INVESTSA Magazine May 2015 by COSA Media

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SMEs:

low-hanging fruit to cure SA’s economic woes?

Tourism: a warm welcome for the foreign invasion

An imperfect storm – the SARB’s dilemma

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SMEs:

low-hanging fruit to cure SA’s economic woes?

Tourism: a warm welcome for the foreign invasion

An imperfect storm – the SARB’s dilemma

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CONTENTS 06

Think small, go big

A welcome foreign invasion

Hedge fund regulation implementation poses challenges

Alternative investments and hedge funds

Momentum Risk summit

Exchange traded products industry review: First quarter 2015

Testing timeS for SA economy

African success story a lifeline to South African growth performance

GENERATING INCOME FUND RETURNS IN A WORLD OF COMPRESSED YIELDS

SA’s Q1 buoyant bonds and equities

One for the ladies

Grow with the flow

News

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From

the editor Volatility. A horrible word; a terrible thing. Yet investors have to live with it. It has been part of the JSE for a long time. Long gone are those days when the market went up, or down, in a steady line. Nowadays the market fluctuates, to varying degrees, every day. But volatility is not necessarily a bad thing. If you study the trend lines closely and can anticipate the dips and peaks, there are great buying opportunities. Some companies lend themselves to volatility. The tricky, risky part is getting the timing right. Volatility is either the subject, or key theme, in well over half the articles in this issue. To mention but one, Linda Eedes from RECM looks at finding value in the ‘market dogs’. I like market dogs, the shares I buy most often. Some turn into winning greyhounds, others remain dogs. I love real dogs too. I have owned and had dogs my whole life. One thing I’ve learnt from dogs is that they are far more intelligent than humans. They put up with us, for a bit of food, with good grace and kindness. You wonder who owns whom? Chris Hart from Investment Solutions writes his usual impeccable column. One point he makes, though it’s not the main point of his column, is that for various reasons South Africans will have to tighten their belts because they are going to get thinner. Arguably, that’s a good thing – at least for most people. Wallis Simpson, the American wife of Edward, Duke of Windsor and formerly King Edward VIII of Great Britain, is the woman for whom the English monarch gave up his crown, abdicating on 11 December 1936. She is alleged to have coined the phrase, ‘You can never be too rich or too thin’. I shan’t comment on her statement at great length, as my area of expertise is financial rather than in the healthcare arena, other than to trust that this issue, as always, gives you excellent guidance on assisting your clients with the former. Yours in slimness and enjoy a fat read.

Shaun Harris

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

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

Copyright COSA Communications Pty (Ltd) 2015, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.

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go big Think small,

The acronym SME â&#x20AC;&#x201C; essentially referring to small to medium-sized enterprises â&#x20AC;&#x201C; is now one of the most bandied about terms in the local business lexicon.

By Marc Hasenfuss

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Finance Minister Nhlanhla Nene emphasised the unlocking of the potential of small enterprises, and indicated that, over the medium term, around R3.5 billion would be spent on mentoring and training support to small businesses. Banking group Absa estimated recently that small businesses now employ 60 per cent of South Africa’s ‘employable’ population from just 18 per cent in the late nineties.

industrialists, these emerging industrialists will be expected to sustain small business creation by sourcing goods and services from a variety of fledgling businesses.

This is understandable, as many former employees have needed to create their own work as employment levels dropped as industrial giants – perhaps protected against foreign competition in pre-democratic South Africa – scaled down operations markedly in the last 15 years. The last few years have also seen the mining sector subdued with large international mining firms not committing to new projects with any vigour – a development that won’t be helped by the prolonged strikes and unreliable power supply experienced recently.

And the public sector appears to be playing ball as well. At the time of writing, automotive giant Nissan had launched a new automotive incubation centre, aimed at increasing the number of SMEs supplying Nissan with vehicle components.

It seems the government – with one weary eye on sluggish growth levels – has cottoned on to the potential of SMEs as employment dynamos and future tax generators. In this regard, it has shown some real determination, perhaps best illustrated in the establishment of a Small Business Ministry – even if the jury is still out on the effectiveness of this recent initiative. But the harsh truth is that in South Africa – with its high unemployment rates and sluggish growth prospects, SMEs must rank near the top of the growth and development agenda. Indeed, the government seems particularly determined to create an economic environment conducive to launching black industrialists. A Black Industrialists Indaba was convened in March – hopefully an initiative that helped secure some traction for the government’s key developmental objectives of rapid industrialisation, skills development and job creation.

n essence, a vibrant hub of SMEs is regarded as somewhat of a panacea to many of South Africa’s economic ills, although creating an environment to nurture small business ambitions is no easy task (not when the primary producer of power is often on the blink). But let’s make no mistake: SMEs are certainly finding enough traction in South Africa.

More tangibly, the Department of Trade and Industry has thrown its considerable weight behind this case by offering to provide affordable loans and grants topping R1 billion. Business Day reported that funding was expected to attract an estimated R10 to R20 billion from other funders like the Industrial Development Corporation (IDC), the National Empowerment Fund (NEF) and banks. While this initiative appears to be aimed at creating large and competitive black

In fact, small business development has become so critical that SME support is one of the government’s nine strategic imperatives for growth and development. In the 2015 Budget speech, Finance Minister Nhlanhla Nene emphasised the unlocking of the potential of small enterprises, and indicated that, over the medium term, around R3.5 billion would be spent on mentoring and training support to small businesses. In terms of providing an enabling environment for emerging entrepreneurs, the Davis Committee on tax recommended a more generous tax regime for businesses with a turnover below R1 million a year. These are key concessions. Qualifying businesses with a turnover below R335 000 a year will pay no tax, and the maximum rate is reduced from six per cent to just three per cent. To complement this relief, the SA Revenue Services is establishing small business desks in its revenue offices to help small businesses in complying with tax requirements. While the state and the public sector can do their level best to support small business development, there is a ‘fear of failure factor’ hanging over the industry. Minister of Trade and Industry Rob Davies recently disclosed that five out of every seven local start-ups fizzled in their first year. Banking giant Absa quoted a failure rate of 63 per cent. Unfortunately, this is higher than the international average failure rate of one out of two. There are a variety of reasons for failure ranging from something as basic as a lack of business acumen to plain old

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bad luck. But repeated small business flaws include poor management, overambitious growth strategies and a lack of financial knowledge. A common thread in the ‘failure narrative’ is, without a doubt, the paucity of funding available to entrepreneurs. Banks, of course, will hesitate to lend to businesses sans track records or enterprises without tangible assets that can be pitched as security. What’s more, when a business enters a rapid growth phase, cash flows can be irregular or delayed, and this may be the critical juncture when a small business might be unable to raise bridging finance. Entities like Business Partners – a small business funder backed by investment giant Remgro and other big businesses – do play a key role in specialising in the intricacies of entrepreneurial funding. But at the end of the day, Business Partners is a self-sustaining organisation, and it cannot afford to back ventures that carry a risk of fizzling. In this way, it might well be one of the most reliable gauges of SME activity, and its annual reports are always worth scanning for telling commentary. Interestingly, the Business Partners latest interim report notes that the macroeconomic environment continued to impact negatively on SMEs’ business confidence, contributing to a very challenging investment environment. Still, Business Partners is keeping SMEs churning. In the six months to endSeptember, the company funded 191 investments to the tune of R507 million – only slightly less than the corresponding period in 2013, when 198 investments worth R531 million were approved. Investments advanced, however, dropped by a third to R247 million. But slightly more heartening was that commitments

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to investments approved but not yet advanced increased by 20 per cent to R517 million. Business Partners anticipated that disbursements during the latter half of the financial year would exceed the level disbursed in the first half of the financial year. In addition, the credit risk in the investment portfolio improved, with Business Partners pointing out that investments with repayment obligations in default decreased from 20.8 per cent of the investment portfolio a year ago to 19 per cent of the portfolio in September 2014. Still, Business Partners signalled that current uncertainties in the SME lending and investment environment meant that achieving the R890 million target for new investments during the financial year ending March 2015 would be a challenge. The bottom line is that if the government’s small business thrust in creating a sustainable growth platform for SMEs seems promising, then investors might hope to jump on this bandwagon as early as possible. Unfortunately investing in small businesses on the JSE is difficult because most listed businesses have track records and are of a certain size. Investing in private SMEs is another story – the investor is essentially divorced from reassuring stock exchange regulations (like filing results twice a year and hosting AGMs), and must rely purely on trusting the owner-manager. But occasionally one is afforded the opportunity to buy into what could, at

a stretch, be construed as a small business on the JSE. Older readers may remember that highly successful plastics packaging company Bowler Metcalf listed in the late eighties as a micro-cap business with a tiny turnover. A more recent example might be logistics group Santova. Currently there are not too many small business options for investors on the JSE, although one might include companies like media group Moneyweb, tomatosauce maker AH-vest and beauty clinic franchisor Imbalie as small businesses. Venture capital specialist African Dawn also offers an entry into startup companies, including funding and advisory services to start-up projects. Possibly the biggest opportunity might lie in having more such small business funding/investment companies, which could conceivably take the form of new empowerment groupings or offshoots from well capitalised existing BEE counters.

PLACING YOUR OWN RETIREMENT INVESTMENT ASSETS? PLACE YOUR BETS. We’ve long been against the ‘member choice’ option for retirement savings. That’s because individuals who choose where and how to place their own investments invariably make wrong decisions. A recent survey, for example, shows that around 65% of people checked their returns less than twice a year. Seriously, would you hire an asset manager who did that? To find out how FedGroup can help, speak to your broker, or visit www.fedgroup.co.za.

@FedGroup

/fedgroup

011 305 2300

FedGroup is an authorised financial services provider

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A welcome

foreign invasion By Shaun Harris

Foreign tourism to South Africa has taken off, making the country one of the top destinations in the world.

ourism has become one of South Africa’s most important and fastestgrowing industries. The climate, scenery, wildlife and top-notch accommodation attract a growing number of international tourists. And it has become an important contributor to the national economy: more lucrative than mining, which was the backbone of the economy ten years ago. In 2009, tourism contributed R189.4 billion to the economy, in other words 7.9 per cent of gross domestic product (GDP). This rose to 8.8 per cent in 2012. The government plans to increase the contribution to R499 billion by 2020 and has put a number of tourism initiatives in place.

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A large source of this tourism income comes from international visitors, a number which is also increasing. There were nearly 10 million foreign arrivals in 2013, according to the Department of Tourism, a 10.5 percent increase over 2012. The average annual growth rate between 2011 and 2013 is 7.4 per cent, above the global average of 4.5 per cent over the same period. Foreign visitors spend up to three times more when touring than domestic tourists, and it’s in foreign currency. The bulk of tourism is still domestic in South Africa, about 70 per cent. But international tourists contribute as much money in their travels. Much of this comes from business travellers, who often convert their business travel to leisure.

Much of the incentive for foreign tourists is the weaker rand. It offers them more affordable travel when they convert their foreign currency to rands. The opposite applies to South Africans wanting to travel overseas, though they can use the liberalised offshore allowances to move rands offshore and convert them to a foreign currency before travelling. The weaker rand makes it cheaper for foreign visitors to buy holiday packages and book safaris, always popular, shop and eat out, stay in hotels and rent cars. “The weak rand should lend support to . . . foreign tourism into South Africa,” says Riaan le Roux, head of economic research at Old Mutual.

The Tourism Indaba is being held in Durban from 9 to 11 May. First held in Durban in 2006, this yearâ&#x20AC;&#x2122;s Indaba has already attracted more than 400 exhibitors and service providers. Some of the top companies attending include the Tanzania Tourist Board, The Blue Train, Tourism KZN, Hilton Worldwide, Tsogo Sun and British Airways.

nearly six million foreign arrivals in South Africa, an average increase of 17.1 per cent over the same period in 2009. With the World Cup being held in June and July, arrivals from the Americas accelerated to a 91.3 per cent increase over the second quarter of the year. There were large spin-offs for business, from hotels to restaurants and car hire. South Africa has now applied to hold the Commonwealth Games in Durban in 2022. The UK remains the largest source of foreign visitors to South Africa though arrivals grew by only one per cent to 442 523 arrivals in 2013, the latest year for official foreign tourist figures. But there was strong growth from other countries, notably Europe, where foreign visitors increased by seven per cent year-on-year to 1 494 978. A total of 304 090 visitors from Germany arrived in 2013, making it South Africaâ&#x20AC;&#x2122;s third-largest tourist market. Arrivals from the rest of Africa is the second largest source of foreign visitors, while China, with 151 847 arrivals in 2013, is the fourth largest market. French visitors are in fifth place, with 134 840 arrivals in 2013. Even visitors from Australasia are growing, with 148 660 arrivals.

Sports tourism is a big draw card for foreign visitors. South Africa has always been interested in sport and has some top class international sports teams, notably in rugby and cricket. But sports fans are global, so any large events attract foreign visitors. This is aided by a number of top sports stadia around the country. There is a long list of successful sports events that have been held in South Africa. Think of the Rugby World Cup in 1995, where the Springboks emerged victorious, as well as the Cricket World Cup in 2003. But the biggest was the Fifa Football World Cup in 2010, which sparked a tourism boom in South Africa. In the first three-quarters of 2010 there were

Business attracts a lot of foreign visitors, many of whom convert their business trips to leisure or return for leisure trips over the following years, according to the National Department of Tourism. It says that business travellers spend significantly more than their leisure counterparts, on average three times more, when visiting the country. South Africa is popular for business conventions because of the many high-class conference and convention centres, although business travellers often prefer to attend a conference arranged at a game park. With some of the top rated golf courses in the world, the sport is an added attraction for business travellers. The National Conventions Bureau has been set up to secure more international business conferences and South Africa is rated 37th out of the top 100 business destinations in the world, according to the International Congress and Convention Association.

increasing number of international airlines now have more weekly flights in and out of the country, aided by upgraded airports, and in the case of Durban, a new airport. The downside here is the bankrupt national carrier, South African Airways, which has cancelled some of its international flights. However, there are many options available for travellers wanting to fly into or out of South Africa. But while tourism is a thriving growth sector of the economy, more needs to be done. Former deputy president Phumzile Mlambo-Ngcuka, who is very involved in promoting tourism, says the industry needs to increase volumes of both local and foreign tourists, increase tourist spending and improve the geographic spread within the country beyond the three provinces that attract the most tourists, KwaZulu-Natal, Gauteng and the Western Cape. She also says that while one job is created for every 12 foreign arrivals in South Africa, some other countries create one job for every eight foreign arrivals, and the tourism industry needs to address this. All the provinces rely on tourism as an important generator of income and jobs, and the mix between business and leisure visitors is fairly evenly spread. Johannesburg remains top for business conferences though Cape Town and Durban are increasingly attracting business travellers as well. And there is a strong move by the government to get more tourism to the rural areas of the country, so that the local communities can earn some of the money.

Foreign visitors spend up to three times more when touring than domestic tourists, and itâ&#x20AC;&#x2122;s in foreign currency.

The government has various plans in place to try and grow tourism. One is e-visas, regional visa schemes and visa waiver programmes to allow travellers to move more freely and efficiently around the country. Tourism service excellence standards have been devised and implemented by the SA Bureau of Standards and the National Department of Tourism. Another key driver of tourism is the liberalisation of South African airspace. An

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Hedge fund regulation implementation poses challenges

Hedge fund regulations may have been passed – but implementing the regulations will take time.

outh African hedge fund regulations pave the way for more transparency, better investor protection and potentially more inflows into what is currently a very small hedge fund industry. Hedge funds will now officially be regulated under CISCA – the Collective Investments Schemes Control Act, where they will have to be formally registered as collective investment schemes. How will the regulations take effect practically? The new regulations are fairly onerous with specific requirements: how will hedge funds meet these, set up the required structures and lodge applications to comply with CISCA? In this exciting and interesting time for the industry, there are some challenges ahead. While we know what the regulations state, as

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an industry we need to work out how best to transition and comply.

structures are recognised by CISCA, as is a traditional collective investment scheme.

The regulations allow for two types of hedge funds – retail investor hedge funds (RIHF) and qualified investor hedge funds (QIHF), although we believe that managers will also have the freedom to manage segregated mandates for single clients outside the regulations, using their Category II and IIA FAIS licenses, as is the case in the collective investment scheme space as we know it today.

A big change for hedge funds will, however, be the establishment of a Manco, which is a regulatory requirement. Hedge fund managers may choose to set up a Manco themselves or team up with an existing one. Hedge fund managers tend to operate in the boutique space, where they are focused on staying nimble by managing funds and outsourcing most, if not all, non-core functions.

Will new structures need to be formed? If a hedge fund has been set up as an ‘en commandite’1 partnership, as many of them are, this won’t need to change as these

They may not wish to enter the Manco space by registering their own Manco and dealing with all the administrative complexity. Instead, they could co-name with an existing Manco, which would

Alternative investment

handle this for them. We have already seen some hedge fund managers moving in this direction. The role of a Manco in the retail space seems fairly clear cut, but not so in the qualified space. One of the questions the industry has is what the Manco needs to look like for qualified investor hedge funds. To my mind, the regulations around Mancos speak mainly to retail investor hedge funds. I am not sure if the same requirements will apply to qualified hedge funds that have less restrictive regulations. Do we co-name with the same Manco for retail and qualified hedge funds, or do we set up our own ‘Manco-lite’, if in fact this exists in the qualified space, and if so, what does the ‘Manco-lite’ need to have other than a majority of independent directors?

in South Africa are actually conservatively managed and well diversified, use moderate leverage and serve to reduce investment risk. We want investors to see this. Hedge funds have been widely misunderstood, and there is an education gap that needs to be filled. I suspect this may take some time, though, and that the big inflows into the industry may only happen over the medium to longer term. My view is further cemented by the fact that CISCA currently does not recognise or permit allocations to hedge funds by existing CISs. This means that until CISCA is changed, which will no doubt take some time, a CIS in securities fund of fund, as an example, cannot invest a hedge fund, whether it’s a retail or qualified hedge fund.

The need for caution Timing is another question many have raised – initially six and twelve-month deadlines were set – but these look likely to be extended.

1. En commandite: a form of partnership in which there are one or more silent partners who contribute funds but were liable originally only for the capital invested and later only according to a registered scheme of liability (www.merriam-webster.com)

We are setting a precedent. This is a time everyone wants to act with caution and fully understand what is required, how it will happen, and what the effects and consequences will be. We need to be careful when we follow this process, how we interpret the regulations and how we complete the applications. This is a very positive time for the industry – but it is new – and with that comes some uncertainty. The regulations will promote the integrity of the industry. CISCA offers more transparency, better investor protection and will show the investing public that the vast majority of hedge funds

Marc Preston, chief operating officer, Laurium Capital

Laurium Flexible Prescient Fund. Boutique manager performance at its best.

www.lauriumcapital.com

Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. CIS prices are calculated on a net asset basis, which is the total value of all the assets in the portfolio including any income accruals and less any permissible deductions (brokerage, STT, VAT, auditor’s fees, bank charges, trustee and custodian fees and the annual management fee) from the portfolio divided by the number of participatory interests (units) in issue. Forward pricing is used. The Fund’s Total Expense Ratio (TER) reflects the percentage of the average Net Asset Value (NAV) of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TER’s. During the phase in period TER’s do not include information gathered over a full year. The Manager retains full legal responsibility for any third-party-named portfolio. Where foreign securities are included in a portfolio there may be potential constraints on liquidity and the repatriation of funds, macroeconomic risks, political risks, foreign exchange risks, tax risks, settlement risks; and potential limitations on the availability of market information. The investor acknowledges the inherent risk associated with the selected investments and that there are no guarantees. Laurium Capital (Pty) Limited is an Authorised Financial Service Provider (FSP No.34142).

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Alternative investments

Alternative investments and

hedge funds

What does the classification of hedge funds as a collective investment scheme mean? The declaration by the Minister of Finance on 25 February 2015 that hedge funds will now be classified as a collective investment scheme places the oversight and supervision of these financial services products under the jurisdiction of the Financial Services Board (FSB). This is a very positive move, for both investors and for the local hedge fund industry, as it now means that South Africa will have one of the most extensive regulations of a hedge fund industry in the world.

Do you think this will change the perception of hedge funds for investors? We believe that by subjecting hedge funds to ongoing regulation, investors would gain a far greater sense of confidence about using hedge funds as an investment product, resulting in great potential upswing for growth in the hedge fund industry.

What does this mean for existing hedge funds? Finance Minister Nhlanhla Nene has given the hedge fund industry six months from 1 April 2015 to apply for registration as a hedge fund in accordance with the Collective Investment Schemes Act. According to the declaration, to be registered each hedge fund must now follow a prescribed set of regulations including providing a deed which sets out, inter alia, its investment policy, how its assets are valued and the frequency on which they will be valued. The assets must also be valued independently, and if not, then the valuation must be independently verified.

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What will happen to a hedge fund if it does not register in accordance with the Act in the next six months? Should any hedge fund fail to register by 30 September 2015, they will be operating illegally, and will as a consequence be subject to regulatory and enforcement action by the FSB.

What does this mean for the FSB in terms of how it will regulate these funds? Given the complex nature of hedge funds, we will require a new skill set to ensure their effective oversight, a challenge we are embracing. As a consequence, a new department has been created for hedge funds and a head of department hired, who is currently in the process of employing six staff members.

It is interesting to note that private pension funds were granted an opportunity to increase the level of their investments into hedge funds to 10 per cent from 2.5 per cent in 2011. However, this didnâ&#x20AC;&#x2122;t result in a huge takeup, as the market still perceived hedge funds to be too risky as a result of the lack of supervision and regulation. Greater diversity will thus be introduced to pension fund investments should the low uptake be reversed as a result of this regulatory initiative. We are confident that the inclusion of hedge funds under the Act and the supervision of the FSB will increase confidence in the hedge fund industry and lead to further growth.

What impact do you think this regulation will have on the SA hedge fund industry? The South African hedge fund industry is currently estimated to be worth more than R40 billion, which is relatively small compared to the global hedge fund industry, which has an estimated $2.7 trillion in assets under management. However, we believe that the increased regulation of this asset class is likely to give it more credibility to retail and institutional investors and we would, therefore, expect the local industry to grow further from its current base.

Jurgen Boyd, deputy executive officer: collective investment schemes at the Financial Services Board

Asset management

Investing in an environment of

rising interest rates and volatility Global monetary policy will remain a focal point for 2015, with investors watching closely for signs of shifts by central banks.

We have material exposure to consumer staples, and we also see attractive opportunities in the technology area. Our key holdings include NestlĂŠ, Moody's, and Microsoft. These are companies with good business models we believe the market has underpriced. We also have exposure to tobacco companies with good dividends and where dividend growth has been strong.

heap money from quantitative easing (QE) has long been blamed as a key factor for the sustained risk asset rally. Markets have been driven by expectations and sentiment, and hence many of the traditional fundamental valuation rules no longer seem to apply. The US economy is showing stronger signs of recovery and the market now expects a move towards normalisation of monetary policy, though the timing of interest rate hikes remains uncertain, and this will keep investors guessing.

We also see better value in nominal bonds and the local bond component of our portfolio has delivered strongly so far. Longer duration bonds have performed far better than cash and, at times, better than the overall equity market. We still find the best value at the longer end of the curve. We believe the credit instruments on offer in the market do not offer sufficient yield and so we are instead taking advantage of the yields available on government bonds. Inflation-linked bonds remain an important diversifier.

However, while the market believes we may be at the start of a more normal interest rate environment, we have not seen the back of market engineering from central banks. The uneven global economic recovery has been the driving force in the divergence of economic policy. In contrast to expectations of the US Federal Reserve (Fed) tightening, the European Central Bank has loosened policy in order to counter weak Eurozone growth and falling inflation. While central banks keep on pumping money into the financial system, stocks may rally, but the jitteriness of markets suggests a growing appreciation of the risks. This volatility has created a challenging investment environment. Equity valuations have become demanding and given the aforementioned conditions, we believe it is best to adopt a cautious positioning in our portfolios. As quality investors, we favour companies that are relatively independent of economic gyrations and are able to consistently generate cash from their operations. In this way, we avoid exposure to areas of the market that may be deemed overly risky or speculative. We are reticent to invest in some of the more capital-intensive parts of the market

and are not interested in highly leveraged businesses. Rather, we prefer to invest in the type of stocks that have proved to be resilient. These companies typically have surplus cash and little debt, hence higher rates may actually be somewhat accretive, and policy normalisation may encourage further capital expenditure for expansion. South African stocks look rich (especially those trading on one hundred times historic earnings), so we have limited our exposure to select equities, favouring those stocks where earnings are predominantly generated offshore. We see the best opportunities in high-quality developed market equities, and we are making full use of our offshore allocation.

In these uncertain conditions, we believe that investors should be cautiously positioned. Our portfolios remain well diversified with multiple opportunities to generate inflation-beating returns.

Sumesh Chetty, portfolio manager, Investec Asset Management

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Asset management

Asset management in the current

economic climate G

lobal and local equity markets are looking distinctly pricey at the overall level. The South African equity market, in particular, has exhibited meteoric price rises since the lows following the financial crisis. And so we find ourselves, as we did in 2008, looking back at almost six years of bull market returns, and wondering how solid the ground is beneath us.

Chart 1: FTSE/JSE Resource 10 Index PB ratio relative to FTSE/JSE Industrial 25 Index PB ratio

In delving beneath the market’s surface, however, there are always risks to be avoided (assets trading well above what they’re worth) and opportunities to be taken advantage of (assets trading significantly below what they’re worth). As bottomup value investors, our job is to value businesses on a case-by-case basis, compare these values to the current market prices, and invest in those trading at a significant discount (30 per cent or more) to the fair value we’ve calculated. Unfortunately, the businesses offering good value are not the high quality, multinational industrials the market currently loves, but the so-called market ‘dogs’ – mining companies and other cyclical businesses going through incredibly tough times, which will not last forever, but which are trading at very low prices as a result. It is in these market environments that a value investor’s temperament and mettle are tested – particularly when cheap stocks get even cheaper, and overpriced stocks continue to nose-bleed levels.

Source: Bloomberg, RECM

commodity supercycle bubble in early 2008, the resources sector was trading at about twice the historical average relative valuation level to the industrial sector. Today industrials are trading at about three times the historical average valuation level relative to the resources sector.

The current dislocation between the industrial and resource sectors in South Africa is extraordinary, and we are positioned to take advantage of the return potential this presents, while avoiding the obvious risks it highlights. Chart 1 shows the priceto-book (PB) ratio of the resources sector relative to the industrial sector in South Africa. When the line is at high levels, it shows the resources sector as being expensive relative to industrials, and when the line is at low levels, it indicates that the resources sector is cheap relative to industrials.

What this means is that industrials are more expensive today in relative terms than the resources sector was when it was experiencing the greatest valuation bubble since the mid1980s. Considering the destruction of capital that followed the over-valuation of resources stocks from those highs, we continue to fervently avoid highly over-priced industrials and are investing in resources with the same discipline and vigour with which we avoided them in 2008.

On the one hand, the chart shows how the market has continued to drive the relative rating of the resources sector lower from already very low levels for the past three years. On the other hand, it shows how, at the height of the

This approach to investing may seem sensible, but there’s a nasty short-term by-product that comes along with it – you have to endure shortterm price volatility and often temporary losses. But we know that if we do our research in such a

16 investsa

manner that it gives us a high degree of conviction in how much a business is worth, we’ll probably be able to sit through the discomfort of short-term price movements, and even build our position further if prices decline. Ultimately, the significant long-term gains that market inefficiencies dangle as carrots are only available to those investors able to endure the stick on the other side.

Linda Eedes, analyst, RECM

Barometer Baro

HoT

noT

SALARIES RISE MoRE THAN 5 PER CENT The January 2015 BankservAfrica Disposable Salary Index (BDSI) revealed that disposable salaries have increased by 5.6 per cent in the last year. The average banked salary for January 2015 is R12 286, up from R11 637 in January 2014. It was reported that the year-on-year increase indicates formal jobs are receiving meaningful increases above estimated inflation.

INvESTMENT PLAN To BooST SA TouRISM SECToR South Africa’s Tourism Minister, Derek Hanekom, announced the launch of the Tourism Incentive Programme in March, a series of new incentives to assist tourism establishments grow their businesses and develop the country’s tourism attractions. This will be an investment of R557 million over the medium term. It was reported that tourism supports an estimated 1.4 million direct and indirect jobs and contributes 9.5 per cent of South Africa’s total GDP, and that the sector has a supply chain that extends deep into the economy.

NIgERIAN ECoNoMy PLuNgES Africa’s largest economy was downgraded one level to B+ by Standard & Poor’s, four levels below investment grade due to falling oil prices and rising political risks. Nigeria’s growth forecast for 2015 was also cut by the International Monetary Fund (IMF) from 6.3 per cent last year, to 4.8 per cent this year.

ESkoM CREDIT RATINg REACHES JuNk STATuS

INCREASE IN AFRICAN uLTRA HNWIs The 2015 Wealth Report, compiled by Knight Frank with support from Standard Bank Wealth and Investment, revealed that over the next 10 years the number of ultra high net worth individuals in Africa, those with at least $30 million in assets, is expected to increase by 59 per cent. This is stronger than the projected global growth of 34 per cent.

s y a w Side

The suspension of four of Eskom’s senior executives has led Standard & Poor’s to downgrade the utility company’s credit rating of BBB- to junk status. The ratings agency’s dwindling confidence is also as a result of Eskom’s operating performance not yet stabilising due to rising costs and the very tight generation capacity margins in South Africa.

ECoNoMIC gRoWTH SLoWS IN TuRkEy ECoN Recent data from the Turkish Statistics Institute (TurkStat) showed that Turkey’s GDP slowed to 2.9 per cent in 2014, down from 4.2 per cent in 2013. The economic growth fell short of the government’s target of 3.3 per cent for the year, and was largely hampered by geopolitical developments and global market volatility.

No gRoWTH BooST FRoM RETAIL SALES Statistics SA reported that despite retail sales rising in January 2015, the growth was at a slower rate compared to the increases recorded in November and December 2014, pointing to modest consumer spending. Retail trade sales increased by 1.7 per cent in January year-on-year, after increasing by two per cent in December and 2.2 per cent in November.

InvESTsa

Risk and opportunity:

Momentum Risk Summit

2015

The outlook for 2015 is tough, but all around, there is still opportunity for advisers ready to seize opportunity. This was the key message from speakers at the recent Momentum Risk Summit, held in South Africa.

By Sarah Bassett

he two-day summit focused on life insurance-related risks and the evolution of the insurance industry in response, and offered advisers insight into how consumers interpret information and behave during tough economic times.

“The industry is tough, the economy is tough and consumers are under pressure – there is a lot of talk and concern around regulation, and there is a sense of uncertainty in this area, particularly in the risk space.”

Now in its second year, Momentum Retail CEO, Mark van der Watt, told INVESTSA that the summit and its programme are part of the drive at Momentum and MMI to put clients at the centre of their businesses.

Even so, Van der Watt suggested that there are still significant opportunities for advisers in this space. “Research from True South, commissioned by the Association for Savings and Investment South Africa (ASISA), shows that if you look at risk from an individual and group cover point of view we are only covering about 40 per cent of that risk currently, meaning there remains a gap in risk cover of 60 per cent – presenting advisers with significant opportunity.”

The purpose of the business is around financial wellness, with the prioritisation of risk needs critical to achieving this wellness.

“Death is better covered than disability at present, with significant opportunity here for advisers to close this gap and assist clients in

Local and international speakers shared thought-provoking content as a result of the changing landscape of the insurance industry.

18 investsa

managing these areas of personal risk,” he continued, adding that there is particular need for a focus on income protection over lump sum protection. Neill Müller, head of Momentum Myriad product development, highlighted the tax changes in income protection benefits and the implication of this change. Noting that while this may have an impact on demand, disability income protection products remain the most cost-effective way for clients to protect themselves from this risk. In advising clients on the change, Müller suggested that there is an opportunity for advisers to help clients reassess their cover. “When we analyse our book, 80 per cent of our clients don’t have maximum replacement cover – so there’s a big opportunity there for

with almost half the world’s population now over the age of 50. By the end of this century, England will be home to an incredible 1 million people 100 years old or older. This was according to professor of gerontology and founder of the Oxford Institute of Population Ageing, Sarah Harper. For the most educated populations, the trend is therefore towards decreasing population sizes, with the predictions for global population size now reduced from 24 billion by 2050, to 11 to 13 billion by 2050. For populations where women remain less educated, the demographic trend looks a little different. In Africa, the birth rate for women remains between four and seven children and the continent is entering a much talked of youth bulge. With aging populations all round, this bulge has the potential to be converted into what is termed a demographic dividend – a young, active and productive working population. Here, notes Harper, the critical question is whehter Africa can educate its youth population sufficiently to convert the youth bulge into a genuine dividend.

advisers to discuss this with their clients and move to increase their cover. For those few clients that are, in fact, over-insured, this is an opportunity to reduce their cover to the correct level and assess whether they are adequately covered in other areas.” Living longer, getting older The dynamics and characteristics of the global populaiton are changing, with global fertility rates dropping as increasingly educated women choose to have fewer children – so much so that two-thirds of the world is now at below the replacement levels of two children per women. At the same time, people are living longer – and these two shifts combined are seeing the global population average age get older

While life expectancy differs from country to country, the global trend is clear – people are living longer. For life insurers, the key question, says Harper, is whether or not they will healthily live for longer or whether these latter years will be characterised by ailing health and disability. “If we can keep pushing back the onset of disability to later and later years, then that is actually really good, because we have productive individuals with a short period of disability at the end of their life,” she said. She noted, however, “if longevity is going to be accompanied by increasing years in frailty and disability, then the insurance world is actually going to have to wake up to a very different picture to the one that we have at the moment.”

“I’m not saying that we are going to go back to the five per cent growth rate that we had before the recession – and there are many real challenges including the power, labour and the economic lethargy in Europe, our biggest trading partner. But our neighbours are looking strong, and the US economy is picking up and this will be good,” he noted, adding that if we can hold on until the Medupi Power Station comes fully online at last this year, along with a new influx of renewables coming online then the electricity situation will be largely sorted and there should be no reason for the constraint to drive us into recession. In the meantime, he notes that the stock exchange remains strong, that inflation is low as are interest rates and that growth of 2.5 per cent could still be possible for South Africa in 2015, with the possibility for greater growth momentum in the coming years. A further positive is that per capita income in South Africa is at an all time high at R66 000 per person per annum, making South Africa an upper middle-income country.” Other speakers at the summit included wellknown scenario planner, Chantell Ilbury, who shared insight on the flags to watch when considering the future of the country and economy, and touched on ways that advisers can use scenario thinking to assist clients in planning their own futures. Brian Gibbon, chief underwriter for Swiss Re Life and Health, shed light on the drastic changes in consumer behaviour and expectations being driven by changing access to information, increased data and instant communication.

SA: an almost positive outlook Prominent economist and academic Dr Roelof Botha painted a cautiously positive picture of South Africa’s economy, reminding us that, although the challenges are real, there are many solid reasons not to sink into total despondency.

investsa

Exchange traded products industry review:

First quarter 2015 The general state of the equities markets in South Africa was solid in the first three months of the year. Performance issues The FTSE/JSE All Share index rose by just under six per cent on a total return basis and other sectors of the local equity market performed even better, including: Financials, up by 11.15 per cent; Listed Property, up by 13.7 per cent, and the global MSCI Index, which rose by 7.3 per cent in rand terms. Other asset classes fared less well, with the SA Government Bond Index rising by under three per cent and cash returns lagging even further behind. In short, the general momentum behind the domestic equity markets remained intact, giving further support for the index tracking industry. Active investment managers looking to exploit areas of undervaluation or mispriced sectors in the market struggle in this type of environment and often have to resort to individual stock picking, with resultant increases in volatility or analytical bias working against them. The struggle to outperform the index, or any representative Beta type benchmark, is intensified. In a frantic search for Alpha, costs related to portfolio churn and the risks taken in trying to catch up with the index can affect the actual performance of portfolios drastically.

32 investsa 20

Of course, this is not just a local issue. Active investment managers are finding it increasingly difficult to outperform market indices on a global basis. A recent study by Standard & Poor’s found that around 75 per cent of active managers in the US and major global equity markets fail to outperform the main benchmark indices and this percentage gets

worse for longer time periods. The South African experience almost exactly replicates the underperformance record of active managers against the index. Much literature is now devoted to explaining this ‘underperformance phenomenon’ around the world.

Table 1 Percentage of Equity Managers Underperforming the Index

3 Year (%)

5 Year (%)

10 Year (%)

76.3%

88.7%

82.1%

73.6%

75.5%

79.2%

79.1%

77.9%

84.2%

US Equity Managers vs S&P 500 Index Global Equity Managers vs S&P Global 1200 SA Equity Managers vs FTSE/JSE All Share Index

Source: Standard & Poor’s – Year End 2014 Spiva Scorecard. Quarterly Unit Trust Survey (December 2014)

etfsa.co.za

Table 2

etfSA.co.za Monthly Performance Survey

Best Performing Index Tracker Funds – 31 March 2015 (Total Return % Performance)* Fund Name Satrix INDI 25 NewGold Stanlib Index Fund

Type ETF ETF

10 Years (p.a.) 23.34% 17.86%

Unit T

17.07%

Satrix 40

ETF

DBX Tracker MSCI USA DBX Tracker MSCI World Satrix INDI 25 NewFunds eRAFI FINI 15

ETF ETF ETF ETF Unit T ETF ETF

17.04% 3 Years (p.a.) 33.51% 30.13% 29.76% 29.28% 1 Year 49.16% 45.80% 41.70%

Unit T

40.90%

Satrix Property Index Fund Proptrax Ten Stanlib Property Prudential Enhanced SA Property Tracker

Fund Name Satrix INDI 25 DBX Tracker MSCI USA Prudential Enhanced SA Property Tracker Proptrax SAPY

Type ETF ETF

5 Years (p.a.) 26.61% 24.94%

Unit T

21.92%

ETF

DBX Tracker MSCI USA DBX Tracker MSCI World Satrix INDI 25 Satrix FINI 15

ETF ETF ETF ETF

Stanlib Property DB CHINA Proptrax SAPY

ETF ETN ETF

21.71% 2 Years (p.a.) 33.19% 28.48% 26.07% 25.96% 6 Months 25.99% 25.03% 24.75%

Proptrax Ten

ETF

23.36%

Unit T

13.36%

ETF

13.35%

3 Months DBX Tracker MSCI JAPAN

ETF

15.39%

DB China

ETN

13.62%

Source: etfSA.co.za / Profile Media Funds Data (31/3/2015)

Prudential Enhanced SA Property Tracker Stanlib Property * Includes reinvestment of dividends.

The arguments often put forward clearly include concepts such as the increasing efficiency of markets; the prevalence of ‘benchmark hugging’ by most investors; the dominance of the large cap stocks in the consolidated portfolios of the major institutional investors (and of course these stocks make up the bulk of the indices); and the increasing importance of liquidity as a core feature in investments and index trackers, particularly ETFs, guaranteeing liquidity. However, it is also becoming increasingly apparent that diverting from Beta strategies, over time, does contain risks that are not rewarded by any outperformance of Beta returns. In this environment, passive investment products are gaining ground worldwide and not least in South Africa, including multi-asset strategies and portfolio construction using index tracking products as an alternative to actively managed strategies. While it may be premature to see in this the ultimate demise of the active investment industry, or a limited future as a ‘cottage industry’, there is growing comment forecasting this future. What is also apparent is an increasing use of ‘blending' techniques, where Beta and Alpha strategies are combined to produce an outcome of costs and risks suitable for specific investment needs. South Africa is showing some signs of also moving into this debate, if not yet fully utilising such ‘core/satellite’ techniques in practice.

With regard to the individual performance of index tracking unit trusts and Exchange Traded Products (ETPs), table 2 summarises the best performing such funds over periods of three months to 10 years. The full performance survey showing the total return performance of all 70 ETPs and 22 index tracking unit trusts in South Africa can be viewed on the website www.etfsa.co.za. For the longest time period measured (10 years), South African equity funds, notably the Satrix Indi 25 ETF, have been the dominant investment performers. In the medium time frame (two to five years), offshore based ETFs, issued by Deutsche Bank (DBX Trackers) have performed particularly well, helped not only by the general recovery of global stock markets over the past five years, but also by rand depreciation.

ETF industry developments For the first quarter of 2015, the total market capitalisation of all JSE listed ETFs and ETNs rose to R126.6 billion, from R 123.9 billion at the end of 2104. This reflected mainly the impact of the rise in market values. New capital raised by listing of additional ETP securities actually fell. The delisting of some commodity ETFs, notably gold and platinum ETFs, was responsible for a net reduction of R2.3 billion in capital. This was partially offset by new listings of some DBX tracker ETF securities and Standard Bank Oil ETNs, but the overall impact was a net decline of R1.8 billion in new capital raised. No listings of ETFs or ETFs by any new issuer took place in the first quarter, but we understand that some unique new products issues are in the pipeline.

In the shorter time frame (less than 1 year), listed property tracker funds have been the outstanding performers, benefitting particularly from consolidation of the domestic property industry under the favourable new REIT dispensation. What is also apparent, however, is the diversity of good investment returns, over relatively long periods of time, of index trackers covering a wide range of asset classes and markets. This boosts the case for using such products in portfolio construction and asset management.

Mike Brown, managing director, etfSA.co.za

investsa

Economic commentary

Testing times for SA economy These remain testing times for the South African economy, despite the South African Reserve Bank pausing in its interest rate tightening cycle, and the South African rand showing some temporary resilience against a strengthening US dollar.

We also believe these are likely to be testing times for investors: the stock market could face considerable headwinds as consumers are increasingly squeezed, and the South African Reserve Bank (SARB) is expected to raise interest rates further and the currency comes under pressures.

he International Monetary Fund recently confirmed that it expects South Africaâ&#x20AC;&#x2122;s GDP growth to average only two to two and a half per cent per year for the next five years. This is significantly lower than the three to three and a half per cent growth levels South Africa had previously achieved, and considerably off the five per cent per year rate most analysts argue is necessary for South Africa to solve its unemployment crisis. While lack of reliable energy has undoubtedly placed a ceiling on our economic growth rate, we have also failed in our ability to ensure graduates are well equipped to perform in the labour market. According to the latest PPS Professional Confidence Index (PCI) survey (see sidebar), professionals in South Africa continue to have very little confidence in the standards of our basic education system, and while they are more confident about our tertiary education system, they remain extremely concerned with its ability to produce maths and science graduates. This lack of confidence is reflected in the inability of the private sector to create jobs. While South African employment is back to the levels it was before the financial crisis in 2008, almost all the employment growth has come from the public sector. Worryingly,

22 investsa

revenue and harder for our social compact to hold together.

the private sector continues to be a netdetractor from employment growth, while the public sector wage bill has spiralled out of control.

South Africaâ&#x20AC;&#x2122;s graduate professionals are more pessimistic about the economic outlook for the South African economy in 2015 than in the last three years. This is according to the latest results of the PPS Professional Confidence Index (PCI) which surveyed over 4 300 graduate professionals. The downward revision in their expectations for economic growth follows a year in which the South African economy grew at just 1.5 per cent, and the South African Reserve Bank cut its forecast for economic growth six times.

Things have also become harder for consumers, despite the sharp drop in the oil price in US dollars in the second half of 2014. The rand remains vulnerable to a strengthening US dollar, while increases to the fuel levy announced at the Budget Speech in February will also offset some of the benefits of a lower fuel price. And consumers will also feel the impact of higher taxes of their take-home pay. A weak economy consequently is challenging for South Africans on a number of levels. It makes it more difficult for the private sector to create jobs, tougher for the government to generate

David Crosoer, investment and research executive at PPS Investments

Investing in Africa

Austere budgets

and rating downgrades in SSA Credit quality in selected sub-Saharan African (SSA) countries

Rank in SSA* 1

South Africa

Standard and Poor’s BBB-

BBB

Baa2

Mauritius

n/a**

n/a

Baa1

3 4 5 6

Nigeria Angola Kenya Rwanda

B+ B+ B+ B+

BBBBB+ B+

Ba3 Ba2 B1 n/a

7 8

B+ B

B B

B1 B1

B+

Ba3

Zambia Ethiopia Democratic Republic of the Congo Cameroon

n/a

11 12

Côte d’Ivoire Ghana

n/a B-

B B

B1 B3

Country

Fitch

Moody’s

Credit quality Investment grade

Speculative grade

*Ranked by credit quality as measured by Standard and Poor’s where applicable, otherwise by one of the other two. **n/a means the country has not solicited a credit rating from the agencies. Sources: http://www.tradingeconomics.com/country-list/rating and Bloomberg

ub-Saharan African countries Nigeria, Angola and Mauritius have announced fiscal budgets for 2015/16 that reflect difficult economic conditions in oilproducing economies and relatively better circumstances in those that import oil. The new budgets for Nigeria and Angola are austere, with government spending reduced due to falling oil prices. For Nigeria, the final budget benchmark oil price was US$65/barrel from the initial $78/barrel. Angola was much more aggressive in lowering the benchmark price to US$40/barrel from the US$82/barrel in the original estimates. Broad fiscal measures introduced in both countries to curb spending will limit the rate of future economic growth. In contrast, oil-importing Mauritius passed a budget with intensified programmes to bolster investment and provide support to the small and medium enterprise (SME) sector. It has put in place processes to remove red tape and has created an SME bank with an initial capital of US$274 million. These measures are aimed at boosting economic growth in the medium

to long term. Similarly, growth prospects for Kenya remain strong, underpinned by robust government and private-sector investment in infrastructure, growth in internal demand and positive spillovers from the East African Community economic integration. Economic hardships in oil-producing countries have resulted in credit-quality downgrading by rating agencies. Nigeria, for instance, has been pushed further into speculative grade by Standard and Poor’s (now rated B+ from BB-). It receives approximately 80 per cent of government revenue from oil. A sharp fall in oil prices means less government revenue and less money to pay back debt and spend on boosting growth. Due to this, the naira depreciated to an all-time low against the US dollar, exacerbating Nigeria’s external vulnerability. There is a big difference between the makeup of Nigeria’s economy and the sources of government revenue. The recent GDP rebasing exercise that put Nigeria’s nominal GDP at US$522 billion – 1.5 times higher than South

Africa’s US$350 billion – has provided evidence of a much more diversified economy. Consequently, the Nigerian Ministry of Finance has put down plans in its latest budget to increase government revenue from non-oil industries through improving tax collection and introducing tighter compliance measures. Oil-producing Ghana, with the worst credit quality within the selected SSA countries in the table, has experienced economic turmoil that led to its borrowing US$918 million from the International Monetary Fund. According to the IMF, Ghana has recently experienced a ballooning wage bill, increased social subsidies and rising interest payments on existing debt. These expenses outpaced the government’s revenue (mainly from oil) and pushed the fiscal deficit to double digits. Public debt has also risen to unsustainable levels and growth remains constrained by fiscal consolidation. South Africa and Mauritius both have investment-grade status, while all other SSA countries have a speculative-grade rating. The economic slowdown in oil-producing countries could result in further downward ratings pressure, widening the gap between South Africa and Mauritius and the rest of SSA. Much more work is needed in these countries to fasttrack reform and improve governance in pursuit of a better credit rating.

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

investsa

Global economic commentary

African success story A lifeline to South African growth performance

or the third year in a row, growth in the South African economy in 2014 has turned out to be significantly weaker than anticipated.

Underperformance of South African economy in stark contrast to the rest of Africa

Table: Average forecast for countries in sub-Saharan Africa, 2014-2019 Country

Country

Mozambique

8.1

Gabon

5.8

Liberia

7.9

South Sudan

5.5

Niger

7.8

Malawi

5.4

Mauritania

7.6

Lesotho

5.1

DRC

7.4

Benin

5.0

Rwanda

7.1

Senegal

5.0

Nigeria

7.1

CAR

4.9

Tanzania

7.0

Sudan

4.5

Zambia

6.9

Suriname

4.2

Burkina Faso

6.8

Madagascar

4.2

Sierra Leone

6.7

Botswana

4.1

Chad

6.6

Mauritius

3.9

Uganda

6.6

Zimbabwe

3.9

Kenya

6.3

Cabo Verde

3.3

Gambia, The

6.1

Eritrea

2.6

Angola

5.9

South Africa

2.4

Congo, Republic of

5.9

Swaziland

1.9

Source: IMF WEO, Oct 14

24 investsa

Even though weak external demand (especially in the EU, China and Japan) can explain much of South Africa's economic underperformance, domestic factors have begun to dominate in depressing South Africaâ&#x20AC;&#x2122;s economic performance and investment attractiveness. These factors include government expenditure limitations, labour instability, electricity supply shortages, higher electricity tariffs and massive unemployment. The underperformance of South Africaâ&#x20AC;&#x2122;s economy has been especially stark in relation to the extremely positive growth being achieved and predicted to continue for the sub-Saharan African continent as a whole. For the majority of economies in sub-Saharan Africa, growth of between four and eight per cent per annum is being forecast over the period 2014 to 2019. Strong growth in rest of Africa a boost to South African growth At least the vigorous growth witnessed in the rest of the subcontinent is providing a lifeline to many local businesses trying to grow their

GDP growth rates of sub-Saharan Africa and South Africa vs selected regions 11 9

Y on y %

7 5 3 1 -1 -3 -5 80

Sub-Saharan Africa | South Africa | Emerging market and developing economies | Advanced economies Source: IMF, World Economic Outlook Database

bottom line. The ability and desire to invest in and trade with the subcontinent at a faster pace than ever before is reviving some hope for an otherwise dismal domestic economic growth environment. Trade figures for 2014 show that South African exports to the African continent almost overtook those to Asia, traditionally the biggest destination of South African exports. Y/y growth in exports to Africa was 13.5 per cent higher than the 12.2 per cent growth of exports to Europe and much higher than the mere two per cent growth in exports to Asia. This suggests a sharp fall-off in the throughput of mineral exports to China as that economy slowed. Manufacturing exports were increasingly directed at the African continent in 2014, partly because of the massive expansion of South African businesses in the region. The result is that the share of total exports accounted for by Africa rose to 30.5 per cent in 2014, from 28.7 per cent in 2013, virtually overtaking Asia as the predominant export destination for South African merchandise goods. If this pattern continues for a few months, Africa will indeed overtake Asia as the biggest export destination for South Africa. Besides the slowdown in China’s economy reflected by these figures, it is also an indication of the manner in which Africa’s growth has remained high enough to be of material

benefit to South Africa’s overall growth through the export channel.

Saharan African region and in particular among African oil exporters, could take a knock.

Investments in Africa by South African companies have been rising sharply. The stock of South African foreign direct investment (FDI) in the rest of Africa equals approximately five per cent of the country’s GDP in 2013, up from one per cent before the global financial crisis (Source: IMF). According to a recent EY report (EY’s Attractiveness Survey: Africa 2014), South Africa was the third-largest investor in FDI in Africa in 2013 (with the UK and US in first and second positions, respectively).

The decline in export prospects for African countries extracting mineral resources and oil has been the main contributor to the latest downward revision by the IMF’s growth forecasts for sub-Saharan Africa for 2015 and 2016 (to 4.5 per cent in 2015 from 5.8 per cent six months ago, and to 5.1 per cent for 2016 from 6.0 per cent in October).

South Africa directed 63 projects into the rest of Africa, up 425 per cent from its pre-crisis levels. South Africa was the largest intraAfrican investor in 2013, with prominent South African-headquartered companies (such as Shoprite, Standard Bank, Coca-Cola Sabco, MTN, Nampak, Nando’s, Naspers, Sanlam and Tiger Brands) actively expanding their African footprint.

Nonetheless, Africa’s global outlook remains promising and, with a growth rate close to five per cent, the region should still have the second highest rate in the world in 2015, after Asia’s emerging countries, which should provide sufficient support for South Africa’s long-term growth performance.

Oil prices could pose downside risk to Africa’s growth The collapse of international oil prices is likely to impact negatively on the economic growth prospects of oil-exporting countries in Africa. As a result, the boost to South Africa’s manufactured exports, provided by rapidly increasing growth in the rest of the sub-

Ilse Fieldgate, senior economist, Econometrix

investsa

Interest rate considerations

Generating income in a world of compressed yields

Generating real returns and continuously compounding them over time should be the key focus of an income fund, particularly now that we live in a world of compressed yields and negative real interest rates.

he Prescient Income Provider Fund, for example, aims to maximise income yield without placing the investor’s capital at undue risk.

interest bearing asset under different interest rate scenarios. Each instrument is considered on its valuation, the risk of investing and the return of the investment under different rate scenarios.

To achieve this, the fund invests in a combination of high-quality, income generating instruments including the money market, bonds, inflation-linked bonds, property, preference shares, derivatives and offshore assets – switching between the different asset classes as they offer value.

Only those instruments offering better return opportunities without any undue increase in risk will be considered for investment. Risk is further mitigated by applying credit limits of A and A1/F1 or better for bond and money market instruments respectively. Benchmark

The portfolio is managed actively with a focus on duration management, yield enhancement via credit exposure and risk management strategies designed to provide downside protection. Prescient doesn’t take a view on rates. Instead, we look for value on the curve. We monitor pricing and invest in assets that offer good value across all interest rate scenarios. We look at the universe of investable instruments that fit within the mandate, and before investing, complete a scenario analysis to calculate the return of each

investsa

Clients can select a benchmark for the portfolio, but generally it is measured against both STeFI Call and the BESA 1 – 3 Year Bond Index aiming to be above both over three years. The Prescient Income Provider Fund is Regulation 28 (pension funds) and Cisca (unit trusts) compliant. Prescient launched a Regulation 28 compliant Namibian Income Provider Fund in July 2012 and follow the same process as we do in South Africa. The fund invests a minimum of 35 per

cent in Namibian money-market assets with the balance invested in South African and offshore interest bearing markets. In terms of what we might expect in the year ahead, the Reserve Bank set the tone at its January 2015 meeting when it left rates unchanged as inflation risks moderated following lower energy prices. At the time, the 2015 inflation forecast was lowered from 5.3 per cent to 3.8 per cent but with an expectation that it would tick up again in 2016. We have likely now seen the bottom of the cycle with inflation moving up from the lowest point of 3.9 per cent. The Governor was clear that a cut in interest rates would require a sustained decline in the inflation rate and inflation expectations, which is not something the Bank is expecting. So we are likely to see rates flatter for longer with the risk for rates to go up higher than it is for them to come down. Interest rate normalisation in the US, currency volatility, increased public sector wage demands, electricity increases, risk of food

fund returns

inflation, rising debt levels and borrowing costs remain a concern to the economy, currency, inflation and ultimately the path of interest rates. Flat rates We are currently in a relatively low interest rate environment with the market pricing in for rates to move up by one per cent over 12 months, and even more over the next 24 months. The good news of January has been replaced by fears around currency and country rating uncertainty, electricity price hikes and food inflation given the drought. We use these adjustments in rate expectation to lock into higher yield incrementally at appropriate levels. At this time, we donâ&#x20AC;&#x2122;t see value in going long yet. With the risk of rates going up being greater, the asset class that is expected to perform well in this scenario is floating rate assets (FRN). These are offering yields of close to eight per cent (when investing in three-year FRNs), versus the repo rate of 5.75 per cent. And because the rate is floating, the yield will go up as interest rates tick up.

Given the current position of our fund, should rates fall over the next year, the fund will benefit from mark to market gains. Should rates rise, the yields on the floating rate assets will adjust higher and we would also look to incrementally lock in the higher interest rate levels by investing in fixed rate assets when these are set to outperform FRNs at a greater level of certainty. One of the other asset classes we have been utilising this year is preference shares. With money market yields shifting lower, preference shares were offering yields of close to nine per cent, making them very attractive. Currently this is somewhat lower, closer to 8 per cent and is less attractive on a relative basis as money market rates have been shifting up. However, liquidity in this market is thin. The Prescient Income Provider Fund includes international interest bearing exposure when valuations are attractive. We measure the difference in real long and short interest rates across numerous economies. When the rate differential between SA and other economies is narrow it makes sense to hold international

assets as diversification. In addition, when measuring SA-specific risk it may be beneficial to include offshore assets as hedge against inflation and the rand. For the year ahead, we will keep monitoring the yield curve for attractive opportunities. Because the market is uncertain about the direction of rates and everything is very data dependent at this stage, we expect further volatility in the fixed income market in the near term.

Farzana Bayat, senior portfolio manager at Prescient Investment Management

investsa

Investment solutions

The imperfect

storm

The South African Reserve Bank’s monetary policy committee (MPC) kept interest rates on hold at its March meeting. On the face of it, it should have had an easy meeting after February headline inflation fell to 3.9 per cent – the lowest in four years. Several months of falling fuel prices drove the inflation rate lower.

he MPC even dropped reference to a tightening cycle, but rightly remained cautious because the clichéd storm clouds had gathered. A weakening currency, a rebounding oil price, drought and Eskom price-increase demands had all converged to shatter any illusion of inflation complacency. Other administered price increases, especially from municipalities, are also adding to inflationary risks. From the MPC’s perspective, the inflation outlook had deteriorated substantially from the more benign position in January. If inflation was the only consideration, the MPC may have had no option but to immediately resume its cycle of rate increases, but a massive cost-push inflation storm has started to unfold. The main inflation drivers have been the weaker currency and administered prices. However, the demand-pull inflation driver has been weak, creating an imperfect storm. This was evident in 2013 and 2014, with inflation temporarily and not extensively breaching the upper limit of the target band to peak at 6.6 per cent in mid-2014. The overall economy has shown weakening growth in the four years to the present. If demand had been strong, the combination of strong costpush factors would have seen the inflation rate

28 investsa

already a major bugbear. The combination of factors does not sit easily.

peak closer to eight or nine per cent. Subdued economic growth allowed the South African Reserve Bank (SARB) to delay the start of its tightening cycle and then only impose two small increases over 2014. The dilemma the SARB faces is the conundrum between inflation and growth. The global growth outlook has deteriorated and several central banks have shifted to an easing stance in their policies since the start of the year. The US has been threatening higher rates but its economy has also been slowing. The SARB has no room for flexibility. Its primary mandate is the inflation target, but it also has to consider growth. Policy so far has been set to defer to growth. The SARB may be the odd central bank out for the remainder of 2015 in having to tighten rates while the rest are easing policy. For households, 2015 may prove to be just what an undersized belt needs: rising administered costs, rising food prices due to drought and a weaker currency, tax increases plus higher interest rates. The public-sector unions will be demanding pay increases to compensate, and who can blame them? However, economic weakness means tax receipts will probably remain subdued and the credit ratings will be at risk if the budget deficit is not reined in. The public-sector wage bill is

The trends in growth and inflation indicate that South Africa has entered a stagflation trap. From a monetary-policy perspective, there are two ironies. The first is that long-run inflation is an obstacle to longrun growth, not a consequence. This is critical to understand and is the reason for implementing the inflation-targeting policy in the first place. Inflation has to be kept under control to enable growth to blossom. The second irony is that low interest rates may well be part of the low-growth problem. An increase in economic capacity requires investment, and investment is resourced through savings. Low interest rates favour the borrower over the saver. The decline in global growth prospects has come in with ultra-low interest rates. Countries with low interest rates also appear to struggle with low growth. A monetary policy trap. But South Africa may well best be served by higher interest rates. Painful in the short term, this will help set up a sustainable path for higher longer-term growth with lower inflation. The experience following 1998 when interest rates were raised to 25.5 per cent is instructive. South Africa enjoyed a decade of growth above the average of the previous three decades, with inflation below the average of the previous three decades.

Chris Hart, chief strategist, Investment Solutions

Investment strategy

Investors should focus on

Risk

risk as well as return

any investors tend to focus only on the return of their investments without taking into account how much risk is taken to achieve these returns. In today’s highly volatile investment environment, it is crucial that investors also consider the factors like risk and consistency when evaluating investment performance. What are the issues to look at and the questions to be asked of investment managers? How can these risks be best addressed? An important risk which needs to be kept in mind is that of liquidity. Investors should be compensated, from a return point of view, for holding an illiquid investment, often referred to as a liquidity premium. How quickly can a manager liquidate an investment portfolio? When managers experience large outflows from an illiquid portfolio, they are often forced to sell investments at a large discount to fair value, to the detriment of the investor. But there is also a balance – too much liquidity often leads to lower returns. Investment managers need to balance liquidity requirements with the additional return offered by illiquid investments. A detail that is often overlooked is the credit risk portfolios are exposed to, or in other words, what is the risk that money lent from an investor’s portfolio to another party might not be paid back in a few years’ time? The better the quality of the counterparty, the better the chance of getting all the money back plus interest. The problem is that some managers might take excessive credit risk which, on the surface, translates to higher returns. The recent demise of African Bank highlighted

this point. The aim is to try and gauge the credit risk in a portfolio and the underlying asset quality. Another way of illustrating this is by looking at the credit risk inherent in the capital structure of companies. Shareholder equity carries the most credit risk followed by preference shares, then subordinated debt and only then senior debt. People don’t always realise that preference shares carry substantially more credit risk than senior debt. In essence, a portfolio of quality senior debt should be a lot safer from a credit perspective than a portfolio of preference shares. Issues like liquidity and credit risk could remain largely undetected. Portfolios with high liquidity and credit risk can have very smooth returns with high risk-adjusted returns – until a default or large liquidation occurs. Only then will the full consequences of credit and liquidity risk come to the fore – when it is usually too late for investors. A crucial objective in managing these and other types of downside risk in a volatile investment environment is, of course, the protection of investment capital. Absolute return funds – which undeservedly had a bad rap after the 2008 market crash – have made a comeback in the last few years for precisely this reason. Besides targeting real returns over three or four years, these funds aim to protect capital over any one year by managing risk through a variety of downside protection strategies – mainly asset allocation strategies. For example, the Sanlam Investment Management (SIM) Inflation Plus

Return

Fund addresses downside risk through diversification across asset classes and the use of derivatives to protect capital over any 12-month period where necessary. The fund targets a ‘hurdle’ rate of return, aiming at inflation plus four per cent over a rolling three-year cycle. The main focus of the portfolio manager is to keep volatility low while assessing the payoff of all the investments in the fund. The use of derivatives protects against capital loss in the same way short-term insurance protects against property and other loss. Investment has always been about taking risk in the face of uncertainty and volatility in financial markets. Managing levels of investment risk appropriately must, however, form part of any investment strategy. A narrow focus on returns as simple percentage gains only is perhaps the greatest risk of all. To mitigate risk, a well-managed absolute return fund that focuses firstly on achieving real returns and secondly on protecting capital should be a core component of most investment portfolios.

Philip Liebenberg, head of absolute return at Sanlam Investments

investsa

SAâ&#x20AC;&#x2122;s Q1 buoyant bonds and equities Listed property and financial stocks breathe life into the All Share Index

Europe Index returning 16.6 per cent for the quarter. In Japan, continuing quantitative easing and signs of an economic recovery resulted in the Nikkei 225 producing a significant gain of 10.8 per cent for the quarter. The FTSE 100 also made decent gains of 4.2 per cent over the quarter.

he first quarter was, for the most part, positive for global markets as major policymakers either veered away from tightening measures or expanded quantitative easing programmes. These moves came amid concerns over growth and deflation. South African equities were buoyed by listed property and financial stocks, while bonds responded favourably to delays in interest rate hikes. The FTSE/JSE All Share Index (ALSI) gained just over 5.5 per cent while the All Bond Index was up nearly three per cent.

30 investsa

Against a backdrop of increasing economic activity in the US, the Federal Reserve decided to push out interest rate hikes in order to preserve growth and maintain a healthy level of inflation in the economy. The S&P 500 reacted positively to the news and, after negative gains in January, gained a relatively modest one per cent over the quarter. US markets were also boosted by the decrease in the unemployment rate to 5.5 per cent. Meanwhile in Europe, concerns over a deflationary spiral led the European Central Bank to announce further quantitative easing in January worth at least â&#x201A;Ź1.1trillion. This proved positive for European markets, with the MSCI

Concerns of a slowing Chinese economy were met with the Chinese government lowering interest rates and its GDP growth forecasts. These actions resulted in the Shanghai SE Composite gaining 16.7 per cent for the quarter, with most gains coming in March. Developing market local currency equity returns marginally lagged behind the rest of the world over the quarter, with the MSCI Emerging Markets gaining 4.9 per cent while the MSCI World gained five per cent. Slower than expected growth in emerging markets had a negative impact on commodity

Morningstar

Q1 2015

1 Year (annualised)

3 Year (annualised)

5 Year (annualised)

10 Year (annualised)

South African RE General

12.70

39.62

23.68

20.08

19.75

South African EQ Financial

9.36

26.40

24.12

19.26

17.75

Global RE General

8.33

32.94

28.11

21.79

12.68

Global EQ General

6.62

18.25

26.76

18.23

11.58

Global MA High Equity

5.86

15.76

24.60

17.03

11.48

Wwide MA Flexible

5.84

15.97

20.21

15.31

13.48

South African EQ Industrial

5.67

21.51

24.93

22.58

20.59

Global MA Flexible

5.57

14.94

23.25

15.88

10.65

South African EQ Large Cap

5.50

8.48

17.48

14.34

16.85

South African MA Flexible

5.37

13.24

15.13

13.05

13.84

Regional EQ General

5.13

12.68

22.37

13.79

9.38

South African EQ General

5.10

11.31

15.88

14.19

15.78

Global MA Low Equity

4.67

13.49

18.97

12.96

9.63

South African MA High Equity

4.64

12.01

14.67

12.30

12.84

South African MA Medium Equity

4.05

11.36

13.59

11.62

11.79

South African MA Low Equity

3.48

10.30

11.37

9.98

10.13

Global IB Short Term

3.46

10.18

14.34

9.69

6.93

Global IB Variable Term

2.32

9.09

14.92

12.13

9.72

South African IB Variable Term

2.27

10.45

8.29

9.19

8.59

South African EQ Mid/Small Cap

2.07

10.73

14.94

15.81

15.18

South African IB Short Term

1.58

5.88

5.93

6.32

7.54

South African IB Money Market

1.52

6.04

5.51

5.68

7.29

Global MA Medium Equity

0.83

5.46

18.12

12.81

9.56

Regional IB Short Term

-0.62

1.69

12.30

8.47

6.39

South African EQ Resources

-0.71

-12.61

-0.36

1.07

11.55

Name

prices. Gold and platinum prices fell by 1.6 per cent and 6.4 per cent respectively. Meanwhile, the spot price of Brent Crude fell to below $50 a barrel for the first time since April 2009. The US dollar price of Brent Crude ended the quarter down 3.9 per cent. Positive returns from the FTSE/JSE All Share drove gains across nearly all the domestic ASISA categories. The South African Equity Financial category was the best performer with a 9.4 per cent gain, while the worst performing category was, unsurprisingly, the Resources Equity Category, which ended the quarter slightly down with a 0.7 per cent loss. The best performing category for the quarter was South African Real Estate General with a 12.7 per cent gain, as listed property continued to soar. The Global Real Estate General and the Global Equity General were the next best performing categories with 8.3 per cent and 6.6 per cent returns respectively. Generally speaking, the continuing depreciation of the

rand against the US dollar bolstered returns of the global categories. The rand fell 4.5 per cent against the US dollar and the Japanese yen. The rand remained relatively unchanged against the pound sterling, depreciating slightly, while bucking the trend against the euro, gaining 7.6 per cent. The best individual fund performance over the quarter was a 26.8 per cent performance for Prescient China Balanced. The fund benefited from the rand’s 4.5 per cent depreciation versus the Chinese yuan renminbi and the Shanghai SE Composite’s 16.7 per cent local currency return. The next best performing funds were the Third Circle MET Targeted Return and the ABSA Property, returning 19.9 per cent and 19.7 per cent respectively. The worst individual performance over the quarter was -7.75 per cent for RECM Equity. The fund’s sizeable exposure to mining stocks, and in particular platinum producing companies (Anglo

Platinum, Impala Platinum and Lonmin), negatively impacted on performance over the quarter. The next worse performing funds were ABSA Euro Income and Stanlib Euro Currency with returns of -6.9 per cent and -6.6 per cent respectively. The rand’s strong appreciation against the euro was the main determinant of negative returns for these two funds.

Kyle Cox, investment analyst, Morningstar Investment Management South Africa

investsa

Practice management

One for the

ladies By Vivienne Fouché

In a world in which people are increasingly living longer than our predecessors, women around the globe also tend to outlive men. Of course, ‘terms and conditions’ do apply when making this sweeping statement, and while it remains an obvious generalisation, it is also a scientifically documented fact – whether we discuss documents produced by Harvard University or Statistics South Africa.

inancial advisers should, therefore, be aware that catering for female clients should bring the longevity issue to the forefront even more than for men. The fact that divorce is on the rise also means that women today are increasingly responsible for their financial planning, rather than being able to leave this mainly with a spouse. As clarified by independent financial adviser Sunél Veldtman of the Foundation Family Wealth, a financial plan should include risk planning, retirement planning, investment planning and cash flow analysis.

Advice for different ages and stages Veldtman outlines seven different stages of a woman’s life, and how this impacts on her saving and investment needs, as follows: when she is young and single; when she moves in with a romantic partner and/or gets married; becoming a mother; working on her nest egg; nearing retirement; reaching

retirement; and winding down and thinking about leaving a legacy.

• Use the tax advantages of retirement vehicles in your favour – these tax advantages compound over time.

Veldtman outlines the following seven main points to women:

Leaving a legacy

• The best time to prepare for financial freedom is your first pay cheque. Financial freedom is the extent to which you can survive without someone else paying you a salary. The earlier you start, the more help you get from time. • You do not need to save a lot to become financially independent. • Focusing on financial freedom instead of retirement may help to motivate you to save. • Be a mindful spender – is it a reflection of the life you want? • Use the power of compounding in your favour. You need time and regular contributions to make compounding work. • Be an investor, not just a squirrel. Just putting money in a stokvel or bank account will not move you forward.

Veldtman advises her clients to think about the practical implications of their estate planning. She says, “For example, if you leave the holiday house to your children, will they get along and be able to manage it together? Moreover, will they have to sell the house because there is not enough provision for the 20 per cent estate duty? A will is also a window into your heart. What do you want to communicate through your will? Discuss your will with your family. “Whatever your stage of life, remember that money is not the object – the purpose is a fulfilled and meaningful life. Think about the type of life you want throughout your life and use your money to help you get there.”

Marlise Kotze, a financial consultant with the Financial Planning division of Alexander Forbes Financial Services, uses different decades in a woman’s life to dispense her input, as follows:

30s Stay away from credit. The responsible investor has no store accounts, and a very limited credit card limit (only to be used in extreme emergencies). Make sure that you are covered for death, disability and sickness. Start saving for both long-term (retirement) and short-term needs (emergencies, education, deposit on a house).

32 investsa

40s Take stock of your retirement saving and boost it wherever you can, for example with bonuses. Keep spending within your means. Expand your investments to a longer term focus. By this time, you should have a big enough emergency fund available. Review your risk cover and make sure that you are not over-insured or under-insured.

50s Aim to be completely debt-free by the time you retire, or as soon as possible. Build up the investment amounts in your own name, outside retirement fund products. This will allow you to structure a more tax-efficient income draw during your retirement years, because income from the retirement fund products will be taxable.

Not always enough: an employersponsored retirement fund Many working South Africans – both male and female – think that if they have a retirement fund through their employer, this will be enough to see them through their retirement, but this of course is not necessarily the case. Sunel Veldtman says, “To save enough for retirement, one generally needs to save between 15 to 20 per cent in a retirement vehicle, assuming that the individual saves over their entire working career and that they preserve their retirement savings when changing employers. When an employer-

sponsored retirement fund gives a choice of contribution level, I advise my clients to make sure that their total contribution funding level is at least 15 per cent.” Marlise Kotze advises her clients to start saving outside their employer-sponsored retirement fund as soon as possible, regardless of whether or not they think they will be with their current employer for the rest of their working career. She says, “There are many different solutions available to discuss with your clients, over and above retirement products. The point is to save as much as possible for as long as possible. Money in one’s pocket is the only real power an individual will ever have in a retirement planning context.”

investsa

Grow

with the flow

By Sarah Bassett

This year marks the 17th PSG Annual Conference, hosted each year at Sun City for PSG’s top financial advisers and product provider partners. ‘Grow with the Flow’ is this year’s theme, and ties closely with the company’s key focus for the year ahead – to grow its premiums and assets under management.

ach year, the conference gives us a chance to connect with our top advisers and reward those doing exceptional work. It also gives us the opportunity to share insights on what is happening in the firm and the industry," says Dan Hugo, PSG chief executive of distribution. “We have access to industry information that is valuable to share with our advisers, and with our product providers.” “This year, the particular focus will be on empowering our advisers to grow their practices and increase their income flows. We are focused on providing the right tools to enable this,” he explains.

34 investsa

Sharing knowledge and a sense of togetherness For delegates, the conference provides an opportunity to share information and best practice learnings with each other. They will also gain insights from PSG itself, along with its partner product providers. “I enjoy the opportunity to interact with so many of our people; to have everyone together. It’s wonderful for our advisers to see what is happening in the firm and to understand that they are a central part of a bigger entity,” notes Hugo. “You don’t

always feel a part of something when you’re alone in your own office somewhere far away. But when you get everyone together they feel connected, and it gives us all a feeling of togetherness and belonging.” “Independent advisers have to rely on themselves to find their way through this maze of technicalities and regulations. But assisting our advisers to do so is part of the value proposition PSG offers. It’s one of the benefits we provide to them and

Profile

this conference gives us the opportunity to share our knowledge with them. It is also an opportunity to remind our advisers that they have this backup,” he adds.

seek to embrace regulation. We want to build our business around regulations, so that we and our clients can benefit from regulation, beyond simply complying.”

Tracy Hirst, head of group marketing at PSG, notes that it is an opportunity to network. “Sun City is a bit of an island. The idea behind hosting the conference there is for our advisers to leave behind all their day-to-day activities and to-do lists, and to make the most of the time with their colleagues and advisers with similar practice challenges. We want them to leave feeling motivated, having asked the questions and gathered the information they needed to.”

“We will outline our take on RDR fully – what we think is positive and where we are concerned the regulator hasn’t given enough consideration. We are quite vocal with the regulator about our opinion. One of the key issues that we would like the regulator to address is ensuring level playing fields in the industry. Currently, the proposed legislation is weighted towards the product provider. We’d like to see this playing field levelled out.”

The nitty gritty As has been the case for a few years now, regulatory change will again be a key topic of discussion that is top-of-mind for many attendees. “The biggest focus will of course be reserved for the Retail Distribution Review (RDR). Most market feedback has now been provided to the regulator and no one knows yet how the regulation is going to pan out,” Hugo says. “At PSG, we always

PSG CEO Francois Gouws will kick off conference proceedings with a review of the year that has been and a reminder of the key focus areas for the year ahead. On the motivational side a highlight of this year’s lineup includes a talk from rugby legend Nick Mallett.

Day two’s lineup includes three panel discussions, each aligned with PSG’s business divisions: PSG Wealth, PSG Asset Management and PSG Insure. “Panels and discussion topics are intended to deal with what advisers in each division are experiencing and could benefit from understanding,” explains Hirst. Panels will address relevant regulatory and business practice issues and concerns. For PSG Wealth, discussions will focus on regulation specifically RDR, as well as alternative products and strategies and the merits of a platform that offers a one-stopshop approach. The PSG Asset Management panel will cover the ongoing passive versus active investments debate, and balancing risk and return, with consideration given to the plethora of choice of unit trusts currently in the market. It will also offer views on offshore investing and trend towards multi-asset funds. The PSG Insure panel will focus on the competitive nature of the current market and the resulting squeeze on margins. It will also unpack the direct versus intermediated approach, and how to make clients aware of hidden costs. Finally, it will consider the matter of lead generation in the era of POPI and the privacy imperative, as well as the importance of managing costs in the context of regulatory change. “For each panel, we’re taking topical issues that we as a business are dealing with ourselves. We unpack them for our advisers, with a focus on how they could be dealt with on the client-facing side,” adds Hirst. Joining the list PSG Konsult made its debut listing on the Johannesburg Stock Exchange in June of last year, a change which Hugo says has raised the profile of the company, but not altered the value proposition to advisers. “We believe we offer fantastic value to our advisers, and this has not changed. The listing has raised the profile of the firm with competitors and other advisers in the market. It’s also been very positive in creating greater pressure on us to deliver and perform.” “The regulatory requirements for listing are stringent. Compliance with these requirements proves the integrity of the business in the market, which has been valuable to the brand,” adds Hirst. The conference stands as a culmination of the work from the year before, and will set the tone for the year to come. INVESTSA wishes you a great conference and will be on hand to cover it all.

investsa

NEWS

Fund managers outsource dealing to reduce transactional costs and enhance returns Prescient Fund Services, the fund administration business in the Prescient Group, has announced the addition of global execution services to its offering, providing investment managers with a comprehensive execution service with access to global markets. Craig Mockford, head of Prescient Fund Services, said the company’s global execution services include a single buy-side point of contact with brokers for access to global equities, derivatives, and foreign exchange markets. “By handing over the dealing function, fund managers can focus on analysis.” With total assets under administration of R128.7 billion, Prescient Fund Services

(PFS) categorises its services under administration, platform services and global execution services. Prescient’s global execution offering includes an extensive algorithmic trading suite, including standard benchmark algorithms and customised algorithms for different trading styles and alpha seeking strategies. Justin Sage, head of global execution services at PFS, says the company’s global execution services are scalable and costeffective. “Due to economies of scale, PFS is able to offer mid-sized fund managers a suite of products and services that they

would not normally be able to afford. “We utilise the world’s leading IT systems to deliver operational excellence and to add value to the fund administration function. We adopt a best practice, best execution approach that gives fund managers peace of mind and the ability to focus on their core business,” he concluded.

MD of Glacier International. Andrew has been with Glacier International since March 2011 as head of product and investments.

Andrew Brotchie

New md of International team at Glacier by Sanlam Andrew Brotchie has been appointed

36 investsa

Prior to that, he spent over 10 years working in the international investment sphere (in South Africa, the United Kingdom, Hong Kong, Singapore and Taiwan), including roles in business development, product and investments and managing an investment advisory firm. He has a BA Honours in History and Politics and an MBA in International Management, both from the University of Exeter in the UK.

Pramodh Debipersad

Global renewable energy expert strenghtens Mazars’ Sub-Saharan Africa Project Finance team Mazars has appointed Pramodh Debipersad as Sub-Saharan Africa Project Finance (SSAPF)

Blue Ink scoops soughtafter hedge fund award The Blue Ink Fixed Income Arbitrage Fund walked away with the Fixed Income Fund of Hedge Funds Award at the annual HedgeNews Africa Awards gala event. The Fund emerged as a winner in the category, having achieved a performance of 14.51 per cent in 2014 and a 12-month Sharpe ratio of 2.05. The annual awards, attended by the industry’s preeminent fund managers and investors, are based on monthly data compiled by HedgeNews Africa, the region’s leading independent hedge fund industry publisher, and recognise the best riskadjusted returns of hedge funds in South Africa and the broader Africa region. The award goes to the fund with the highest return for the 12-month period, provided its Sharpe ratio (a return-perunit-of-risk-measure) is within 25 per cent of the top Sharpe ratio achieved among the nominees in each category. Two additional criteria for winning an award are a return above the median for the

category, and that the fund must be within 10 per cent of its high water mark. Blue Ink, a member of the Sanlam Group in South Africa, is a South African-based fund of hedge funds solutions and hedge fund platform provider, which prides itself in providing a high level of service to its clients. Blue Ink’s vision is to lead Africa in providing innovative and effective alternative solutions. The Blue Ink investment team is composed of Selwyn Pillay, Grant Hogan and Tatenda Chapinduka. Combined, the team has 40 years of experience in hedge funds and their funds have won several accolades over the years. Investor education is important to the business and, to ensure that investors make informed decisions before investing with Blue Ink, it readily shares information on hedge funds in general, as well as on its investment products, with potential investors. Selwyn Pillay, CIO of Blue Ink, said the company was elated to have walked away with the award. “The fund has achieved an annualised return of 12.40 per cent since its launch in January 2009, outperforming bonds (8.05 per cent) over the same period at a lower volatility.

officers. Naudé has extensive experience in Category I and Category II Financial Service Provider (FSP) compliance, and will be working with clients in Gauteng. She holds a BComm in Investment Management and has honours in Business Management in Financial Management.

director. Based in Johannesburg, his role will be to build capability in the region and diversify and strengthen Mazars product offerings to the energy sector. A global renewable energy expert, Debipersad has extensive specific corporate finance experience, having worked previously for Venture Capital & Private Equity, Industrial Development Corporation, Worldwide African Investment Holdings and Standard Bank. With vast experience in the project finance space coupled with the expertise available from Mazars International Project Finance team, led by Bob Green in the UK and dedicated teams in New York, Paris and Delhi, Mazars is gearing up to make a formidable challenge to project finance on the continent.

“We have partnered with skilful managers, and we are glad our portfolio construction is working over the long run,” added Grant Hogan, the portfolio manager of the Blue Ink Fixed Income Arbitrage Fund.

Anél Naudé

Compliance officer appointed at Compli-Serve sa Compli-Serve SA announced the appointment of Anél Naudé to its team of compliance

Richard Rattue, managing director of Compli-Serve SA, says Anél will bring a wealth of knowledge with her to CompliServe SA and the company is pleased to welcome her to the team. Compli-Serve SA offers professional support and services to financial professionals, thus enabling businesses to meet the increasing challenge of regulatory compliance risk in today’s environment.

investsa

Products

investment Solutions launches a flexible fund of funds Investment Solutions has launched its Investment Solutions Flexible Fund of Funds. Gareth Johnson, head of retail at Investment Solutions, said the portfolio seeks to generate absolute returns over the long term with the freedom to navigate the entire investment landscape to find the best opportunities. “It is the first time we will be offering an unconstrained flexible fund of funds free of restrictions in terms of investment type, asset class and location. To have the best chance of achieving absolute returns over the long term, the underlying asset managers invest in different asset classes such as equities, property, cash and bonds, in the most attractive regions locally and globally. Investment Solutions then diversifies the overall

portfolio based on the investment strategies of each asset manager. “A portfolio such as the Investment Solutions Flexible Fund of Funds can morph from a relatively aggressive profile to a more conservative one as the underlying funds in the portfolio adjust their allocations to the asset classes,” he said. According to Johnson, the key features of this fund include: • Maximising capital growth. • Making use of a variety of financial instruments. • Ability to switch between asset classes. • Exploiting global diversification.

investors tax free investment growth, flexibility and a wide choice of underlying investments. Rupert Giessing, head of product development at PSG Wealth, said the company believes that every investor who can should take advantage of this opportunity. This type of tax-free product has been available in the UK and the USA for some time, and Giessing said that PSG was delighted that it has come to South Africa as it is a milestone in the financial services industry. In line with the Treasury’s restrictions, investors can invest R30 000 per year taxfree in the PSG Wealth Tax Free Investment Plan, up to a lifetime ceiling of R500 000.

pSg launches tax-free investment product PSG has announced that it has launched a new, tax-free investment product. The PSG Wealth Tax Free Investment Plan gives

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PSG has also lowered its minimum lump sum investment from R20 000 to R6 000 for this product. The minimum monthly debit order is R500 and investors may combine debit order and ad hoc lump sum investments as they choose. “Investors in the PSG Wealth Tax Free Investment Plan can choose from a range of some 50 unit trusts available on the PSG investment platform as their underlying investments. They may invest in any single manager unit trust that does not charge performance fees and offers ‘clean’ pricing (i.e. does not have a rebate fee structure),” said Giessing.

• Portfolio is managed on a multi-manager basis (Investment Solutions has an eighteen year track record). • Competitive fees. The portfolio’s benchmark is inflation plus five per cent over rolling five-year periods and aims to outperform the average of its peer group in the ASISA (Association for Savings and Investment South Africa) World Wide Multi-Asset Flexible category. “The launch of the Investment Solutions Flexible Fund of Funds is part of our strategic goal to build portfolios that are not only robust in their construction and risk control, but also meet the needs of an ever - increasingly sophisticated client base,” Johnson concluded.

citadel introduces new tax-free investment plan Citadel Investment Services announced the launch of its new Citadel Tax-Free Investment Plan (TFIP). John Kennedy, Citadel director: wealth planning, stated that the Citadel Tax-Free Investment Plan has no minimum investment term, requires low contributions and is attractively priced. Depending on the underlying investments, funds should be available within days when needed. “The features of this new initiative are aimed at encouraging South Africans to start saving from an early age, to save regularly over the long term and to dissuade them from dipping into their savings unnecessarily.” TFIPs are available to individuals of all ages, but contributions to this product are restricted by regulatory annual and lifetime limits. Kennedy advises that TFIPs should be used in addition to retirement savings, such as traditional retirement vehicles, including retirement annuities (RA), and pension and provident funds, and should not be viewed as a replacement.

The world

ASIA, EUROPE, MEXICO, BRAZIL, AUSTRALIA, EGYPT, ZIMBABWE, BRITAIN

FDI in Southeast Asia beats China in 2014 According to research recently released by Thomson Reuters, 2014 was the second consecutive year that saw economies in Southeast Asia attract more foreign direct investment (FDI) than China. Overall FDI in Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam rose to $128 billion in 2014, exceeding that of China’s, which totalled $119.56 billion. FDI in the Philippines grew by 66 per cent and Indonesia, the region's biggest economy, increased by approximately 10 per cent. Investment plan for Europe continues to grow European Commission President, Jean-Claude Juncker, has commissioned the Investment Plan for Europe, which involves raising €315 billion over the next three years to help investment projects around Europe to recover and to boost economies. The Prime Minister of Italy, Matteo Renzi, announced that the country will contribute €8 billion to this plan. Italy is the fourth member of the European Union to add funds to this project, following contributions from France, Spain and Germany. The investment plan is said to increase employment and growth in Europe. Mexico open for international business investments Mexico’s President, Enrique Pena Nieto, announced on his recent trip to London that the country is open for business and investment. In an effort to boost confidence in the country, Nieto recently told British investors that Mexico is a good country to invest in and that the

country is a stable democracy that has seen peaceful and orderly transitions of government every six years for the last 80 years. He believes the country is on the right track, with the number of tourists to Mexico rising from six million to 29 million in 2014, and the country offering access to 1.1 billion consumers through free trade agreements with 45 countries. SA & Brazil top of BRICS Brazil is the top member of the BRICS nations when it comes to converting foreign direct investment (FDI) into social progress, followed by South Africa in second place. Overall, Brazil received a score of 70 followed by South Africa with 63, Russia with 60.8, China with 58.7 and India with 52.2. This is according to a Deloitte report released earlier this year, which indicates how the Social Progress Index can be used as a guideline for businesses and other organisations to make better strategic investments, which in turn will assist with economic and social development. Australian unemployment rate alleviated The Australian Bureau of Statistics recently released statistics which indicate that approximately 15 600 new job opportunities were created within Australia in February 2015. The new jobs include 10 300 full time-positions and 5 300 part-time positions, and are said to provide some relief to the unemployment rate of 6.3 per cent. Despite the improved figures, the rate is still the highest Australia has seen since 2002. Egypt plans to increase FDI According to Egypt’s planning minister,

Ashraf al-Arabi, the country hopes to draw in $60 billion in foreign direct investment (FDI), starting this year until the end of 2018/19, and it is targeting an average growth rate of 7 per cent. Over the next four years Egypt aims to attract billions of dollars’ worth of FDI to boost the economy, which was affected by the chaos caused during the overturning of past president Hosni Mubarak. Arabi went on to say that the country is “working on decreasing the budget deficit to below 10 per cent in the same period, as well as the unemployment rate to below 10 per cent.” Negative growth predicted in Zimbabwe The International Monetary Fund believes the Zimbabwean economy faces a challenging outlook as the country struggles to pay back debt to various international lenders. Even though oil prices have dropped within the country, the IMF says growth has decreased and is not expected to get better further into the year. According to Zimbabwean Finance Minister, Patrick Chinamasa, the government is “continuously seeking alternative methods to improve the ease of doing business in the country.” Wage increase benefits Britain’s labour force The minimum wage in Britain is set to increase three per cent from October 2015 to £6.70 per hour, and is the biggest increase since 2008. According to the British Prime Minister, David Cameron, the increase means “more financial security for Britain's families” and is a step towards creating a fairer society while building a stronger economy.

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They said

A collection of insights from industry leaders over the last month

“Global megatrends will change the real estate landscape considerably over the next six years and beyond. While these trends may already be evident, there’s a natural tendency to underestimate how much the real estate world will have changed by 2020. By 2020, real estate managers will have a broader range of opportunities, with greater risks and new value drivers.” PwC’s Ilse French, asset management and real estate leader for Africa at PwC, discussing the company’s Real Estate: Building the future of Africa report. “Royal Dutch Shell decided it needed to hold back amid aggressive growth and expansion in more than 90 companies where it has taken a presence. In South Africa where we have been for 113 years, we adopted a low cost holding position.” Shell South Africa’s chairperson Bonang Mohale discusses the company’s decision to put its shale gas plans in the country on hold with local media, EWN. He attributes this to delays in the legislation governing the exploration and mining of the underground gas.

“Lower oil prices and widespread monetary easing has brought the world economy to a turning point, with the potential for the acceleration of growth that has been needed in many countries.” OECD’s chief economist Catherine L Mann commenting on the organisation’s Interim Economic Assessment on global movements, including stronger domestic demand in the US and the impact of the oil prices in the Euro area, among others. “The Committee anticipates that it will be appropriate to raise the target range for the federal fund’s rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its two per cent objective over the medium term.” US Federal Reserve Government’s Policy-Making Committee statement on its interest rate decision in March and forecast on this in the coming months. “Balancing the need of large investors and small investors has always been complicated. It is critical that regulators

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centralise the process so that clients can see what is happening in African markets. It is also important that we maintain good liquidity levels and provide proper disclosure to the marketplace.” Donna Oosthuyse, director Capital Markets, Johannesburg Stock Exchange, speaks at the fourth Trading Africa Summit by Thomson Reuters where speakers also debated Africa’s high interest rates, doing business on the continent as well as Africa’s economic fundamentals, growth performance and prospects. “[It is] very encouraging to see as we believe that significant private sector participation is required alongside government initiatives in order to enable Africa to close its infrastructure gap with the rest of the world.” Andre Pottas, regional director at Deloitte, discussing the company’s third annual African Construction Trends report, which also saw a four per cent rise in PPPs from the previous year. The report also noted that investment in Africa’s mega projects surged by 46 per cent to $326 billion in the past year, led by heavy investment in transport and energy and power.

“As one of the top financiers of green buildings in South Africa, we want to ensure that buildings are designed, built and operated in an environmentally sustainable way.” Robin Lockhart-Ross, executive head at Nedbank Property Finance, the co-sponsor of the Green Building Council of South Africa’s Existing Building Performance Tool. “For a policy that is so fundamental in changing the shape of the economy, it is baffling that such a monitoring mechanism is being mooted only now. But I suppose it’s better later than never. As we approach the 21st anniversary of democracy in SA, it is crucial that policies are translated into actions.” Onkgopotse JJ Tabane, director of Pholosang BEE Resolutions, on the establishment of the Black Economic Empowerment Commission to monitor the implementation of the new BEE codes of practice. The Commission will aim to ensure that companies embrace BEE rather than trying to circumvent the system.

You said

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

@themotleyfool: “Investing can feel like riding a roller coaster. Just remember that in both activities, leaping in/out at random can end very badly for you.” The Motley Fool – Helping the world invest – better.

@WayneMcCurrie: “Aspen. GSK sells 50% of their stake. Aspen down 5% to R386. Now down 10% from high of R448. Be careful of high PE shares (40 at peak)” Wayne McCurrie – Portfolio Manager – Momentum Wealth.

@InvestEAfrica: “Nigeria has the most #startups raising capital, but Kenya has attracted more overall investment – VC4Africa report.”

EA Trade Invest Hub – The USAID East Africa Trade and Investment Hub works to boost trade and investment with and within East Africa.

@TheBubbleBubble: “The vast majority of the post-Crisis booms that people are excited about are just bubbles that will end disastrously. Stop being so naive.” Jesse Colombo – Analyst & Forbes.com columnist warning about dangerous economic bubbles. Recognised by the London Times for predicting the Financial Crisis.

@TheStalwart: “"The industry hasn’t seen this many mega-startups since 2005, when 13 funds raised a combined $19 billion."

Joseph Weisenthal – Doing something new at Bloomberg.

@ConfidentInvest: “Knowing your exit strategy is an important investment fundamental. - Rich Dad” Confident Investor – Teaching people the skills they need to confidently invest in the stock market.

@ReformedBroker: “Futures trading was for many years a way for those with a blue-collar background to enter the whitecollar world” Downtown Josh Brown – Chairman of the Twitter Federal Reserve Author of Clash of the Financial Pundits, star of CNBC’s The Halftime Report, CEO of Ritholtz Wealth Management.

@Jesse_Livermore: “Being recklessly optimistic, buying non-selectively – it can work too. Sometimes better than “cautiously optimistic” & “buying selectively.” Jesse Livermore – Trader, Speculator, Bucketeer.

@feeonlyplanner: “I get asked ‘Will there be a correction in the stock market?’ I answer ‘Yes’. Follow up question is ‘When?’. I change the subject.” George Papadopoulos – Independent Fee Only Certified Financial Planner (CFP) & CPA. I provide top quality personal finance advice. Wall Street Journal Expert panellist.

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And now for something completely different

Old world charm

Takin ga step b a in tim ck e

or most people, the concept of going antique shopping on a lazy Saturday afternoon simply means strolling down to the local treasure trove for a new clock to add to their collection. However, not all antiques are equal. In the world of collectibles, antique collecting is considered a serious investment that can yield significant return for an astute collector. By definition, an antique is considered to be any item that is over 100 years old (with the exception of motor vehicles, which are considered antiques after 25 years). Antiques can range in shape and size, but are generally sought after due to their age, rarity, beauty and historical significance. Over the centuries, valued antiques have been prized by royalty and the upper echelons of society. This hasn’t changed. However, shows

like Antique Roadshow have simply elevated the profile or form of alternative investing.

sold for a whopping $28.6 million in 2007.

If the Antique Roadshow is anything to go by, even the most unassuming antiques can hold tremendous value. Take the example of a gentleman from Oklahoma, who brought his collection of Chinese carved cups to a filming of the popular TV series in 2011 – only to find out that his 18th century collection was valued between $1-1.5 million. This was definitely not the first time that an unassuming item has turned out to be a highly sought after antique, nor will it be the last time either.

Like many other collectibles, investing in antiques is seen as a hedge against market volatility, which also helps to reduce volatility in your overall investment portfolio. As with stocks, an individual antique or work of art could perform far better than average. According to the Mei Moses indices, art and antique prices act conversely to stock prices – meaning that while the stock markets may take a dip in value, your collectibles and other forms of alternative investments may increase in value.

Happenstance has allowed for the unearthing of some incredible antiquities. The 2 000-yearold 36-inch bronze statue of the Goddess of the Hunt was discovered by construction workers in the 1920s. Once valued as one of the most expensive antiques ever sold, this relic

However, it is important to point out that, unlike many other forms of collectibles, antiques are generally rather illiquid and don’t necessarily sell as easily as other collectible items, such as art and vintage cars. Antiques are a long-term investment.

Prized history investments 1

3 Pinner Qing Dynasty Vase – $80.2 million

Olyphant – $16.1 million Considered one of the most expensive antiques to ever be auctioned off, this 11th century carved ivory battle horn is one of only six copies with the same ornament group known to the world. It has been perfectly preserved and is a fully functional battle horn.

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Badminton Cabinet – $28.8 million Considered one of the finest pieces of French furniture ever crafted, the 12-foot Medici Dynasty cabinet took 6 days and 30 craftsmen to complete. Decorated with coloured polished stones and semi-precious gems, inlaid with ebony, amethyst and lapis lazuli, this cabinet is considered one of the most magnificent antiques ever created. There is also a clock at the top of the badminton cabinet, which is marked with fleurs-de-lis. The 18th century badminton cabinet now resides in the Liechtenstein Museum.

The vase was once featured on the TV show Going for a Song and was incorrectly evaluated as being a ‘nice replica’ of the original. The vase is embellished with gold, pastel yellow and sky-blue colours and features four motifs of fish and flowers. It is believed to have been created around 1740 and is considered one of a select few art pieces that still exist from the Qing Dynasty in China.

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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 performance. 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 the management of the portfolio. *Performance periods to 31 December 2014. Since inception 1994.

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