INVESTSA by COSA Media

You may not understand this. But if you’re investing offshore, your fund manager should. With more than half of our investment team based abroad and with some of the largest investors across every continent, barring Antarctica, counting among our clients, Investec Asset Management is the only truly global investment manager with solid South African roots. Shouldn’t you entrust your offshore investments to a local partner who can guide you towards opportunities on all shores? We are able to provide you with a diverse range of award-winning offshore funds like: Investec Global Franchise Fund

Investec Global Strategic Managed Fund

• A global equity fund, investing in high-quality global brands

• Makes the difﬁcult decisions on your behalf by balancing investments in global

and blue chip stocks from around the world. • Consistent returns over the medium to long term.

equities, bonds and cash, thereby aiming to minimise risk and maximise returns. • Award-winning fund, delivering solid returns since inception in 1995.

If opportunity is there, we’ll find it. For more information, contact your financial adviser, call us on 0860 555 700 or visit www.investecassetmanagement.com

Asset Management Unit Trusts

Retirement Funds

Offshore Investments

Collective Investment Schemes in Securities (CIS) are generally medium to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of charges, fees and adviser fees is available on request from the manager. Additional adviser fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only. Investec Asset Management is an authorised financial services provider.

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2012/09/07 4:10 PM

Contents

CONTENTS

06 10 12 16

SHOULD YOU STAY OR SHOULD YOU GO?

FOREIGN INVESTORS A tale of two halves

PROFILE: Rob Spanjaard, Investment Director at Rezco Asset Management

SHIFTiNG MARKETS Steer the financial industry into uncharted territory

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OFFSHORE INVESTING AND RISK

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INVESTSA

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Letter from the editor

letter from the

editor Investing offshore has always been a little daunting. Readers will know or would have been told of several good reasons to diversify an investment portfolio into overseas assets. It all makes good sense but perhaps it’s just the fear of the unknown. We tend to be more comfortable with investments we know. And most often those will be investments in our home markets. Well, if offshore markets seemed a little scary a few years back, the unknown has entered new realms of menace. What we do know is what has gone wrong in developed countries. How do you stock pick your way through the minefields of the Eurozone crises or faltering economy in the US? Fortunately, this issue has lots of answers. Offshore investing often weighs the choice between developed and emerging markets. You will read more about the debate here. At least two contributors, Andre Cillie of Fountainhead Global Equity Partners and Wilhelm Hertzog from RE:CM, put forward the case for developed markets. Yet in the Fund Profiles section, Fungai Tariah from Momentum Asset Management and Jonathan Kruger from Prescient offer detailed descriptions of their respective Africa funds and why performance has been good. Where should investors be? The answer is: probably in both markets, skewed towards your preferences. It’s a subject I touch on, deciding that apart from unit trust funds, multinational company shares exposed to both developed and emerging markets might be the way to go. The trick is choosing the right multinational company shares.

EDITORIAL Editor: Shaun Harris investsa@comms.co.za Features writers: Fiona Zerbst Miles Donohoe Publisher - Andy Mark Managing editor - Nicky Mark Art director - Gareth Grey Design - Herman Dorfling | Dries vd Westhuizen | Vicki Felix Editorial head offices Ground floor | Manhattan Towers Esplanade Road Century City 7441 phone: 0861 555 267 or fax to 021 555 3569 www.comms.co.za Magazine subscriptions Sandy Stober | subscriptions@comms.co.za Advertising & sales Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Greg Botoulas | greg@comms.co.za

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

Getting back to the scary overseas markets, colleague Fiona Zerbst writes a very sensible guide to offshore investing and risk. I always enjoy investment experts putting it on the line. Here you will find Cannon Asset Managers on stock picks, both offshore and on the JSE. Financial advisers be warned: some people believe your time has come. Read the FPI’s Almo Lubowski’s article on why the financial services industry wants to cut out the middleman. And do investors feel more confident? You should be, according to Brendan Howie’s Momentum Investor Confidence Index. It says investor confidence is improving.

Copyright COSA Communications Pty (Ltd) 2012, 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,

This came through too late for an article, but ASISA has finally reclassified unit trust funds. With nearly 1 000 funds available the old system was a nightmare, making it difficult to choose a fund and compare performance. The new classification is far more logical, although it comes into effect only in January.

which are not mentioned or advertised. While every effort is made to ensure

But enough of nightmares, this issue will ensure a more peaceful sleep for investors and advisers. Especially when dreaming about those frightening offshore markets.

the correctness or suitability of the information contained and/or the products

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 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

All the best until next time.

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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FOXP2/2561/TRUNK/E

TRUST IS EARNED. Top Performing Equity Fund Top Performing Balanced Fund Top Performing Retirement Income Fund Top Performing Immediate Income Fund Over 3 years and 5 years.*

*Coronation Top 20, Balanced Plus, Capital Plus and Strategic Income Funds 1st Quartile over 3 years and 5 years in their respective ASISA fund categories to 31 August 2012. Source: Morningstar. Coronation Asset Management (Pty) Ltd is an authorised ďŹ nancial services provider. Unit trusts are generally medium to long-term investments. The value of units may go up as well as down. Past performance is not necessarily an indication of the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Fund valuations take place at approximately 15H00 each business day and forward pricing is used. Performance is measured on NAV prices with income distribution reinvested & quoted after deduction of all costs incurred within the fund. Coronation is a full member of the Association for Savings & Investment SA. Trust is EarnedTM.

Shaun Harris

SHOULD YOU STAY

SHOULD YOU GO? Investors know that they have to diversify portfolios offshore. Foreign investments have not been particularly rewarding over the past years but that should not concern a long-term investor too much. Share prices, stock markets and economies recover over time. With the turbulent global economies, itâ&#x20AC;&#x2122;s probably going to take longer this time. But then investors also know that patience is one of the greatest virtues of successful investing.

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One reason why offshore investments have not fared well is that the investments, whether in individual companies or global unit trust funds, have centred on developed markets blue chips shares. Under normal circumstances these investments would have been the prudent choice, but events have been far from normal since 2008. There remain great opportunities in developed markets but most economies are flat and consumers are under pressure. The real action is in emerging markets, where real and forecast GDP growth is far more robust and points to potentially better investment opportunities. “The issue of whether to invest offshore can be an emotive discussion for South African investors. The evidence of the last 10 years clearly suggests that it was a time to stay at home,” says Peter Bourne, MD of Ashburton. With the benefit of history we now know that. But a decade ago local investors were under pressure from their financial advisers (following the advice of various investment professionals) to asset management companies to invest offshore. Lots of that money went into developed markets before the great collapse started at the end of 2008.

Just one reason why investors would have been better at home is that the JSE outperformed global equity markets by more than three times, measured in US Dollars, says Bourne. But the times are changing. “The past two years has seen this situation reverse as global equities have begun to match and overtake the South African share market, while the Rand has begun to show signs of renewed vulnerability.”

“The past two years has seen this situation reverse as global equities have begun to match and overtake the South African share market, while the Rand has begun to show signs of renewed

vulnerability.”

So it seems to make sense to go offshore again. But where? There are no doubt opportunities in both developed and emerging markets. However the Eurozone crises and sluggish economic growth outlook is mitigating many developed markets. While economic growth does not necessarily translate to stock market performance, the numbers certainly look far better in emerging markets. Real global GDP growth in 2011 was 3.8 per cent. This can be broken down into 1.3 per cent in developed markets and 6.5 per cent in emerging markets, according to a table prepared by Absa Asset Management Private Clients, using Barclays Capital as the source. Looking ahead, the forecast for the full 2012 is 3.4 per cent globally, with developed markets GDP accounting for 1.4

per cent of this and emerging markets 5.4 per cent. Looking at some individual countries, the US is forecast to complete the full year with 2.3 per cent growth in GDP; Germany, the leading contender in Western Europe, with 1.1 per cent; and the UK a negative 0.2 per cent. Against this are large, leading emerging markets like Brazil with forecast GDP growth for 2012 of 1.7 per cent; China with 7.9 per cent; and India with 6.2 per cent. Ashburton is putting this into practice, with Bourne noting that Ashburton is focusing its resources away from developed markets to emerging markets like India and China, with strong trade and strategic links to Africa. But there’s more to emerging markets than the mostly large BRICS countries. Emerging markets investor Mark Mobius

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points to emerging Europe, saying many Western European banks are disposing of a number of prior acquisitions in Eastern Europe because they need capital. “Many individuals and companies in emerging markets, including those in emerging Europe, are picking them back up. China is very active in this regard and so is Russia. As a result, we are seeing a transformation in the way investments are being made in Eastern Europe.” This includes the introduction of financial regulations and privatisation programmes, Mobius adds. “I believe that even as the Eurozone’s troubles dominate headlines, long-term investors should take a closer look at emerging Europe.” However, many top companies operating in developed markets

looking at the products in their homes. Many skin care, baby care, oral health as well as medicines will probably come from Johnson & Johnson.

Wal-Mart, and earlier in the year was investing in General Electric. These serve as examples of good companies that can be bought at bargain prices because of the struggling US economy. should not be written off. Poor economic conditions and pressure on consumer spending have hampered growth prospects for many of these companies. For these reasons the share prices of many have been driven to lows not seen in years, if not decades. They remain sound companies with good management and while the short-term outlook is bleak, the companies and share price performance will no doubt bounce back strongly with stronger economic growth. Savvy investors know this and are using depressed markets to buy what they consider undervalued shares. According to MarketWatch.com, legendary investor Warren Buffett has been filling up on US bank Wells Fargo over the first half of the year, as well as BNY Mellon Corporation and General Motors. According to the site another legend, George Soros, has been buying

But perhaps investors want exposure to both developed and emerging markets. This can be achieved through investing respectively in emerging markets and developed markets unit trust funds. Or investors can look at the large multinational companies, which have exposures to both markets. There are quite a few based in South Africa that investors might feel more comfortable with, because they are more familiar with the companies. Examples would include Anglo American (the share is relatively cheap at present and rated a buy by many analysts), Sasol and SABMiller. However, the really large multinational groups are based offshore, many also on cheap share ratings. Take Johnson & Johnson as an example. Investors can gauge the extent of its global reach just by

A recent analysis by Anchor Capital’s Blake Allen in the firm’s London office says while the group’s growth in developed markets is expected to be sluggish, emerging markets growth is strong and will continue to drive earnings. On a forward price-to-earnings ratio of 13.3 times the share might be as cheap as it ever gets. This is one of the reasons Allen says Anchor Capital is buying the share now. So many offshore shares are presently cheap. But when will the share price come back? Best answer would be an educated guess from the experts. But the issue should not concern long-term investors too much. It comes down to the relationship between price and value. “Value is a stable number over time. The market continuously tries to guess how much stocks are worth and sometimes these decisions are made in a very emotional manner, thus resulting in a very volatile number, as seen on the stock exchange,” says Piet Viljoen, executive chairman at asset manager RE:CM.

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“Poor economic conditions and pressure on consumer spending have hampered growth prospects.” “Extensive research and analysis are therefore the best method of evaluating a stock’s value.” Decent dividend yields, at least above three per cent, are also important. If an investor does not need the dividend income and leaves it in the investment portfolio, it will prove surprising how the compound effect of that dividend income builds up over time.

Fiona Zerbst

OFFSHORE INVESTING Fiona Zerbst

AND RISK

outh Africa is a small investment pond. With approximately 400 shares to choose from, making up about 0.5 per cent of the global economy, it’s understandable that investors may feel like big fish in search of more interesting waters.

“You buy these shares through your broker, pay in Rand and don’t have to use your foreign exchange allowance.” 10

Then again, offshore may be a hard sell for a couple of reasons. Investors had their fingers burnt in 2001 when the Rand value plummeted and they moved up to a material proportion of their assets offshore, only to watch it recover up to 50 per cent of its value in 2002. Secondly, returns from global investments in developed economies and markets over the past decade have been little short of dismal. In Rand terms, local

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funds have outperformed foreign funds, so investors are forgiven for looking askance at asset managers extolling the virtues of offshore funds. Yet there are still compelling reasons to consider taking your money offshore. According to Mako Mapfumo, senior investment consultant at OMAC Actuaries and Consultants, it’s really a no-brainer for

“Most local asset managers don’t have offshore capabilities, but there is an advantage to their having an offshore associate who knows the landscape.” investors. “Investors need that diversification. The local market offers too few opportunities to diversify institutional funds. Growth prospects in South Africa are very much subdued – growth of only 2.7 per cent is forecast – but emerging markets are showing a lot more promise. Going offshore will allow funds to enhance their performance.” Another benefit is that you have access to a wide range of interesting investment possibilities. “For example, there are no South African car manufacturers,” says Tshepo Modiba, senior investment analyst at Cannon Asset Managers. “We are really quite limited here, in terms of quality assets on a company level. Astute investors are conscious of the fact that although there’s great macro uncertainty about the European region as a whole, there are pockets of quality to which we need access.” Alwyn van der Merwe, director of investments at Sanlam Private Investments, says that the investment risks of going offshore are no different to the risks of investing at home. Investors need to weigh risk against reward. “In our view it is now much easier to uncover value opportunities in offshore markets compared to 12 years ago. There’s an opportunity cost if you don’t gain exposure offshore,” he says. “In addition, remember that you have a much wider asset choice offshore and you protect your portfolio from currency and sovereign risk in the process.”

Foreign exposure limit The foreign exposure limit for retirement funds investing offshore is 25 per cent, an extra five per cent can be allocated for investment in Africa. The limit for individuals is R4 million or, if you join forces with your spouse, R8 million. As of January this year, it was also possible to take R1 million offshore without SARS clearance. Strategically, this means potential exposure to both developed and emerging markets, with the option to invest directly or indirectly in various markets. Given enough money and appetite, a piece of this pie is worth having, but the key is to know what your objectives are, what your time horizon is, and whether you are sufficiently well informed. “The landscape is vast, so knowledge is vital,” cautions Van der Merwe. How can you gain exposure? Increasingly, there are a number of ways for South Africans to go offshore with relative ease. And this could become a contested space as more investment solutions are offered. Within that space, you can opt for either Rand-denominated or foreign currency-denominated investments. “One of the easiest ways to gain offshore exposure is to invest in JSE-listed multinationals earning most of their income outside South Africa, such as Richemont,” says trader Simon Brown. “You buy these shares through your broker, pay in Rand and don’t have to use your foreign exchange allowance.” Brown says JSE-listed ETFs and ETNs (including x-tracker ETFs like Deutsche Bank’s MSCI USA Index Fund), also bypass the forex allowance, but adds that gaining international exposure through locally listed companies is the lazy route as you’re not necessarily putting your money to work. The convenience and low cost of passive investing appeals to many, but is it optimal? “Going passive means you can be wiped out by sentiment,” cautions Mapfumo, who feels that knowledge is what protects the investor dipping into offshore waters. “Most local asset managers don’t have offshore capabilities, but there is an advantage to their having an offshore associate who knows the landscape.” The flip-side of this is that active managers have struggled to outperform indices. “Only about 20 per cent of active managers overseas have outperformed after costs,” says Van der Merwe. Is there merit in going the DIY route? Brett McLaren, the joint country head for Saxo Capital Markets SA, says Saxo (a subsidiary of Denmarkbased Saxo Bank) offers a platform that gives local investors greater access to a wider variety of instruments, as well as gearing. “We offer real-time trading on global markets to local investors who want to take control of their own investments. This is for investors who want access to 32 exchanges and 2 000 ETFs globally as well

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as those who prefer instruments like CFDs, options or futures.” For McLaren, one of the key issues is transparency. “Sure, you get a quarterly statement from an asset manager showing you what’s been done on your behalf, but do you really know what’s going on? There’s a need to offer transparency, so when you place an order you know exactly what you’re getting and what the brokerage fee will be.” As with all investing, investor protection is an issue. McLaren says Saxo works with guidelines laid down by the Financial Services Board (FSB) to protect clients. An ‘appropriateness test’ is conducted; for example, so a 70-year-old widow won’t have access to gearing, for example. Is there an advantage to Rand-denominated investments? This largely depends on a client’s liquidity requirements and they need to understand that money taken offshore can’t be comingled with local assets. The issue of cost A number of asset managers agree that it’s generally more expensive to take your money offshore. You can set up an offshore bank account and transfer money from your local bank to an overseas broker, but expect to fork out quite a bit for the privilege of direct buying. “Trading costs for buying direct offshore equities are marginally more expensive than the local costs. The same applies for custodian fees and portfolio management fees,” says Van der Merwe. “As always, financial advisers must be careful not to charge excessive management and offshore fees. We regard a fee of 50 basis points for the decision to take the money offshore and the basic administration as fair to the client.” Clients can always compare their total costs of offshore investment with the local total expense ratio to judge whether the overall costs are excessive.” Although the client doesn’t have direct control over global investments, they aren’t being exposed to potentially poor broking services and untested platforms, which might be the case with direct investment. “For example, you might want to go direct to China but you could come up against poor corporate governance,” warns Mapfumo. It seems somewhat safer – and cheaper – for clients to leverage off a South African platform and seek clarity on fees upfront. The question is: are investors more likely to place their money in the hands of local asset managers or opt for a trading platform where there’s no minimum balance and they can invest as much or as little as they choose? There’s no doubt that the less knowledgeable investor shouldn’t dabble for the sake of avoiding layered fees. The dark offshore waters are navigable, but without sufficient knowledge a client could quickly incur losses. Investing offshore requires safe and steady hands.

Offshore Investing

LIGHT AT THE END OF THE TUNNEL Philip Bradford | Head of Investments at Absa Wealth

n a medium and long-term view, at Barclays we believe that the eventual avoidance of economic and Euro area disaster will deliver respectable corporate profitability with a modest degree of inflation risk. Certainly, the rebound in risk assets hasn’t been without foundation. The Euro debate is moving forward fractionally. Corporate results have surprised positively (and are possibly better than they look, because the biggest shortfall was partly attributable to lower oil prices). In recent weeks, US consumer resilience has been a little more visible. With developed equities up by 11 per cent since June’s low, there are potential profits to be taken and plenty of possible triggers for that. The failure, however, of core government bonds (including US Treasuries, UK gilts, bunds and OATs) to sell off more markedly as stocks have rallied testifies to a continuing intense risk aversion. For the meantime, developed stocks in particular look moderately inexpensive (even after the rally), while government bonds remain very expensive. The relative valuation of developed stocks versus bonds looks more extreme still. Our strongest conviction remains that on a multi-year view, equities will likely deliver better risk-adjusted returns than bonds – a belief baked into our Strategic Asset Allocation. As such, Barclays continues tactically to favour both the US and Euro area stocks ahead of those in Japan, the UK and the rest of the developed bloc. It is Barclay’s view that it is where expectations have become most overly pessimistic. On the multi-year view, stocks will also likely deliver better risk-adjusted returns than corporate bonds (whether investment grade

or high yield), not least because corporate bonds do face potential interest rate risk at some stage. However, spreads are likely wide enough, and the economic outlook sufficiently benign, to offer some support when interest rates and government bond yields do start to rise materially. We suggest though that this is unlikely this side of 2014, and goes on to emphasise the firm’s strategic preference for corporate securities generally ahead of government bonds. Despite the ongoing short-term challenges, 2012 has also provided a useful reminder of the benefits of taking a balanced approach to investing, financial personality and circumstance permitting. Certainly, while all asset classes have delivered positive returns in 2012 to date, some have fared markedly better than others. As such, for an investor with moderate risk appetite, Barclays estimates that the weighted basket of nine asset classes that constitute Barclays Strategic Asset Allocation would have delivered a total return of around seven per cent (in Dollar terms). An investor shunning risk entirely and sheltering in cash and short-term bonds, on the other hand, would have received perhaps one per cent. An investor who had bet the ranch on developed equities would have received 10 per cent, but at the cost of a rollercoaster ride during the second quarter at least. More generally, looking to the future, and given the lacklustre growth outlook in Europe and the US, the trajectory of global growth is still likely to be bolstered by Asia’s growing economies. However, they too face headwinds, one of the most prominent being domestic infrastructure. Since growth is either export or import driven, and given weakness elsewhere (especially in Europe), the focus in

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Asia is shifting to the domestic market where infrastructure projects (especially in China, Malaysia and Indonesia) will prove critical in capturing the wealth of Asia’s booming middle class. For EMEA-based and risk-tolerant investors, Barclays suggests taking advantage of the Asian infrastructure theme through credit rather than equity. Due to the fast-growing nature of some of these companies, the equity prices are likely to be particularly volatile, being influenced by complex market and regulatory environment. However, as infrastructure companies are usually able to generate steady cash flow to meet the defined coupon and principle payment schedule, the bond market has been an important funding platform for infrastructure projects to date with issues being well-received by investors. As such it would be best to hold a basket of bonds to avoid concentrating risk.

OFFSHORE INVESTING

LOCAL vs OFFSHORE Andre Cillie | Managing Partner of Fountainhead Global Equity Partners

“Investing is most intelligent when it’s most business like.” – Benjamin Graham.

n a nutshell these words gave birth to value investing. They suggest investors should think of common stock investing the same as buying whole businesses (focus on business fundamentals). Always ensure that the price you pay provides a sufficient margin of safety relative to the intrinsic value calculated via the cash flow streams of the business. This should help negate permanent capital loss. Lastly, ignore past share price performance. Our experience suggests that very few market participants stick to these basic principles. The most pervasive reason for this is the impact financial mathematics together with the proliferation of instantaneous financial market commentary has had on the collective investment psyche. Academics have taught fund managers to be more concerned with dampening the volatility (their preferred measure of risk) of a portfolio over the short term rather than reducing the potential for permanent capital loss (business man’s measure of risk). Volatility is measured against the market as a whole and due to monthly performance measurement, becomes the overriding concern when constructing a portfolio, not the business and valuation fundamentals of the companies being bought or sold.

This results in the typical portfolio consisting of hundreds of counters. Another consequence of this mind-set is that companies that have done exceedingly well in terms of performance over the medium term have a bigger impact on the potential volatility calculation of the portfolio relative to the market. They therefore become almost obligatory holds in an ever-increasing percentage exposure. Warren Buffett calls the phenomenon “rear-view mirror investing” and is probably the biggest cause of inferior returns over the long run. This brings us to the topic of this article, local vs. foreign investing. Over the last 10 years, investing in SA has been terrific for investors especially relative to investing in offshore developed markets, which have produced very poor returns. In our opinion, due to this differential in performance, many investors are making exactly this mistake when expecting these returns to be repeated on an absolute and relative basis over the next 10 years. Let’s go back in time and look at the valuations of the hottest of hot sectors in SA currently, namely retail. It should be clear from these figures that in 2001 any of the companies provided

terrific value (margin of safety), yet at the time substantial pessimism surrounded these counters. Now fast forward to today and let’s look at these same companies. Despite similar growth levels and much expanded/peak margins, the market is suddenly demanding far less yield to own these companies. In our book this results in a very significant chance of permanent capital loss.

“Volatility is measured against the market as a whole and due to monthly performance measurement, becomes the overriding concern when constructing a portfolio, not the business and valuation fundamentals of the companies being bought or sold.” Yet suggesting to investors that now is the time to sell will likely result in most investment advisers receiving a barrage of abuse from their clients due the terrific historical performance of these retailers. Today developed market stocks are in the same camp that the SA retailers found themselves in 2001. They’re exhibiting trough margins, very cheap multiples and, in our opinion, a terrific margin of safety; and as in 2001, are being treated with the same scepticism and negativity. The end result is likely to be similar to that experienced over the last 10 years, just in reverse.

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Offshore Investing

POCKETS OF OPPORTUNITIES René Grobler | Sales Director: Investec Asset Management

Given the turbulent nature of world markets and the general uncertainty clouding the global economy, it is little wonder that the thought of investing in the stock market these days leaves most people with a sense of fear to part with their money.

ne of the factors making it challenging to operate in this market is the fact that it is very fickle: on any given day certain bourses – our JSE is a case in point – will be reaching new all-time highs, while others will be severely punished. Increasingly, the global economic environment and global events are driving local asset prices. There is a scarcity of growth worldwide. In order to obtain decent investment growth in this environment of low interest rates and real returns, investors need to diversify their investments across asset classes and will need some exposure to equities. Investors will need to be more selective in their exposure to equity markets and choose stocks with characteristics aligned to their appetitive for risk and growth objectives. There are pockets of opportunities that hold great value for long-term investors. In order to identify these, investors need a new way of looking at investment opportunities that involve a combination of macroeconomic and institutional analysis, combined with fundamental research. In other words, investors will require a global lens to identify macro themes and trends and a microscope to identify investment opportunities. It is important to bear in mind that although there is growth, this is not broad-based. Additionally, the traditional safe havens – such as developed market credit – are not as attractive (or necessarily as safe) anymore. We believe there is good value to be found in global markets, but it is important that

investors remain calm. Sentiment is very depressed as there is an enormous amount of negative noise clouding the investment outlook. This is causing immense volatility in markets, resulting in investors being cautious at best, but nervous at the worst of times. In this environment, investors require a portfolio that offers real growth along with downside protection, lower volatility and a lower risk of capital loss. This type of performance can typically be found in blue chip international franchises with robust balance sheets and global distribution networks. We have seen that, even during times of uncertainty big global brands, which include companies such as Johnson & Johnson, Nestlé, Pfizer and Coca-Cola, typically enjoy consistent earnings growth and create wealth for their shareholders year after year, even when the wider economy has been struggling. These household names usually manage to maintain consumer demand when the economic environment is uncertain. Furthermore, current markets present a good entry level for long-term investors compared to these companies’ historical valuations. South African investors can gain exposure to high-quality global brands and blue chip stocks via funds like the Investec Global Franchise Fund, which is managed out of London and Cape Town by a globally integrated investment team headed by award-winning portfolio manager Clyde Rossouw. The fund was launched in 2009 and invests in a concentrated portfolio of

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attractively valued high-quality stocks with a proven track record of sustainable growth, producing above average yield. The stocks included in the portfolio tend to have better balance sheets, better credit ratings and a lower default probability (in terms of their five-year debt) than many governments. This is particularly pertinent in the current era of heightened sovereign risk and high aggregate levels of public sector debt. Many of these companies have significant exposure to robust and growing emerging markets, but because they’re listed in developed markets that are trading at depressed levels, they are available relatively cheaply compared to historical valuations, effectively giving investors the best of both worlds. The average price earnings multiple of the portfolio currently averages 13; it has a 7.3 per cent free cash flow and the average dividend yield is 3.4 per cent. Investors also have some downside protection because you are not taking a risk on a value trap that may never recover. With $440 million under management, the fund’s outperformance target is three to five per cent per annum gross of fees over the full market cycle, assumed to be around seven years. The five-year annualised return to July 2012 was 4.1 per cent, which is convincingly better than the MSCI AC World Index of -2.4 per cent. The fund has consistently been ranked in the first quartile over all periods since inception and over the last three years returned 13.1 per cent compared to the MSCI AC World Index return of 4.9 per cent.

OFFSHORE INVESTING Responsible Investing

VALUE IN EMERGING OR

DEVELOPED MARKETS Wilhelm Hertzog | portfolio manager at RE:CM

sset manager RE:CM says that its preference lies with developed, rather than emerging markets. Emerging markets have outperformed developed markets for more than a decade, on the back of superior growth in earnings power and a significant rerating relative to developed markets. “Looking at markets from a book value and price-to-book (P/B) perspective, which in our experience gives a better indication of long-term value and price levels for markets as a whole than earnings-based measures, it is clear that since the early part of 2009, emerging markets have traded at a P/B ratio premium compared to developed markets,” says Wilhelm Hertzog, portfolio manager at RE:CM. “However, we believe these high ratios are not justified, for a number of reasons.” The first reason, says Hertzog, is that over the long term, risk-adjusted returns on capital between markets should not diverge widely. “Theoretically there is no reason why a Dollar invested in a developed market should be worth more or less than a Dollar invested in an

emerging market. Investors will be indifferent about where to invest if the risk-adjusted returns are the same from investments in emerging and developed markets respectively. If the riskadjusted returns are different, capital will tend to flow to the superior destination, which will erode the superior returns over time. A clear discrepancy in prospective risk-adjusted returns should therefore not last for a very long time.” He says the statistics show that capital has been flowing into emerging markets at a rapid rate. “This should drive down the superior returns on capital (and equity) enjoyed in emerging markets over the past decade. “There has been a dramatic increase in foreign direct investment (FDI) in low- and middleincome countries since 2005, which is more or less when returns on equity (ROE) in emerging markets started increasing meaningfully above that of developed markets.” He says if you consider the 1.0 to 1.5 per cent average spread in return on equity that emerging markets have earned above developed market for the past 15 years to be a sustainable level, and assume that emerging markets will continue to grow earnings about 2.5 per cent faster than

developed markets as they have done on average over the same period, the question that will determine empirically whether emerging markets should trade at a P/B premium to developed markets is simply whether cost of equity differences between emerging and developed markets offset the better growth and returns achieved in emerging markets. A two per cent difference in cost of equity between developed and emerging markets will fully offset the benefits of the slightly higher levels of growth and profitability enjoyed in emerging markets. “There is unfortunately no definitive answer to the question of what the cost of equity differential is between developed and emerging markets. But our assessment is that a two per cent equity risk premium for emerging markets above that of developed markets is easily justifiable. While political risk and matters like the security of property rights have certainly vastly improved in most emerging markets over the last decade, expropriation of assets, super taxes and capital controls still occur more often in emerging markets than developed markets, recent events in Europe notwithstanding. These all increase investment risk and hence warrant an increased required rate of return on equity. “For these reasons, we do not believe the P/B premium that emerging markets currently enjoy over developed markets is justifiable. We are finding attractive value in high quality businesses in developed markets, and will not be lured into emerging markets just because (or especially because) they are currently top of mind for most investors and capital allocators globally.”

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HEAD TO HEAD

ACPI INVESTMENT MANAGERS CIO | ALTERNATIVE INVESTMENTS

Markus

K reutzer

CIO | Alternative Investments at ACPI Investment Managers

1. Is offshore investing just an overhyped fad? The onshore market in South Africa has grown tremendously over the years. However, for the foreseeable future offshore allocations are proving popular as they can provide access to the whole variety of investment strategies and styles available to investors. 2. Developed markets are struggling. Do any of these offer potential for investors? Within traditional asset classes like fixed income and equities, a large proportion of the Western developed world continues upon its multi-year deleveraging cycle, which in turn should lead to lower levels of aggregate corporate profitability, both due to stagnating revenues and increasing costs. In such an environment where governments compete with the corporate sector for scarce capital, we believe that branded, large multinational companies with a strong presence in faster growing emerging markets should be the relative beneficiaries over the coming years. Therefore, one of the most compelling investment opportunities over the long term remains to be invested in Western companies that serve domestic emerging market demand. 3. Should SA investors consider emerging economies, given that investors are already invested in a developing market? In a world of developed market deleveraging, emerging markets offer attractive investment opportunities especially in the fixed income space. As yields in developed markets have been driven to extreme lows due to unprecedented monetary policies, investors challenged with the question how to achieve

positive real returns are increasingly drawn to tap into markets which offer higher yields and in some instances better fundamental data especially with regard to fiscal health. Within equity markets, what is increasingly striking to us is the price investors are willing to pay for exposure towards the secular change taking place especially in the consumer sectors. While we don’t doubt the ever-growing levels of prosperity for the average emerging market consumer, we believe the key question for investors is posed by how one capitalises from this long-term secular growth story in the most profitable manner. 4. What’s the best way to access offshore markets? In order to access offshore markets, longterm investors should analyse the relative valuations of various market segments. We believe that emerging markets lend themselves to fixed income allocations due to the yield advantage and fiscal strength of various countries. Within equities, we believe that on a risk-adjusted basis the secular shift within emerging markets’ consumer sectors can be accessed via well managed branded developed market consumer companies with high quality attributes should be able to perpetuate a virtuous cycle of pricing power, strong cash flow generation, brand-building reinvestment and rising barriers to entry over the long term. In addition, investors need to identify non-correlated strategies to mitigate the significant downside risks that traditional investments have repeatedly witnessed over the past decade. Investors focused on capital preservation have come to the conclusion that macroeconomic risks have generally been understated and made investments which turned out to be much riskier after the fact. This threatened the permanent impairment of capital. Unlike the limited diversification

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that traditional portfolios provide in a severe market downturn, hedge funds can significantly reduce extreme losses and smooth the variability of returns over time. 5. What are the biggest risks to investors of investing offshore? Investors focused on positive real returns still need more diversity, less benchmark orientation, and better protection against significant market downturns in their portfolios. In addition to selected investment themes like emerging market credit and the secular shift within global consumer sectors, hedge funds – especially in strategies like fixed income relative value, discretionary and systematic macro – are one of the few investment forms that can serve this purpose. Investors need to understand the sources of returns, the framework followed, and the implicit and explicit liquidity risks taken in relation to their desired risk and return. 6. Should investors look at diversifying their offshore asset classes as well, or stick with equities? Like hedge fund strategies complementing the allocation to active and passive equity and fixed income mandates, offshore funds can offer a distinctly different strategy and, therefore, risk exposure in addition to existing onshore allocations. As a positive side effect, such an approach also reduces operational and regulatory risks associated with external fund mandates. Investors should diversify their portfolios across asset classes and investment styles, based on their risk tolerance. By combining thematic exposure based on relative valuations between emerging and developed markets, with truly diversifying exposures in form of actively managed strategies, investors can achieve higher risk-adjusted returns over time.

HEAD TO HEAD

Coronation Fund Managers Head of Personal Investments

P ieter

K oeke m oer

Head of Personal Investments at Coronation Fund Managers

1. Is offshore investing just an overhyped fad?

revenue in emerging economies with faster than expected growth rates.

No. A strategic allocation to offshore assets is an important diversifier that will improve the quality of virtually any investment portfolio. It provides investors with access to economic drivers (e.g. the consumerisation of the Chinese economy) and industries (global technology giants such as Google and Apple) that are not accessible through the local asset markets. It also allows investors to hedge the portion of their future spending that is priced in foreign currencies (such as transport, food and healthcare costs) against a decline in the value of the Rand, which is one of the most volatile of the globeâ&#x20AC;&#x2122;s major currencies. We have recently emphasised the benefits of offshore investing because we believe offshore growth assets offer better value than their local counterparts. While we have implemented this view in all our multi asset funds - which are close to their maximum allowed foreign allocations - private investor demand has not yet followed suit.

3. Should SA investors consider emerging economies, given that investors are already invested in a developing market?

2. Developed markets are struggling. Do any of these offer potential for investors? It is easy to conclude that there are few attractive investment opportunities in regions or countries where the overall economy is struggling. While it is true that all companies in aggregate canâ&#x20AC;&#x2122;t continue to grow faster than the economies in which they operate over extended periods of time, this is not necessarily true at the individual company level. Disruptors can rapidly gain market share in mature industries or markets, while globalisation means that many businesses listed in developed markets actually earn a major portion of their

This is an investment myth that leads investors to the wrong conclusions for the right reasons. SA and other emerging markets are highly correlated in the short term. This was an issue when offshore exposure was severely restricted through tight exchange controls, as it made more sense to allocate the 10 per cent or 15 per cent of portfolios that could be invested offshore to less correlated developed market assets. This constraint has become largely irrelevant, as exchange controls have been pretty much abolished for most investors. We would argue that broader emerging market exposure is actually less risky than SA equity exposure, as it allows you to diversify sovereign risk (exposure to many policy environments rather than just one) and increases the size of your investment universe 12 to 15 times. SA is a low-growth economy compared to countries such as China, India, Indonesia, Brazil and Turkey, where roughly three billion people are slowly joining the middle class with increasingly sophisticated spending needs. Examples include US company Yum! Brands (owners of KFC) and Dutch brewer Heineken, which earn a major portion of their revenue outside the developed world. 4. Whatâ&#x20AC;&#x2122;s the best way to access offshore markets?

aligned to their time horizons. This simplifies the process significantly and allows investors to gain exposure to a wide variety of markets, regions, currencies and asset classes. It also enables the portfolio manager to reduce exposure to overvalued assets, reducing the need for the investor to actively make judgments about the relative attractiveness of different assets. 5. What are the biggest risks to investors of investing offshore? Paying the wrong entry price. Local investors got badly burnt in the late nineties and early noughties by overpaying for international assets. At the time, global share markets were at the end of a 20-year bull market, trading at very high multiples, while local shares were relatively cheap. The Rand also weakened dramatically as nearly all investors tried to diversify offshore at the same time. This led to poor outcomes. At the moment, the Rand is relatively strong and foreign assets are relatively cheap, making a repeat of this experience less likely. 6. Should investors look at diversifying their offshore asset classes as well, or stick with equities? We believe a broader view is useful. We use asset classes such as listed property, corporate credit and commodities to widen the opportunity set and enhance the efficiency of portfolios. DIY investors without access to appropriate research are probably best served by sticking to global blue chip shares.

We strongly believe that most investors should consider investing via multi-asset funds with clearly defined objectives that are

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Shaun harris

â&#x20AC;&#x153;We view gold as the ultimate currency and safe haven during this period of slowing global growth. In an investor portfolio, gold offers diversifying benefits as it is uncorrelated with other asset classes. We remain bullish on the prospects for the commodity as well as gold equities.â&#x20AC;?

FOREIGN INVESTORS A tale of two halves Shaun Harris

outh Africa has long been one of the favoured emerging market investment destinations for foreign investors. The popularity of South African markets was growing earlier this year, borne out by near-record inflows of foreign investment capital into the local bond market. Everything was going well, with expectations that the South African Government would start using the proceeds of bond issuance to fund its extensive infrastructure development programme. Then the country was hit by the tragedy at Marikana platinum mine and the way the police shootings were dealt with by mine management and government authorities. It seems foreign investor perceptions have turned from glowing to dim.

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“In terms of Africa, South Africa still generates the most interest from global investors, both directly and as a springboard into the African continent at large.” It may, and probably will be, a fairly short response. Institutional investors overseas aren’t stupid, at least not most of the time and they are quick to right mistakes. Erring on the side of caution it’s no surprise they withdrew from South African investment markets. But not being stupid, foreign investors will gauge the right time to come back. It may be before the end of the year. Assessing political risk is just one aspect of investing in foreign markets. The time will come when the risk balance again tips in favour of getting decent bond yields, as capital markets in much of the developed world offer lousy returns. Over the first six months of the year there was a foreign inflow of more than R50 billion into the South African bond market. But foreign flows into local bonds and equities aren’t called hot money for nothing. As the events at Marikana spread to the South African mining industry in general, foreign money began to flow out, close to R3 billion in the week at the time of writing from bonds and equities. That may look small against the large inflows over the first half of the year; however, the question we cannot answer is how long the outflow will continue and when it will again turn positive. It seems that all is not lost. “In terms of Africa, South Africa still generates the most interest from global investors, both directly and as a springboard into the African continent at large,” writes Lance Gordon, portfolio manager at Absa Asset Management Private Clients, in its latest newsletter. Apart from attractive returns on investment there are many reasons for this. Both the South African stock market and bond market are efficient, transparent and probably as sophisticated as many counterparts in developed markets. That makes it relatively easy for foreign investors to invest in South Africa. Susan Shabangu, Minister of Mineral Resources, was at pains to stress at a recent conference in Australia that South Africa remained a friendly investment destination and would not allow what she called “renegade elements” to subvert the rule of law. South Africa was ready and open for business, she said.

Important as the foreign hot money inflows into South African bonds and equities are – and often these do turn out to be long-term holdings – what is really needed are foreign direct investment (FDI) inflows. That’s foreign money that becomes permanent capital in the country as foreign investors either invest in South African companies or start green fields operations, building factories, starting new business and often creating new jobs along the way. On this front South Africa is, fortunately, not doing badly at all. According to the UN Conference on Trade and Development, FDI inflows into sub-Saharan Africa increased from US$29.5 billion in 2010 to US$36.9 billion in 2011, an increase of 25 per cent. South Africa received US$5.81 billion of this, the secondlargest recipient of FDI in the region after Nigeria. The report also noted that foreign investor perceptions were positive based on decent economic growth figures and high commodity prices.

“Over the first six months of the year there was a foreign inflow of more than R50 billion into the South African bond market.” When FDI represents a foreign company coming into the South African market, it’s sometimes treated with suspicion by South Africans. It’s the wrong perception. Foreign shareholdings in local companies should be welcomed, introducing new competition that ultimately must be good for whatever industry the foreign investor is in and for consumers. There are also fears, for Africa as a whole, of foreign economic colonialism by China and some other countries in Asia. Once again it’s the wrong perception. China might be trying to corner resource industries that make economic sense for it to control back home. But the fixed investment needed to do that will benefit the host country. And FDI often results in a two-way flow of business; as foreign companies might use South Africa as a springboard into Africa their presence can result in opportunities for South African companies to enter new foreign markets.

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In these turbulent times for developed economies there is one investment asset in South Africa that is again proving its safe haven status: gold. Daniel Sacks, portfolio manager at Investec Asset Management, says investors are again seeking shelter in gold, shown by the rising price of the metal. Sacks is convinced that gold will reach US$1 800 next year. “We view gold as the ultimate currency and safe haven during this period of slowing global growth. In an investor portfolio, gold offers diversifying benefits as it is uncorrelated with other asset classes. We remain bullish on the prospects for the commodity as well as gold equities.” Gold equities are the interesting question with all the trouble going on in the mining industry. Yet at the time of writing, gold mining shares were going up against the trend. It was too early to tell why. It might have just been a short-term recovery in gold share prices; or perhaps sharp foreign investors getting in to take advantage of the low stock prices and the bullish prospects for gold. Another local investment asset foreign investors could be looking at is listed property. It remains, as it has for so long, one of the top-performing assets in the country. Property experts Catalyst Fund Managers, in its latest property report, points out that the UBS Global Investors Index (recording the performance of global listed property), advanced 23.4 per cent in the year to end-August measured in Rand. Against this, the SA Listed Property Index was up by 36.7 per cent over the same period. FDI inflows should continue to be strong. South Africa, apart from its own investment attractions for foreign investors, is the ideal base for a springboard into the rest of Africa. The banking system remains sound, quite a claim to be made as large banks around the world go bust and have to be bailed out with taxpayers’ money. The infrastructure is developed, and technology systems and technology skills are high. South Africa’s major ports are well equipped to deal with imports and exports for foreign companies. If the gold mines recover and they can manage to boost exports and narrow the current account deficit, the year might not end that badly. And that, in turn, will encourage more foreign investment.

profile | REZCO ASSET MANAGEMENT

Rob S pa n j a a r d I nvest m ent D irector at R ezco A sset Manage m ent

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“Foreign investments have become an increasingly

important factor, as the very low return available to investors in first world markets means they have to be more adventurous in searching for yield.”

1. You are based in America for part of the year. What is the reason for this and how does this assist Rezco in its investment strategy?

Over the next year I will be in the USA about 25 per cent of the time. We are unusual in that we invest the foreign portion of our funds into direct shares, not foreign unit trusts. Spending some time in the USA therefore helps greatly in developing an international perspective. This is valuable for our local holdings as well, in that generally about half of the South African market is owned by foreign shareholders, so the South African market’s movement is hugely influenced by foreign markets and investors. If you can understand how they think, it gives you an edge as a South African manager. By way of example, there has been about a 98 per cent correlation between the JSE and the American market over the years. I find South Africans tend to take a far more bearish view about their country than the foreign view.

that when managers get over a certain size, performance suffers as they have reduced flexibility. There is a demand for niche managers who can manage the risk part of the equation as well as the return side. 3. You have a compelling performance record in the industry. How has Rezco achieved this?

The performance has two sources. Our stockpicking ability has enabled us to outperform the JSE even with an average of only 65 per cent of the fund invested. Secondly, we believe preserving capital is as important as making it. We try and avoid trouble, for example, in the crash of 2008 our fund was actually up about eight per cent for the year.

When we buy a share we see it as part of a business. I always ask myself whether I would like to be the CEO of this company for the next five years if I was paid only in incentive shares. Having founded and run a JSE-listed company makes this easier to visualise.

Foreign investments have become an increasingly important factor, as the very low return available to investors in first world markets means they have to be more adventurous in searching for yield.

We also invest directly into foreign shares and not into foreign unit trusts. This cuts out a whole extra layer of fees. There are some really fantastic companies that we invest in through the 25 per cent that we can hold offshore.

2. Rezco is a fairly recent company, having been founded in 2004. What was your motivation behind setting up a new asset management company?

4. There are still concerns around the global market following the 2008 economic crisis. What do you think investors can expect for the year ahead?

The founders have all managed money at large institutions and proved that we can do it very well. The excitement and flexibility of running your own business, versus being part of a large institution, is a huge attraction. We also believe that we can achieve a better result. International research has also shown

We believe that volatility is going to remain going forward. However, we don’t see a big meltdown like we had in 2008, but having said that, there will be some gut-wrenching moves. We see the US economy starting to recover, which should underpin improving equity markets.

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5. A number of asset managers have said this year that it is becoming increasingly difficult to find good quality, under-priced stocks. Do you agree?

We would agree, especially locally. However, if you look hard, there are gems out there. This is where the boutique managers have a huge advantage. We can move five per cent of our portfolio into a company with a R10 billion market cap: the mega-managers just cannot do this. 6. How has the investment industry changed since you started?

The market has moved towards balanced funds rather than specific mandates, on both the individual and institutional size. Five years ago it was fine for managers to say that they don’t have a clue whether the market is going to go up or down. The thinking has moved towards holding the asset manager accountable for managing risk, as they are supposed to be the experts in the room. There has been an increased understanding that boutique managers are an important part of an investment portfolio. The internet age has levelled the playing fields. Even as a smaller manager I have access to way more great research than I could ever possibly read. So not having a huge research department is no longer a disadvantage. The distinguishing factor has become how you process that information and in managing to focus on what is important and what is just noise.

Fund profile

MOMENTUM

AFRICA EQUITY FUND Fungai Tarirah | Fund manager and head of Africa investments at Momentum Asset Management

1. Please outline your investment strategy and philosophy for the fund. The Momentum Africa Equity Fund seeks to provide sustainable, riskadjusted returns over the long term through the selection of stocks that trade below their long-term intrinsic value. The fund is managed on a benchmark-agnostic basis, where ideas are implemented to create a best-ideas fund. Our approach integrates bottom-up and stock-picking processes with an actively managed and disciplined risk management process. The team focuses on finding companies that are actively participating in the key themes unfolding across the continent and run by experienced management teams. Having strong brands that command market share, while maintaining clean balance sheets and generating free cash flow, are also important considerations. 2. What are your top five holdings at present?

Tarirah has spent his professional career as an analyst and portfolio manager for Africa ex SA funds. The analysts are generalists, allowing for robust debate and sound understanding of various sectors across countries. Given that the team travels the continent extensively, this broad skill set reduces key man dependency. 7. Please provide performance of the fund over one, three and five years (please include benchmark). • One year: vs. benchmark • Three years: vs. benchmark • Since inception p.a. (Jul ’09): vs. benchmark

1 year

3 years

5 years

MOMENTUM AFRICA EQUITY FUND

22.0%

8.1%

8.2%

Benchmark

19.2%

-2.0%

-2.3%

Our top holdings consist of fast-moving consumable goods, manufacturers and banks. 8. Please outline fee structure of the fund. 3. Who is the fund appropriate for? Fees are implemented on a 1.5% (excluding VAT) flat basis. The fund is a listed equity-only fund that is suitable for long-term investors interested in participating in a pooled investment vehicle that seeks to exploit opportunities in inefficient, under-invested markets on the African continent. 4. Have you made any major portfolio changes recently? No, there have been no major changes to the fund over the past three months.

9. Why would investors choose this fund above others? The Momentum Africa Equity Fund is a liquid and diversified vehicle that allows investors to easily access the African market. The investment process takes cognisance of the risks inherent to frontier markets and thus ensures that downside risk is actively managed through stock selection, country diversification and consideration of non-financial factors like environmental, social and governance (ESG) practices.

5. How have you positioned the fund for 2012? At the beginning of the year, we expected economic growth to remain robust across African countries. We also anticipated that we would see volatility in the markets, as well as merger and acquisition-driven price movements. Against such a setting, the stocks in the fund have been and remain geared towards internal consumer demand growth within the various countries. These have been stocks benefiting from a rise in middleclass spending, burgeoning demand for consumer goods in towns and cities due to increasing urbanisation and higher government spend on transport and housing infrastructure. For the remainder of the year, stock selection remains crucial to performance within the fund.

With the Africa team travelling the African continent as extensively as it does, opportunities are constantly being sought. Ground-level research is also being undertaken on an ongoing basis, as are meetings with company management and in-country stock brokers. The fund will not buy into a stock where company management has not been met, thereby ensuring that the generation and implementation of investment ideas is based the most up-to-date information provided. For those with sufficient patience, the African market currently offers a number of attractive return-generating opportunities in industries including the provision of financial services, the production and supply of consumer goods, infrastructure development (road, rail, ports, etc.) and import substitution (local production stimulus).

6. Please provide some information around the individual/ team responsible for managing the fund? Fungai Tarirah is fund manager and head of Africa investments, and Annie Yates and Sandisile Dlamini are both investment analysts.

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Fund profile

MET WORLDWIDE

FLEXIBLE FUND OF FUNDS Wynand Steyn | Portfolio manager at Olympiad Investment Managers

1. Please outline your investment strategy and philosophy for the fund. We believe that macroeconomic themes ultimately drive the profitability and returns of investments across all asset classes. Investors should pay attention first and foremost to their allocation across asset classes as this will be the biggest determining factor of long-term investment return. Various studies have shown that as much as 93.6 per cent of investment returns can be attributed to asset allocation. We therefore undertake long-term strategic asset allocation, enhanced by a more dynamic tactical asset allocation component which rebalances the exposure to each asset class on an ongoing basis.

He is a respected financial analyst with a particular interest in monetary economics, macroeconomics and policy issues. He is also the proud recipient of an Absa/Beeld Economist of the Year award. Derek Lowe, analyst, has over 20 years’ experience in the investment management field, and another 20 in the pensions fund industry. Derek boasts an impressive track record of delivering outperformance. 5. Please provide performance figures for the fund. Management of the fund was taken over by Olympiad Investment Managers in September 2010. 1 year

2 years

MET Worldwide Flexible FoF*

21.06%

27.11%

Fund benchmark

8.80%

16.37%

WorldWide AA category average

17.56%

27.19%

2. Who is the fund appropriate for? The fund is suitable for an investor with an appropriate investment time horizon (ideally longer than 36 months) and moderate risk appetite. Diversification across asset classes has resulted in this fund having a risk profile that is significantly lower than general equity funds, while still allowing for outperformance. Volatility levels over the past year were less than half of that experienced in general equity funds (while delivering returns well in excess of 20 per cent).

*Previously IMC Worldwide Flexible FoF and to be co-branded MET Olympiad Worldwide Flexible FoF.

3. How have you positioned the fund for 2012?

6. Please outline the fee structure of the fund.

Listed industrial and commercial property yields continue to appear very attractive when compared to returns on government bonds and commercial paper. We have therefore favoured an overweight allocation to listed property, both locally and abroad, since 2011. With central bank stimulus and quantitative easing programmes being the order of the day, we ensured that we had some allocation to both local and international equities in order to benefit from this focus. Our offshore allocations further provided a hedge against the depreciation of the Rand. We make extensive use of exchange traded funds, where appropriate, in order to reduce costs within our portfolio.

The fund charges an annual service fee, as well as a capped performance driven fee for performance above its benchmark.

4. Please provide some information around the team managing the fund. Wynand Steyn is the portfolio manager and is an internationally Chartered Alternative Investment Analyst (CAIA). He is also a registered person in equities with the SA Institute of Financial Markets (SAIFM) and an associate member of ASISA. He started his career in investments as an analyst more than 12 years ago, after which he was appointed portfolio manager at Olympiad Investment Managers. André Mellet, economist, has a master’s degree in monetary economics and is economics lecturer at North-West University.

7. Why would investors choose this fund above others? The MET Worldwide Flexible FoF forms part of a selection of funds managed by independent managers under third-party boutique manager co-naming agreements on the MET Collective Investment Schemes (CIS) platform (previously Metropolitan). Co-naming agreements enable smaller managers to compete successfully with larger investment management industry participants, as well as enjoy the backing of one of the largest CIS management companies in South Africa. Accessibility and communication is what sets our company apart. We form close relationships with intermediaries utilising our funds for their clients and they enjoy direct access to our decision makers and have ongoing insight into, and understanding of, our investment process and current position. This approachability, combined with aboveaverage fund returns, places the intermediary in the ideal position to satisfy their clients’ investment needs. Please visit our website at www.olympiad.co.za for more information.

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Fund profile

PRESCIENT AFRICA EQUITY FUND

Jonathan Kruger | CFA, graduated BBusSc honours in quantitative finance at the University of Cape Town.

1. Please outline your investment strategy and philosophy for the fund. The Prescient Africa Equity Fund is a Pan-African fund which invests in listed equity markets across the continent, excluding South Africa. The investment universe includes emerging markets, Egypt and Morocco, and frontier markets, Tunisia, Kenya, Nigeria and Mauritius. Smaller African stock markets are currently excluded on liquidity considerations. The philosophy of the fund is that African shares and markets can be over or under valued, which can be exploited using an objective, value-based investment process. The investment process follows a bottom-up, quantitative approach, producing a composite ranking of individual shares, and selecting those which show value compared to the rest of the market. At the core of the process is a value model which selects shares based on fundamental factors. Behavioural factors complement this value core to produce consistent performance in different market cycles. The portfolio is benchmarked against the MSCI EFM Africa ex ZA Net Total Return Index, and is managed in a benchmark-cognisant manner. 2. What are your top five holdings at present? 1 2 3 4 5

Commercial International Bank Guaranty Trust Bank Zenith Bank Plc Nigerian Breweries Plc First Bank of Nigeria Plc

9.23% 7.32% 6.70% 6.22% 5.98%

3. Who is the fund appropriate for? The fund is suited to institutional and retail investors with a long-term investment horizon, who are seeking capital growth and have an appetite for African equity market risk. 4. Have you made any major portfolio changes recently? No. 5. How have you positioned the fund for 2012? The portfolio construction is suggested by our quantitative model, which is currently delivering the following country allocation profile: Egypt Kenya Morocco Mauritius Nigeria Tunisia Cash

30.90% 15.99% 4.66% 3.94% 40.50% 2.92% 1.09%

â&#x20AC;&#x153;The investment process follows a bottom-up, quantitative approach, producing a composite ranking of individual shares, and selecting those which show value compared to the rest of the market.â&#x20AC;?

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6. Please provide some information around the individual/ team responsible for managing the fund. Jonathan Kruger, CFA, graduated BBusSc honours in quantitative finance at the University of Cape Town. He conducted his honours thesis in conjunction with Prescient and subsequently joined the company as a portfolio analyst in February 2007. Initially he developed equity portfolio management systems and conducted research on local and global equity markets. He was promoted to portfolio manager in 2009 and was instrumental in implementing equity strategies within Prescient’s Global Growth Fund. After three years of research on African markets, he launched Prescient’s Africa Equity Fund in April 2011. 7. Please provide performance of the fund over one, three and five years (please include benchmarks). ZAR performance to end August 2012. 9. Why would investors choose this fund over others? Since inception, p.a. (April 2011)

1 year

Prescient Africa Equity Fund

14.90%

33.33%

Benchmark

19.56%

38.24%

8. Please outline the fee structure of the fund.

Sculpture by Beth Diane Armstrong

Prescient Tortoise Ad_130x175.pdf 9/10/12 2:07:00 PM There are various fee classes. Potential investors are welcome to enquire for details.

While developed markets are faltering and global growth is depressed, African economies are vibrant and rapidly expanding. Rising GDP per capita, urbanisation, the rise of the African consumer and an improving fiscal environment are translating into strong profitability and performance of African companies. The Prescient Africa Equity Fund allows an investor entry into these markets while providing the comfort of liquidity as the fund invests only in the most liquid shares in African markets. The fund follows a value-based quantitative investment process, which avoids the pitfalls of forecasting and removes emotion from the valuation and portfolio construction process.

SLOW AND STEADY WINS, CONSISTENTLY. At Prescient, we’re in it for the long run. In fact, our first clients are still our clients. They

trust

our

proven,

pragmatic

approach; something we call QuantPlus®.

It’s how we invest – in the past, today,

and in the future.

CMY

To know more about any of our products and services, visit www.prescient.co.za.

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V E RY

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SHIFTiNG MARKETS STEER THE FINANCIAL INDUSTRY INTO UNCHARTED TERRITORY Financial markets are operating without a compass and in an entirely new context. There has been a fundamental shift in the dynamics of investment markets as well as traditional investor behaviour. However, while there are still opportunities to be found, asset managers are warning investors that impulsive and irrational investment decisions could be more costly now than ever.

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aul Stewart, head of Grindrod Asset Management, says, “Seldom in our modern economic history have we experienced such aggressive fiscal and monetary policy operating simultaneously with such muted effect. However, without ignoring the obvious economic risks, it does appear that based on valuations good opportunities exist in selected global and South African shares as dividend yields increase and corporate balance sheets are strengthened.”

Meanwhile, Matt Brentzel of Cadiz Asset Management says that the combination of fiscal intervention and investor mindset has altered the inherent behaviour of the share markets. In the recent Cadiz 2012 Annual Report, Brentzel reported that the conventional wisdom – that the equity market is supposed to discount the future – no longer holds.

“Some investors look at commodities and believe that the price is really cheap. However, there is something in investments called the value trap, where an asset looks cheap but just keeps getting cheaper because the earnings keep falling.” Brentzel explains the shift in investor mindset from an implied point-of-view: “The view is one of a ‘we believe it because we know that it’s going to happen’, to one of ‘we’ll believe it when we see it’. Thus, in the earlier period, it was not unusual for the PE ratio to expand in the face of declining earnings as investors anticipated some form of monetary or fiscal stimulation,” he explains. Anil Jugmohan, CFA, investment analyst at Nedgroup Investments also comments on the changing investor mindset in today’s markets. He says that off the back of poor returns from managed funds, many investors have taken investment decisions into their own hands. He notes that due to the erratic returns of the current market, many investors are tempted to switch from one investment to another; a strategy he says can be exceedingly damaging. “The fundamental expectation behind switching is that the investor believes that he can consistently predict when a particular fund will produce better returns than the alternatives and thereby take advantage of this by investing or disinvesting at the appropriate time,” he says.

COMMODITY SLUMP PRESENTS MORE THAN ONE CHALLENGE FOR INVESTORS Investors who are looking towards the recent slump in commodity prices – which has seen many resource stocks plunge on the Johannesburg Stock Exchange (JSE) – as a good buying opportunity, are likely to be severely disappointed. According to Rob Spanjaard, investment director at Rezco Asset Management, the record high margins that have been enjoyed by commodity producers over the past decade are likely to start falling, which will continue to make the cheap valuations of many mining shares a mirage. “The mega boom that we have had in commodities will start coming to an end.” Spanjaard says that while mining stocks as a whole are underperforming, this does not mean that all commodity prices are set to contract. “Each commodity has its own supply and demand fundamentals, so oil would be different to iron ore. It is the large industrial commodities that investors should

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be most concerned about such as iron ore, aluminium, copper and zinc.” “There has been a lot of speculative demand for gold but we are relatively negative about yellow metal. It has already had a fantastic bull run, from $280 to highs of around $1 980. Many investors bought gold for the pure reason that they believed it would continue to go up. We are quite negative on gold for that reason, as we believe it has reached its peak.” Even though commodities are set to come down, Spanjaard warns against viewing this as a buying opportunity. “Some investors look at commodities and believe that the price is really cheap. However, there is something in investments called the value trap, where an asset looks cheap but just keeps getting cheaper because the earnings keep falling. “This is something we are concerned about when it comes to commodity shares. They look cheap but we feel they could still get far lot cheaper. It will take a long time for commodities to get back to these levels and over the next year or two commodities will not be a great place to be.”

Momentum Collective Investments Roundtable

Patrice Moyal

Paul Sundelson

Tavonga Chivizhe

MOMENTUM ROUNDTABLE UPS THE ANTE WITH THE BEST BLEND SPECIALIST EQUITY FUND

s the financial markets continue to illustrate uncertainty, Momentum Collective Investments continues to seek value for investors. In August, the roundtable series, which introduces its portfolio managers to some of South Africa’s leading financial advisers, presented delegates with a new fund comprising of a carefully selected cluster of boutique fund managers.

Tony da Silva

The three events took place in Johannesburg, Durban and Cape Town, detailing the benefits of an innovative multi-manager approach, with each specialist manager being allocated a portion of the portfolio for them to manage as if it were an individual portfolio.

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With strict benchmarks to meet, Momentum’s boutique multi-manager criterion focuses on entrepreneurial flair, where ownership structures encourage low staff turnover. “These boutique managed firms’ investment activities typically take precedence over business activities, which ensures that clients’ interests are at all times closely aligned to those of the investment team. Also in favour of boutique managed firms is that the size of the investment team is typically small which promotes a deeper level of accountability. Taking this into account, together with the very focused product range as well as high conviction ideas typically expressed in most boutique manager portfolios, you have clear ingredients for strong alpha generating potential, says

Tavonga Chivizhe, portfolio manager at Momentum Investment Consulting (MIC). The result is the Momentum Best Blend Specialist Equity Fund comprising of Aylett Fund Managers, BlueAlpha Investment Managers and Mazi Visio, each of whom have a carefully selected back-up boutique manager, a technique used by MIC to control they key-man risk that is typically associated with boutique managers. Their focus will be to provide enhanced alpha by including an above-average component of small and medium-cap shares in their respective sub-portfolios,” says Chivizhe. The benefits of this multi-specialist approach are that it allows clients to gain value from different skill sets and investment management experience, where managers make independent decisions and build concentrated portfolios of their best investment ideas. “This adds to the scalability of the portfolio while a carefully selected back-up manager ensures continuity thus providing a powerful control to one of the biggest risks of backing up a boutique manager – key-man risk. The added benefit allows the consistency of returns over different market cycles,” adds Chivizhe.

Equity markets are currently trading at fair valuation levels and are still providing decent opportunities that can outperform cash, bonds and property over the short to medium term. However, Chivizhe says that because of heightened levels of macro-economic uncertainty, superior stock selection skill that is backed-up by a rigorous capital preservation framework are critical to achieve an appropriate balance between wealth creation and capital protection. These are some of the main criteria that MIC’s manager research within South Africa’s boutique manager landscape focuses on. Launched five years ago, the Momentum Best Blend Specialist Equity Fund has outperformed the All Share Index by an average of 5% per annum. On a relative basis, this portfolio has achieved topquartile performance since its inception.

Comments from delegates

Key speakers at the events

“For me the most important aspect of the discussion was that for a fund manager to achieve significant outperformance over time, he/she must deviate substantially from the market index, i.e. focus on the mid- to small-cap segment of the market. Furthermore, portfolio constraints such as fund size may seriously hamper fund performance over time, despite the manager exhibiting skill. Thus, relative small funds with managers following a concentrated or niche-type of investment approach are more likely to achieve desired outperformance.” Daniel Wessels, Martin Eksteen Jordaan Wessels

Tavonga Chivizhe – BBus.Sci (Hons) Actuarial – Portfolio Manager, MIC Presented at the Johannesburg, Cape Town and Durban events. On completing his actuarial studies at the University of Cape Town in 2005, he joined Metropolitan’s multi-manager division in September 2005. Given that the Metropolitan multi-manager business division had just been established with a seed capital of just under R100 million, Chivizhe was instrumental in building up the division for the Metropolitan Group to an asset base of just under R6 billion at the time of the merger between Metropolitan and Momentum in 2010. Patrice Moyal – CA (SA) – Director/Portfolio Manager, Visio Capital. Patrice presented at the Johannesburg event. Tony da Silva CA (SA) – Buy-side Equity Analyst, BlueAlpha Investment Management. Tony presented at the Cape Town event. Paul Sundelson – BCom, CFA Charter Holder – Portfolio Manager/Analyst, Visio Capital. Paul presented at the Durban event.

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“The importance of adding quality stock pickers that are not limited to a specific market segment but has access to small-, mid- and large-cap stocks and the value it adds to a client’s portfolio were highlighted in the presentation. The boutique funds tend to have lower standard deviation and combining these managers with larger managers could bring the client’s overall risk in the portfolio down.” Philip Botha, Capvest Wealth Management “I found the presentation interesting in terms of the methodology that Tavonga used to screen for their potential fund managers in terms of the high conviction required. I believe that their fund can work well as a satellite in conjunction with a low-cost core.” Louis van der Merwe, Mazars

“The South African investment industry has so much more to offer than well-known stalwarts. As multi-managers, it is Skyblue Fund Managers’ responsibility to identify new opportunities and alpha-adding components for client portfolios. This meeting again highlighted the need for the aforementioned with the highlighted funds adding tremendous alpha compared to the run-of-the-mill big manager. In our opinion, opportunities are hidden within the smaller forgotten/unknown managers.” Arno Smit, Skyblue Fund Managers “I find smaller sessions such as this to be invaluable as we can interact directly with the fund managers and gain insight into their worlds and I suspect that they too benefit.” Jeremy Squier, Squier Financial Services

Regulatory Developments

POSITIVE DEVELOPMENTS FOR FUNDS and investors in r230 billion money market fund sector Sean Segar | Head of Product at Nedgroup Investments, Cash Solutions

n anticipation of the implementation of Basel 3, which will commence in 2013, the investment guidelines prescribed for money market funds have been amended by the Registrar of Collective Investment Schemes with effect from 1 July 2012. As a result of this, money market funds are likely to experience higher yields within a more regulated environment. Sean Segar, head of product at Nedgroup Investments, Cash Solutions, says that ahead of the phased implementation of Basel 3, banks are already positioning themselves by changing the way they fund themselves. Segar believes that it will be to the advantage of the R230 billion money market industry to follow suit. This amendment to the investment guidelines for money market funds could not have come at a better time for yield investors following the recent surprise interest rate cut. With the lowest interest rates in 40 years, investors will look more intensely at money market funds to compensate for the lower call rates that banks will be offering as money market funds offer higher rates without compromising access to funds. “It makes sense that money market funds, a large source of funding for banks, adapt to remain compatible with the evolving funding needs of banks,” he says. The new investment guidelines for will enable yields on money market funds to increase marginally. Furthermore, the new controls and closer monitoring will regulate the increase in capital risk of money market

funds. “In line with trends in Europe and the USA, a further development is that money market funds are now able to invest in single instruments with a term to final maturity of 13 months versus the previous limit of 12 months. The weighted term to maturity of the fund as a whole has also been increased from 90 days to 120 days,” says Segar. To ensure that these funds retain their identity of being low-risk income funds with a stable capital base and that the inclusion of longer-dated instruments does not lead to funds taking on too much duration – which may lead to volatility in the capital values – a new control measure has been introduced. “The new limit dictates that the weighted duration of a money market fund cannot exceed 90 days and will ensure that investment managers incorporate a large proportion of floating rate paper in their portfolios,” says Segar. “The type of instrument that may be invested in by money market funds is also better controlled as a result of these regulations, as are the valuation procedures. Investors in money market funds can take comfort from the fact that their investments are well regulated by the Financial Services Board which is clearly keeping a close watch on money market funds,” he says. Among the changes facing money market funds is the move to focus on the market capitalisation of issuers as a basis for setting limits as opposed to a minimum credit

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rating. “There is also a further control which stipulates that in order to issue instruments to money market funds the institution issuing or guaranteeing such instruments must have capital and reserves of at least R100 million,” Segar continues.

“It makes sense that money market funds, a large source of funding for banks, adapt to remain compatible with the evolving funding needs of banks.” Segar explains that in the face of evolving capital markets, a number of instruments have now been specifically precluded by the Registrar from being held by money market funds. These include instruments with no fixed maturity, instruments whose initial interest rates are not known at date of inclusion, credit-linked notes whose return or redemption is dependent on another instrument, entity or event. Another control contained in the latest amendments is that the manager of a money market fund must perform a mark-to-market valuation of the money market portfolio and each participatory interest every six months. Segar concludes that this is to determine the variance of the mark-to-market value from the constant price and report the calculation to the FSB.

ALTERNATIVE INVESTMENTS

AFRICAN

PRIVATE

EQUITY IN DEMAND Derrick Roper | CEO of Novare Equity Partners

hanges to Regulation 28, which allow an additional five per cent of pension fund assets to be invested in the rest of Africa, are helping to boost private equity funds that invest on the continent. Regulatory changes aside, Derrick Roper, CEO of Novare Equity Partners, says other factors contributing to its success include Africa’s new status globally as a sought-after investment destination, as well as the actual returns being generated. “Some private equity funds focused on sub-Saharan Africa are enjoying significant inflows as investors increasingly buy into the African growth story.” He added that in frontier markets, private equity vehicles are often the best option to access investment potential. “This is mainly because the listed equity markets in most countries are currently too limited for larger institutional investors. Also, with private equity, investors exercise stronger control over the underlying investments, which can be an important factor.” Roper feels that South Africa, with its deeper and more regulated financial markets, could serve as a model for some other countries. However, with private equity investments, returns tend to reflect the performance of the underlying economy. And economies in subSaharan Africa have experienced strong GDP growth in recent years. Youthful demographics and a growing consumer group are the main growth drivers, making retail, property, consumer goods and agriculture good sectors in which to invest, particularly in countries like Ghana, Angola and Nigeria.

Roper is particularly interested in the property sector. “Aside from economic growth fuelled by consumer spending, the case for property investment is supported by urbanisation and investment in under-developed infrastructures in fast-growing cities.” Urbanisation, facilitated by improving infrastructure, makes it easier for developers to optimise utilisation by concentrating property investments in areas where more people live. There is demand, he says, for office, retail and residential property. Indicative of the limited supply of facilities is the lack of modern shopping space in many cities in sub-Saharan Africa where the scope for retail property development is enhanced by the involvement of store owners like Shoprite and Massmart. However, investing in longterm projects in the region has its challenges, including finding the correct opportunities and dealing with relatively slow-moving authorities. Debt financing is more difficult to come by and leveraging strategies more difficult to achieve than in developed markets. Operating costs in sub-Saharan Africa are also high. But Roper says real rental yields of over 10 per cent for retail, residential and industrial properties are achievable.

“Some private equity funds focused on sub-Saharan Africa are enjoying significant inflows as investors increasingly buy into the African growth story.” INVESTSA

Cannon Asset Managers Stock Picks Responsible Investing

C A N N O N S T O C K

Old Mutual Old Mutual is certainly not new to anyone, but from an investment perspective it lacks the interest given to many of its contemporaries, despite its strong price performance since late 2011. This is best evidenced through different measures of valuation or performance. For instance, Old Mutual’s price to net asset value is at 1.3 times versus the peer group average of 2.1 times. This comparison suggests a discount of approximately 50 per cent, but the return generated by Old Mutual’s assets is 15 per cent, just shy of the peer group’s 17.5 per cent. Old Mutual appears to be priced as a global insurance firm, a cluster that has been under high levels of financial stress over the recent past. We consider this to be misplaced sentiment, as 80 per cent of Old Mutual’s earnings are derived from emerging markets, which enjoy high margins and where consumers of insurance products are increasing. Not only does Old Mutual have a commanding position in many sub-Saharan African nations, but insurance market penetration remains relatively low. Any advance in these levels will further contribute to Old Mutual as an established and dominating emerging market insurer. Samsung Mobile consumer electronics, such as cellphones and tablets, accounts for 41 per cent of Samsung business, with the balance comprising TVs, cameras, appliances and computers.

Samsung has produced a positive cash flow from operations for 20 years without interruption, except during 1998/1999 – the Asian financial crisis – when the company returned a loss for two years. Samsung has delivered revenue growth at a compound annual rate of 17 per cent and earnings growth at a staggering compound annual rate of 23 per cent. The company has virtually no debt: at a low three per cent of total assets, it is essentially ungeared. This high-quality, world-class business is on a forward price:earnings ratio of 8.3 times, which compares favourably to Samsung’s own history and to peers. The price:book multiple is an attractive 1.4 times. Banco do Brasil With an economy that has performed well over the past decade, Brazil has been overlooked by investors preferring the glamour of Asia or the recent popularity of Africa. Banco do Brasil offers investors an excellent opportunity to tap into the Brazilian economy. It is the country’s largest bank by assets, comprising mostly loans in the agricultural sector and payroll loans, notably to government employees. The benefit of Banco’s business model is its low level of susceptibility to bad debts. Most of the payroll loans are serviced via direct debits from salaries and the nonperforming loans are kept to a minimum. In addition, the exposure to the critical food sector is significant. The through-the-cycle return on equity of Banco is a very impressive 24 per cent, its price:book ratio is 1.1 and its price:earnings ratio is 5.8 times. The dividend yield is an impressive 7.9 per cent. These are outstanding metrics indicating extremely good value for a high-

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P I C K S

quality company. For an investor, this is the proverbial dripping roast. African Rainbow Minerals African Rainbow Minerals (ARM) is diversified across its assets, with interests ranging from the base metals such as iron ore and copper, to the precious metals of gold and platinum. Without doubt ARM’s foremost asset is its 50 per cent shareholding in Associated Manganese. Associated Ore (Assore) owns the remaining 50 per cent, essentially its only asset, which enables us to calculate a market value for ARM’s share of the business. Alongside Associated Manganese, ARM also holds a 14.8 per cent shareholding in Harmony Gold, has numerous joint venture platinum projects with the likes of Implats and Anglo Platinum, as well as a 50:50 joint venture with Vale in a Zambian copper project, which is expected to come on line later this year. Assore has a market cap of R43 billion, whereas ARM has a market cap of R32 billion, which represents a pricing anomaly. Stripping out the cash and adding back the debt to arrive at an enterprise value, we see that ARM trades at a R7 billion discount to Assore (R39 billion vs R46 billion). ARM’s interest in Harmony is valued at R4.4 billion, based on Harmony’s market value. Thus, investors are not only receiving the Associated Manganese asset at a substantial discount through ARM, but are also getting all the other above-mentioned assets for free. Turning attention to valuations, ARM continues to trade on exceptionally compelling multiples as evidenced by its single digit price-earnings ratio of 9.2 times, a forward price-earnings ratio of 7.5 times and a dividend yield of 2.7 per cent. Coupled with this, by our measures, ARM is considered a business of high quality, with a sound balance sheet.

CHRIS HART

FINANCIAL REPRESSION Chris Hart | Chief Strategist at Investment Solutions

anufacturing data in recent months has reflected an underlying weakness in the global economy, which is showing clear signs of slowing. This is placing pressure on political establishments to do something. However, government finances have become too precarious to embark on any major stimulus measures. If anything, governments are being forced more into austerity due to stretched finances and the reality of being shut out of capital markets. Central banks are trying to step into the breach through monetary policy to stimulate economic growth.

Governments are being trapped by high and rising debt levels and low interest rates. For example, it has become impossible for the Bank of Japan to raise interest rates should inflation become a problem due to excessive government debt funded at very low rates. A rate increase would very quickly place the Japanese Governmentâ&#x20AC;&#x2122;s finances in an untenable position. The US, the UK and Eurozone countries such as France,

Italy and Spain are also heading into the same trap. This is one manifestation of financial repression where interest rates are suppressed, favouring the borrower over the saver. Financial repression is gaining ascendency not just in the realm of setting interest rates. While Barclays was hit by most of the fallout from its involvement

The impetus to ease monetary policy is gaining momentum as a consequence. However, the latest round of monetary easing is from a starting point of negative real interest rates. This is highly unusual as under normal circumstances negative real interest rates would raise expectations of rate increases. Economic growth and financial market stability have overtaken inflation to become the most important monetary policy objectives. Debt levels (especially in the developed world) are rising exponentially. The quantum of debt has become unpayable, essentially a systemic Ponzi scheme. The reality is that the borrower is politically more powerful than the saver and investor. The consequence is that any solution to excessive debt will be to extract value from the saver and transfer it to the borrower. Negative real interest rates have become a structurally entrenched phenomenon that is expected to last for several years.

â&#x20AC;&#x153;Central banks have been manipulating markets increasingly as a matter of routine, whether it be currency, equity, bond or commodity markets.â&#x20AC;? INVESTSA

in the Libor rate manipulation, the issue exposes a much wider malaise of official intervention in most financial markets. Central banks have been manipulating markets increasingly as a matter of routine, whether it be currency, equity, bond or commodity markets. For instance, there is a covert currency war being waged through competitive debasements. The exporter is favoured over the importer. There is intervention in commodity markets to suppress prices, while intervention in equities is to boost markets. Regulations are also increasingly being used in financial repression. Measures such as exchange controls and prescribed assets are all designed to limit choice or impose stealth taxes on the investor. There are also governments that are becoming increasingly involved in their economies in a phenomenon called state capitalism, crowding out the private sector in the process. Financial repression is becoming increasingly important and needs to be factored in when making investment decisions. Choice and mobility are restricted through financial repression. It also reduces the importance of underlying fundamentals in favour of policy pronouncements. The next quantitative easing announcement has become a far more important market driver than the influence well-researched fundamentals will yield. This is one reason global active managers are struggling. Policy also becomes increasingly uncertain, which shortens the investment time horizon.

The biggest risk to investors is to maintain value as policy measures damage the ability to preserve value through default and negative real rate risk. Safe-haven assets such as cash and bonds are expensive and are rapidly becoming the epicentre of risk. Investors might find protection in assets that have their own intrinsic value (property, precious metals, etc.) against those that depend on confidence for their value, such as cash and bonds.

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Retirement Investing

An update on retirement reform Craig Aitchison | General Manager of Corporate Customer Solutions

pproximately only 50 per cent of employed South African’s belong to a retirement fund and the country has a notoriously low savings rate. In response to this, the government has proposed a range of retirement reforms aimed at increasing the savings rate of the population. In spite of the potential consequences of the reform proposals, levels of awareness of retirement reform remain low. This was the view presented by Craig Aitchison, General Manager of Corporate Customer Solutions, speaking at a recent OMAC breakfast discussion on retirement reform in Sandton. “South Africa has a national savings rate of 16 per cent of GDP, which is significantly lower than some of our BRICS counterparts (China 53 per cent, India 34 per cent and Russia 28 per cent). Retirement reforms aimed at addressing this have become a priority for government and South Africans and the financial industry should prepare for these,” he says. It’s clear from the results of the 2012 Old Mutual Retirement Monitor that general awareness of what the retirement reforms discussions entail is very limited. According to Aitchison, responses indicate, that although general awareness of a proposed state pension scheme is good, the majority (79 per cent) of members have very little understanding of what entails or what means for them. “A further 10 per cent think it means that all working individuals must be a member of a fund, while six per cent think that it will mean that all existing funds will join together and government will have a central fund,” he says. Aitchison explains that the retirement reform discussions are wide-ranging proposals to reform social security and retirement fund arrangements are under consideration. He

says National Treasury is likely to focus on short- to medium-term retirement fund reforms that will complement the broader social security reforms. As part of the broader social security reforms, government is proposing a compulsory savings scheme. “The current proposal is that all employed individuals should pay a contribution of their annual income, up to a cap of R150 000 per annum to a compulsory fund. The contribution will be directed towards funding retirement savings, as well as a death benefit and a disability benefit. Current thinking is that the level of contribution would be 10 per cent of earnings,” says Aitchison. This contribution would go into the National Social Security Fund. ‘The pension received from the NSSF would be at least 40 per cent of the annual income of the individual before retirement. Following this, individuals could make further contributions (and receive tax deductions) into either their own retirement fund or a defined contribution section of the NSSF.” Aitchison points out that, for individuals who do not currently belong to a retirement fund, this represents an additional cost. However there are proposals being considered to provide a form of contribution subsidy to lower income individuals to assist and encourage the contributions to the NSSF. As part of the retirement reform proposals, National Treasury has proposed that some level of preservation of retirement become a default option when employees change jobs. “Treasury is also suggesting that the unemployed be given some access to their preserved retirement savings and that access will also be allowed in cases of demonstrated medical need. Further, the new preservation arrangements would not affect current retirement savings, which would still be available when an employee changes jobs.” Another very important part of retirement reform is the proposed reforms of the annuity

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market. “The decision of which annuity to purchase at retirement is one of the most significant financial decisions a person can make. However, our research indicates that retirement funds do not offer sufficient support to members when they reach retirement and, therefore, the decision between conventional and living annuity not necessarily made for the correct reasons,” says Aitchison. Treasury has flagged the level of charges of some retirement savings products as an issue. For this reason, Treasury is expected to propose measures to standardised some products and encourage default solutions, which would not require financial advice. Treasury is also seeking to simplify taxation of retirement savings. “Employer contributions will be included in employee’s remuneration as fringe benefit. Individuals will be permitted a deduction of up to 22.5 per cent of income if under 45, and 27.5 per cent if over 45 on all contributions made to pension, provident and retirement annuity funds. The maximum deduction will be greater than R20 000 and less than R250 000 (R300 000 over 45). While simplifying the taxation of these funds, the impact on most members is expected to be neutral. Some funds have a total current contribution higher than the proposed deductions and consideration is being given to a special arrangement in these circumstances,” adds Aitchison. According to Aitchison, following the paper on proposals for ‘Strengthening retirement savings’, which was released on 14 May 2012 by National Treasury, five further papers are expected over the course of this year. Aitchison ended with a message for trustees. “The most important response is to become familiar with the proposals and then engage with Treasury to provide practical input and comment on how to best implement these reforms. As an industry, we all have an opportunity to play a proactive role in bringing about reform and ultimately encouraging better security in retirement for our members.”

Economic Commentary

SOUTH AFRICA’S GROWTH CONUNDRUM Merina Willemse | Economist at Efficient Group

hould we allow our economy to grow freely at all costs, or is economic growth something that results from the correct mix of direct state intervention? Another way of looking at it; should we stimulate supply to create demand or should we always first adhere to demand and then only supply what is needed? When I read current economic policy schemes and listen to policymakers, government, analysts and economists, this seems to be the point on which people differ. Some believe that we should first and foremost stimulate the productive sectors of our economy through drastic measures such as exchange rate interference, regulatory reform, skills development and infrastructure investment, and this in turn will support employment creation, poverty alleviation and eventually, economic growth. Others say that our economy should be allowed to grow freely, achievable through less regulation of markets, trade, business, employment and capital investment in competitive productive industries. By allowing the economy to expand in exactly those sectors that have an international comparative advantage while producing the goods that are actually demanded it could, in due course, result in the best possible financial/economic situation for all in a long-term sustainable fashion. This debate isn’t new. John Maynard Keynes (1883–1946) challenged theories by Jean-Baptiste Say (1776–1832). Both are considered to be among the most influential economists of our time and the founding fathers of modern economic theory. Keynes’s formulation (and rejection) of Say’s law (supply creates its own demand) stated that any increase in output of goods and services (supply) will lead to an increase in expenditure to buy those

good and services (demand). Say’s law further projects no shortage of demand and that there will always be jobs for all workers (full employment). Furthermore, unemployment would only be a temporary phenomenon as the pattern of demand shifted and equilibrium would be restored by the same process. Keynes in turn argued that aggregate demand determined the overall level of economic activity and that inadequate aggregate demand could lead to prolonged periods of high unemployment. In terms of our own country’s economic policy direction, the debate continues. The two major role players today are the plans brought forth by Ibrahim Patel (Minister of Economic Development) with The New Growth Path and Trevor Manuel (the minister heading up the National Planning Commission) with the National Development Plan. While it is easy to criticise these plans, it is only when you start formulating your own plans for the country that you realise it is much easier said than done. These plans beg the question why we even have two major economic plans on the table. While The New Growth Path seems to be a collection of previous policies all in one, the focus is very much on the productive side of the economy long before it sees that economy growing. The National Development Plan speaks of growing an inclusive economy that aims to raise employment from 11 million to 24 million by 2030. This is a tough goal. But what is our situation at present?

advanced economies continue to struggle with economic uncertainties brought on by high debt burdens. Secondly, our own economy seems to be in a political and economic structural rut. We are still arguing about what should come first. Policy implementation seems slow. Currently our economy is performing below par. To lift the living standards of the poor and unemployed, faster growth is required. We need to be asking the right questions. What will get our economy growing now? A possible answer is to set it free.

South Africa’s gross domestic product (GDP) for the second quarter of 2012 expanded at only 3.2 per cent q/q. The economy is still expected to grow below three per cent for the whole year and forecasts for the next five years remain fairly subdued. This is mostly because of subdued global economic demand as most

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Industry Associations

THE FINANCIAL SERVICES INDUSTRY WANTS TO CUT OUT THE MIDDLEMAN Almo Lubowski CFP® FPSA(TM) | head of technical and advocacy services at The Financial Planning Institute of Southern Africa (FPI)

n recent dealings with financial policy makers and even regulators, and on the various aspects that will affect financial advice in the future, a definite trend has emerged. These policy makers are adamant on disintermediation of the financial services industry and their focus is on eliminating advisers and planners. The commission earned in this space is seen as an unnecessary layer of costs. The policy makers seem to believe that the majority of consumers should be able to get themselves off-the-shelf products and not have to pay anybody a commission for that. It is certainly true that financial advice has generally moved away from pure ‘order taking’. While there are certainly many products that should be available to the public directly, perhaps even all of them, this certainly does not negate the importance of good financial advice and planning, as good financial planning goes far beyond products. Financial policy makers have got it wrong There is a misconception by the South African policy makers, and regulators specifically, that advisers and planners wish to support products that are complicated so that the adviser’s relevance is maintained in the eyes of the consumer or client. It seems that many product providers are often driving this misconception in their engagements with

policy makers. As professional advisers and planners, we know that our guidance goes far beyond explaining the ins-andouts of a product. I think many would agree that they would have no issues with a range of simple products that could be used to fill the needs that have been identified, after much planning and advice has taken place for a client. The real role of financial planners Advisers and planners are much more than order takers these days. Financial advice and planning are skills that take into account the many circumstances in a client’s financial situation and entail much more than just product advice. A financial planner is often a financial coach whose only function could be as simple as assisting with tracking a client’s spending and ensuring that client manages their debt before using surplus money for investments. . Regulators need to shift their mind-sets Policy makers will have to change their mindsets in order to effectively regulate the financial services industry. Their focus needs to shift away from looking to eradicate the good advisers and planners who already exist and assist their clients in real and tangible ways. They should focus on the product providers who continually fail to create products in simpler and more understandable ways.

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Fortunately there are some initiatives in South Africa that focus on product providers. The South African formulation of the Treating Customer Fairly (TCF) regime is taking some different directions to the United Kingdom, the first country to implement the concept. In the UK there was almost purely a focus on financial advisers having to adhere and apply to TCF principles within their practices, whereas in South Africa it would seem there would be equal responsibility placed on advisers and product providers to treat their customers fairly.

“The commission earned in this space is seen as an unnecessary layer of costs.”

SUNEL VELDTMAN

THE VALUE OF A GREAT CAPTAIN

Sunél Veldtman, CFP CFA is the author of Manage Your Money, Live Your Dream, a guide to financial wellbeing for women. She is also a presenter and facilitator. Sunel is currently the CEO of Foundation Family Wealth and has more than 20 years of experience in financial services, most of which as a private client adviser.

happened to listen to the radio commentary of the last day of the final cricket test between South Africa and England. A win was required for South Africa to become the top test cricket team in the world. Towards the end of the match, England’s run rate picked up dramatically, threatening what looked like a winning position for South Africa. Captain Graeme Smith made no changes to his bowling attack or his fielding positions. The commentators became increasingly agitated at his seeming lack of response to England’s batting improvement. But, Graeme Smith had a plan. He stuck to it. He knew that the likelihood of a high run rate continuing without mistakes was low. Eventually the batsmen slipped up and South Africa emerged victorious. Smith’s captaincy was central to winning the match. During those crucial moments his plan, courage, experience and leadership came together, securing success for South Africa. Likewise, a good financial adviser can win the game for investors. An adviser needs the same qualities to succeed and investors need that kind of leadership to secure long-term success.

“A good financial adviser can win the game for investors. An adviser needs the same qualities to succeed and investors need that kind of leadership to secure long-term success.”

Private investors do not benefit from the returns available in the financial markets, because of their behaviour. Typical detrimental behaviour includes withholding funds from the market in fearful times, withdrawing funds from the market at the worst times and trying to ‘play’ the market. Numerous studies prove that these behavioural patterns are the norm.

Financial plans are based on achieving longterm asset class returns. Clearly, most investors are not able to achieve these returns on their own. When markets get ugly and headlines scary, the leadership of an adviser is required to help investors stick to the plan. This is one of the most important and hardest jobs of an adviser. Experienced advisers know how difficult it can be to keep clients focused on the long-term prospects. Think back to 9/11 or the Lehman’s demise, advisers spent days calming nervous investors.

Dalbar conducts an annual study of investor behaviour in the USA. It shows that for the past 20 years, private investor behaviour has consistently destroyed the majority of the returns achievable in the US market – 3.5 per cent per annum for investors vs. 7.8 per cent per annum in the S&P 500 – primarily because investors are unable to stick it out. The study shows similar results for all asset classes. In order to benefit from financial markets investors need to stay invested. However, the average holding period for the average equity fund was just over three years; not nearly long enough.

Another study by KPMG Econtech in Australia showed that individuals who appointed financial advisers saved significantly more than individuals who did not. The saving amounted to AU$91 000 in additional wealth at age 65 for investors who commenced saving at age 30. Other benefits of financial advice included better provision for death and disability; emotional benefits of feeling more in control; greater likelihood of having an appropriate asset allocation; and an enhanced ability to cope with major life transitions. For all these benefits to materialise, it is crucial for a long-

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term relationship to exist. Not only do investors change funds, they also change advisers, sometimes equally often. Moreover, in the past, many financial planners did not see the longterm benefits of cultivating ongoing relationships with clients. First prize is for advisers to behave like top cricket captains. The current debate is about the value and cost of financial advice in our country; and how the cost of an investor’s advice should be determined. Many urge advisers to ‘do it themselves’. What should be considered is whether investors will reach their desired results without an adviser. Valuable financial advice helps investors to achieve market returns, on which long-term financial plans are based. In the USA example, the opportunity cost of not properly investing amounted to 4.3 per cent per annum or 55 per cent of the available return; a cost that dwarfs the cost of advice. I urge you, in the interest of investors, to promote the value of good advice.

Practice Management

THINK LIKE A FOX Paul Kruger | Head: Communication, Moonstone

Calling all foxes is the latest collection of recent articles published by Clem Sunter, future scenario planner par excellence. In the run-up to the big ANC deliberation on our president for the next five years, the prophets of gloom are being fed all the fodder they need to cast a cloud over the country.

he mood in the financial services industry, and particularly from an adviser perspective, is not much different. The implementation of an act which was written before 2002, and implemented in 2004, has brought significant change to the way financial advice and services are rendered. The regulatory obligations despite adjustments and tweaks no longer addresses the issues it was meant to. There exists an urgent need for regulatory legislation to be reviewed. Sunter identifies a number of steps that are vital for the success of Trevor Manuelâ&#x20AC;&#x2122;s National Development plan. All of these are focused on small to medium enterprises, where the biggest opportunity for employment exists. Some of these are very relevant to the financial services industry.

rather than poor advice. It would seem logical therefore that stricter regulation of products, rather than advice, could prevent this. The onus is currently on the adviser to conduct a due diligence on the products he recommends. The only body enabled by legislation to do this is the regulator, who approves licence applications of providers. Advisers cannot legally market a product that is not authorised. The recent Herman Pretorius furore is an example of investors placing their funds in a non-regulated scheme by an unlicensed provider. In time, it is highly likely that those who invited clients to attend presentations on this scheme will be held liable for client losses. Had this scheme been identified for what it really was, the loss could have been curtailed long before it took on the proportions that it did.

1 Relax legislation applicable to small enterprises. 2. Enhance cash flow. 3. Access to means to start or expand current businesses.

Until such time as the regulator is empowered to decide what may be sold, investors will suffer.

If we apply these loosely to the financial services industry, it could play a major role, not only in job creation, but also in building an industry that is vital in the creation of a savings-oriented culture. National savings, as a percentage of disposable income, has shown a steady decline and is destined to continue without the vital role played by financial advisers.

There are moves afoot to reduce the cash flow of financial advisers through changes to the existing commission structures. The blueprint for the road ahead, entitled â&#x20AC;&#x2DC;A safer financial sector to serve South Africa betterâ&#x20AC;&#x2122;, provides for a further reduction in their cash flow without taking into account the reality of the cost of advice.

Legislation The current focus appears to be almost exclusively on the advice process. The major catastrophes, from a consumer perspective came from the products that led to losses,

Remuneration

Commission is regulated, yet schemes that imploded paid advisers double the standard percentage of commission available. While the Conflict of Interest legislation was imposed three years ago to address anomalies where advisers were incentivised

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for the wrong reasons, it was necessary for the FSB to publish a warning in August this year about malpractices which are still rife in the industry. It is clear that change will happen only if addressed by the authorities and product providers. Focusing on transgressing advisers is like shooting rhino poachers. It will not address nor remove the cause of the problem.

Financial assistance The cost of compliance is not only a huge burden to financial houses. For the advisory corps, it impacts greatly on their productivity and cash flow. Devising, implementing and managing the required measures to ensure compliance reduces their available time to produce income. In many instances, this leads to support staff being laid off in order to survive, or the appointment of an outsourced compliance solution, which inflates overheads. The double-edged sword of conflicting interests cannot be avoided, but a way has to be found to enable the number of independent advisers to grow. Tied agents are less able to comply with a critical element of the FAIS Act: to enable the client to make an informed decision, rather than have a choice between limited product offerings.

Defeating the purpose The intentions of regulatory interventions are pure but the outcomes are often not. Until such time as the focus is shifted from apprehension to prevention, the biggest loser will remain the consumer who should, in fact, be the beneficiary.

allan gray

HOW TO RETAIN

GOOD EMPLOYEES Jeanette Marais | director of distribution and client services, Allan Gray

n the last issue of INVESTSA, we discussed the challenges of recruiting the right people and shared some guidelines in this regard. Successful recruiting is the first step in building the right team for your practice; putting the right measures in place to retain good employees is every bit as important. The costs associated with recruitment, training and mentoring are high and advisory practices need to make sure retention is part of their management strategy. A retention strategy begins on day one for a new recruit and should inform other key human resourcerelated decisions.

An interactive induction programme To some companies, induction means showing new employees their desks, giving them a brief overview of their responsibilities and letting them get on with the job. But if used properly, the induction process provides an excellent opportunity to help new employees become fully productive, and quickly make a genuine contribution to your practice. A good induction programme gives a new employee the ‘big picture’ about your business – what your goals are and how you plan to achieve them – and clearly indicates how their role contributes to your goals. It also provides a clear picture of your values and culture. Helping your new employee develop connections with other key individuals in your practice is also important, as is assigning them a mentor.

Set clear performance objectives Set out your new employee’s performance objectives, and take time to ensure they are thoroughly understood. Review your

“Practices that treat time as a currency – through remote work options, staggered hours and reduced hour arrangements – are more likely to attract and retain high calibre employees.” employee’s progress regularly; feedback is critical to ensuring that your employee’s efforts are fully aligned with your business goals. While giving feedback is important, so is receiving it: give employees the opportunity to tell you how they feel about their progress, their role and your practice.

Reward performance Monetary rewards are a very important driver of performance and bonus schemes should be clearly communicated. However, according to the Centre for Talent Innovation (CTI), money is not the major motivator, particularly among university-educated workers. Take the time to build and nurture one-on-one relationships with your employees and understand what motivates them. You may be surprised to learn that they are also driven by non-financial offerings: • Flexible work arrangements Practices that treat time as a currency – through remote work options, staggered hours and reduced hour arrangements – are more likely to attract and retain high calibre employees. Achieving a balance between work and life is important to working parents who may be juggling the demands of family and highpowered jobs. In addition, the younger generation of workers considers it a basic right to have a life beyond the office. Employees appreciate a culture that recognises them as whole beings, with a variety of needs, and not just as workers.

• Frequent, public recognition Frequent recognition of an employee’s accomplishments is considered the most effective non-monetary reward, particularly when it comes to high achievers, who thrive on recognition. Thanking people for their hard work and commitment is imperative to making them feel appreciated.

Empower employees Internal communication is the key in an advisory practice. Obviously not everything is open to full disclosure, but share what you can with your employees to make them feel that they are in the picture and part of the decision-making processes. An advisory practice with a culture that encourages employees to grow fosters loyalty and commitment. Good employees want to enhance their skills and knowledge, and tackle new challenges. Affording employees such opportunities will keep them from looking for growth elsewhere. Providing access to training, conferences and workshops, as well as giving them financial assistance to study further, establishes a solid value proposition and encourages employees to stay with your practice. Sources: Labournet.com, www. callcentrehelper.com; Harvard Business Review Blog Network

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched adviser services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser services shortlists third-party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser services performs research and maintains the shortlist of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.

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Momentum Investor Confidence Index

The Momentum Investor Confidence Index (Momentum ICI) Brendan Howie | Deputy CIO, Momentum Manager of Managers

he Momentum Investor Confidence Index (Momentum ICI) is a unique combination of financial indicators that gauge the level of investor confidence in the market as measured by underlying market conditions. These include market breadth and liquidity, investment return expectations, investor psychology, risk aversion and market-specific risks associated with investing in South African asset classes. The index combines important market indicators to produce a single measure of investor confidence that is easily understood and meaningful to the investor.

The MICI is constructed from a combination of six equally-weighted indicators that encompass:

Definition of investor confidence

•

Investor confidence means different things to different people. In this case, it can be defined as having confidence in investments remaining liquid; investments paying expected income; investments protecting capital value; and the issuer of investments remaining solvent.

•

Deconstructing the Momentum ICI The Momentum Investor Confidence Index is a composite coincident index of the level of investor confidence in the South African financial markets. A coincident indicator is an indicator that varies directly and simultaneously with what is being measured. In this case, the index measures and varies directly with current conditions, mood and sentiment in the financial markets.

“The index combines important market indicators to produce a single measure of investor confidence that is easily understood and meaningful to the investor.”

Figure 1: Momentum Investor Confidence Index at June 2012

•

Source: CBOE; ETM Analytics; JSE; Reuters The Momentum Investor Confidence Index is a diffusion index with a minimum of 0 and a maximum of 100. Levels above (below) 50 indicate improving (deteriorating) investor confidence. It uses the same methodology as the Purchasing Managers Index (PMI). However, its coincident properties distinguish it from the PMI, which has leading properties.

T he Chicago Board Options Exchange Volatility Index (VIX) is an indicator of global market volatility. The VIX is an implicit indicator of the level of risk aversion in the market. High levels of market volatility are associated with risk aversion, as the expected returns of investments decline. A rising VIX level indicates an inverse relationship with the Momentum Investor Confidence Index. An explicit indicator of global investor confidence in South African investments delivering positive returns is net foreign portfolio inflows. Outflows indicate poor investor confidence and expectations of poor or negative investment returns. A positive spread between the South African 10-year sovereign bond yield and the repo rate indicates low short-term rates and ample liquidity. Long-term rates higher than short-term rates indicate that positive long-term returns can be financed by short-term borrowing. A positive spread is thus associated with positive investor confidence.

igh South African Credit Default Spreads (CDS) indicate rising H demand for default insurance and a loss of investor confidence in the solvency of the sovereign bond issuer (South African Government), while lower CDS indicate higher confidence in the sovereign and sovereign bonds. This is an explicit indicator of underlying confidence in the issuer, being the SA Government. Falling FTSE/JSE All-Share Index trading volumes indicate longer average duration of equity ownership, an implicit indicator of investor confidence. On the other hand, rising trading volumes indicate shorter average duration and a relative lack of investor confidence in SA equities. Low bid/ask spreads on the US Dollar/Rand are indicative of liquidity in the foreign exchange market, while high bid/ask spreads on the US Dollar/Rand indicate global/local liquidity constraints and high exchange rate volatility. Exchange rate volatility is an implicit indicator of risk aversion and low investor confidence.

At July 2012, investor confidence climbed from 60 to 63 on account of continuing portfolio inflows into local markets, lower US Dollar/Rand bid-ask spreads, a narrowing in sovereign credit default spreads and a calmer trading environment as FTSE/JSE All-Share Index trading volatility declined. The recent uptick in the VIX was the main detraction.

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morningstar

LONMIN IN THE HEADLINES David O'Leary | CFA, MBA, Morningstar

latinum miner Lonmin (JSE: LON) made headlines in August after escalating tensions resulted in the death of 34 people in a clash at Marikana mine. On 17 August 2012, at Marikana, police were attempting to disperse a large group of miners who had requested to speak with Lonmin CEO Ian Farmer. Miners were demanding a pay increase from R4 500 to R12 000 a

month. The interaction between police and miners turned tragic when police opened fire on a small group of advancing miners. While video footage is inconclusive, police say they were being attacked and acted in self-defence.

tensions began to surface, the company has lost roughly18 per cent of its market value as investors express concerns about the firm’s corporate governance, it’s ability to meet its debt obligations, and a potential credit rating downgrade.

Production at Lonmin ground to a halt as workers continued to strike. This disruption is costing the firm production of approximately 2 500 ounces of platinum each day. Since

Given Lonmin’s size and scale, it is a widely held stock in many South African equity funds. The following funds in our database had an exposure to Lonmin greater

than three per cent of fund assets as at 30 June 2012: It is worth noting that it is possible these funds have added to or reduced their exposures to Lonmin since their last reported holdings (30 June 2012). According to the data, none of the listed funds has an exposure to the stock that couldn’t be liquidated very quickly should the fund manager deem it desirable to do so.

Portfolio weighting %

Position market value

Number of days to liquidate

30/06/2012

7.4

59.121.694

0.5

Old Mutual Mining & Res

30/06/2012

6.6

103.029.648

0.9

Kagiso Islamic Equity

30/06/2012

6.0

8.945.682

0.1

Old Mutual Value

30/06/2012

6.0

49.844.390

0.5

Old Mutual Gold

30/06/2012

5.9

32.409.790

0.3

Kagiso Balanced

30/06/2012

5.0

4.608.460

0.0

Kagiso Stable

30/06/2012

3.9

3.505.158

0.0

Nedgroup Inv Growth

30/06/2012

3.6

40.350.540

0.4

Cadiz Equity Ladder

30/06/2012

3.5

25.097.530

0.2

Element Islamic Equity

30/06/2012

3.3

6.038.500

0.0

Old Mutual Top Companies

30/06/2012

3.1

52.343.378

0.5

Old Mutual High Yield Opp

30/06/2012

3.1

67.316.765

0.6

Old Mutual Growth

30/06/2012

3.1

42.351.233

0.4

Symmetry Satellite Eq No.4

30/06/2012

3.1

4.029.087

0.0

RE: CM Flexible Equity

30/06/2012

3.1

36.212.280

0.3

Name

Date

Kagiso Equity Alpha

INVESTSA

INDUSTRY INDUSTRY NEWS NEWS

Appointments

Ebrahim Moolla, an attorney and senior partner of EB Moolla and Singh, was appointed as the new chairman of the board of PPS Holdings Trust. Moolla first joined the board on 11 March 2002 and was appointed as the deputy chairman on 23 June 2004. Dr Sybil Seoka was appointed as the new deputy chairman. Dr Seoka joined the board on 15 August 2005 and holds a PhD in pharmacy and is currently the managing director of Ample Resources (Pty) Limited.

Foord Compass Limited appointed Darron West as the company’s independent chairman following the retirement of Chris Greyling. West is a senior lecturer in the department of finance and tax at the University of Cape Town. He has previous experience at Cadiz Asset Management where he managed structured investment portfolios, and at the HBD investment group. West completed his accounting traineeship at Ernst & Young.

Manstika Matooane was appointed to as a non-executive director at the Johannesburg Stock Exchange (JSE). Matooane will serve as a member of the risk management committee and is currently the head of technology at Hollard Insurance.

Momentum Property Fund hits R1 billion

Prescient’s lists on JSE

The Momentum Property Fund has reached R1 billion in assets under management, marking significant growth from approximately R500 million at the beginning of 2010 and R600 million at the beginning of 2012.

In an effort to facilitate the continuation of the group’s impressive growth path, Prescient Holdings has listed on the Johannesburg Stock Exchange (JSE) via a reverse listing into PBT Group (previously Prescient Business Technologies).

The fund’s performance is impressive in light of its conservative investment philosophy. The property investment team tends to invest in stocks with a high income yield that has good growth prospects in distributions in the long term. The research process and philosophy is concentrated on investing in those property companies that are located in strong geographic nodes and have the potential to manage their vacancies and improve on rentals. The fund does not sacrifice yield at the expense of quality and ensures that the selected property shares are defensive through various property cycles. The Momentum Property Fund has roughly 75 per cent of its exposure in large-cap, blue-chip property counters, but has also been selective in investing in new property listings, which account for 15 per cent of the fund. The offshore exposure is taken through Capital Shopping Centres in the UK and NEPI. Holdings include Growthpoint, Redefine, Capital Property, Resilient, NEPI, Acucap, EMIRA, Vividend, Fortress Vukile and Hyprop, all of which underpinned returns over the last year.

Murray Louw, CEO of the listed entity, Prescient Limited (PCT), says the listing will provide the company with the flexibility needed to capitalise on longterm growth opportunities in financial services, while unlocking the intrinsic value of the business. “Being a public company will help raise our profile and introduce the brand to a wider market. This will assist in building on our growing product offering across the financial services spectrum.

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The listing comes with transparency and corporate governance requirements and lends some comfort to clients. This will assist the group in its global growth path as company information is more readily available to potential clients. The listing will also provide a valuation platform for our shares to retain and attract valuable employees.” The reverse listing resulted in PBT acquiring Prescient for a total consideration of R1.59 billion, settled through the issue of additional PBT shares at R1.35 each to Prescient shareholders. Management and staff were the majority shareholders in Prescient Holdings with an interest of 76.8 per cent. The total black economic empowerment (BEE) shareholding in the business was 29 per cent, with external BEE shareholders owning 23.2 per cent of Prescient. The BEE shareholding will remain above 25 per cent following the listing.

PPS Investments celebrates fifth anniversary PPS Investments, the investment arm of the Professional Provident Society of South Africa (PPS), celebrates its fifth year of operation in 2012.

Nick Battersby, chief executive of PPS Investments, says the company is one of the fastestgrowing businesses of its kind in South Africa. “We have over 13 000 individual investors and an established national presence, with representatives in the Western Cape, Eastern Cape, Southern Cape, Gauteng, KwaZulu-Natal, the North West and the Free State. We’ve launched and developed two comprehensive product suites, with the PPS products designed to cater to PPS members and the OPN products

to the needs of all other discerning investors (who may not qualify for PPS membership). We’re also gaining momentum in the corporate market.” Having launched the company at the peak of an extended equity market rally in May 2007, Battersby concedes that the journey hasn’t always been easy. He points out that the business faced heightened investor uncertainty and negative market sentiment shortly after its launch as markets plummeted and the global financial crisis set in.

“Nonetheless, it is encouraging to note that the unit trusts launched soon after the establishment of our business and managed by PPS MultiManagers reflect strong three-year performances and satisfactory five-year track records,” Battersby says. The company also recently received approval from the Financial Services Board to launch the PPS Management Company on 2 July 2012. Along with PPS MultiManagers, the PPS Management Company is now its second wholly owned subsidiary.

“The company is one of the fastest-growing businesses of its kind in South Africa.”

sim.smartcore and Satrix deal takes off Sanlam Investment Management (SIM) made a strategic decision to buy the remaining 50 per cent shareholding in Satrix, SA’s largest provider of equity ETFs; a deal that was recently formally approved by the Competition Commission.

SIM has one of the strongest passive investment offerings in South Africa, called sim.smartcore. The merger of sim. smartcore and SATRIX could prove to be a formidable combination. “Satrix has up to now only offered ETFs, while sim.smartcore has a significant institutional and unit trust footprint. Now, with the merger, we can offer all three product vehicles,” says head of sim.smartcore, Helena Conradie. SIM helped set up Satrix in 2000 as the first ETF provider in the country. SATRIX now has about R12 billion under management. sim.smartcore was also set

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up in 2000, with R800 million in enhanced index money. Today, its assets under management have risen to R30 billion. Up until now SATRIX has only been offering equity funds, but with SATRIX and sim.smartcore now working collaboratively as a team, it will span all asset classes. “We will be able to offer a wider range of funds in three different vehicles: unit trusts, segregated funds from institutional investors and ETFs. Our products will stay true to the Satrix philosophy of being transparent and cost-effective,” says Conradie.

PRODUCTS

Standard Bank launches new product suite Standard Bank has made it easy for the investor who wants to invest in a commodity, without all the distractions posed by investing in a company with its strategic and daily operational challenges. Standard Bank has developed a broad suite of products in three categories that invest only in the commodity investors want: exchange traded notes (ETN) issued on the JSE; commodity futures listed on Safex (the South African Futures Exchange); and warrants.

“Effectively, this means you have to take two guesses when making an investment decision: the commodity price and the Rand price.”

Absa Capital’s NewGold continues growth path in Africa Absa Capital has listed the first-ever exchange traded fund (ETF) on the Ghana Stock Exchange (GSE), making it the fourth African bourse to list the NewGold ETF after South Africa, Botswana and Nigeria. Four hundred thousand NewGold shares were listed on the GSE. NewGold, Africa’s largest ETF, is the best performing on the continent over five years, with a return of 22.55 per cent per year, a two-year return of 24.76 per cent and a return over three years of 21.66 per cent. As at 1 August 2012, NewGold’s assets under management were US$ 2.15 billion.

“The introduction of exchange traded funds to the GSE offers both individual and institutional investors a cost-efficient and convenient way to invest in multiple shares or other assets, such as commodities, through a single security,” says Dr Vladimir Nedeljkovic, head of investments at Absa Capital. “We have been encouraged by the success of the NewGold ETF in the African markets where it has been listed. Africa is an exciting proposition for this product and we will continue to explore opportunities across the continent,” adds Nedeljkovic. NewGold is the only goldbacked ETF on the continent and is a simple and costeffective way of investing directly in physical gold bullion through a GSE listed share. NewGold’s primary listing is on the Johannesburg Stock Exchange.

Charles Leishman, Standard Bank chief dealer of commodities, says private investors tend to look at these three products as complicated or risky. “In fact, they are no more complex – or high risk – than buying an ordinary stock.” Most investors are familiar with ETFs, but to make these products more accessible, Standard Bank has brought out a suite of ETNs which track the value of commodityspecific futures, including gold, silver, platinum and the palladium group metals, as well as one tracking a basket of commodities. Leishman spells out the main difference between ETFs and ETNs: “ETFs are fully collateralised in that they represent a direct investment in underlying securities that make up a pre-determined index; ETNs are uncollateralised products where the risk is not the commodity but the financial strength of the issuer, and the performance of the product is linked to an underlying security, basket of securities or index.” The ETN guarantee is dependent on the financial strength of its issuer, in this case Standard Bank, to have the money available when you want to sell your investment, and Leishman explains that Standard Bank therefore makes a market for its ETNs. “The beauty of our ETNs is that if you have a view on a commodity you can buy into it directly, just as you could a normal share. This enables you to invest directly

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in the commodity without all the complications of management and high input costs that come with purchasing a South African miner,” says Leishman. However, if the investor is investing in a commodity in a currency other than Dollars, then the Rand/Dollar exchange rate effect can distort the price performance. The Rand’s performance may either amplify or dampen the gains. “Effectively, this means you have to take two guesses when making an investment decision: the commodity price and the Rand price,” says Leishman. The second product set is futures, and Standard Bank also makes markets in futures relating to gold, silver, platinum, copper and WTI (West Texas Intermediate) oil. Walter de Wet, head of research for Standard Bank South Africa, explains that these are not traditional retail products but have been made as attractive as possible. The value of contracts in South Africa is only one-tenth that of the US market, and even then they are typically bought by brokers who would split the value among their private clients. “Futures are somewhat more risky because you may have to pay in ‘margin’ if the value falls away from your contract price. It is therefore aimed more at the sophisticated retail client more actively involved in trading his portfolio and who keeps a constant eye on the contract value,” says De Wet. These products introduce some interesting variables that have not yet been picked up by the local market. For instance, individuals or businesses exposed to the oil price or even a currency can hedge that exposure with a future and lock in a lower price. “At the same time you purchase a Rand-denominated commodity future, you can sell a currency future and hedge out the Rand currency risk that way,” adds Leishman. Standard Bank also offers warrants on oil, gold and platinum. There is less risk to these according to Leishman, as you simply pay a premium with no margin call.

etfSA.co.za

AUGUST 2012 – etfSA.co.za MONTHLY SOUTH AFRICAN ETF, ETN AND INDEX TRACKING PRODUCT PERFORMANCE SURVEY Mike Brown | Managing Director | etfSA.co.za

he latest Monthly Performance Survey showed property companies dominating the two to five-year total return rankings. Proptrax SAPY ETF, which tracks the top 20 property companies on the JSE (market cap weighting) and Proptrax TEN ETF, which tracks the top 10 property companies on the JSE equally weighted, have slightly outperformed the more actively managed Prudential Property Enhanced Index Unit Trust Fund. Also showing up well is the DBX Tracker MSCI USA ETF, which tracks the MSCI 600

index of USA equities, and is among the top performer over the one-year and twoyear periods. Other foreign indices, traded on the JSE through ETFs and ETNS, also showed superior performance, indicating that offshore equity investment is now worth considering. In the short term, three to six months, soft-commodity ETNs, such as the Corn and Wheat linker ETNs issued by Standard Bank have produced significant returns, reflecting the present food shortage and weather concerns that have propelled many agricultural commodity prices upwards.

The etfSA Performance Survey measures the total return (Net Asset Value (NAV to NAV)) changes including reinvestment of dividends) for index tracking unit trusts and exchange traded funds (ETF) available to the retail public in South Africa. The performance tables measure the one-month to five-year total return compared with the benchmark index returns (including reinvestment of dividends). As the FTSE/JSE calculates the index without taking into account any brokerage or other transaction costs, index tracking products will typically underperform the index because of their transaction and other running costs.

Best Performing Index Tracker Funds – 31 August 2012 (Total Return %)* Fund Name

Type

5 Years (per annum)

Fund Name

Type

3 Years (per annum)

NewGold

ETF

23.40%

Proptrax SAPY

ETF

27.23%

Prudential Property Enhanced

Unit Trust

17.25%

Prudential Property Enhanced Index Fund

Unit Trust

26.08%

Satrix INDI 25

ETF

14.45%

Satrix INDI 25

ETF

24.96%

2 Years (per annum)

1 Year

Standard Bank Silver-Linker

ETN

33.66%

Proptrax TEN

ETF

40.55%

Satrix INDI 25

ETF

28.93%

DBX Tracker MSCI USA

ETF

39.63%

DBX Tracker MSCI USA

ETF

24.91%

Proptrax SAPY

ETF

38.15%

Proptrax SAPY

ETF

24.72%

Prudential Property Enhanced Index Fund

Unit Trust

36.39%

NewGold

ETF

23.98% 6 Months

3 Months

Standard Bank Corn-Linker

ETN

50.00%

Standard Bank Corn-Linker

ETN

53.31%

Standard Bank Wheat-Linker

ETN

41.22%

Standard Bank Wheat-Linker

ETN

28.38%

Proptrax SAPY

ETF

27.15%

Proptrax SAPY

ETF

28.28%

Source: Profile Media FundsData (31/08/2012)

* Includes reinvestment of dividends.

Now, for the FIRST TIME ever, all South Africa’s ETFs & ETNs on a SINGLE WEBSITE. • Everything you need to know about each ETF/ETN • Absa (NewFunds), BIPS (RMB), DBX Trackers, Investec, Nedbank, Proptrax, Satrix, Standard Commodity Linkers • Transact online all ETFs/ETNs • Low costs • Easy access and switching • From R300 per month • From R1 000 for lump sums

Visit the website: www.etfsa.co.za or call 0861 383 721 (0861 ETFSA1)

egypt, europe, botswana, germany, spain, greece, sudan, portugal, namibia

IMF approves $4.8 billion loan request for Egypt Egypt requested a $4.8 billion loan from the International Monetary Fund (IMF) to improve economic stability. Managing director of the IMF, Christine Lagarde, says the objective of the loan is to rebuild investor confidence following 18 months of political turmoil. European Central Bank’s bond programme has Eurozone up in arms The European Central Bank’s (ECB) new government bond-buying programme aimed at helping debt-ridden countries in Southern Europe was met with resistance after reports that the chief of Germany’s Bundesbank threatened to quit in protest of the plan. However, Italy and France put pressure on the ECB to reduce crippling borrowing costs for southern Eurozone states. Botswana provides financial aid to Zimbabwe Botswana agreed to loan Zimbabwe 500 million Pula to finance working capital and re-equipment by the manufacturing sector, which is the economy’s hardest hit sector. Zimbabwe, which is under Western sanctions due to concerns over human rights issues, is struggling to raise capital on the world markets. Zimbabwe’s Finance Minister Tendai Biti said the credit facility would offer the industry both short- and long-term capital. Apple’s victory over Samsung Apple’s win over Samsung, following a copyright and patent infringement case, has resulted in the Japanese company having to pay $1.05 billion in damages. Apple won a major victory over Samsung, after a jury found it had copied critical features of the hugely popular iPhone and iPad. Samsung and Apple have been embroiled in patent

lawsuits spanning four continents as part of their efforts to dominate the US$219 billion global smartphone market. German jobless rate reaches 2.9 million German unemployment continues to rise as the European debt crisis limits the demand for exports while companies refrain from investing. According to Federal Labor Agency in Nuremberg, there has been an increase in the number of those unemployed from 9 000 to 2.9 million. The rate of unemployment has continued almost uninterrupted for more than twoand-a-half years. Spain seeks second bailout as regions dip into emergency funds Spanish Prime Minister Mariano Rajoy is seeking a second European bailout after Spanish regions, Murcia, Catalonia and Valencia requested emergency loans. Rajoy says the indebted regions aim to use more than half of the £18 billion bailout fund from July, which was granted to enable struggling regions to finance their deficits in the second half of the year. Greece cuts spending by £11.5 billion Greece is looking to cut spending by £11.5 billion in order to continue receiving the international rescue loans that are protecting the country from bankruptcy. Greece has been dependent on two multi-billion international bailouts from other Eurozone countries and the International Monetary Fund since its debt crisis broke in 2010. South Sudan receives concessional loans from IMF The International Monetary Fund (IMF) has included South Sudan in its list of 72

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low-income countries eligible for Poverty Reduction and Growth Trust’s (PRGT) interest-free loans. IMF’s managing director, Christine Lagarde, acknowledged the formidable challenges facing the new nation, citing economic instability and weak institutions but assured South Sudan President Salva Kiir that the IMF will assist the region in meeting its challenges. Portugal failing to meet bailout requirements Portugal’s tumbling tax revenue is an indication that the country is likely to miss its budget deficit target of 4.5 per cent this year. The aim of the £78 billion rescue three-year bailout programme is to restore Portugal’s financial growth and allow it to regain investor confidence. However, the interest rate on its 10-year bond stands at 9.4 per cent, which is an indication that investors remain cautious of its ability to repay its debts. In contrast, the yield on Germany’s 10-year bond was 1.4 per cent. Namibia cuts growth projection Namibia may have to cut its growth projection of 4.5per cent to 3.5 per cent for this year because of uncertainty in global financial markets and a fall in mining output. Mining amounts to 15 per cent of the country’s gross domestic product (GDP), headed by diamond mining and uranium mining. Bank of Namibia governor, Ipumbu Shiimi, has cut interest rates by 50 basis points in an effort to offer the economy some relief. Namibian interest rates have varied between 12 and 15 per cent for the past 18 months.

HOT

Two South African females listed as world’s most powerful women Nonkululeko Nyembezi-Heita, chief executive of ArcelorMittal SA, and Maria Ramos, group chief executive of Absa, have been named in Forbes magazine’s annual top 100 most powerful women in the world survey and ranked 97 and 93 respectively. The rankings are determined by calculating wealth, media presence and overall impact. Other women listed include Britain’s Queen Elizabeth II and US first lady Michelle Obama. South Korea’s rating improves Ratings agency, Moody’s Investors Service, has upgraded South Korea’s sovereign credit rating by lifting the government bond rating to Aa3 from A1. The upgrade was awarded for the country’s strong fiscal fundamentals and resilience to external economic shock. Additional stores boost Shoprite’s profits Shoprite has reported a 17per cent growth in trading profits for the year to June. This has been attributed to Shoprite’s increase in new stores, which amounted to 90 openings over a 12-month period and a growth in market share due to low prices.

NOT

Confidence in the global economy falls According to the latest World Economic Forum, which surveys 430 risk experts, confidence in the state of the global economy over the next 12 months fell to its lowest level in five quarters during the third quarter. This was due to the fear of a major economic disruption rising from 46 per cent in the previous quarter to 68 per cent. Business index reveals a slowdown in South Africa Figures released by the Reserve Bank show South Africa’s leading business cycle indicator fell for the fourth consecutive month in June. The index for the indicator dipped to 129.3 from 130.8 in May, making June the lowest month since February 2010. The decline suggests the economy is still losing momentum.

“The index for the indicator dipped to 129.3 from 130.8 in May, making June the lowest month since February 2010.”

Namibia’s growth stunted by global uncertainty Speaking at Namibia’s third quarter monetary policy, Bank of Namibia governor, Ipumbu Shiimi, announced that due to the uncertainty in global financial markets, and a fall in mining output, Namibia would have to consider cutting its economy growth projection of 4.5 per cent to 3.5 per cent for this year.

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SIDEWAYS

BAROMETEr

Economy experiences growth while forecasts remain poor According to Statistics SA, South Africa’s economic growth accelerated as forecasted to 3.2 per cent in the second quarter of this year from 2.7 per cent in the first quarter. However manufacturing output decreased and activity slowed in two of the economy’s main sectors, namely wholesale and finance, real estate and business services. The figures confirm the predicted outlook that the economy will perform poorly this year due to a global slowdown and a recession in South Africa’s main trade partner, Europe.

Events

Intermediary Focus – Sustainability

Investment Solutions brings sustainability to the table

intermediary services at Investment Solutions; Jon Duncan, ESG analyst at OMIGSA; Malcolm Gray, portfolio manager at Investec Asset Management; and Chris Hart, chief strategist at Investment Solutions. Silverman’s presentation and the panel discussion illustrated a genuine concern about our collective future and that Investment Solutions is taking sustainable environmental, social and governance (ESG) issues seriously. The days where investors, brokers and fund managers would focus their energies into garnering the maximum profits by exploiting natural resources, the environment and people for short-term profits are numbered. The way I see it is there are two kinds of people: those with their heads in the sand and those without. Quoting from various thought leaders and authors, he painted the bleak story of where our current economic system has led us to this pivotal moment in our human history. The creation of unsustainable business models saw premature foreclosures, profit losses and the US banking crisis, which then lead to the subsequent global economic crisis and the volatility we see today. We live on a finite planet with limited natural resources. Food security and shortage is on the increase; climate change continues to threaten natural resources and access to fossil fuels, 80 per cent coal, oil and gas reserves have been declared inaccessible resulting in a $28 trillion loss as a result; there is a growing and dire inequality gap; the human population recently made the seven billion mark; and sovereign debt levels are in the danger zone. Yes, we are at a tipping point, or have we already passed it? The investment implications for ignoring these issues will continue to impact on global volatility, low returns and result in few safe havens and huge retirement challenges, never mind the social and environmental upheavals that are pervading the world around us. Silverman’s key message is that the time is now to change the way the collective structure works and those who do not shift their mind-sets and adopt effective ESG systems will not be successful. Unfortunately, that also means taking the rest of us down with them.

he Investment Solutions Intermediary Focus seminars were held at the Cape Town International Convention Centre in June and the Sandton Convention Centre in August. The seminars addressed a pertinent issue that is increasingly affecting every factor of society today: sustainability. According to a 1987 UN conference, sustainability is defined as “that which meets present needs without compromising the ability of future generations to meet their needs”, and it was this core focus that Glenn Silverman, chief investment officer at Investment Solutions, brought to the table. His presentation was followed by a panel discussion consisting of Mike Clare, head of

However, it is encouraging to note that the general shift in perception around the world is emerging within the financial sector. Although this is more noticeable in the developed economies, it is beginning to take root here. These kinds of strategies involve banks implementing a 10-year focus, and no longer quarterly profits that have unsustainable long-term issues, for example. Building the ESG lens into a portfolio is becoming the new normal and we are beginning to see these changes being implemented in regulations and codes, which is encouraging us to think about these issues. In fact, as a responsible adult, we all have a duty to become actively involved in whatever facet possible. It is our responsibility to share these ideas and practices with others and to realise that we’re not in a rat race against each other but in a race to save our collective future. I’m thrilled that this issue is on the table. I’m looking forward to seeing the shift away from unsustainable practices and products sooner rather than later, into a system that is built around something we can all agree is ethically sound and contributes to the success of us all.

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AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Vintage collectable watches –

wearable and value investments that keep on ticking Some may argue in favour of owning a watch despite traditionally being considered a one-function device. With 75 per cent of the world’s population owning a mobile phone, of which one of its most basic features includes a clock, the need to own a watch may slowly be on the decline, but the value of collectable watches certainly are not. According to Julien Schaerer, watch director at New York auctioneer Antiquorum, the market has evolved since the early 80s when watch collecting was still a hobby. “There’s definitely more interest. This is partly because unlike most accessories, the best watches hold or increase their value,” says Schaerer.

Watch collectors agree that a watch’s typical average return on investment over a period of five to 10 years is roughly 10 per cent. Although this return isn’t extremely high, no other investment is as wearable as a collectable watch.

type of magnifying glass, is used to make spotting the stamps more easily. A loupe should also be used to inspect the dials on the watch. Many dials are made with some silver, which naturally tarnishes from water and polluted air. So an older watch should have dirty spots,” adds Rich.

Aaron Rich, head of watches at Sotheby’s in New York, advises collectors to always ask for the certificate of origin to guarantee that the watch is original. “In addition, collectors should look out for any scratches on the side and underneath a watch’s case, as this can reduce the value of the watch by 20 – 40 per cent. Another tell-tale sign of an original comes in the form of a manufacture stamp or seal usually found on the underside of the case. A loupe, a

Rich advises that collectors should never turn down a watch because of its band. Watches with original bands may be able to fetch more money when selling it, but a replacement band affects the value less than other factors. Whether it is just to avoid the volatility of the stock market or to invest in something a bit more exciting than bonds, the following are a few examples of just how much valuable vintage collectable watches are worth.

Patek Philippe Calibre 89 (1989) – $5 002 500 Patek Philippe Henry Graves Supercomplication (1932) – $11 002 500

Patek Philippe 18-carat gold wristwatch (1943) – $5 700 000

One watchmaker seems to win the hearts of collectors. Experts estimated that the watch would sell for between $3 million and $5 million, but due to intense competition, bids soared to more than $11 million. The Henry Graves Supercomplication yellow-gold pocket watch took four years to build by Swiss master watch maker, Patek Philippe. It holds the record for the most expensive watch ever sold. It has two faces and 24 complications (or functions).

Made in 1943, Patek Philippe’s 18-carat gold perpetual calendar chronograph wristwatch features moon phases in a tonneau-shaped case. It sold for $5.7 million at Christie’s in May 2010. It surfaced in 2002 and is believed to be the only watch that was not classifiable since it did not only lack a model number but missed similar characteristics to Patek Philippe’s 1940’s series.

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The Patek Philippe Calibre 89 is a commemorative pocket watch crafted in 1989 to celebrate the company’s 150th anniversary. Declared by Patek Philippe as “the most complicated watch in the world”, it weighs 1.1 kg, exhibits 24 hands and has 1 728 components, including a thermometer and a star chart. It took five years of research and development and a further four years to manufacture the Calibre 89. Only four watches were made; one in white gold, one in yellow gold, one in rose gold and one in platinum. This particular white gold example was sold by Antiquorum in 2004 for just over $5 million.

they said

They said “South Africa has held off from recession, but we do expect weakness on the horizon and even the Reserve Bank cut its 2012 growth to 2.7 per cent from 2.9 per cent at the July rate meeting.” Anisha Arora, an emerging market analyst at 4cast, provided a forecast on the economic outlook for South Africa, given the Reserve Bank’s rate cut. “What this simply means is that as the world economy declines further, the South African consumer will feel the pinch even quicker and if we don’t update our ability to save and to spend within our means we are in big trouble.” Mike Schussler, of economist.co.za, recently remarked on the latest Consumer Vulnerability Index, which highlighted a sharp rise in how financially vulnerable South African consumers are. “Markets have shown increasing nervousness over possible disruptions to supply, amid rising geo-political pressures in the Middle East.” Leo Drollas of the Centre for Global Energy Studies justified the oil price increase that has been fuelled by tension between Israel and Iran.

“Global issues are unlikely to be clearly better or worse by then; we’re in for a period of heightened global uncertainty for a long period of time.” Absa Capital Economist Jeff Gable commented on South Africa’s economic outlook in light of the IMF’s reduced growth forecast for the country. “I always said the exit of one or more of its members would mean the disintegration of the Eurozone. It would mean the failure of an historic project to unify Europe and no-one would want that.” Silvio Berlusconi, former Italian Prime Minister, reveals his stance against Italy leaving the Euro. “However, what appears now to be almost certain is that the metal surpluses currently prevailing in platinum and palladium will be further eroded as the year progresses as output from primary producers is throttled back or simply lost to the market by way of unscheduled stoppages. This combined with our outlook for steady metal demand should lend support to prices as the year progresses.” Jerry White, marketing manager of Northam Platinum, described its outlook of the platinum industry for the rest of the year.

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“The South African economy has been insulated from much of the global market turbulence due, in part, to the country’s top-ranked audit and accounting standards, sound banking system and well-regulated stock exchange.” David Campbell, Grant Thornton CEO, reflects on the results of its recently released survey which reports the views of senior executives across 12 000 businesses globally. “The jump in equities trading can be attributed to a strong undertone that central banks would act as a backstop for any effects of the Eurozone crisis, thereby creating a greater degree of certainty among traders.” Andrew Kinsey, head of risk at Global Trader, describes why retail investors have shifted their focus from currency futures to equity index futures, according to the Global Trader Futures Monitor (GTFM). The fact that the ALSI has tested a new high does not necessarily make the market expensive.” Francois du Plessis‚ a director at Vega Asset Management, commented on the JSE’s All Share Index first-ever break through beyond 35 000 points.

you said

You said A selection of some of the best tweets as mentioned by you over the last four weeks. @LaMonicaBuzz: “Jobless claims up from a week ago and higher than forecasts. 372K. QE3 calls may get louder. Fire up that grill again. Still a BBQ recovery.” Paul R. La Monica – Paul R. La Monica’s The Buzz on @cnnmoney. All stocks and economy. All the time. New York

@angelo2711: “I’ll be watching the Lonmin share price... with 1 eye & the news wires with the other...” Angelo Coppola – Tactical content, media; China Central TV correspondent, blogger & financial journalist. I mean & support everything I tweet & RT Johannesburg

@M_McDonough: “When the bright spot for investors is hope that the Fed will print money, we have a problem.” Michael McDonough – Economist & Bloomberg Brief contributor {BRIEF GO} Former Deutsche Bank economist/strategist. mmcdonough10@bloomberg.net *All views are my own* Hong Kong

@Bruceps: “Of course this will all do the price of platinum no end of good. Whoever’s got any’s going be a lot richer this weekend than last.#Lonmin” Peter Bruce – Editor, Business Day, Johannesburg. Former editor Financial Mail & Business Report. Former Madrid Correspondent & Bonn Corr, Financial Times Johannesburg

@PatriceRassou: “FNB estimate that 20% of house purchases were by foreigners!” Patrice Rassou – Head of Equities, Sanlam Investment Management Cape Town

@VentureCapitalX: “Stocks struggle to extend recent gains Stock benchmarks dip into the red but moves are relatively mild and mixed across asset classes in.” Owen Benson – Get the latest Venture Capital & Angel investors news and info! New York

@mayaonmoney: “CPI just came in at 4.9pc, lower than forecast. Remember your groceries, electricity and other bills still go up, just at a lower rate.” Maya Fisher-French – personal finance columnist focusing on information that actually matters South Africa

opinion, and do not in any way reflect the views of the SABC. Johazardousburg @RobinBew: “Exports and imports slow in #China. Problems within and without. Still think Gov will avoid big fiscal splurge. But regions acting” Robin Bew – Chief Economist & Editorial Director of The Economist Intelligence Unit. Expert on global economy, world business environment & industry trends. London @patmcgroarty: “It’s harder to find a job in S Africa today than at the outset of the financial crisis in ‘08, World Bank says in a new report.” Patrick McGroarty – Covering South Africa and the region for The Wall Street Journal and Dow Jones Newswires. Views are my own. Johannesburg

@GuntherDeutsch: “Markets keep looking for stimulation yet they know central banks are almost powerless at this point. STOOPID!!” Gunther Deutsch – Just here to pass on your questions. My tweets are my personal

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LIFESTYLE

CHARMED AT LA BOHEME BISTRO Most people tend to have their favourite local coffee bar, café or lounge. For me, this has become La Boheme Wine Bar and Bistro in Sea Point. This is one of those unique French café street-side bistros, where you catch yourself reminiscing about a forgotten European trip. To pull off this kind of magic, you need vision, ingenuity and passion and to serve it up with good food and, of course, good wine. This is what owners Faisal Khakoo and Anna Rasclosa did when they set up La Boheme and its sister La Bruixa Espresso and Tapas Bar sitting next door.

presented in a wholesome and generous style. On quite a few occasions I have kept the waitron holding the menu board while I chop and change my options. There is the Mediterranean and Spanish influence with a splash of Italian. Occasionally they will throw in the eastern blend, but there is always a hint of South African and European culinary flair.

At La Boheme, it’s all about intimate wining and casual dining and it certainly has a certain je ne sais quoi. Perhaps it’s the tea-light candles that give off a mystical glow, or the way the light reflects off the scattered wooden barrels that creates that faraway ambience. Or perhaps it’s the extensive wine list that isn’t too pretentious nor below par, with some 80 varieties always served at the right temperature. The wine list has been recently updated to include a small selection of international wines, two of which are from Spain.

The beef Carpaccio, basil pesto and Parmesan cheese sets the tone, and the caramelised onion and chorizo spanakopita with tzatziki can take your taste buds to new heights. For mains, the ostrich meatballs with homemade tagliatelle and a spicy Napolitano keep it nice and homely. The balsamic fillet on a bed of mushroom risotto served with mushroom sauce is winner. But the pork belly with stir-fried vegetables served with mashed apple chutney and a ginger jus illustrates La Boheme’s true culinary flair. La Boheme likes to surprise and the menu presents a different assortment of accompaniments to the dishes you once enjoyed, so you can try it again for a twist when you feel that call to return.

But maybe it’s that the world’s flavours have been combined under one roof and are

Chocolate brownies with ice cream and the vanilla baked cheesecake are classic

favourites for dessert. But you have to try the assortment of crêpes: cinnamon and sugar, caramel and banana, or chocolate sauce. On Sundays from 12h00 to 16h00, guests are treated to a Spanish-style leisurely lunch and can choose from paella, tapas, sangria, an all-day eggs Benedict and a few favourites off the weekly menu. If you are in the area during the day, pop into its sibling La Bruixa Espresso and Tapas Bar for coffee and breakfast or a selection of delicious breads, or choose from the tapas menu and indulge in your own favourite foods. As Khakoo says, it’s the kind of experience that leaves you with a warm, fuzzy feeling. I suggest making a reservation. Address: 341 Main Road, Sea Point, Cape Town Phone: 021 434 8797 or 021 434 6539

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E-mail: info@labohemebistro.co.za

HKLM4684

Accessing Africa through African expertise Due to its vast resources, young demographics and expected development over the next 20 years, Africa presents an exciting long-term investment opportunity. This opportunity requires a deeper knowledge and comprehensive understanding of the African continent. At Momentum Investments we draw from our pool of highly skilled and experienced investment professionals, as well as from our well-researched network of external managers, offering the best African investment opportunities to the world. Momentum Investments is a leading African investment management business. It is the investment house of MMI Holdings Ltd, an African-based financial services group listed on the Johannesburg Stock Exchange. We have a footprint across Africa with divisions covering asset management, alternative investments, manager of managers, collective investments, properties and wealth management. And an international representation in our UK-based investment house â&#x20AC;&#x201C; Momentum Global Investment Management. For more information go to www.momentum.co.za/investments, or view our blog at http://news-from-africa.momentuminv.co.za.

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