equity General category. The benchmark will be the Johannesburg All Share Index (J203) and the period used to calculate the performance will be a rolling two-year period. The REZCO Equity Fund will be invested in only South African-listed equities, and the fund will thus be suitable as a building block for multi-managers. It will be consistent with our company philosophy of preserving capital and creating wealth.”

Camac energy

first to list on the JSE in 2014

Camac Energy CEO Dr Kase Lawal with JSE CEO Nicky Newton-King celebrate the US-based firm's start of trade on the JSE.

CAMAC Energy (JSE: CME), an independent oil and gas exploration and production company focused on energy resources in Africa, was the first to list on the JSE this year. The company, which is headquartered in Houston, Texas, has a primary listing on the New York Stock Exchange (NYSE EuroNext). CAMAC Energy’s portfolio includes eight licences, including production and other projects off the coast of Nigeria, as well as on and offshore exploration licences in Kenya and off the coast of Gambia.

Rob Spanjaard, Investment Director of REZCO Asset Management

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Zeona Jacobs, director of issuer and investor relations at the JSE, says they were pleased

to see CAMAC Energy list on the JSE main board. “The listing in Johannesburg gives CAMAC Energy a presence on Africa’s biggest bourse and access to a large and diverse investor base with an array of investors looking to gain exposure to the African continent.” Dr Kase Lawal, chairman and CEO of CAMAC Energy, says the JSE listing signifies a new chapter in the company’s history and allows access to capital on the continent, as well as providing a new option for investors in terms of diversity. Sasfin Capital acted as CAMAC Energy’s corporate adviser and sponsor for its listing.

New Korea JSE introduces diesel hedge desk for Barclays Africa contract The corporate and investment banking division of Barclays Africa Group Ltd recently signed an agreement with Korea’s Hana Bank to establish a Korea Desk in Johannesburg, South Africa. The desk will promote business co-operation and investment between Korea and Africa’s vibrant sub-Saharan economies. The establishment of a Korea Desk on the continent was one of the key points agreed in the broad Memorandum of Understanding (MOU) signed between the two banks in November 2013. The MOU will deliver on Hana Bank’s African strategy by servicing its clients in sub-Saharan Africa through Barclays Africa’s network across the continent. In turn, the partnership with Hana Bank will give Barclays Africa direct access to corridor trade flows between Korea and sub-Saharan Africa. The signing of the agreement was witnessed by Stephen van Coller, chief executive of corporate and investment banking, Barclays Africa, and Jung-Jun Kim, president and chief executive officer of Hana Bank. “The desk will help us meet the growing needs of Korean companies in Africa while providing them with a comprehensive array of local and global trade finance solutions at competitive prices through Barclays Africa’s extensive African and global network,” said Kim.

The JSE added Diesel Hedge Futures and Options (DSEL) to its range of commodity derivatives. The diesel contracts will allow investors to protect themselves against movements in the local diesel price. The contracts will be traded in Rand per litre and cash settled. The contracts provide a hedge against movements in the local pump price of diesel through following the price of European Gasoil futures, as traded on the New York Mercantile Exchange (NYMEX). Gasoil is a refined crude oil product and is close to diesel in the refinery process. Chris Sturgess, director of commodity derivatives at the JSE, says the new contracts provide investors with a hedge against movements in the price of diesel refined in Europe, but this price also plays a big role in what we pay for diesel in South Africa. “We are excited about the new product that will make it easier for local participants to manage their price risk in the diesel market. Interested clients can trade via JSE derivative brokers with transactions guaranteed through the JSE’s clearing mechanism.” The diesel price can have a great influence on the input

costs of South African businesses in industries from transport to agriculture and mining. The contracts can help farmers and businesses to protect themselves against volatility in the diesel price and give them greater certainty to manage their costs. One contract represents 5 000 litres of diesel, which means any business that uses a greater volume of diesel per month can meaningfully use the contract. Chris Kairinos, commodity trader at Rand Merchant Bank (RMB), which will be acting as market maker for the contracts, says energy markets are especially prone to volatility. “Geo-political tensions can see energy prices blow out for no valid reason. The contracts can be extremely useful because they enable businesses to be more prudent and lock in their margins, regardless of where the diesel price goes.” The price of the diesel contracts will be calculated based on the average exchange rate and average European Gasoil futures in the month before the contract expires. This is known as the Reset month and the contract will not trade during this month. The month in which the contract expires will be known as the Pump month and the contract will expire at the beginning of this month.

London-based practitioner to join Africa’s largest law firm In a bold move, Michael Tétreault Schilling has joined ENSafrica as an executive. Schilling has relocated to Mauritius to become part of the growing opportunities on the ground in Africa. He will focus exclusively on the emerging markets of Africa, bringing extensive experience working with multidisciplinary teams in multijurisdictional M&A, corporate finance, energy, mining, privatisation and infrastructure transactions. His expertise will support the expansion of ENSafrica into new markets throughout Africa. Mzi Mgudlwa, the deputy CEO of ENSafrica, says, “The ability of ENSafrica to recruit world-class talent is evidence of the growing attractiveness of opportunities in the African market and the firm’s ability to seize those opportunities.”

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Products

Sanlam iTrade launches Fantasy League on Facebook The online trading platform Sanlam iTrade has announced the start of a new iTrade Fantasy League, aimed at exposing social media users to the vibrant world of online share trading. Facebook fans can vote for their favourite stock picks in a real share portfolio, and stand a chance to share in the profits over a nine-month period. Sanlam iTrade will again invest R1 million in the portfolio. Fans will be given a basket of about 100 shares and ETFs in five sectors – ETFs, resources, financials, retailers and industrials – and vote to reduce these picks to the top 20. Additional shares will be voted on or off over the following months. Gerhard Lampen, head of Sanlam iTrade, says its Facebook fans will effectively be the portfolio managers over the nine months and manage the portfolio by ‘liking’ or ‘unliking’ a share. “Fans who accurately predict the actual profit of the portfolio at the end of the league in November 2014 will share in the profit of the portfolio, with 60 per cent of the profit going to the fan whose guess was closest to the value, 20 per cent to second closest, 10 per cent to third closest and the final 10 per cent to charity.” Last year’s iTrade Fantasy League outperformed the JSE All Share Index – the latter increased by 13 per cent over the nine-month period while the Fantasy League portfolio profit was 17.6 per cent. The profit of R167 000 was shared by the three winners: Mark Anthony Swartz, Walter Biesenbach and Thabong Malatjie. More than R16 000 was donated to the Childhood Cancer Foundation of South Africa (CHOC). “It was a great learning experience for all of us, and we hope that this year, more people will make use of the opportunity to increase their knowledge of the exciting world of online share trading,” concludes Lampen.

Are you thinking about international investments?

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About Navigate by Glacier International A highly guided list of fund choices to help simplify international investments. These daily traded, actively managed funds have been selected from local and international companies with strong histories and performance records.

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The portfolio is actively managed by Pieter Fourie, global head of equity at Sanlam Private Investments (UK).

The world

CRIMEA, ZAMBIA, CHINA, KENYA, AUSTRALIA, UGANDA, GERMANY, NIGERIA

Political instability in Crimea affects investors

Kenya to create separate Islamic financial institutions

NIGERIA NOW AFRICA'S BIGGEST ECONOMY BY GDP

The political instability in Crimea, Ukraine could affect investor sentiment towards emerging markets in general. This is according to Goolam Ballim, Standard Bank’s chief economist, who says that while the level of risk is low at the moment, global market volatility induced by the situation in the former Soviet Union may be unwelcome at a time when emerging markets are already burdened with precarious fundamentals.

Kenya’s financial regulator, the Capital Market Authority (CMA), has proposed a separate regulatory framework for Islamic financial institutions. This comes as part of a 10-year strategy intended to boost capital markets in east Africa’s biggest economy. Islamic finance could attract investment into Kenya from Islamic funds in the Gulf and Southeast Asia. According to the CMA, this is a long-term project, but the framework should provide the legal basis in all relevant financial sector legislation.

Nigeria, Africa's biggest oil producer, has had the value of its GDP recalculated by the National Bureau of Statistics. This was the first time the data was overhauled in two decades.

Second Eurobond will prove costly for Zambia After Zambia’s budget deficit ballooned, its second Eurobond will prove much costlier than the first issued in 2012. Last year’s downgrade by Fitch Ratings was as a result of spending reforms by President Michael Sata and pushed the country further into junk status, making it the continent’s poorest bond performer. China’s manufacturing activity worsens China’s manufacturing activity is at its worst in seven months. According to British banking giant HSBC, the latest data has shown that there is trouble in the world’s second largest economy. In February, factories’ and workshops’ activity fell to 48.5 on the purchasing managers’ index (PMI). The PMI gauges the health of China’s economy, and a reading above 50 indicates growth, while anything below signals reduction. Qu Hongbin, economist at HSBC in Hong Kong, blamed the worsening PMI figure on the decrease of production at Chinese factories. Hongbin has called on the Chinese Government to adjust policy in order to support the growth of its economy.

Australia’s growth expected to strengthen Despite a continued weakening in the economy, Australia’s central bank has kept interest rates at a record low of 2.5 per cent. This rate has remained unchanged for the past six months and it is unlikely to change in the near future. Glenn Stevens, governor of the Reserve Bank of Australia, says that despite the decline in the resources sector and an increase in the unemployment rate, the country’s growth is expected to strengthen and will be assisted by low interest and exchange rates. Uganda’s currency affected by homosexuality law Uganda’s currency, the second-best performing in Africa this year, has recently taken a dive as a result of President Yoweri Museveni’s implementation of a harsh homosexuality law. According to the International Monetary Fund, Uganda, which relies on aid for about 20 per cent of its annual budget, may post a deficit equal to 7.1 per cent of its GDP in the fiscal year to end-June, up from an estimated 4.1 per cent gap in the previous year.

The new calculations took into account changes in production and consumption since the last time the exercise was carried out in 1990, including an added focus on communications and the movie industry. The data indicated that the economy grew to $453 billion in 2012, instead of $264 billion as measured by the World Bank for that year. South Africa's economy was at $384 billion in 2012, according to the World Bank. This increase meant that Nigeria has advanced ahead of South Africa and is now Africa's biggest economy by GDP. For ordinary Nigerians, the rebasing is likely to have little effect, but it will improve the country's balance sheet and its credit rating and promote it from being a lowincome economy. Germany’s bond rating raised Germany’s bond rating has been raised from negative to stable by Moody’s, as it expects balanced economic budgets for 2014 and 2015. The balance in budgets is due to an improvement in debt-toGDP ratio, which is down to 79 per cent from 81 per cent in 2012. Germany’s outlook has also improved, as risks that the government would have to do more to support its banks have diminished. Moody says this change reflects the stronger ability of German banks to endure shocks because of a year of reduced crisis-related losses and improved capital strength.

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They said

increase since 2008, has negatively affected various sectors of the economy, it presents an opportunity for those who have savings or investments.

A collection of insights from industry leaders over the last month

“It is somewhat counter-intuitive that South Africa has an increasing Dollar millionaire population against the backdrop of a faltering global economy.” Director of Sanlam Private Investments (SPI), Shane Tremeer, says that despite the global financial meltdown, the domestic economy has powered ahead and local entrepreneurs have made fortunes by being active in the right sectors at the right time. “Valuations are cheap relative to emerging markets and the consumer boom is leading to greater demand, which is also extending to infrastructure development, construction and leisure. Improving operating environments across the continent means investors now have access to previously unobtainable opportunities and greater investor protection.” Head of Ashburton Investments, Boshoff Grobler, comments on the launch of its new Ashburton Africa Equity Opportunities Fund. “Standard Bank is finally in a position to release excess capital post the major restructuring of its international business.”

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Banking analyst of RMB, Greg Saffy, comments that the bank could possibly pay a special dividend of as much as R7 billion after selling many of its overseas assets. “The talk from the retailers is that we will see some fairly significant price increases coming through over the next couple of months and the number that is being banged around for inflation is in the high single digits.” Economist of Vunani Securities, Ilke van Zyl, says that South Africa's hard-pressed consumers will face higher food prices over the next few months as factors like Rand weakness and poor harvests affect food inflation. “Investors are likely to benefit from a rate hike as it influences the interest they could earn on their savings. This is the perfect time to revisit one’s investment strategy with a view of unlocking potentially far better returns.” Head of FNB Commercial Investments, Elize Giese, comments that while the 50 basis-points rate hike, the first interest rate

“Stocks in Europe offered extraordinary value over the past two years. Once investors began to realise that Europe wasn’t about to implode, stocks rerated tremendously.” Wilhelm Hertzog, one of the portfolio managers of RECM’s award-winning Global Fund, discussing why, as a result of the rerating of European stocks during 2013, the value-based asset manager now has to hunt in more obscure places to find cheap assets. “In the UK where they have similar regulations, the number of advisers decreased but the guys [who were] left were a lot more successful as they were more qualified, so they were able to get more clients.” Chief executive officer of Momentum Retail, Mark van der Watt, says that although financial advisers have been subjected to increasing regulation and pressure to meet higher professional standards, the new regulations have resulted in better qualified, more professional financial advisers. “There were numerous speculators who saw Africa as a way to make a quick buck, but the investor base is now made up almost entirely of long-term investors such as sovereign wealth funds and conservative private wealth managers. The easy money has gone out the door.” Manager of African Alliance Pioneer Fund, Nic Piquito, says the nature of the investor in African funds has changed over the past few years. “So Lamberti has to gear up the company and prepare it for a downturn.” Portfolio manager of Momentum Wealth, Wayne McCurrie, says that although Imperial is a great company, newly elected CE Mark Lamberti should prepare the company for an economic downturn as a result of the consumer cycle turning against them, which could last up to two years. “For the manipulator, this means the possibility of losing that flashy car and big-screen TV (movable assets), shares in a company (incorporeal assets) or that mansion in Camps Bay (immovable assets), if these assets are attached and sold in execution.” Senior forensic investigator at the Financial Services Board (FSB) Directorate of Market Abuse, Shaeeda Hoosen, says the board has fined market manipulators with more than R24 million over the past six years, and warns it will continue to penalise offenders going forward.

You said

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

@ConanOBrien: “Forbes released the list of the richest billionaires. Kinda makes you feel bad for the poorest billionaires.” Conan O’Brien – The voice of the people. Sorry, people.

@MThompsonCNBC: “Warren Buffett to CNBC on bitcoin: ‘The idea it has some huge intrinsic value is a joke’.” Mary Thompson – Reporter for CNBC.

@jackschwager: “Trading is probably the world’s only profession in which a rank amateur has a 50-50 chance of being right in the beginning.” Jack Schwager – Author of Market Wizard series and Schwager on Futures series.

@ObsoleteDogma: “Former Bear Stearns chief economist David Malpass thinks the Fed borrows from banks to do QE. In other news, Bear Stearns doesn’t exist now.” Matt O’Brien – Senior Associate Editor at The Atlantic covering business and economics.

@carlvdberg: “Advisors! Stop selling products. Sell solutions.” Carl van der Berg – Financial consultant with @alexforbes Futurist, behaviouralist and passionate about unique retirement solutions. There’s always a way to do something better.

@BBCLerato: “Apparently income tax accounts for 32% of budget. About 13 million people registered as taxpayers, only 6 million liable to pay. Unfair burden.” Lerato Mbele – Presenter of Africa Business Report on BBC World News. Views expressed are my own. “Money won’t create success, it’s the freedom to make it that will.” – Mandela.

@deonopperman6: “The key phrases of economics are ‘it depends’ & ‘all things being equal’, which can be translated as: No-one knows & neither do I.” Deon Opperman – Playwright, entrepreneur, despise welfare-warfare imperialist statism, cryptocurrency believer.

32,4% – when the wizard is outdone by the sheep something is out of line...” Mark Barnes

@jbarro: “If you are claiming to know that an asset price is obviously and systematically wrong, and you’re not filthy rich, stop.” Josh Barro – National correspondent for The Upshot, coming this spring to The New York Times. MSNBC contributor. I’ve never eaten at a Taco Bell.

@DougKass: “Memo from many Wall Street strategists this morning in my inbox: ‘The market is ‘oversold’.’ Thanks, Captain Obvious.” Douglas Kass

@mark_barnes56: “Buffet does 18,2%, S&P 500 does

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And now for something completely different

It’s a dog’s life Lifestyles of the rich and famous… animals.

hroughout history, kings and queens, business moguls and even Hollywood icons have expressed their love for their family pets by splashing out on extravagant gifts and accessories. While the average person would not spend $31 000 on a Hello Kitty crystal dog house for their furry friend, it is not that unusual for the super wealthy to spend more on their pets than most people make in a year. This can range from designer clothes and diamond collars to luxurious beds, accessories or even pet trusts. As monetary settlements known as pet trusts grow in popularity, animal companions of the wealthy can continue living large even after their owners are long gone. There is a rising trend of wealthy individuals seeing their pets as family members, especially if they do not have any children of their own. The most notable example of this is Gunther IV, an Alsatian who is considered to be one of the most pampered pets in the world. In 1992, a German Countess by the name of Karlotta Liebenstein left her fortune of $372 million to her pet dog, Gunther III. However, the untimely death of Gunther III meant that his son Gunther IV inherited all of this impressive fortune.

Amour Amour 52-carat diamond dog collar – $3.2 million Dubbed ‘the Bugatti of dog collars’, the Amour Amour crocodile leather and platinum dog collar is embellished with 1 600 handset diamonds. The collar has a seven-carat centrepiece and a chandelier design, as well as 18-carat white gold.

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almost tripled in the last few years. The dog owns several homes, including Madonna’s former Miami mansion. He also has a villa in the Bahamas complete with butler. The Alsatian once successfully bid for a very rare white truffle in 2001. The canine managed to snap it up for $1 800 via a bid placed by his caretaker, Maurizio Dial. Gunther IV’s luxurious days are set to continue well into the future since the enormous wealth he has inherited is increasing at a constant rate every passing year. If leaving your wealth to your furry family members may not be your first choice for investing your money, it is hard to ignore the attractiveness of this market as an alternative investment. The demand for luxury pet products has already lured companies and even celebrities into the business. Among them Martha Stewart, Ellen DeGeneres, Fisher-Price and the General Nutrition Centre, which now offers health supplements for pets.

Wise and calculative investments made by Karlotta and her aides have ensured that the value of the multi-million Dollar pet trust has

According to the American Pets Products Association, pet owners in the US spent $55.72 billion on their pets in 2013 alone. The organisation projects that this figure will rise to $58.51 billion in 2014. With a rising middle class globally, the luxury pet market will continue to grow at an exponential rate.

Dog tiara – $4.3 million

Custom built dog house – $417 000

Designed by Riwin Jirapolsek for his 15-year-old male Maltese, Kanune, the tiara is adorned with 250 carats of diamonds and emeralds. The jewel encrusted piece was set in titanium.

The most expensive dog house ever created was designed by architect Andy Ramus and ran up a bill of $417 000 – more than the cost of many full-sized houses. The kennel is equipped with temperature-controlled beds, food and water dispensers, a webcam to allow around-the-clock dog monitoring, and a 52-inch plasma television.

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10014202JB/E

I INVESTED IN MY CHILD HOW SUE PILLAY* GAVE HER SON WINGS

“As a parent, my child is the most important part of my life. When he was born, I decided to give him the best possible opportunities, and started investing R500 a month in the Old Mutual Balanced Fund. 18 years later, his investment has grown to R606, 201 (13.7% return p.a.) and I’m able to send him to the university of his choice. It feels good not having to worry about my child’s education because the Old Mutual Investment Group has taken care of everything.” GREAT THINGS HAPPEN TOMORROW WHEN YOU START INVESTING TODAY Make Old Mutual Investment Group your investment partner today. Contact your Old Mutual Financial Adviser or Broker, call 0860 INVEST (468378) or visit www.omut.co.za/mychild

Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium- to long-term investments. Past performance is no indication of future growth. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to 00 investsa the management of the portfolio. Premium grew in line with inflation at 6%.*Based on average customer experience but actual investment returns.