INVESTSA October 2011

IRELAND/DAVENPORT 67841

Asset Management

Partner with the industry leader Invest in award-winning results. Investec Asset Management, a leading provider of specialist investment strategies across the world won the coveted “Offshore Management Company of the Year” award at the 2011 Raging Bull Awards and, more recently were awarded “Global Manager of the Year” in the Imbasa Yegolide Professional Excellence 2011 Survey. Make the difference to your world of investment by partnering with us today. For more information, contact your financial adviser, call us on 0860 555 700 or visit www.investecassetmanagement.com

Raging Bull 2011 - Offshore Management Company of the Year

Collective investment schemes in securities (unit trusts) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. Commissions and incentives may be paid and if so, would be included in the overall costs. Investec Fund Managers SA Ltd is a member of the Association for Savings and Investments SA. The Raging Bull Award 2011 for Offshore Management Company of the Year is based on the best overall performance across unit trust sectors that consist of a suite of five or more non-rand-denominated funds with at least three years history for the overseas-domiciled management company. Investec Asset Management is an authorised financial services provider.

Contents

CONTENTS

06 09 12 14 16 18 20

Offshore investing in the middle of Armageddon

22 29 32

FUND PROFILES

SUBSCRIPTIONS

Offshore Investing focus Head to head Sanlam Private Investments • Ashburton Where are financial advisers going?

Trading across the World FSB gets tough on errant advisers The best short-term investment in the market Profile Dave Foord: Director and Chief Investment Officer, Foord Asset Management

Sector Report SA financials: the battleground heats up BEWARE THE NERVOUS INVESTOR

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Letter from the editor

letter from the

EDITORIAL Editor: Shaun Harris investsa@comms.co.za

editor

Features writers: Maya Fisher French Miles Donohoe Publisher - Andy Mark Managing editor - Nicky Mark Design - Gareth Grey | Dries vd Westhuizen | Robyn Schaffner 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 Bonnie den Otter | bonnie@comms.co.za Advertising & sales Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Miles Donohoe | miles@comms.co.za

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

Copyright COSA Communications Pty (Ltd) 2011, 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

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olatile financial markets make for interesting times. It has fund managers trying to decide where to find the best relative value and financial advisers facing investors who are probably skittish and want to get out. Interesting times can quickly translate to difficult times.

My personal interesting time was attending the Sanlam Benchmark Symposium in Durban. I got to meet a lot of financial advisers and asked what they thought of INVESTSA. Many know the publication well and are complimentary about what we are doing. There were other advisers present who didn’t know INVESTSA, so the free copies were much appreciated and the response I received was that we are making an impression on the industry.

Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication.

Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.

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But back to these volatile times.

Advisers and investors are trying to work out how to handle them. We think we have a lot of relevant advice in this issue. Maya Fisher-French looks at spread trading, and warns that while it’s a good opportunity for South African investors to trade in Rands offshore, it’s a high risk investment. Local investors can use Rands to buy just about any investment internationally. But you can lose more than originally invested. Maya also looks at investing offshore and speaks to the investment experts who told us to take advantage of the relatively strong Rand and lower global valuations.

World markets have crumbled,

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and Maya concludes that good opportunities are available overseas to a greater extent than locally.

The profile is on Dave Foord, director and chief investment officer of Foord Asset Management. A veteran in the industry as the company celebrates its 30th birthday, Foord reflects on changes in the industry and offers advice on how to invest in these turbulent times.

Head to Head has Craig Massey, head of stock broking at Sanlam Private Investments and David Christie, head of distribution SA at Ashburton, answering the difficult questions and providing expert advice. I look at the welcome return of more investors using financial advisers. But it comes at a cost as the regulatory burden is forcing many advisers out of the industry. The end result could be more investors and less financial advisers.

The Financial Services Board (FSB) is central to my second article on investment services providers seemingly being targeted, perhaps unfairly, for fines for the late reportage of debarred advisers.

I’m now off to track down a debarred financial adviser. I kid you not that I was having nightmares about them.

As I’m discovering, you are finding INVESTSA fascinating and relevant in these interesting times. All the best until next time.

KINGJAMES 16907

An offshore fund that speaks in your language.

As Allan Gray’s global asset management partner, we speak the language of long-term wealth creation.

It’s what we at Orbis are most passionate about. The Orbis Global Equity Fund allows you to diversify your portfolio and expose it to offshore markets and currencies, while accessing it locally is made simple through Allan Gray. So while the currency your investment will be exposed to might not be familiar, the investment approach will be. When your money’s ready to work for you on the global market, contact us. Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

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

Maya Fisher-French

Offshore investing in the middle of Armageddon

By Maya Fisher-French

“The world has gone pearshaped once again with negative real interest rates.”

Over the last year, investment gurus have told us to take advantage of a relatively strong Rand and lower global valuations by investing offshore. Since then the world has gone pear-shaped once again with negative real interest rates, an investment in government bonds resembling a game of roulette and our best option seems to be Kruger Rands stashed away in our safes.

Speaking to global fund managers you get the sense that they would like nothing better than to knock together the heads not only of short-term traders, but many of their investors, too.

“When a client wants to cash in because they are worried markets will fall further, we have to sell companies with dividend yields of five per cent against our better judgment. People pulling the money out don’t realise the value of this dividend income and are instead investing it in cash at 0.5 per cent if they are lucky,” said one such frustrated manager, Kokkie Kooyman, international fund manager at Sanlam Investment Management (SIM) Global.

Coronation Global Balanced Fund manager, Gavin Joubert concurs highlighting one of his top picks, Vodafone, which is currently trading at nine times its cash flow, and which will pay a 7.5 per cent dividend in British Pounds next year while Tesco’s, one of the UK’s largest retailers, is paying investors 4.5 per cent a year.

It seems like a no brainer when you would be receiving one per cent from a UK bank right now.

“You can buy one of the biggest mobile phone companies in the world with 25 per cent of its earnings from emerging markets at these levels. It is the biggest opportunity you can find,” said Joubert.

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Investing geographically An interesting anomaly has been developing over the last few years in terms of geographical asset allocations. Although the US economy is in dire straits, US companies delivered earnings growth above expectations. In this world of globalisation, where a company is actually listed has very little to do with where its earnings come from.

Coca-Cola, a stalwart of the New York Stock exchange, makes 50 per cent of its earnings from outside America and is very much geared to the emerging market. Ditto other companies like Microsoft, Apple and even YUM Brands which owns KFC. Buying a US-listed company does not mean you are tied to the US economy.

Equity as income

The fear factor

The point both these managers make is around income and it is an important one.

In a world where real yields on government bonds and cash are negative, investors will have to start looking for better yields and high dividend-paying blue chip shares will be in demand. In many ways it goes back to the fundamental reason for investing in shares which is earnings and dividends, which in turn drive the share price over the longer term.

There are several factors at play. Firstly the market is made up of investors and traders.

Traders try to exploit short-term movements and are focused on the short-term prices of shares not long-term earnings. Joubert points to the high frequency trading funds which are programmed to buy or sell on certain triggers; this tends to feed on itself pushing the market to extremes and creates massive volatility.

“If you invest now, as long as you know the company will pay dividends every six months, then you can live through the share price volatility because the earnings are safe,” said Kooyman who added that investors sitting in good quality US companies are receiving dividend income of around five per cent. This is real tangible income, not a price variable on a stock exchange manipulated by shortterm traders.

Investors on the other hand are susceptible to human emotions namely fear and greed and, when faced with uncertainty, flee to what they perceive as safe investments such as US treasuries and gold. The irony is that while existing investors are cashing in their funds, new investors are relishing the opportunity to buy companies and dividend income at record lows.

Kooyman said that SIM Global is on the lookout for companies that are not only paying good dividends, but also have a track record of paying dividends to ensure that they continue paying.

When you compare that to virtually zero per cent returns from cash and bonds, it seems simple; so why the flight to US Treasuries which are producing virtually no income and have just been downgraded, or gold which has no value beyond sentimental value and generates no income?

Joubert currently has a 70 per cent equity weighting in his managed fund as he takes a strong view on under-priced equities. Despite this high equity weighting, the Coronation Balanced Fund has maintained a positive return for the year losing only 3.5 per cent during the August bloodbath. He said that nothing has fundamentally changed for the prospects of the companies he invests in. Take beer company Anheuser-Busch – the brewer that produces Budweiser – it generates a significant portion of its earnings from high-growth emerging markets. “If you ask me if I would have changed my five-year earnings forecasts between the months of July and August, I wouldn’t as nothing has changed to impact that model, yet the share price fell 15 per cent.”

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Michael Power, strategist at Investec Asset Management, said that its Global Franchise Fund simply invests in high quality global companies irrespective of where they are listed. “We chose the best companies wherever we find them, it just happens that 20 per cent of the best companies are listed in the US.” As companies become increasingly global, the idea of geographical investing is losing its relevance as the investor has to look beyond the listing to where the earnings are being generated. “We do a lot of homework and focus on regions which are conducive to good growth,” said Kooyman.

“US companies delivered earnings growth above expectations. In this world of globalisation, where a company is actually listed has very little to do with where its earnings come from.”

When looking at companies with geographically diverse earnings streams, Kooyman added that his fund managers look at each earnings stream separately based on the region and then calculate the earnings going forward.

In Europe there are a number of good companies with offshore exposure like Renault which sells outside of France. It is currently inexpensive as investors have sold out European stocks. In America, Microsoft is the cheapest it has been in 20 years with a P/E ratio of eight times, yet 40 per cent of sales are outside the US. The problem with globalisation is that it is more difficult to manage currency risk. You may get great earnings out of a region but the currency in which the company is listed collapses, so you need to include currency risk in the relative valuation of the share. For example, if the view is that the Euro will depreciate by 10 per cent then any purchase of a European company will have to offer a discount of 10 per cent. In other words, companies listed in countries that have currency risk will have to trade at a lower value to make them attractive.

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Buying at the right price Many offshore investors have been extremely disillusioned with their returns over the last 10 years. During that time global equities have been flat while the JSE has delivered returns of 17 per cent per annum. Joubert argues that this is exactly the reason investors should go overseas, because finally valuations have come back down to reasonable levels.

“In our opinion, the best predictor of returns is the price you pay for the investment relative to its intrinsic value and risk.”

In 2000, investors simply over paid for global equities. In the accompanying table, Joubert demonstrates that in 2000, at the height of the tech bubble, you would have paid $38 for technology company Cisco.

Eleven years later that share price is still down 58 per cent. However, the earnings per share have increased by 250 per cent.

There was nothing wrong with the company, what was wrong was the amount paid for it.

Share price performance is determined by how much you pay for those future earnings.

At the moment, Cisco is trading at a price to earnings ratio of 9.6 times, compared to the mind-blowing 81.4 times in 2000.

Delphine Govender, portfolio manager at Allan Gray, said long-term investors need to understand that risk is not volatility but the permanent loss of capital. If your investment falls in value due to short-term

market volatility, it is not a significant risk.

The problem is if you are never able to recover your losses. This happens when you overpay for an asset, as in the case of Cisco in 2000. “Since our primary definition of risk is the probability and the extent of capital loss, we always try to invest in businesses when share prices are well below our assessment of the company’s intrinsic value and we are offered some protection should things turn out worse than we forecast – in other words, a margin of safety exists.”

Govender said that Allan Gray believes that to invest where value is exceptional is not only the lowest risk, but also the most rewarding strategy. “In our opinion, the best predictor of returns is the price you pay for the investment relative to its intrinsic value and risk.”

Kooyman added people make the mistake of comparing current valuations to valuations over the last five or 10 years. That is too short a comparison and you are comparing to a period of overpriced assets, again demonstrated by the accompanying price and earnings table. He argued that you should analyse the company price versus earnings and net asset value over the last 20 years to understand its relative valuation.

Based on these criteria, good opportunities are available overseas to a greater extent than locally. It is interesting to note that for the first eight months of the year the global markets had outperformed the JSE by five per cent even before accounting for the Rand devaluation.

An investment approach In uncertain markets, a focus on income is a sound investment strategy as income, whether from earnings or interest, is more stable and predictable. Michael Power recommends the following strategy: • Invest in the equity and corporate debt of high quality blue chip companies who have earnings from high growth areas.

• Invest in emerging market debt (government bonds) rather than US or European bonds.

There is less risk of default and the yields are higher.

• For cash, Power’s best bet is Singapore Dollars. Although the returns are only one per cent, it will appreciate by three per cent to four per cent against the US Dollar providing a total return of around four per cent.

• Gold, although expensive, is preferable to US treasuries. Although gold does not pay an income nor do US treasuries to any significant degree and gold will act as a hedge against a weaker Dollar price.

source: Coronation Fund Managers

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Offshore investing: Absa Wealth

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Investors should look to the US to unlock value in offshore assets South African investors are frequently being told of the importance of allocating a certain portion of their portfolios to offshore investments; yet deciding where, how much and exactly how to invest in this segment of the market can be fraught with difficulty.

Philip Bradford | Absa Wealth

Despite the current turbulence facing the US over its huge $14 trillion debt pile and the ongoing sovereign debt crisis in Europe, according to a number of local asset managers it is some of these markets that are currently offering real potential for investors. Philip Bradford, head of investment advisory at Absa Wealth, said that the US is a prime market for South African investors at the moment.

“Developed market equities, and in particular the US, are attractively valued currently. On a forward price-to-earnings basis the S&P 500 is trading at a 25 per cent discount to its long-term average. In addition, US companies are mostly now in very good shape. Over the last few years they have used the tough times to both cut out a lot of extraneous costs as well as streamlining their businesses.

However, Bradford added that while US stocks are offering good value to investors, another area that should be considered is emerging market equities. “Our research shows that despite SA being an emerging market, it makes investment sense for South Africans to invest in other emerging markets. They possess attractive investment opportunities that are not available locally.”

Despite the value on offer, however, South African investors are still unfortunately very nervous of investing offshore.

“Historically investors were keen to invest offshore to protect against domestic economic and political risk. Yet often this decision was emotionally charged and South Africans have a tendency to take their money offshore when the Rand is already weak. In contrast, the best time for South Africans

to invest offshore is when markets are attractively valued. If you make your decisions on investment fundamentals, the currency movements will come out in the wash.”

“South Africans have a tendency to take their money offshore when the Rand is already weak. In contrast, the best time for South Africans to invest offshore is when markets are attractively valued.”

One of the other problems for local investors when they are looking to take money offshore is the inclination to invest offshore assets in low-yielding, low-risk assets. “They tend to see this as their safe money which will protect them from any economic or political risk in South Africa. However, our research shows that the strong influence of currency fluctuations on offshore investments impacts on returns and magnifies the risk. This has resulted in traditionally safe investments exposing investors to unintended risk.”

“We therefore recommend that investors place up to 30 per cent of their portfolio offshore, but that they view this as part of their high-risk asset allocation and focus on equities. They should instead use onshore assets for their allocation to local lower risk investments like cash, preference shares and bonds.”

For any financial planners who may be constructing portfolios or providing advice to their clients, it is critical to consider the tax implications of investing offshore. “An adviser can really add value through asset location rather than simply asset allocation.

If the financial planning and tax implications are correctly considered then this can often prove as important as asset allocation decisions in generating good after tax returns,” concluded Bradford.

Bradford cited an example: a South African investing in a low-risk foreign investment has historically experienced volatility similar to that of global (and local) equities. “Once the investor accounts for currency fluctuations, they may not be compensated for the risk that they’re taking on. When the performance of a US cash portfolio is measured in Rand, they may be taking on the same risk that they would have experienced in a local equity portfolio.”

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Offshore investing: 36ONE Asset Management

Offshore investing:

Not so foreign after all

Asset managers, financial advisers and market commentators have all been trying to persuade retail investors to increase their investment allocation to offshore equities. The trail of thought has been along the lines of ‘offshore equities have underperformed for more than a decade, at some point soon the returns will surely improve, and might even be better than our local market’s performance’.

Jean Pierre Verster | 36ONE Asset Management

Investors who listened to this advice have probably been disappointed with the performance of their offshore investments so far, especially after the worldwide market turmoil experienced in August.

Investors should be clear in their minds as to why they might allocate a portion of their portfolio to offshore equities. Even though it is a truism that, on average, everyone will earn the mean return from a certain asset class, the dispersion of investment returns will lead to very different outcomes for each investor individually, depending on the actual securities held in their portfolio.

In other words, ETF investors and fund managers who stick closely to their offshore benchmark (closet index trackers) should perform in line with the market. Benchmark-agnostic stock-pickers, however, might perform materially better (or worse) than the norm. The basic principle, which also applies to our local market, is that investment returns are driven by security selection, not asset allocation. This should not be a foreign concept.

It was proved in a study done by Brinson et al. published in 1986, which concluded that asset

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allocation explains on average 93.6 per cent of the variation in return over time. However, the study is often misinterpreted as saying that asset allocation almost completely explains the variance in return between portfolios. Here are two reasons why this is wrong:

“Just because, on average, everyone earns the mean return, does not imply that each individual investor will earn the average return.”

1. The variability of returns from the three main asset classes (equities, bonds and cash) vary materially. The value of both the yield and capital are known in advance in the case of cash (or, at least, the yield is bounded by zero). In the case of bonds, the yield (coupon) is generally known in advance, with some uncertainty regarding the return of your capital.

For equities, both the future (dividend) yield and capital value are uncertain. That is why equities are more volatile than bonds, which in turn are more volatile than cash instruments.

Needless to say, the greater the proportion of your portfolio that you allocate to the asset class which exhibits more variability of returns, the more variable the return of your overall portfolio will be. That is what the study showed. Not that the variability between portfolios are explained by asset allocation, but rather that the absolute variability over time is driven by the allocation to the asset class that exhibits the most variability.

It is a finding on risk (variability), not on return.

2. Just because, on average, everyone earns the mean return, does not imply that each individual investor will earn the average return.

The dispersion between the returns of securities within the same asset class is what counts.

Picking the best performing securities within a specific asset class will prove to be much more profitable for your portfolio than simply increasing the allocation to a certain asset class within your portfolio.

Equity portfolio returns are driven more by security selection than by the allocation to local equities versus offshore equities. This is a universal principle – place more emphasis on stock-picking skills, whether locally or offshore, than on the geographic allocation of your portfolio.

Offshore investing: AFRICA

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Investing in Zimbabwe:

The fall and rise of Africa’s bread basket We see Zimbabwe being the next frontier investment destination, despite much being written about the rise of the rest of Africa, and subSaharan Africa in particular – the lion of Africa. It appears that Zimbabwe has fallen off the international investment community’s radar, and rarely enjoys a positive headline. We believe this is changing.

Paul Robinson and Gavin Vorwerg | Laurium Capital Pty LTD The Zimbabwean economy has begun to recover from years of economic decline. The pivotal point came early in 2009, with the decision by the newly-formed Government of National Unity to abandon the hyperinflationary Zimbabwean Dollar in favour of the greenback.

The recovery is in its infancy and there are a number of tailwinds for long-term growth. Even with serious challenges like a delicate political environment, chronic lack of liquidity and virtually non-existent foreign direct investment, Zimbabwe grew its economy at eight per cent in 2010 and is on course for nine per cent growth in 2011. Looking further out, we are optimistic that Zimbabwe may enjoy one of the highest economic growth rates in Africa over the next decade, close to 10 per cent per annum by some estimates.

Bouyant economic growth, coupled with a scarcity of capital, is likely to underpin strong investment returns for those investors willing to take on the risk and commit capital to the country. Of course, investing in Zimbabwe must come with a stern warning, particularly with the political landscape so unpredictable; but on the other hand, we think early investors will be handsomely rewarded because they would buy assets at depressed prices that will be driven higher as more investors arrive in future.

Coinciding with Zimbabwe’s chaotic land redistribution programme and hyperinflation, the country’s economic output almost halved from 1998 to 2008. The period is euphemistically referred to as the lost decade by economic commentators, or the unfortunate decade by the county’s battle-hardened CEOs whose laconic humour and resolute belief in the huge potential of their country kept them going through the worst times.

If Zimbabwe’s economy had grown at a similar rate to its non-oil producing sub-Saharan peers (around five per cent annual growth) during this period, then its economy would have been three times the size of what it was by end-2008. Many of the underlying trends that drove growth in those economies are also relevant for Zimbabwe, and that gives us confidence that Zimbabwe can play catch-up to a large degree over the coming years.

Surprising to many is that Zimbabwe has a well-developed financial market and stock exchange relative to most of its neighbours. The Zimbabwe Stock Exchange (ZSE) trades close to US$ 2 million a day on average, making it the third most liquid market in sub-Saharan Africa (excluding South Africa) after Nigeria and Kenya, and alongside Mauritius. In fact, the ZSE often trades more in value in a day than

Botswana, Ghana, Malawi, Namibia, Tanzania, Uganda and Zambia combined.

Of course, it is not all good news. Politics remains the single biggest risk to the renaissance of the economy and the positive investment case.

The current tenuous political situation and its resultant controversial economic policies, such as the recent indigenisation regulations, are discouraging much-needed foreign investment into the country without which the country would not reach its undeniable potential.

For the investment community, Zimbabwe has become the land of false dawns, but one of these days, hopefully fairly soon, there may be a significant change in the landscape, investment will flow into the country, and the economy and asset prices will head higher. Investors should consider Zimbabwe only as part of a diversified portfolio, and then only with high risk capital that they can afford to lose, because the downside risk could be substantial. However, if the current momentum continues, and is not derailed by dramatic political developments, then the upside could be substantial in the long term and investing in Zimbabwe may be a risk worth taking.

Laurium Capital (Pty) Ltd is a licensed financial services provider.

HEAD TO HEAD | Sanlam Private Investments

Sanlam Private Investments C raig

M a sse y

Head of Stock broking

1. With all the turmoil currently taking place globally, is now a good time to invest offshore?

who meet all our criteria in terms of a credible investment process, investment performance, back office support and financial stability.

When you evaluate whether to invest offshore, I believe there are three main considerations.

These are level of the currency, valuation of the investment and the investment profile of the client.

Currently developing market currencies, including the Rand, are trading close to near term highs.

They look overextended on a purchasing power parity basis and accordingly I believe this is a good time to externalise Rands. On a relative valuation basis global equities, in particular developed markets, look good value. Historically it was not uncommon to have to pay a 50 per cent premium for developed market stocks. Today you can buy them at parity. While the growth story is better in the developing economies, it would appear there is some mispricing of risk. In conclusion then, I believe now is a good time to invest offshore.

3. Which offshore markets do you think offer the best value to investors currently? Why?

2. What are the major challenges of investing offshore?

The biggest issue is the enormous universe of investment choices that are available to investors.

In South Africa we are fortunate to have intimate knowledge of the direct equity market while offshore we do not have the requisite coverage to make informed investment calls on direct equities.

As a result we are reliant on third party managers or passive ETFs or index trackers to give us our desired exposure to offshore markets. There is therefore a selection process that needs to be followed to identify suitable investment managers

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5. Have you seen an increase in appetite for offshore investments following the relaxing of exchange controls last year and the strong Rand?

I believe that developed markets offer good value at present. While some would argue that the emerging markets have a much better earnings growth profile as a result of faster economic growth, valuations in the developed market have fallen to very attractive price earnings levels. Investors are perhaps then too pessimistic on developed markets. I favour large cap multinational US companies with exposure to emerging market economies.

Surprisingly the appetite has been low. What we have noticed with private investors is that they often tend to be contrarian in that, when the Rand is weak, the demand to externalise funds is high, but when the Rand is strong, the interest falls away. Investment logic suggests it should be the other way round. There has been some demand from clients who are setting up offshore trusts, to send funds out, as they seek to take advantage of the increased R4 million annual allowance. However, this is concentrated in the ultra high net worth market.

4. Given the current turbulence, should an offshore investment be considered a longterm investment?

6. What is your advice to financial advisers whose clients want to go offshore but are not sure how?

We believe that all investment decisions should be made with a long-term time horizon. This is to allow markets to revert back to normal valuations and to take the emotion out of the investment decision. Offshore investing forms an important part of the asset allocation decision and is a key risk diversifier. The current turbulence has impacted most markets and it is really only the US bond, the Dollar and gold that have performed well in this time of uncertainty while equity markets have been punished. It is, however, often the case that these periods of weakness present fantastic entry levels for investors who have cash and a long-term investment horizon.

My advice would be to engage with a firm that is able to provide you with global asset allocation advice, has a comprehensive offshore offering and is dealing with credible offshore partners. In addition, you should make sure the firm is able to provide you with a consolidated view of all your investments. This will make the management of your entire investment portfolio a much more simple task. The more sophisticated investor may also want to consider a firm that is able to provide a tax efficient offshore investment vehicle or wrapper to house the offshore assets.

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HEAD TO HEAD | Ashburton

Ashburton D avid

C h ristie

Head of Distribution, South Africa

1. With all of the turmoil currently taking place globally, is now a good time to invest offshore?

When asked if it is the right time to invest offshore, I cannot stop myself from smiling.

It’s always a good idea to diversify your assets and, certainly, investing offshore is a way in which to achieve this. Is now a good time to invest? Well, if you consider that markets are now trading at the same levels as seen last October, with a 16 per cent rise in revenue, then I would say that now could be a good time to invest.

2. What are the major challenges with investing offshore?

In the current regulatory environment, you should not encounter any barriers to investing offshore. Virtually every local financial institution has a mechanism of externalising assets out of the Rand and, if they don’t, they should.

3. Which offshore markets do you think offer the best value to investors currently?

Why? If you look at where to go when investing offshore, there are certainly plenty of opportunities in the developed markets as well as the emerging markets. Most of the smart money is flowing to the East and it does seem that ‘rising water lifts all boats’ in that region – excluding Japan. Our current regional calls are overweight in India and

neutral China – which is enjoying huge attention from around the globe at present.

We also need to look at sectors and in which regions these sectors operate. For example, in Europe we have a theme on energy and oil which is most prevalent in the Scandinavian countries and, therefore, we are heavily weighted towards that region within Europe.

4. Given the current turbulence, should an offshore investment be a long-term investment?

Clearly, when investing in equities, which are our preferred asset class from these levels, you must take a medium to long-term outlook. With the unprecedented volatility in equities at present it would not be wise to invest for the short term. Over time though, we believe equities should outperform other asset classes. Should you require a short-term investment, then it may be best to stick to the money-type instruments that banks offer.

made use of the relaxation, even in the face of compelling reason to do so.

6. What is your advice to financial advisers whose clients want to go offshore but are not sure how?

In simple terms, what a financial adviser needs to do should a client approach them to invest offshore is to source the appropriate vehicle – apply for the relevant tax and Reserve Bank clearances and then facilitate the process. Needles to say, they must make sure the products are regulated, transparent and, if need be, liquid. I appreciate that this sounds simplistic as there is a plethora of investment vehicles out there and this is where the financial adviser really earns his worth in finding the appropriate structure/vehicle.

Should you invest offshore? Yes. Should you obtain professional financial advice? Most certainly. Is it complex and an exhausting process? It needn’t be.

5. Have you seen an increase in appetite for offshore investments following the relaxing of exchange controls last year and the strong Rand?

Since the relaxation of exchange controls, those people who have the means and have invested offshore previously, are making use of the relaxation to externalise more of their assets – the so-called ‘international bulls’.

However, those who previously did not make use of exchange controls generally have not

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13

SHAUN HARRIS

Where are financial advisers going? consumers grow but advisers shrink

By Shaun Harris

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Investors are increasingly moving back to using financial advisers.

It’s probably not surprising with volatile and unpredictable financial markets. Consumers are also finding that existing insurance cover and investments need to be reassessed. For this the investor is prepared to pay.

Increased use of financial advisers is encouraging. But as important as the return of consumers, is determining why so many have stopped using financial advisers in the first place. Costs are part of the reason but perhaps even

more so the behaviour of some advisers. These would typically be advisers working on a commission structure. It invites many questions.

Advisers must know of others in the industry who prescribe a policy, typically an endowment plan, just for the commission it pays and not because it’s necessarily the best product for the investor. Many consumers don’t realise and don’t care about this. But some do, and when they stop using an adviser they are hard to get back.

“Why should an adviser with a successful career behind them want to carry this regulatory hassle. It’s easier to just sell your book of clients and retire from the business.”

“The unfortunate reality is that advisers who are commissiondriven have a significant conflict of interest in how they advise their clients to invest,” said Andrew Bradley, CEO of acsis.

This followed a survey conducted by acsis which showed, among other things, the ongoing debate between paying advisers fees versus commissions. Even as regulatory bodies in many parts of the world stamp out commissionbased pay structures, it remains a big topic for consumers in South Africa. A presentation by Masthead at the end of September had fees versus commissions as one of the key items.

But from the advisers’ side, the return of more investors is not made any easier by the regulatory burden that advisers grapple with. Apart from being distracting and taking up a lot of time, it is forcing smaller advisers, typically one-person shows, out of business.

And why should an adviser with a successful career behind them want to carry this regulatory hassle.

It’s easier to just sell your book of clients and retire from the business.

The regulatory exams are a big obstacle for advisers, especially those who don’t speak English as a first language, but more regulations abound and more are coming in. And it’s not just the newer advisers struggling with the exams. An experienced CEO of an asset manager, Simon Pearse at Marriott Asset Management, tells of how his answers were largely different to his experienced colleague sitting alongside. “We said to each other, ‘I think I had the right answers’,” commented Pearse. Only one could have.

As from September 2009, mandatory professional indemnity cover was required for advisers.

“Intermediaries are required to tell their clients whether or not they have professional cover in terms of the Policy Holder Protection Rules. Using an intermediary who has the cover is critical as it provides protection to the client in the event of the intermediary being found negligent,” said Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA).

The FIA has more than 15 000 licensed financial advisers as members. The other large professional body for advisers is the Financial Planning Institute of Southern Africa (FPI).

There are other regulatory requirements for advisers. “All financial advisers must display a copy of their FAIS license at their office. It is important to ask to see a copy of their license and make sure that the adviser is licensed to sell the products they are advising on,” said Van Pletzen.

On the regulation side, belonging to a professional body is important, he added.

“Intermediaries who belong to professional financial organisations, such as the FIA, are reputable, more informed and therefore in a better position to provide professional advice.

Furthermore, affiliation with a professional financial body means the intermediary will be kept up to date with regulatory and legislative changes, industry developments as well as have access to vital training opportunities.”

So the opportunity presented by the reset of structures and costs in the financial services industry should be the fundamentals of your financial plan review – a review you should be conducting on an annual basis,” Battersby said.

Ideally this should be conducted by an adviser. Consumers are prepared to pay for good advice on financial plans and life savings.

That’s all very well but doesn’t fully cover the needs of consumers. The ethics of the adviser is important.

This is one of the criticisms of the regulatory exams and other regulatory requirements. They don’t deal with the ethics of the adviser.

A competent adviser can pass the exams and hold all the necessary regulatory requirements but this doesn’t deal with ethical advice and the regulations shifting out poor advisers. Probably the best a consumer can do is look at more than one financial adviser, getting a second opinion if necessary.

This is even more important as the responsibility for savings and investments now lies with the consumer. Nick Battersby, CEO of PPS Investments, said that clearer and more comprehensive investment detail affords investors more information. But this comes with heightened responsibility on the individual investor to ensure that savings products are optimally structured to provide a secure financial future. “As times have changed, you may very well find that the product you invested in some years ago may not be the most appropriate choice today.

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But while more investors are returning to financial advisers, so advisers are virtually being forced out of the market.

Consider the recent acquisition

by Marsh of parts of Alexander Forbes, mainly its broking business. It’s an example of big-time consolidation in the financial adviser’s industry.

Smaller acquisitions are certain to follow. The end game is that while more financial advisers will probably be needed, the industry is likely to end up with less.

It’s the result of regulations, perhaps over-regulation, and remaining profitable in a competitive business.

What the industry needs to do is find advisers from outside the traditional field. Which is, as I’ve written before, largely over 50 in age and white. Pulling in new advisers will not be easy but it’s necessary to meet the demands of growing consumers.

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Maya Fisher-French

Trading across the world

By Maya Fisher-French

Spread trading allows you to trade the value of any share, index or commodity anywhere in the world without going through foreign exchange control.

Spread trading allows you to bet on the direction of a market, a share or a commodity. You can place a trade if you expect the Dow to close 100 points up one day or bet that it will fall 200 points the next. If your prediction is correct, you make money; if your prediction is wrong, you can lose money – even more than you initially invested, so this is a high risk investment.

“You can deal in most international shares, index, commodities and currency pairs without having the exposure to the foreign currency fluctuations against the Rand.”

The benefit for South Africans is that because it’s possible to trade in Rands, you can deal in most international shares, index, commodities and currency pairs without having the exposure to the foreign currency fluctuations against the Rand, which you would have if you were to invest directly in those instruments. Neither are you required to have Reserve Bank authorisation, as would otherwise be the case.

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With the gold price reaching meteoric levels, spread trading provided an excellent way to gain exposure to bullion without having to go out and buy a gold bar. Matt Twomey, managing director of WorldSpreads SA, the South African arm of one of the world’s largest spread trading companies, said that gold is the most popularly traded market in South Africa, followed by certain currency pairs like the Rand/ Dollar and Sterling/Dollar.

Charles Savage, CEO of Global Trader, said the recent volatility and extended bull run in gold and other commodities has seen a strong increase in volumes and client sign-ups beyond levels experienced even in the heady investment days of 2008. Although gold is a national obsession for most South Africans, one of the problems with buying gold in South Africa is that you are linked to the Rand gold price which can be significantly different from the Dollar price of gold.

If you trade the Absa NewGold exchange traded fund, you are trading the Rand price of gold which means you have to take into consideration not only the direction of gold, but also the direction of the Rand vs Dollar. From 2005 to 2008, while the Dollar value of gold was increasing, most South African investors saw their gold investments remain flat as the Rand strengthened during the same period limiting the Rand price of gold. Through spread trading you can trade in Rand but make money off movements in the Dollar value of gold, effectively removing the currency risk.

However, if you have a strong view on the direction of the Rand against the greenback, you can bet against that as well by taking a currency position. You can also trade Apple’s share price, the value of the Euro/ Dollar, oil and the Hang Seng or even the price of pork bellies – in fact, you can trade any financial instrument once there’s a market price and sufficient liquidity available.

one day; for example, from 11 100 to 11 200 points.

WorldSpreads requires you to put down an initial margin (deposit) of 80 points and the minimum you can bet is R5 per point. That means that to trade the Dow, you would need to have a minimum of R400 available on your WorldSpreads account.

You decide to trade R20 a point with the expectation that the Dow will move up 100 points to yield a profit of R2 000. Your required margin would be R1 600 (80 points at R20 per point); and for every point the Dow moves up, you would make R20.

If it only rose by 50 points (11 100 to 11 150 in our example above) your position would have risen in value by R1 000 (R20 x 50). You could elect to close out your trade and take your profit at that point, even though your contract might still have hours (in the case of a daily trade) or weeks (in the case of a monthly trade) to run. Hence the opportunity to make money is greater when markets are volatile and moving in a wider range.

If, on the other hand, the Dow were to drop, you would lose R20 a point – your trade could lose more than the initial 80 points (R1 600) initially allocated from your trading account, in which case you would be required to have further funds available or run the risk of having your trade closed out automatically. If you are on the wrong side of a blood bath, you could lose a significant amount of money. This is why it is important to have a trading strategy, including ‘stop losses’ (see investment strategy), in place.

How it works:

Positions can be daily, rolling or quarterly and on cash or future bases – a daily position closes that day and a rolling position is rolled into the following day, for which one point (R20 in our example) is charged to your account. A quarterly trade on an index, such as the Dow, is set to expire on the third Friday of the relevant quarter month, i.e. March, June, September or December.

You believe that the Dow Jones Index will increase by 100 points in

Costs: These are built into the spread between the buy and sell price.

According to Twomey, the spread depends on the volatility, liquidity and

(based on rates provided by WorldSpreads)

value of the investment. For example, WorldSpreads charges a three point spread for the Dow, so on a trade of R20 per point, your total cost would be R60 irrespective of how many points the Dow went up or down. The spread for the FTSE 100 is two points and for gold the spread is 50 cents.

The market spread on quarterly positions is higher than on daily positions – eight points versus five in the case of gold. However, on a daily trade you would incur new costs each day to roll over the position. Consequently, it makes sense to take out a quarterly contract if your time horizon is longer than three to four days; for example, you might believe gold will reach $2 000 before December and so would go ‘long’ in the December contract at current levels; conversely, you might believe it will reach R1 200 in that time frame and so would go ‘short’.

Investment strategy Spread trading is a very high risk investment because there is no limit to the losses that you can clock up if you don’t put strategies in place. It is also effectively betting as you are not working with market fundamentals but sentiment.

It is vital therefore to be aware of the risks and to arm yourself with a strategy designed to meet your targets and perhaps more importantly to limit potential losses.

“We find that people are often inclined to take profits as they arise, which means that they might only benefit by say 60 per cent on profitable trades; but on the other hand they allow negative positions to run in the hope that they turn around and so allow losses run to 100 per cent of their potential,” said Twomey.

Trading guidelines: • The exposure on any single trade should not exceed 10 per cent of your trading capital. For example, if you have R20 000 in an account, the maximum exposure you should consider is R2 000 on any one position.

• If running more than one position it is advisable to do so across a range of instruments.

• Have an idea of your anticipated profit level – if you are ‘buying’ the Dow, you should think about

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“Spread trading is a very high risk investment because there is no limit to the losses that you can clock up if you don’t put strategies in place.” how much you think it will rise by.

Say, you decide on 100 points, you can place a take profit order at that level to ensure that your position is auto-closed for your anticipated profit. However, you should also consider placing a stop loss order to trigger should the trade not go your way, which as a general rule should be at half the level of your expected gains – 50 points in this case.

• Start with a simulated trading account and test out your strategies until you feel ready to put money on the table.

WorldSpreads, which is quoted on the London Stock Exchange (AIM) and South African-based Global Trader are the only two companies in South Africa where it’s possible to trade in Rands. Both companies are registered with the Financial Services Board; however, the product itself is not regulated.

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SHAUN HARRIS

“We fully agree that errant financial advisers should be debarred ... A concern though is the investor or client at the end of the pile.”

FSB gets tough

on errant advisers

But is it fair to fine providers for late reporting of debarment?

by Shaun Harris

Financial advisers get debarred. It’s a fact of the industry that shouldn’t concern good advisers except out of morbid curiosity. Debarments are apparently increasing, but that’s probably in line with the poor economic conditions that have led to an increase in white collar crime.

The Financial Services Board (FSB) oversees the debarment process. That’s what a regulator should do. What concerns us, though, is the way the FSB is doing it. But, as to be expected, the FSB doesn’t agree with the way we see things. Here’s what’s happening now, since the FSB released a guideline (Section 14 A of the FAIS Act) on the debarment process on March 3.

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A financial services provider, which could range from a large life assurer to a small investment company – anybody who deals with financial advisers – must report a person who needs to be debarred to the FSB, more specifically the Registrar of Financial Services Providers. The background note helps to explain how the debarment process worked up to 2008 and some of the justifiable concerns of the FSB. Prior to an amendment to the FAIS Act in 2008, only a provider could debar a representative no longer fit and proper. The debarment could be done only if the adviser was still employed by the provider. This caused a lot of potential problems. To quote directly from the note: “Some representatives could not be debarred because the conduct was discovered only after the contract or mandate between the provider and the representative had been terminated, or if the representative had left the employ of the provider.”

This process still applies. But the FSB amended the Act with Section 14A, allowing it to debar financial advisers.

The process followed by the FSB, to its credit, affords much opportunity to the affected person to respond.

But if debarred, the financial adviser’s name will be flagged on the FSB website. The guideline says the period of debarment, dependent on the severity of the transgression, is usually between two and five years. But what the guideline doesn’t spell out is that the financial services provider can be fined if it doesn’t notify the FSB of a possible debarment in time. Apparently these late notifications have been increasing.

We suspected the providers would be howling in protest.

But they are not, at least on the record. Why not?

Perhaps some with an international presence hope to cut a deal with the FSB. That seems unlikely and the FSB would have to make very sure it treats everyone in the same way. Others mumbled, off the record, about debates that had to be held. What was most telling though is that it seems providers are scared of openly criticising the FSB. Maybe they should get together and issue an industry statement, where everyone hides behind everyone else’s tailcoats. But it remains a pity, we feel, that those who are being unreasonably targeted with fines are not speaking up. Maybe some will follow the route and quietly pay the fines if necessary.

What seems clear though is fear of offending the FSB. Does this make the FSB the mafia of non-banking financial services industries? And is Gerry Anderson, deputy registrar Financial Services Providers, the godfather? Anderson didn’t come across that way to us. But who knows? It probably depends on which side of the table you’re on.

“I disagree with your interpretation of the process. In terms of the Act it’s clear that a time period is placed.

You can’t just debar somebody,” Anderson said. But why, we asked, are you targeting the providers with possible fines?

“As the regulator, we have two options. One is we’ve got to respect the time frame: 15 days. The second option was that late notification by providers can lead to a penalty. We’re doing the latter by fining

the financial services providers.” Anderson gives an example of the first option, also detailed above in the guideline. “Gerry Anderson works for a bank. He steals clients’ money. Then he joins another bank.

There are no red flags.”

But why does it look like the obligation and timely reporting is unfairly being placed on providers?

“Because the representative is employed by the financial services provider. If the person is no longer needed (as in terms of the debarment process), it must be reported,” Anderson said.

We fully agree that errant financial advisers should be debarred. And the number of debarments is steadily climbing. That’s quietly being welcomed all round.

A concern though is the investor or client at the end of the pile. If your financial adviser is debarred, do you have protection or possible recourse?

“What seems clear though is fear of offending the FSB. Does this make the FSB the mafia of non-banking financial services industries? And is Gerry Anderson, deputy registrar Financial Services Providers, the godfather? Anderson didn’t come across that way to us. But who knows?”

Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA), points out that financial advisers are required to have professional indemnity cover. “Using an intermediary who has this cover is critical as it provides protection to the client in the event of the intermediary being found negligent.”

He added that he can’t be sure how many financial advisers have the required cover – they must by regulation tell clients if they have the cover – but adds that all FIA members must have professional indemnity cover. On fining providers, Van Pletzen has some reservations. “The fines should be in line. But is a fine necessary? If an intermediary is debarred that’s the punishment.”

He also questioned the application of the debarment process, which he said came out of the old Life Offices Association. “I think the whole debarment process must be reviewed. That’s important.”

So is the FSB being the indiscriminate scourge of financial advisers who have gone wrong? It seems not though there may be some substance over form.

But the financial advisers’ industry needs to be cleaned out. It’s to be hoped the current debarment process will weed out the worst.

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PROFILE | Director and Chief Investment Officer at Foord Asset Management

D a v e F oord D irector and C hief I nvestment O fficer , F oord A sset M anagement

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“By collecting as much information as possible about potential investment opportunities, investors are better placed to protect and grow their capital.”

Foord Asset Management celebrated its 30th birthday this year. How has the industry changed during this period?

When Liston Meintjies (director at Foord from 1981-1997) and I started Foord in 1981, the industry was entirely dominated by the large life offices, with the notable exception of the Allan Gray Investment Council (now Allan Gray Limited). We started Foord so that investors could get a fair deal; by that I mean a quality investment service at a fair and transparent price.

It is pleasing to see the growth of independent investment management houses in competition to the large life offices. Yet I fear the investing public still faces a high cost burden through the chain of asset management fees, advisory fees, administration fees, distribution fees and platform fees. I continue to urge all investors to be vigilant regarding the effective cost structures of their investments and to choose wisely from the plethora of investment options available on the market today.

What differentiates Foord from its competitors?

Foord has been in existence since 1981. It is fairly uncommon for a successful investment management company to remain largely unchanged for 30 years. Doing what is right for clients has a lot to do with our success. Foord Asset Management focuses on long-term wealth creation for its clients. In order to achieve this, you have to often make decisions that may seem at odds with the industry in general but which are in the best interests of clients. Capital preservation is much easier to achieve by taking a longer term view. Foord has the luxury of being owner managed, which allows for the implementation of a three-to five-year view. Foord is also in the fortunate position that most of the investment professionals responsible for the track record are still actively involved in the business, managing money for clients, and passing on their experiences to the younger generation.

Have you changed your investment strategy over the last 12 months?

Our strategy has remained largely unchanged over the last 12 months – although a more conservative asset allocation policy is in place today compared to a year ago. Equity market valuations remain attractive, and the outlook for company earnings is still positive. Twelve months ago, inflation was very low (with talk about deflation still doing the rounds). Today, inflation is rising, but short-term interest rates in

most markets are still very low, making cash an unattractive asset class. Liquidity is on the decline – one of the reasons for our more conservative positioning (last year markets rallied on QE2, which the Fed seems unlikely to repeat). We remain invested in quality companies with strong balance sheets and growing dividends across a wide spectrum of economic sectors.

What is your advice to investors in the current turbulent market?

It is extremely difficult to stay the course in volatile markets. We spend an enormous amount of time analysing companies and markets, trying to identify viable investment opportunities, as well as identifying companies that our clients should avoid. We also spend a lot of time understanding our clients’ needs and investment objectives. By collecting as much information as possible about potential investment opportunities, investors are better placed to protect and grow their capital. Many investors unfortunately do not have the time or the resources at their disposal to make these very important decisions. My advice in this case would be to partner with a reputable investment company that meets your objectives, and can provide this service to you at a reasonable cost. Having made that decision, it’s up to the investors to remain steadfast in their commitment to long-term investing and to let the fund manager do what he is being paid to do.

What impact do you think the ongoing sovereign debt issue in the developed world will have on local stock markets?

Sentiment plays a very important part in the direction markets take. The more concerned investors are about company earnings, the global economic outlook, interest rates or inflation, policies around corporate taxes, government expenditure and investment, the less capital they are likely to commit to markets.

Liquidity is affected, which is a drag on market multiples. A prolonged period of uncertainty, particularly the effect of the debt crises on banks’ balance sheets, can be negative for markets in the short term. However, if this uncertainty occurs without affecting global output and demand for commodities, then investors who are prepared to take a longer term view can buy future earnings at very reasonable prices.

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

Over the years, many successful companies have

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been taken private or bought over by competitors.

The number of quality companies listed on the domestic board has declined over the years; there is no question about that. However, Foord believes in portfolio concentration as a way to protect the quality of our clients’ investments.

We are still able to adequately diversify portfolios, without compromising on quality. In addition, many companies are diversifying their businesses outside the borders of their domestic markets, towards fast growing consumer markets in Asia. Some of these companies are trading on premiums to the domestic market, but are superior quality to many domestic-focused businesses. A quote from Warren Buffet comes to mind: “Price is what you pay, value is what you get.”

What advice would you have for financial advisers in the current environment?

Focus on what you have control over – namely putting together an appropriate plan to ensure your clients can meet their investment objectives, whatever they may be. Then allow the portfolio managers you choose to do what they have control over – implementing an appropriate portfolio strategy that has a high degree of certainty to achieve the desired objective over the medium to long term. Allow time to play its part. No-one has the ability to predict the direction of markets consistently over time. But the longer your investment horizon, the greater certainty you have in achieving your client’s objective. Don’t make knee-jerk recommendations to appease clients during volatile markets, which often result in selling low and buying high. Lastly, don’t forget about equities when you look for yield. Many companies can grow earnings and dividends well in excess of inflation over time. If investors invest in equity markets early enough, they can live off dividends alone for retirement notwithstanding what happens to prices in the short to medium term.

How do you wind down from the pressures of your position?

I am passionate about investing and I have been fortunate to be able to make investing other people’s money my life’s career, with some measure of success. I also enjoy travelling and meeting new people. The wonder that is modern technology has allowed me to combine these passions and I am now able to travel and manage money from wherever I am in the world. Travelling and observing other economies first hand provide insight to Foord’s investment outlook.

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fund profiles

FUND PROFILES

Investec Global Strategic Managed Fund

Have you made any major portfolio changes recently?

We are currently fairly defensively positioned, although we have been taking profits on certain defensive assets such as 30-year bonds, in which we had a material position. We continue to run our gold and gold share positions and believe that we are approaching quite a good tactical buying opportunity for equities.

How have you positioned the fund for 2011?

To achieve significant upside, investors need to see a cure of the cancer eating away at the global financial system – the Eurozone crisis. Without growth, which a lack of competiveness in southern Europe makes impossible, there can be no escape from the fiscal, debt and banking crisis engulfing the region. This can only end one way – with at least six countries leaving the Eurozone. Provided that central banks provide the liquidity to support their banks, which will inevitably face major losses, this should have the same consequences as the break up of every unsustainable malfunctioning currency union has. It will pave the way for economic recovery and sustainably higher equity markets. We are in the process of positioning our portfolios for that now, as we are almost at crunch point.

Please outline your investment strategy and philosophy for the fund.

The Investec Global Strategic Managed Fund aims to provide long-term total returns through investment in a globally diversified and actively managed portfolio consisting of any combination of equities, bonds, cash and currencies on an international basis. Normally, the maximum equity content will be limited to 75 per cent of the fund. This broad diversification should help to reduce risk while retaining the potential for good long-term returns.

We take an active approach to asset allocation seeking to position the fund to benefit from cyclical asset class behaviour over the medium to longer term and to balance the opportunity for gain against the risk of loss. While our strategy is set with a medium-term horizon, in the interim we tailor positions to take advantage of shorter-term, tactical opportunities, but only if such actions are consistent with our strategic stance. We adpot an objectively global approach and have no bias to any single region or currency.

What is the fund’s asset allocation?

Global equities = 58 per cent Global bonds = 32.0 per cent Global currencies and cash = 10 per cent Who is the fund appropriate for?

The fund is suitable for investors seeking actively managed and diversified exposure to international markets as part of their overall investment strategy, with capital appreciation as their primary goal over the medium to longer term. It is available as an offshore domiciled fund or a Rand-denominated unit trust; this means investors may access the fund either by using their individual offshore allowance or domestically with Rands.

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Please provide some information around the individual/team responsible for managing the fund?

The lead manager of the fund is Philip Saunders, head of Investec Asset Management’s global multi-asset team. He was a founding director of Guinness Flight Global Asset Management (which was acquired by Investec Asset Management in 1998) and led its successful global fixed income team. He assumed responsibility for establishing Investec Asset Management’s multi-manager business in 2000, which was combined with Investec Asset Management’s broader global asset allocation capability in 2004. He graduated from Cambridge University with a degree in history in 1980.

Please provide performance of the fund over one, three and five years.

1 year

3 years p.a

5 years p.a

Investec GSF Strategic Managed Fund

24.1%

2.0%

4.3%

MSCI World

31.1%

1.0%

2.8%

CITI WGBI

10.5%

5.8%

7.3%

Please outline fee structure of the fund.

Investec Asset Management does not charge an initial fee. The annual management fee is 1.50 per cent.

“The team adopts an objectively global approach and has no bias to any single region or currency.”

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Barak Structured Trade Finance Fund How have you positioned the fund for 2011?

The fund’s return is a function of the demand for the finance provided, which is in turn a function of trade volumes. The fund seeks to continue to take advantage of the fast-growing volume of cross border trade within Africa and between Africa and other emerging nations. We see this volume growth continuing over the foreseeable future and have a very large universe to choose from and hence are able to further protect the downside by being highly selective in the counterparties we deal with.

Please provide some information around the individual/team responsible for managing the fund?

Jean Craven (BCom University of Stellenbosch) has more than 14 years’ experience in building and managing commodity trading businesses at leading South African financial institutions. His commodities business was of the first active participants in the South African Commodities Futures Exchange and he served on the South African Futures Exchange advisory panel for many years.

Please outline your investment strategy and philosophy for the fund.

The fund provides trade finance to the commodity supply chain.

The fund is able to charge attractive interest rates due to the lack of competition in the market in which it operates and especially because of its ability to act swiftly and provide financing far more quickly than a typical bank. The fund holds a highly diversified portfolio of credit investments that typically average around 120 days in duration.

Counterparty credit exposure is tightly managed through close personal relationships as most deals are with recurring clients. The key differentiator of the Barak Fund is that the fund actually takes ownership of the commodities as collateral until all debt is settled. If a client were to default, the fund would sell the assets without having to go through any repossession procedures. The value of the collateral is managed through daily margining, adding an additional layer of protection.

Barak’s fund managers are highly connected and experienced in the physical commodity space and are very comfortable owning physical.

What are your top five holdings at present?

In terms of instruments, the fund’s two largest counterparty exposures are 16 per cent and 14 per cent respectively.

The fund’s largest commodity allocations are: • Wheat • Fruit • FMCG • Pulses • Rice

Prieur du Plessis (BCom CA (SA) University of North West) has more than 12 years’ experience in the commodities trading and financial services arena. His career includes time as head of structured trade and commodity finance at Absa Corporate and Merchant Bank, a subsidiary of Barclays Bank Plc and head of commodity finance at Standard Bank. Du Plessis also headed up the soft commodities origination team for Standard Bank.

Please provide performance of the fund over one, three and five years (please include benchmark).

One year to end July 2011

Since inception (Feb 2009) to end July 2011

Fund (net of fees in USD)

16.04%

16.78%

Benchmark (USD 3mth LIBOR per annum)

0.26%

0.42%

Please outline fee structure of the fund.

Two per cent per annum management fee and 20 per cent of outperformance fee for returns above benchmark with look-back to zero.

Why would investors choose this fund above others?

The fund has a unique niche that is completely removed from movements of the general market and is well positioned to exploit the opportunities provided by commodity trade in Africa. Volatility is very low, which provides for an extremely high risk adjusted return (for example, the Sharpe ratio since inception is approximately 28). We believe the fund’s strategy is sustainable over the next few years as client relationships are entrenched and the fund managers’ networks on the continent continue to grow.

Who is the fund appropriate for?

The fund is appropriate for sophisticated investors looking for very stable and predictable (approximately 0.6 per cent annualised volatility since inception) US$-based returns that are uncorrelated to general equity and bond markets.

“Counterparty credit exposure is tightly managed through close personal relationships as most deals are with recurring clients. The key differentiator of the Barak Fund is that the fund actually takes ownership of the commodities as collateral until all debt is settled.”

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STANLIB International Balanced Fund of Funds Please provide some information around the individual/team responsible for managing the fund?

It is a combination of Fidelity Investments (they choose the individual securities within the funds) and Paul Hansen, who chooses the asset allocation and the particular fidelity funds.

Please provide performance of the fund over one, three and five years (please include benchmark).

12 months to 31 July 2011

3 years to 31 July 2011

5 years to 31 July 2011

Stanlib International Balanced Fund of Funds

3.34%

-2.07%

2.04%

Benchmark

4.96%

0.96%

3.51%

Please outline fee structure of the fund.

The fund has a service fee of 1.71 per cent a year and an asset management fee of 0.71 per cent. The combined total is 2.42 per cent fees on an annual basis.

Please outline your investment strategy and philosophy for the fund.

My fund, the STANLIB International Balanced Fund of Funds, carries a spread of all four asset classes; equities, bonds, listed property and cash, hence the term ‘balanced’.

What are your top five holdings at present?

Fidelity International Fund, Fidelity Global Bond Fund, Fidelity Emerging Markets Fund, Fidelity Global Property Fund and Sterling Currency Fund.

Who is the fund appropriate for?

Investors who want a balanced approach to investing offshore, with exposure to the four asset classes.

Have you made any major portfolio changes recently?

I have reduced my cash bet against the Dollar, i.e. boosted my Dollar position at the expense of Euros and Pounds.

How have you positioned the fund for 2011?

Overweight equities in quarter 1, neutral to underweight in quarter 2 and part of quarter 3 and now overweight.

24

Why would investors choose this fund above others?

It has a track record spanning 10 years and has performed relatively well in comparison with competitors.

“The fund profile is appropriate for investors who want a balanced approach to investing offshore, with exposure to the four asset classes.”

Somewhere out there, there’s a bottle of Pinotage with my name on it.

Many people imagine owning a vineyard. But for most it’s just a distant dream. Well, Sbu Nkosi made it happen.

At STANLIB we admire his drive and tenacity. With over 300 years of combined investment experience, we manage the wealth of people like Sbu Nkosi.

Speak to your financial adviser or visit www.stanlib.com.

Our experience.

Your goal.

STANLIB is an authorised financial services provider.

Templeton Frontier Markets Fund Please provide performance of the fund over one year and since inception.

A (Acc) USD

1 year

Since inception (14 October 2008)

Fund

4.75

63.41

MSCI Frontier Markets Index

7.53

-16.58

Why would investors choose this fund above others?

• Positive economic trends Frontier market economies are growing at a robust pace. For instance, countries such as Qatar, Nigeria and Vietnam are forecast to grow 19.9 per cent, 6.8 per cent and 6.2 per cent respectively in 2011 while developed markets such as the US, UK and Japan are expected to have growth of 2.7 per cent, 1.6 per cent and 1.3 per cent respectively.

(Source: Copyright © 2011, International Monetary Fund. All Rights Reserved, April 2011)

Please outline the investment strategy and philosophy for the fund.

Frontier markets are smaller, less-developed, less-accessible and less-liquid countries that are considered to be in the nascent stages of development. In essence, they represent what emerging market countries like Brazil, Russia, India and China were 20 years ago. Some examples of frontier markets are Kenya, Nigeria, Ghana, Zimbabwe, Vietnam, Sri Lanka, Egypt, United Arab Emirates, Peru, etc.

FTIF Templeton Frontier Markets Fund’s objective is to achieve long-term capital appreciation by investing primarily in transferable equity securities of companies incorporated in the frontier markets countries, and/or which have their principal business activities in frontier markets countries across the market spectrum.

Who is the fund appropriate for? Who are the typical investors?

Investors seeking long-term capital appreciation and not current income.

Investors who can tolerate above average volatility. The fund invests in companies located in or significantly exposed to frontier markets, which may involve currency risks, liquidity risks and higher price fluctuations.

• Low correlation to world markets due to their diversity The relatively low correlation of frontier markets to global markets provides investors with an opportunity to diversify their investment portfolio. Furthermore, the economic drivers across frontier markets are diverse. For example, Botswana, one of the world’s largest diamond exporters, is introducing call and data processing centres. On the other hand, Kazakhstan, a country rich in oil and other natural resources, is seeing significant investments in infrastructure development. These varied economic themes across frontier markets ensure a diversified portfolio.

• Expansion of capital markets The rising number of initial public offerings (IPO) in these countries demonstrates that local capital markets have been steadily gaining strength. This is largely a result of governments selling some of their assets to the public while entrepreneurs have increasingly been using the capital markets as a source of funding for business expansion.

The increase in IPOs has, in turn, boosted the overall equity market capitalisation of the frontier universe and is starting to bring those countries and companies to the attention of more investors. According to World Bank, the total stock market capitalisation of frontier countries more than tripled between 2003 and 2010 from US$268 billion to approximately US$907 billion (Source: World Bank, April 2011).

Please provide some information around the team responsible for managing the fund.

Templeton uses a team approach in the management of its emerging and frontier markets funds. The Templeton Emerging Markets Group, with 49 portfolio managers and analysts, is spread across 17 emerging markets offices, providing access to local resources and facilitating relationships with local contacts.

“The fund invests in companies located in or significantly exposed to frontier markets.”

Dr Mark Mobius, based in Singapore, is the lead portfolio manager of the fund. He joined Templeton in 1987 as president of the Templeton Emerging Markets Fund, Inc. and currently directs the analysts based in Templeton’s emerging markets offices and manages the emerging markets portfolios. Dr Mobius has spent over four decades working in emerging markets all over the world.

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SECTOR REPORT

SA financials:the battleground heats up The structure of South Africa’s financial system is a hybrid of an emerging market and developed market as penetration rates measure highly versus GDP, yet customer growth prospects look high. The SA financial system is generally robust and capital is conservatively managed, both aspects providing support in these challenging financial times. This has been a key reason for SA financials outperforming their developed and emerging market international peers over recent months. That said, the domestic financials have their own challenges, with a key near-term risk relating to pedestrian top-line growth and the consequential pressure of rising cost ratios.

David Danilowitz | Nedbank Capital, Equity Analyst

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Performance of SA life insurers versus UK peers

Performance of SA banks versus global peers (in US$)

The average SA consumer’s level of indebtedness is higher than in most emerging market regions and, in some segments of the population, is as high as in developed market regions. The need for continued consumer deleverage combined with political, social and economic challenges to employment and economic growth are likely to hamper top-line growth for both banks and insurers. Both sectors are therefore looking for growth prospects beyond the traditional customer by expanding their entry level offerings in SA to capture new customers as well as broadening into other markets outside SA. To date, successes beyond the SA borders have been hard to come

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by. There have been limited, if any, successes of developed market expansion with some failures, such as Old Mutual and Discovery in the US, Investec in UK and Ireland private banking, Standard and FirstRand in the UK serving into Asia, being particularly severe.

Most companies appear to have contained and even surrendered any developed market expansion aspirations, barring Discovery.

Emerging market expansion, however, remains on the agenda despite the fact that results to date have been mixed. Standard Bank, which used a big bang approach into emerging markets, specifically Nigeria, continues to reiterate a long journey to value creation.

Nedbank and Liberty have seen more opportunity in growing

their underperforming domestic operations, both of which appear to have recovered some ground.

The most successful growth for both banks and insurers to date has actually been through broadening their scope ‘behind enemy lines’. Banks have seen solid growth in their bancassurance subsidiaries, which are becoming significant entities, expanding faster than traditional banking earnings.

Insurers have also stretched their wings, seeing strong growth from niche ‘assur-finance’ offerings, albeit off a lower base. In deeper search for top-line growth, both banks and insurers are likely to encroach further into each others’ territories.

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Changing capital and funding regulations for banks are also heating up the front lines between the two sectors as banks are forced to become more innovative to capture retail deposits and also look to expand the non-lending parts of their businesses. Basel regulations have made capital a more expensive resource for some types of lending and have created funding challenges for banks.

Current Basel 3 is forcing banks to match the funding of their assets more closely by duration and increases the importance of, specifically, long-duration retail funding. The low retail savings rate and the short-term nature of the money market industry make this requirement particularly challenging.

The SA financial system is particularly integrated with the various cross-holdings between banks and insurers continuously under scrutiny. The battle to secure a greater piece of the retail savings pie could become a source of conflict within different group structures. Alternatively, this could be an opportunity for improved collaboration.

Capital regulations may also change the playing field somewhat. Historically there were significant capital advantages in a group holding structure; however, these have gradually been diminished. That said, the diversity of earnings on offer as well as the

“Changing capital and funding regulations for banks are also heating up the front lines between the two sectors as banks are forced to become more innovative to capture retail deposits and also look to expand the non-lending parts of their businesses.“ potential for lower cost combined distribution still offer benefits to closer working relationships.

Both banks and insurers’ capital ratios are likely to expand into the next few years with asset growth looking to remain pedestrian; the use of the excess capital will therefore become a critical differentiator. At this stage it appears that the most likely use of this capital will be for emerging market, and primarily African, expansion together with better yields for shareholders. Domestic cross-sector consolidation may,

870-1_INVEST_SA_hlf_pg_final_artwork.indd 2

however, re-emerge as a theme as banks and insurers look to capture a greater share of their customers’ wallets.

04/03/2011 16:03

ASSET MANAGEMENT

Beware the nervous investor Investors are jittery after months of volatility in the markets. While it is easy to find reason to panic, it is less clear what the best course of action for investors is. The majority of asset managers are advising clients not to make impulsive changes to investments, as pensioners and opportunistic investors could lose out significantly by making a rash decision.

Anil Jugmohan, CFA investment analyst at Nedgroup, warned investors not to rush into adjusting their portfolio and investments based on recent volatility, as this could have unintended negative effects on their long-term savings goals.

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INVESTSA

and which are expected to grow dividends in real terms (above inflation) over the next 12 months.”

Health stocks may provide a shot in the arm for investors Investors who chose to invest their cash in the global pharmaceutical and healthcare sectors 10 years ago would be nursing more than a headache now, as the share prices of these companies have underperformed significantly since 2000.

However, according to one local asset manager, these businesses are now presenting a good opportunity for investors looking to achieve longterm capital growth by investing in shares that are trading at historically low multiples.

“Selling riskier assets to buy low-risk assets might subsequently result in the investor not being able to outperform inflation over the long term; however, their portfolio’s growth characteristics might become more stable,” said Jugmohan. He explained that the impact of market shocks on asset pricing is largely determined by the expectations of market participants. He said that during ‘normal’ market conditions, the effects are usually an increase in demand for short-dated, money market-type instruments, as these instruments will yield more if the interest rate increases.

However, for other asset classes such as equities, property, offshore and bonds, there are a number of other factors which play a role in current pricing and subsequent returns.

“Investors are often ill informed of these potential effects and feel more secure making adjustments to their portfolio. However, short-term changes such as this can affect the long-term balance of the portfolio when the market readjusts.”

However, Eddie Theron, head of guaranteed investment portfolios at Old Mutual Corporate said that for pensioners and members close to retirement, protecting retirement savings from the effects of market shocks is especially important.

“During this year, from its highest point on 6 April 2011 to its lowest level on 8 August 2011, the JSE All Share index (JSE ALSI) lost 13 per cent of its value. For a member with a significant proportion of their retirement savings invested in equities, retiring during this kind of market decline would have been severely detrimental. Particularly if they were planning to convert some savings into cash while purchasing some form of annuity guaranteed for life with the balance,” he said.

He advised that one way of softening the impact of equity market declines is to invest in a balanced portfolio made up of a range of different, uncorrelated asset classes.

“A typical balanced fund lost over 20 per cent of its value over the nine months to February 2009. The cost of such a 20 per cent capital loss for members saving for retirement after they have contributed to their retirement savings for 40 years is equivalent to approximately eight years’ worth of contributions.”

Meanwhile, Gail Daniel, portfolio manager, Investec Managed Fund, believes that during times of significant uncertainty and volatility, the benefits of multi-asset funds come to the fore. She said this is because multi-asset funds allow the portfolio manager the flexibility to actively allocate between the different asset classes.

“We continuously manage the question between capital growth and capital preservation. Over the last few months, questions regarding the sustainability of global growth and rising concerns about sovereign debt have prompted us to take a more defensive stance,” she said.

Daniel explained that the problem with the safety of cash is that while capital is preserved in nominal terms, low interest rates and rising inflation translates into negative real returns for investors. “Instead, we have increased our allocation to defensive assets that typically provide uncorrelated returns to equities during times of heightened uncertainty.”

Furthermore, according to Daniel, stock-picking becomes increasingly important during periods of volatility. She said that in an environment where growth is becoming a scarce resource, returns generated from dividends are becoming increasingly important.

“When selecting shares, emphasis is not just placed on the companies that offer the highest dividend yields, but we also place emphasis on companies which are in the best position to maintain and grow future dividend payments, even in difficult economic conditions. We prefer stocks with dividend yields in line or even higher than that of money market yields

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Daniel Malan, investment director of RE:CM, said that the market has been disillusioned with the healthcare and pharma industry on the assumption that the product pipeline has dried up and companies are not generating enough new products in order to offer value. In short, they are considered ex-growth.

However, Malan believes this is not the case, arguing that these companies have their own rapidly growing generics businesses and the global industry is consolidating.

RE:CM – which is currently invested in a number of pharmaceutical companies as well as other healthcare industry businesses such as Johnson & Johnson, Zimmer and Amgen – believes that these companies are cheap relative to their intrinsic values.

These companies have all significantly underperformed world markets since 2000 and, as a group, currently trade on a free cash flow yield of 12 per cent and a trailing dividend yield of just over four per cent.

“Considering that these 15 pharmaceutical companies account for more than 75 per cent of the global industry’s total annual spend on research and development (R&D) of new pharmaceutical drugs, sooner or later this R&D tends to pay off.”

He compared the situation to tobacco companies, which 10 years ago were considered to have no future. “An investor who invested in global tobacco businesses a decade ago would’ve received an excellent return, because they would have paid a very low price for the shares in that particular industry. At the time it was the general belief that tobacco businesses could not grow anymore.

“These same pharmaceutical companies, that were considered to be the market darlings 11 years ago, are now generally considered dogs.

The prevailing negative sentiment provides our clients with a sensible investment opportunity in this industry,” concluded Malan.

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acsis

Financial planners provide

financial security to consumers While it is perhaps not surprising to financial planners themselves, the results of a comprehensive new survey of more than 400 individuals has demonstrated that middleto-upper income South Africans who make use of financial planners are significantly more financially secure than those who do not.

Andrew Bradley | CEO, acsis

The objective scores of the acsis Financial Security Barometer (AFSB) revealed that at 6.9 out of 10, the financial security score of pre-retired individuals with a financial planner is significantly higher than the 6.1 scored by those without a financial planner.

The AFSB was created to provide an objective measurement of the financial security of middleto-upper income South Africans, as well as to determine the importance of financial planning in achieving long-term financial goals.

“This is a clear finding that a living financial plan and the use of an expert in these matters significantly empowers people and contributes to their financial wellbeing,” said acsis CEO, Andrew Bradley.

The AFSB also showed that with a score of 7.3, retired individuals were more financially secure than pre-retired individuals. According to Bradley, this may be due to the fact that pre-retirees are still unsure about their future and whether they are doing enough to secure themselves financially, while retirees are already experiencing the results of their earlier provisions.

As part of the acsis study, respondents were asked about their own assessments of their financial security. Primary reasons given by those with low self-assessments included not saving enough, the current economy and uncertainty about what might happen in the future, both in South Africa and globally.

Fifty-one per cent of high scorers indicated that the primary reason for their positive selfassessment was that they had made sufficient provision to provide for the future.

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Other key findings from the survey included:

Use of a financial planner According to the survey, 52 per cent of all respondents cited that a financial planner is their main source of financial information and advice. “However, it is concerning that 26 per cent of all respondents said they are taking financial planning advice from friends or family, while 30 per cent cited the Internet,” said Bradley. “While the investments that friends, family or Internet sources are recommending may be good, they may not be appropriate for a particular person and their unique needs and circumstances.”

“This is a clear finding that a living financial plan and the use of an expert in these matters significantly empowers people and contributes to their financial wellbeing,” Of those who make use of a financial planner, 81 per cent claimed that they involve their planners in their financial decision-making processes, but that they make the final decision.

Retirement planning Findings from the survey revealed that retirees generally started their retirement planning at around age 28, while pre-retirees started at age 31. According to Bradley this is concerning as it indicates that people are

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increasingly delaying saving for retirement.

“With medical advances, people are generally living longer, meaning that their retirement savings will need to last a lot longer than previous generations’ savings. So the fact that people are starting to save much later only exacerbates an already bad situation.”

The survey also showed that the average age at which people with a planner started saving was 29.6 versus 33 for those without a planner. “While this difference may not seem like a big deal, an extra three or four years can significantly boost your retirement savings as compounding works in your favour.”

Financial planner remuneration The survey also revealed a lack of understanding among consumers about how financial planners and advisers are remunerated and how this could affect the value of savings and investments.

According to Bradley, the issue of how financial planners should be remunerated remains a burning issue in South Africa.

But while regulators, financial planners and product providers battle it out, consumers are often left on the sidelines with very little guidance on how they should be paying for financial advice.

The survey found that 49 per cent of respondents expressed a preference to pay a financial planner a fee, while 39 per cent preferred to remunerate them on a commission basis. The remaining 12 per cent of respondents indicated that it did not matter, did not know or preferred neither model.

ALTERNATIVE INVESTMENTS

Derivatives–

add some spice to your investments Derivatives have had a lot of bad press since

Goldman shares at almost half the 2007 peak

performance while maintaining a proper risk-

the global financial crisis. And it is true this

price.” Derivatives are types of investments where

management strategy.”

investment instrument can be risky if implemented

the investor does not own the underlying asset,

incorrectly. “Derivatives are often misunderstood

but he betakes a view on the direction of the

Scholtz used the analogy of food when explaining

and, if used correctly, can make a valuable

price movement of the underlying asset via an

the benefits of derivatives. “The creative and

contribution to an investment portfolio,” said

agreement with another party.

balanced use of spices can make the difference between dull and delicious food. Some of the

Johann Scholtz, head of derivatives at Sanlam “There are many different types including

‘spices’ investors might add to enhance the

options, swaps, futures and forward contracts,

flavour of their portfolios include index futures,

“Given the current volatile investment environment,

and they are typically used to hedge a portfolio

single stock futures, commodity futures (in Rand),

now could be a good time to consider shifting

position, increase leverage or speculate on an

currency futures and futures on internationally-

some capital into these instruments.”

asset’s movement.”

listed companies also traded in Rand.

Scholtz said that, even though the world’s most

According to Scholtz, the many myths which

“Once they have experienced the difference

famous investor Warren Buffet has been publicly

exist around financial derivatives are spurred by

derivatives can make to the performance of their

bearish on derivatives, his company, Berkshire

their perceived complexity. “Some critics equate

portfolio, they may like to try something spicier.

Hathaway, has been extremely successful in

derivatives with gene splitting, potentially

In this regard, they might like to apply options

applying these instruments to their advantage.

useful, but dangerous if used without proper

to their portfolio. ‘Plain vanilla’ call and put

“For example, Berkshire Hathaway invested

safeguards. However, with the right guidance,

options as well as more exotic option structures

in Goldman Sachs during the financial crisis,

investors can integrate derivatives with their

such as spreads, ‘shark-fins’ and fences can be

whereby Buffet got five-year warrants to buy

equity portfolios and enhance portfolio

constructed to suit the client’s requirements.”

Private Investments.

Survey reveals alternative investments

growing in popularity According to a new report by international research

“It was somewhat surprising to us to see such

Meunier added that these figures represent a huge

firm Cogent Research, 78 per cent of all retail

broad and consistent use of alternatives, not

opportunity for mutual fund and ETF providers to

advisers are presently using alternative investments

only across channels, but also based on assets

satisfy a growing demand among retail advisers

within client portfolios. Furthermore, the study

under management,” said John Meunier,

for institutional-quality alternative investment

found that the primary reasons that advisers are

cogent principal and author of the 2011

strategies that are both scalable within their

using alternatives are to further diversify portfolios

Adviser Brandscape report.

practices and palatable to skeptical investors.

“Clearly, advisers of all stripes and tenure

“However, as they roll out new products or

have embraced the notion that managing

broaden distribution of existing offerings,

These and other findings are included in the 2011

client portfolios in today’s environment

providers must not overlook the importance of

Adviser Brandscape, an annual report based on a

requires the tools to provide greater asset-class

providing the support and education that will be

survey of 1 643 retail investment advisers.

diversification and better risk

required to promote acceptance.”

(83 per cent), manage risk (80 per cent), or to achieve absolute returns (54 per cent).

management strategies.”

Cogent found that advisers now allocate an average of 11 per cent of their book to alternatives spread across a variety of different products. Independent advisers, the heaviest overall users of alternatives, show the strongest preference for venture capital, private equity, and hedge funds, while bank advisers have a greater appetite for limited partnerships and RIAs tend to use structured products/notes.

Philadelphia Oliphant

Philadelphia Oliphant | Economist at Investment Solutions Risk aversion intensified significantly in August, initially led by concerns over the US political deadlock on raising the country’s debt ceiling before the 2 August deadline. The debtceiling debacle culminated in a credit-rating downgrade, with Standard & Poor’s (S&P) lowering the country’s long-term sovereign credit rating by one notch to AA+ with a negative outlook. This was done on concerns that the fiscal consolidation fell short of what, in S&P’s view, would be necessary to stabilise the government’s medium-term debt dynamics.

More importantly, the downgrade also reflected S&P’s view that the “effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges”. The downgrade was not a surprise and was way overdue in Investment Solution’s opinion. The US AAA rating was undeserved given its fiscal position, which had spiralled out of control, and given the lack of political will to resolve structural debt problems.

That said, the downgrade was a significant step as the US Government had never not held a AAA rating on its debt since it was assigned in 1917, with US government bonds long regarded as risk-free assets. The downgrade therefore has potentially significant ramification for financial markets, particularly in the longer term. For one, the US has for a long time been the global capital absorber given the size and scope of its financial markets. As a result, despite its deficit economy, the reserve status of the Dollar has enabled the US to attract a natural and almost automatic flow of capital from other parts of the world. This has allowed the US Government to be funded at very low cost despite its deteriorating fiscal position.

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Shifting fundamentals The Japanese Government has managed to avoid market discipline only by maintaining a surplus economy and funding its deficits from internal sources. The US, on the other hand, has been relying on the Dollar’s status as a reserve currency. The downgrade will potentially accelerate a shift away from the Dollar and increase efforts in the rest of the world to disintermediate the greenback for global trade and building of foreign reserves. Already the BRICS’ declaration is to establish bilateral payment mechanisms that cut out the use of the Dollar for intraBRICS trade.

“There’s an unfolding change in risk fundamentals between risk assets, defensive assets, emerging markets and the developed world.”

The US fiscal woes reflect a widespread problem across many developed countries, with countries in the European periphery already under great pressure. Greece, Portugal and Ireland have received bailouts subject to austerity programmes, and there have been increased concerns of contagion to other European economies, with Italy, Spain and France coming under the spotlight recently. The US downgrade and fiscaladjustment programmes in developed markets happened at an unfortunate time of widespread slowdown in global growth. For developed economies, the slowdown comes against a backdrop of monetary and fiscal policy that is already stretched to the extreme and where governments are under mounting pressure to cut back their debt levels.

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The risk episode following the US debt-ceiling stand-off and the resultant credit downgrade amid deteriorating global growth conditions resulted in the biggest risk-aversion trade since the 2008/2009 global financial market crisis. Global equities plummeted, bond yields fell (to record levels in the case of the US and Germany), and safe-haven assets (the Swiss Franc and gold) continued to climb to record highs. However, this traditional market reaction to sell off risk assets (equities and emerging markets) and buy defensive assets, including US bonds, could be challenged over time.

There’s an unfolding change in risk fundamentals between risk assets, defensive assets, emerging markets and the developed world. Cash and bonds have started to become increasingly risky, given poor debt fundamentals and negative real interest rates in developed economies. This means the practice of defaulting into bonds and cash will be challenged over time. The risk to the Dollar is no longer negligible and this is likely to lead to greater diversification from the greenback as a global reserve currency.

The relative risk between the developed world and emerging markets has also been closing. Emerging markets have an investment advantage over their developed counterparts in the form of yield, growth and solvency.

Lastly, the health of the corporate sector (particularly multinationals with a strong presence in emerging markets) has been strengthening to a point where corporate risk is being rated better than their sovereign homes.

Therefore, over the long term, conventional asset allocation according to current risk profiles could be fundamentally challenged.

Retirement Investing

UMBRELLA FUNDS A VALUABLE TOOL TO INCREASING SOUTH AFRICAN RETIREMENT SAVINGS

Hugh Hacking | Head of Retirement Fund Solutions at Old Mutual Corporate

As a result of the growing skills shortage problem in South Africa, the retention of staff has become a key focus for employers.

Offering retirement benefits to employees is not only considered a valuable tool in retaining current staff for the long term, but could also play a significant role in bolstering low savings rates in South Africa.

This is according to Hugh Hacking, head of retirement fund solutions at Old Mutual Corporate. He points to the results of the recently released 2011 Old Mutual Retirement Monitor which revealed that a lack of awareness around personal retirement savings and contributions to retirement schemes is one of the key reasons why the majority of working South Africans are not saving enough for retirement.

He explained the growth in the popularity of umbrella funds has also been boosted as a result of them having successfully addressed some of the previous criticisms levelled at them and having become more flexible for employers and members.

“Umbrella funds are particularly attractive to employers due to the fact that the funds offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer.”

Hacking believes that employers have an important role to play in encouraging South Africans to save adequately for their retirement. He recommends that one way for the employers of small- to mediumsized enterprises to offer benefits to their employees without the significant costs often associated with other benefit programmes, is to consider an umbrella fund.

“Umbrella funds are particularly attractive to employers due to the fact that the funds offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer. These funds also embed the expertise of providers, and can offer better value, lower cost and better benefits than comparable stand-alone funds.”

Hacking said there has already been considerable growth in umbrella funds in recent years as employers seek to shed trusteeship responsibility in an increasingly legislated industry, while also attempting to reduce costs. “Umbrella funds from the leading providers already meet strict governance requirements, are more cost effective and offer protection benefits for employees such as death and disability cover.”

According to Hacking, businesses that currently don’t offer retirement benefits to staff should recognise that offering these benefits can be a vital tool to retain staff. He believes that the introduction of simpler and more cost-effective retirement solutions such as Old Mutual’s Easy Benefit Plan, and a growing awareness of the need to ensure that their employees are financially secure are key contributing factors to an increased willingness

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among employers to offer their staff members some form of employee benefits.

“This product was designed specifically with affordability in mind, allowing people to gradually increase the amount that they are saving. Old Mutual recommends that if you plan to work for 40 years, you should ideally save around 15 per cent to 20 per cent of your monthly salary in order to ensure a comfortable retirement. Therefore, employees should be encouraged to contribute additional amounts over and above the basic employer contribution. In addition, having access to disability and funeral benefits will give many employees peace of mind, as they know that their families will get the required financial support when they need it the most.”

Hacking said a further attraction is that retirement savings are invested in Old Mutual Absolute Growth Portfolios which have displayed resilience during recent market turbulence.

Hacking added that the fact that more than 250 employers have joined the Easy Benefit Plan over the last few months is an encouraging sign that smaller employers are seeing the value in offering retirement benefits to their staff. “I am particularly pleased that with an average salary level of R2 100 per member, we are seeing that many lower income earners in small businesses are now being offered potentially life-changing benefits. This is good for South Africa.”

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ECONOMICS

RATE BACK ON THE AGENDA The beginning of August saw us changing our rate call to one where the Reserve Bank leaves the repo rate unchanged over the next 12 months. Our risk scenario sees the Reserve Bank cutting the repo rate further. We had previously argued that a rate hiking cycle would start in November. We had further argued that the key risks to this view related to global events; and recent global events necessitated the change in our rate call. The repo rate is currently at 5.5 per cent, with the Reserve Bank having cut this benchmark rate by a cumulative 6.5 per cent between December 2008 and November 2010.

Adenaan Hardien | Chief Economist: Cadiz Asset Management

The fragility of peripheral Europe and its potential to disrupt markets and economic activity not only in core Europe, but globally, has been of particular concern to the Reserve Bank. This region has remained fragile and market dislocation resulting from events there continue to pose a significant downside risk to global growth.

More recently, there has been rising concerns about the strength of the economic recovery in the US. In a clear reflection of the seriousness of this concern in the minds of policymakers, the US Fed FOMC stated at its last monetary policy meeting that it “anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013”. Previously the committee had anticipated that conditions would “warrant exceptionally low levels for the federal funds rate for an extended period”. This peg that the FOMC has put in the sand is significant for South Africa, because it raises the prospect of an extended period of very low global rates.

High-frequency data released since the last MPC meeting were generally weaker than expected, both locally and abroad.

Commodity prices have weakened in sympathy, with gold the notable exception.

While the high gold price may signal future inflation problems, the near-term trajectories of inflation, both locally and abroad, are likely to be lower than was previously expected.

While growth has certainly not collapsed, these releases have necessitated downward adjustments to growth and inflation forecasts.

The extent of the downward adjustments to

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forecasts adds support to the change in our rate view. But much of the motivation for the change in view stems from the increased probability attached to a risk scenario where market dislocation pushes the world economy back into a recession. And if the probability of this alternative scenario increases to the point where it becomes the Reserve Bank’s base case, there is every chance that the MPC will cut the repo rate.

“The fragility of peripheral Europe and its potential to disrupt markets and economic activity not only in core Europe, but globally, has been of particular concern to the Reserve Bank.”

Market volatility and risk aversion has increased substantially over the weeks following the July MPC meeting, driven by worries about fiscal sustainability in the US and the Euro area. S&P’s downgrade of US federal debt to AA+ from AAA on 5 August added to market woes. The US lost the coveted AAA rating on concerns about its willingness to pay, after the US Congress dallied on raising the federal debt ceiling.

The potential negative feedback loop from market dislocation into the real economy increases the risk of plunging the world into another recession.

These worries were key in motivating the US FOMC’s response. Other major central banks, both in advanced and emerging

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economies, are generally expected to maintain looser monetary policy than was anticipated even a few weeks ago.

An environment where major central banks maintain a looser policy environment, and where markets settle and risk aversion diminishes, is one that would likely be more supportive for the Rand. At the margin, this too would provide support to the view that local rates remain lower for longer.

BAROMETER

HOT

sideways

Sub-Saharan Africa region the destination of choice for global investors A report by Rand Merchant Bank has revealed that sub-Saharan Africa currently houses seven of the 10 emerging global market economies and will experience significant growth over the next five years. The report also revealed that the region has an estimated market potential of 840 million people with a purchasing power of $1.9 trillion.

Geldof’s African private equity fund inches towards $200 million mark Former singer and Live Aid front man, Bob Geldof’s private equity fund, called 8 Miles – which represents the shortest distance between Europe and North Africa – has raised nearly $200 million.

Australia continues to perform as top property investment destination Latest data released by Asia Pacific Capital Markets has revealed that Australia has emerged as a favourite for inter-regional investors.

Positive investment traits included its AAA-rating, good fundamentals of transparent real estate markets and its economic links to the rest of Asia.

Substantial deals with investors from Canada, Switzerland, US and global funds increased the total inter-regional inflow to Australia to US$1.2 billion – a 442.1 per cent increase year on year.

South Africa has the potential to lure climate funds According to the United Nations, emerging economies such as South Africa can benefit significantly from climate finance and technology transfers, but more needs to be done to promote an investment-enabling environment.

Currently, climate change investment is going to G-20 countries and South Africa needs to make itself more investment-friendly in order to capitalise on green investment, which is estimated to reach $500 billion by 2020.

NOT

South Africa’s economic growth still stuttering According to the National Treasury, South Africa’s annual growth is still expected to average between three per cent and 3.5 per cent over the next three years. This is a fraction of the seven per cent that the government and the International Monetary Fund have estimated is needed to create job opportunities in the country.

Global economic woes put SA rate cut back on the cards In worrying news for South Africa’s savers and retirees, Finance Minister Pravin Gordhan hinted that dangers posed by unstable global markets could put an interest rate cut back on the table at the Reserve Bank’s MPC meetings. Gordhan said “in the event of a significant global downturn, South Africa’s Monetary Policy will react appropriately”.

Japan latest victim of sovereign-debt downgrade Moody’s Investors Service has cut the rating on Japan’s government debt by one notch to Aa3, its fourth-highest level. The cut was due to large budget deficits and the buildup of debt since the 2009 global recession.

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BETTER BUSINESS

Client surveys: the truth can set you free While most financial advisers spend a lot of their time and effort finding appropriate products and funds for their clients, many are unaware that clients will ultimately judge them not only on their competence, but also on the effort they put into nurturing and developing the adviser-client relationship. Indeed, a relationship based on trust and two-way communication can survive the test of short-term volatility and muted invested returns.

A great way to build relationships and deliver value-add to your clients is to find out exactly what they want by surveying your base. This may sound simple, but very few financial advisers actually do this, meaning many are missing out on the perfect retention strategy. International research shows practices that take the trouble to find out what their clients are thinking, not only strengthen their relationships, but also generate, on average, a 74 per cent increase in bottom-line profit.

But where to start?

“Through client feedback you can assess if you are living up to your value proposition.”

There are a number of ways to perform a client survey, including face to face, over the phone, via e-mail or by means of a web-based questionnaire. You can either put a survey together yourself, or you can use a third party to conduct the survey on your behalf.

Using a third party gives your clients greater freedom to speak their minds, providing you ensure their responses remain confidential.

As your service is relationship based, the types of questions you will ask are more likely to be open-ended, qualitative questions as opposed to closed-ended, quantitative questions. Qualitative questions ask about attitudes and feelings and generally yield the most useful information regarding your clients’ experiences with your firm.

It is important to establish your objectives at the outset, as these will help you design your survey

appropriately. Try to limit yourself to between three and five overall goals, and keep your survey short and straightforward. You can use different formats for your questions depending on the type of responses you require. You can use a multiple choice format for questions that lend themselves to choosing a specific response; rating questions which allow clients to choose from a range of options; and questions that allow clients to give more personal, detailed feedback.

Although your questions must be tailored to meet your objectives, there are some standard questions you can adapt, such as: • How do your clients feel about your relationship: responsiveness, accessibility, understanding of their situation, your level of proactivity, the quality of your personal interactions?

• How do your clients feel about the services you provide: the accuracy, relevance, and frequency of your reports? Are they aware of all the services you offer – is there an opportunity to do more for them?

• How do your clients feel about your portfolio management activities: the effectiveness of your decisions, portfolio performance versus their personal investment objectives?

Be transparent

Once you have your results, share them with your clients, prospects, staff and other stakeholders. You can post selected extracts on your website, include a summary in your next newsletter and incorporate positive feedback into your marketing material. This lets your clients know that they have been heard and that you take their feedback seriously.

Take action

Clients always appreciate the opportunity to speak their minds, and offering them the chance to air their views is a great way to enhance relationships.

However, don’t embark on a client survey unless you are committed to acting on the findings, and make sure you thank your clients for taking the time to participate. Through client feedback you can assess if you are living up to your value proposition and you can quickly strengthen any perceived weaknesses.

Sources: Articles by Gina Lauer, C. Zorski, Helen Modly, Larry Seibert, F. John Reh, Rod Bertino (BusinessHealth).

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 being 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 short lists 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 short list 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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INVESTSA

etfSA.co.za

Monthly South African ETF, ETN & Index Tracking Unit Trust Performance Survey - August 2011 Best Performing Index Tracker Funds – 31 August 2011 (Total Return %)*

Mike Brown | Managing Director | etfSA.co.za

Fund Name

Type

5 Years (per annum)

NewGold

ETF

22,52%

Unit Trust

17,23%

The August Performance Survey of retail index tracking products in South Africa emphasises the premium performance of commoditybased products in recent years.

ETF

15,80%

Prudential Property Enhanced Satrix INDI 25

3 Years (per annum) NewGold

ETF

25,39%

Prudential Property Enhanced

ETF

18,56%

Satrix DIVI

ETF

17,65%

NewGold, which is an exchange traded fund (ETF) that physically holds gold bullion and issues securities to investors backed by such physical gold holdings, is the best performing tracker fund over the two-, three- and five-year periods surveyed. It also performed very well in the shorter term periods; although here some of the more recently issued Standard Bank Commodity-Linker exchange traded notes (ETN) are showing competitive performance.

2 Years (per annum) NewGold

ETF

30,29%

Satrix INDI 25

ETF

20,57%

NewFund eRafi INDI 25

ETF

16,67%

Standard Bank Silver-Linker

ETN

104,53%

Standard Bank Palladium-Linker

ETN

47,82%

NewGold

ETF

1 Year

39,23% 6 Months

Standard Bank Gold-Linker

ETN

31,03%

NewGold

ETF

29,16%

Standard Bank Silver-Linker

ETN

25,10% 3 Months

Standard Bank Gold-Linker

ETN

22,19%

NewGold

ETF

20,48% 1 Month

Standard Bank Gold-Linker

ETN

17,54%

NewGold

ETF

16,90%

Source: Profile Media FundsData (31/08/2011) * Includes reinvestment of dividends.

Standard Bank Silver-Linker ETN comfortably leads the one-year performance stakes, with a total return of 104.53 per cent for the 12 months ended 31 August 2011. The Standard Bank GoldLinker ETN also shows up well, tending to outperform, even if only marginally, the NewGold ETF product, over the one to six-month performance intervals.

The Standard Bank Commodity Linker Notes use futures indices to track the performance of the commodities they follow. Future contracts can benefit from the forward contango and can also provide investors with a margin profit. It is possible that they can provide superior performance to spot metal positions, but this would need to be confirmed over time.

Standard Bank have also listed additional ETNs, giving access to wheat, corn, copper and oil and a basket of commodities in the last two months and the choice of commodity-based tracker products has widened significantly in recent times. With the current turmoil in world financial markets, commodity-based investments appear to be offering a viable alternative investment to counter the disappointing performance in other investment assets. However, to date, very few investors in South Africa appear to have realised the merits of direct investment in commodities, through ETFs and ETNs, as an alternative investment strategy.

The full Performance Survey can be accessed on www.etfsa.co.za.

INDUSTRY NEWS

Appointments

Vuyo Nogantshi

Deon Swart

Nedgroup Investments has appointed Vuyo Nogantshi as senior consultant on the institutional team. With over 10 years’ experience in the financial services industry, Nogantshi has previously worked at Alexander Forbes Asset Consulting as an investment consultant and more recently was head of performance surveys.

Nogantshi has a BEconSc degree in actuarial science and mathematical statistics and is in the process of completing his final

Peregrine Capital opens new unit to expand its reach British women’s hockey team sponsored by Investec 42

Henriette Herbst

exam to qualify as an investments actuary.

Liberty Corporate, a division of Liberty Holdings has appointed Deon Swart as its new chief operating officer. Swart joins the Liberty Corporate Exco team and will steer the group’s planned growth and innovation in the umbrella fund market as well as being integrally involved in all aspects of Corporate’s operations, strategy and growth. He previously worked at Old

Wealth and alternative asset management group Peregrine Holdings has created a new company within the group with the ability to raise capital for selected alternative investment managers that are not necessarily affiliated to the Peregrine group. The new unit, the Peregrine Portfolio Innovation, will focus on sophisticated local and international investors.

Mutual, Deloitte and Touch and a number of financial institutions in the United States.

Cannon Asset Managers has announced the appointment of Henriette Herbst as a portfolio construction analyst. Herbst holds a a BCom Hons (finance) degree and has previously worked at Pecunua Financial Trading where she was involved with various activities including data formatting, data integrity and running data queries.

and can pass our rigorous due diligence process. This greater scope will give investors further comfort that they are being introduced to managers that, in our view, are best-ofbreed,” commented Leila Kuhlenthal, MD of the new division. The unit’s focus remains on raising capital from the appropriate sources into the appropriate funds/products.

“We are thrilled to announce that we now have the ability to engage with non-Peregrine group funds which complement the existing offering

To further bolster its presence in sports investment, Investec has announced a deal to sponsor the England and Great Britain women’s field hockey teams for a duration of five years.

“We began sponsoring the South African women’s team last year and have expanded our backing of the sport as it symbolises commitment, enthusiasm, skill and personal development,” said Raymond

INVESTSA

van Niekerk, Investec’s global head of marketing.

The sponsorship ranges from grassroots children’s hockey to national team level and commenced at the European Championships, which was held in late August in Moenchengladbach, Germany.

Investec, which has operations in South Africa, the UK and Australia, has been involved in numerous

sponsorships, ranging from horse racing, rugby and motor racing to cultural events such as concerts.

Kate Walsh, the Great Britain and England team captain, said the Investec deal “will hopefully inspire future generations and help to build on the fantastic progress of England and GB women’s hockey”.

cadiz Absolute Yield Fund reaches R2 billion milestone Market cap of exchange traded products surges in 2011 Investment Solutions celebrates SA’s top female artists

Assets under management in the Cadiz Absolute Yield Fund, a flexible fixed interest fund, have now exceeded the R2 billion mark, to underscore the 2011 Morningstar Fund Awards’ top ranking of the fund in the Cautious Allocation Category. The award recognises Absolute Yield’s superior riskadjusted performance. Last year, the fund received the 2010 Morningstar Fund Award in the Cautious Balanced category.

The fund has successfully provided investors with a return of inflation plus three per cent (CPI+3%) over rolling three-year periods and a positive return over any rolling 12-month period.

A survey of the market capitalisation of all exchange traded funds (ETF) and exchange traded notes (ETN) listed on the JSE, shows that the combined market capitalisation grew 19 per cent from R33.3 billion at the end of 2010 to R39.6 billion at the end of July 2011.

“With most of the market moving sideways, at best, in 2011, the increased size of the ETF/ ETN industry stems largely from new listings (12 new products were listed in the first seven months of the year), or from additional listings of securities in existing ETFs, rather than market performance,” said Mike Brown,

Paul Hutchinson, head of Cadiz Collective Investments said: “In the difficult investment environment of the past couple of years, the Cadiz Absolute Yield Fund has appealed to retail and multi-manager investors who do not want to make the complex asset allocation decision between the growing (in number and complexity) range of fixed interest instruments.

It is, however, the fund manager’s ability to make use of the myriad available investment opportunities to diversify risk and enhance the yield of the portfolio that has proven to be extremely attractive and beneficial to investors.”

managing director of etfSA.co.za He said that there are now 44 exchange traded products listed on the JSE, and, with a number of other products apparently in the pipeline, this should grow to around 50 products listed by the end of this year.

Investment Solutions continued its commitment to South Africa’s burgeoning art scene with the sponsorship of Celebrating 20 Artists, an exhibition devoted exclusively to a selection of female South African artists in honour of Women’s Month in August.

“As a young brand, Investment Solutions is pleased to reveal its diversity by forging a strategic partnership with Friends of the Johannesburg Art Gallery – custodians of much of South Africa’s heritage,” said Derrick Msibi, managing director of Investment Solutions.

Msibi said there is a natural synergy in the partnership as art is a form of investment. “This partnership provides a means of investing in our artists, for future posterity. It is a privilege and an honour to be associated with distinguished women artists who have risen above diverse disadvantages and who have told the story of South Africa through their visual art.”

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PRODUCTS

Sygnia launches new portfolio products Given the changing trends and demands in the market, Sygnia is launching two new products; the Sygnia Symphony Portfolio and the Sygnia Skeleton Portfolio. The products are available as pooled portfolios, as well as customised portfolios where the assets remain registered in the name of the investor.

The Sygnia Symphony Portfolio capitalises on the trend towards investing in global balanced portfolios managed by leading asset managers in South Africa, while the Sygnia Skeleton Portfolio is the first balanced product based entirely on index tracking specialist mandates to be launched in South Africa. Both portfolios are medium risk and aim to outperform the Alexander Forbes Global Large Manager Watch Median. The differences lie in the management style and in the cost. The charging structure of the Symphony Portfolio reflects the active nature of the investment strategies employed by the underlying asset managers, while the Skeleton Portfolio provides investors with a highly cost-effective exposure to the domestic and international equity, property and fixed interest markets.

The Sygnia Symphony Portfolio is split-funded between the global balanced portfolios of the top asset managers in South Africa. All the underlying strategies represent the managers’ best house view. The managers retain responsibility for the asset allocation strategy, as well as for the management of the global portion of each portfolio. Sygnia

44

PRODUCTS

manages the selection process, as well as the relative allocation to the underlying managers.

The managers are selected on the basis of Sygnia’s proprietary research.

The Sygnia Skeleton Portfolio is constructed using specialist index tracking portfolios. Sygnia retains responsibility for managing the asset allocation strategy on an active basis. The Sygnia Skeleton Portfolio is an appropriate core investment strategy for any retirement fund. The split funding approach to investments can lead to overall ‘average’ netof-fees performance (particularly if performance fees are taken into account). By using the Sygnia Skeleton Portfolio to obtain cost-effective exposure to the market for the core strategy, and employing more expensive active asset managers for the remainder of the assets, the board of trustees can achieve a more efficient deployment of capital without any sacrifice of performance.

All quantitative and qualitative selection screening data for both portfolios is available to investors via Sygnia Platinum Light Internet portal to ensure compliance with Regulation 28.

Investment Solutions goes retail

Investment Solutions, South Africa’s largest multimanager with over R175 billion in assets under management, recently launched a broad range of unit trusts to the retail market. The products range from the conservative Investment Solutions Superior Cash fund to the balanced Investment Solutions Multi-Managed Balanced Fund of Funds and the aggressive, Investment Solutions Multi-Managed Equity Fund of Funds.

Through its multi-managed unit trusts, Investment Solutions is able to achieve consistent returns at below-average risk by selecting uncorrelated managers that contribute to the performance of portfolios in various economic environments.

With over 900 unit trusts to choose from in South Africa, Investment Solutions follows a propriety process called the Manager Assessment and Ranking System (MARS model) to select the best-pick managers in a particular unit trust category. This gives the company a better perspective of the investment-manager environment, allowing for effective blending of the best-pick managers to construct multi-managed portfolios that are available to the Independent Financial Advisers (IFA) network and retail investors.

“This in turn allows IFAs to focus more on managing client relationships, instead of spending their time on investment management,” added Ntai Phoofolo, business development manager at Investment Solutions.

EVENTS

GREAT MINDS DON’T THINK ALIKE – but they do get together that the actual debt relief being offered to the beleaguered state was close to zero.

He noted, however, that austerity measures currently being implemented in Europe will need to be intensified.

Great minds don’t think alike was a sound bite that many attendees took away from the Discovery Invest Leadership Summit in Sandton, Wednesday, 21 September. With a host of regarded international and local speakers, the event explored a number of critical topics including the strength of emerging markets, the ongoing sovereign debt crisis and the likelihood of a double dip recession.

Nouriel Roubini, widely regarded as a financial prophet for predicting the collapse of the US housing market and the global recession that started in 2008, gave his views on the current global economic turmoil in Europe and the US. In an alarming forecast, given his credentials, Roubini said the global economic recovery was reaching stall speed and facing a possible free fall, citing a disorderly default by a Eurozone country as a potential threat that could ignite a rerun of a similar event to 2008 when the collapse of Lehman Brothers sparked the global economic meltdown.

Warning of a two thirds probability of a downturn in the US and Europe, Roubini also noted that the current crisis in Europe could lead to the disintegration of the Eurozone, which would have significant ramifications for the rest of the world. “In Europe you have 17 governments that need to agree on any one thing and you have policy stalemates that don’t really help. The current approach in Europe has been that of kicking the can down the road. The European crisis could be worse than Lehman. You have a banking crisis – banks are undercapitalised and have not restructured properly.”

He castigated the recent deal given to Greece, describing it as a rip-off and noting

In a positive note, Roubini said the rise of emerging markets, including sub-Saharan Africa, will provide a source of strength in the future. He added that this is reflected in the fact that the Group of Seven advanced economies has become largely obsolete, with the Group of 20 – of which South Africa is a member – now being the policymaking body.

“Economic and environmental challenges are inter-linked. Climate change is a tremendous opportunity that if faced correctly can help us deal with many other challenges.”

Closing the event was former US vice-president and renowned environmentalist, Al Gore, who spoke on climate change. At one point during the session he noted: “I didn’t bring slides … because I didn’t.” As it turned out, there was no need – his opinion was more than enough to carry the audience. Contrary to much opinion on the matter, Gore indicated that climate change actually holds great opportunities for the global economy.

“Economic and environmental challenges are inter-linked. Climate change is a tremendous opportunity that if faced correctly, can help us deal with many other challenges.” He noted that the opportunity lies in job creation – by getting the unemployed back to work in jobs that help combat climate change such as windmills and retrofitting buildings. This, he said, would also help in some part to lift the economy out of its current stagnant state. “We have an opportunity to solve this crisis in a way that lifts the global economy and inspires hope for future generations.”

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45

Snippets | THE WORLD

cap set at 0.4 per cent of gross domestic product for the maximum combined deficit of the central and regional governments from 2020.

Derailment of world economy recovery is a possibility Christine Lagarde, managing director of the International Monetary Fund (IMF), warned that the world economy was in a “dangerous new phase”, adding that steps must be taken to strengthen growth with the US, arresting a slide in house prices and European banks boosting capital to prevent the continent’s debt crisis from affecting more countries.

Moody’s downgrades Japan over swelling deficit Moody’s announcement to downgrade Japan from an Aa3 rating to Aa2 came as a result of large budget deficits and the build-up in Japanese debt after the world economic recession. According to the agency, a tougher deficit is urgently needed in Japan as they have the highest debtto-GDP ratio of any country in the world, with its borrowings estimated to hit 233 per cent of annual economic output in 2011.

Libyan leader overthrown Anti-government forces gained control of the majority of the oil rich country of Libya during August, ending the 42-year reign of Muammar Gaddafi. While his wife and three of his adult children were reported to have fled to neighbouring Algeria, Gaddafi’s whereabouts remain unknown (as at 1 September).

Hurricane Irene causes billions in disaster damage Hurricane Irene is said to have been one of the costliest catastrophes to ever hit New York City, with damages estimated at $7 billion. Most of the loss will very likely come from property in New York and New Jersey along the Atlantic Coast. According to the Insurance Information Institute, Irene is among the 10 costliest catastrophes in American history.

Spain first Eurozone country to agree to deficit cap Spain is the first of Eurozone countries to react to a call for including deficit caps by German Chancellor Angela Merkel and French President Nicolas Sarkozy. Leading the way of pushing forward with structural reforms, this move will allow the Spanish Government to run small budget deficits in case of extraordinary emergencies or serious economic downturns.

Additionally, a separate law will be enforced in June 2012 with the specific

46

France announces plans to safeguard itself from a credit downgrade In an attempt to safeguard its AAA credit rating, French President Nicolas Sarkozy has proposed an increase of $16 billion in new taxes. Sarkozy acknowledged that the country’s economy has been slowing down and that, in order to escape a credit downgrade, they need to increases taxes to reach its deficit-reduction targets.

Chinese Renminbi to replace US Dollar as the currency of trade in Africa Negotiations are underway for the Chinese Renminbi to possibly replace the US Dollar as the official currency to finance trade between China and African countries, according to research conducted by Standard Bank. The research estimates that up to 40 per cent, or $100 billion, of China’s trade would be denominated in Renminbi by 2015.

Italy accepts austerity package Italy, the Euro region’s second-largest debt country, has accepted the €45 billion austerity package in an attempt to convince investors they can avoid a bail-out. Italy’s public debt burden is more than 120 per cent of gross domestic product, amounting to one of the largest in the world and its weak economy has been one of the world’s slowest growing over the past decade.

Hungary drifts into a seriously dangerous situation Hungary is in serious trouble as it faces risks from the Eurozone debt crisis as well as poorer than expected growth, all of which poses extraordinary, immediate threats to the country. Speaking at a news conference in Budapest, Prime Minister Viktor Orban of Hungary said Hungarians should brace themselves for tough times ahead as major budget cuts will be enforced to avoid loss of economic sovereignty.

IMF advises SA to tighten its fiscal policy South Africa has been instructed by the International Monetary Fund (IMF) to constrict its fiscal policy to contain public debt at about 35 per cent of GDP, allowing planning and manoeuvring in the event of a surprise. The IMF advised a gradual financial tightening over the next three years, reducing its budget deficit to 3.8 per cent of gross domestic product (GDP) by 2013-14.

INVESTSA

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

A

made in china

ntique collectables can provide a very lucrative investment opportunity for those who prefer to invest in something out of the ordinary. An AD550 Mayan warrior sculpture that sold for over $4.9 million seemed to be a profitable investment for its collector until it was discovered to be a fake shortly after it was sold earlier this year.

While this may not be a common occurrence, it does highlight the need for investors to ensure that their antique collectables are properly valuated and deemed authentic before making the decision to purchase. However, this should not scare off prospective investors as there are many other valuable antiquities that investors have profited from very handsomely indeed.

Unlike the modern day mass of goods that are churned out from China, antique items dating back to the dynasty-ruled era have proven very valuable investments. Here are three examples of the most valuable vases hailing from Chinese dynasties.

Qianlong vase – sold for $80 million This 18th-century porcelain vase was inherited by a mother and son who expected to sell for only £1.2 million ($2 million), but managed to rake in an amazing $80 million at auction in 2010.

The vase was discovered during a routine valuation at a house in the London satellite town of Pinner. The vase is decorated with elaborate artwork of medallions and varied pairs of fish set against modelled and carved waves. The buyer of the vase was a wealthy Chinese industrialist and collector of antiquities.

Qing dynasty vase – sold for $32.5 million This 300-year-old vase sold for $32.5 million and set a world record at the time in 2010. The globular yellow-ground Qing vase, decorated with flowers and golden emblems for durability, is an example of the so-called ‘famille rose’ family of Qing vases that have been among the most highly sought after works by wealthy Chinese in recent years.

Ming dynasty vase – sold for over US$10 million The Ming dynasty ruled China from 1368 to 1644. That era in Chinese history saw the creation of a startling amount of carved lacquer wares, glazed porcelain wares, embroidered silks and works of art in a variety of other materials.

This 14th-century Ming dynasty vase, decorated in copper red scrolling flowers, is well preserved considering its rarity. Rather than keeping it locked away in his private collection, the buyer returned the vase to China by donating it to the Macau museum.

INVESTSA

47

LIFESTYLE

ROCKET – SMART AND SIMPLE IN THE HEART OF RIVONIA

Rocket Restaurant and Cocktail Bar has become an established name among both lunchers and night-time diners. Located just off Rivonia Boulevard in Johannesburg, the restaurant is ideally situated for workers in the busy Sandton suburb, the hub of SA’s business community.

With an upmarket African theme, the décor is smart but simple – much like the menu.

There is a comprehensive range of dishes on offer to suit most palates – from salads and pastas to racks of lamb and seafood.

If you want a light bite and a drink before heading home, or a full three-course meal, all are catered for here.

The wine cellar is also fairly well stocked and caters for most tastes and budgets.

Whites start at about R75 and go up to R170, while red wine lovers can either pay as little as R99 or if they’re feeling flush, can splash out R420 on a bottle of Meerlust Rubicon. While I didn’t sample them on this occasion, the cocktail menu should also prove a hit with revellers looking to blow off some steam after a day in the office.

The prices are reasonable, especially given the location. Starters are priced at between R34 and R48, while the extensive dinner menu begins at R50 for a salad all the way up to an affordable R120 for fillet medallions. I tried the camembert phyllo pastries with berry coulis as a starter. If you like good cheese in all its forms, then you will be a fan – the sharpness of the berry coulis cuts through the camembert in a great combination. Dinner was the French roasted rack of lamb – easily one of the nicest lamb dishes I’ve had in a long time – cooked to perfection and in a sauce that I would like to have bottled and taken home with me.

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INVESTSA

While you may be lucky enough to get a table on a quiet Monday evening, if you are looking to visit later in the week, it is essential to book well in advance.

Contact details: Address: Corner of Rivonia Boulevard and 11th Avenue, Rivonia Tel: +27 (0)11 234 8807 Fax: +27 (0)11 807 9956

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THEY SAID...

A selection of some of the best homegrown and and international quotes that we have found over the last four weeks.

“Developments this summer have indicated we are in a dangerous new phase. The stakes are clear; we risk seeing the fragile recovery derailed. So we must act now.” IMF managing director Christine Lagarde, calling for urgent action to prevent a descent into a renewed world recession.

“I have never had a relationship with the president of the ANC personally. My relationship with the president of the ANC has always been organisational and that’s how we continue to relate. I have never wanted a relationship with the president of the ANC.” Julius Malema, president of the ANC Youth League commenting on the nature of his relationship with Jacob Zuma.

“My friends and I have been coddled long enough by a billionaire-friendly Congress; it’s time for our government to get serious about shared sacrifice.” Warren Buffet Berkshire Hathaway CEO, expressing his opinion in an article he wrote for the New York Times.

“Investors were looking for some big picture solution to the Eurozone crisis.

Looking at these headlines, I don’t think much has been achieved. Andrew Wilkinson, a senior market analyst at Interactive Brokers commenting on global stocks falling as Germany faltered.

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“Growth may virtually stagnate in the second half and there’s a threat of a renewed recession. It’s up to Merkel and Sarkozy to prevent further contagion to the economy.” ING Groep senior economist, Martin van Vliet commenting on the fact that European economic growth slowed more than was forecast.

“Our problems are imminently solvable. And we know what we have to do to solve them.

We continue to have the best universities, some of the most productive workers, the most innovative companies, the most adventurous entrepreneurs on Earth.” US President Barack Obama commenting on the condition of the US Dollar as it continues to fall.

“The world needs a better monetary arrangement. We can have an international currency which will take the burden off the Dollar as the sole reserve currency.” Top developmental economist Meghnad Desai, commenting on the need for a new global currency to replace the Dollar.

“I believe Apple’s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.” Apple’s Steve Jobs announcing his decision to step down as the company’s CEO.

“The parallels between AbM’s struggles against the ANC and the latter’s fight against the apartheid regime cannot be ignored.

The accounts of forced removals, violence, intimidation and leaders in hiding seem like echoes of a time supposedly gone forever.”

US diplomatic cable released by WikiLeaks draws a link between the psychology of the ANC’s fight against apartheid and its handling of the Abahlali baseMjondolo (AbM) shack dwellers movement.

“We have systematically increased the level of our foreign exchange reserves to provide protection against global shocks in the economy.” A written reply from Minister of Finance Pravin Gordhan to a parliamentary question.