INVESTSA Magazine October 2014

R37,50 | October 2014

Private equity goes

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CHOOSING A FUND MANAGER ISN’T EASY, BUT IT MAY HELP TO KNOW THAT OUR BALANCED FUND IS A CONSISTENT, TOP PERFORMER. The Prudential Balanced Fund continues to outperform 75% of high equity funds over every period from 1-10 years.

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4th Quartile 1 year

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Source: Morningstar

To learn more about our philosophy based on consistency and how it can benefit you, please speak to your financial adviser or call us on 0860 105775 or visit balanced.prudential.co.za

Consistency is the only currency that matters.

Source: Morningstar data for periods ending 31 July 2014, Multi-Asset High Equity fund category. Assets are managed by Prudential Investment Managers (South Africa) (Pty) Ltd, which is an approved discretionary financial services provider #45199. Collective Investment Schemes (unit trusts) are generally medium-to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to future performance. Unit trust prices are calculated on a net asset value basis, which is the total book value of all assets in the portfolio divided by the number of units in issue. Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used. All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates.

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Private equity enters the public world

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Private equity on the rise locally and into Africa

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Ploughing into Africa

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Can investors afford not to invest in hedge funds?

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Equities remain tops for the long term

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PuttING THE EMPLOYER BACK INTO EMPLOYER – SPONSORED RETIREMENT FUNDS

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IIA SA launches 2014 Corporate Governance Index

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Planning for income and capital growth in 2014 and beyond

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Active share: what you need to know

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Profile: Khanyi Nzukuma, CEO Metropolitan Retail

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The reality of a sound retirement

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Regulatory changes will allow retail investors to participate in hedge funds

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From

the editor Financial advice, both giving it and receiving it, is getting more difficult. But it can’t be avoided. The potential impact of financial advice is huge, putting strain on both financial advisers and investors.

On a macro scale, look at what happened in August when Moody’s credit rating agency downgraded the four biggest South African banks. Share prices toppled, especially Capitec, which had been trying hard to tell the market its business model was not at all like the collapsed Abil. Moody’s was decried but the damage was done. About all that saved further carnage was the fact that the other two big agencies, Standard & Poor’s and Fitch, did not follow the same route.

And just who makes the decisions at these leading rating agencies? No doubt they know their jobs, but these nameless, faceless individuals can cause so much damage. Not only to companies and industries, but even countries when they downgrade sovereign ratings.

Back to the point though. Financial advisers need to filter financial advice carefully. And investors need to interpret this advice with care.

Financial planner Gavin Came from Sasfin Wealth puts this into great perspective in a well-written piece, ‘Caveat intermediator’. He spells out how financial advice in South Africa has become fraught with uncertainty, to the extent that every bit of advice a planner gives has to be accompanied by caveats, including one on how stupid you are. It’s a very funny yet serious article that financial advisers should not miss.

One writer who is clear on financial advice is Marc Hasenfuss, who this month tells us how investing in agriculture has become a sophisticated investment strategy. As always, Marc offers examples of agri-business companies investors should look at.

Mohammed Nalla of Nedbank Capital tells us about the adjusted Big Mac index, which shows, among other things, that the rand is one of the most undervalued currencies in the world. That means less burger for your money when you eat overseas.

And don’t miss something completely different – The toy collecting game.

There’s big money there for readers who have kept their childhood toys, like a 1966 dinky car that cost 48 cents now being auctioned for US$9 thousand.

The article also mentions GI Joe soldier dolls. I have one somewhere, probably in a box in the garage. I must find it before a rating agency starts setting prices for GI Joe. They rob everybody.

Enjoy this issue, it’s a good one.

Shaun Harris

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

www.comms.co.za

Magazine subscriptions subscriptions@comms.co.za Advertising & sales Claudia Heyl | claudia@comms.co.za Michael Kaufmann | michaelk@comms.co.za

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

Copyright COSA Communications Pty (Ltd) 2014, All rights reserved.

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

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Private equity enters the public world Private equity, that sometimes mysterious investment asset outside JSE-listed equities, bonds and cash, is going public. That sounds like a contradiction, and it is, as private equity, most often an investment in companies, is differentiated from equities because the former is private, non-listed companies and the latter public, listed companies.

By Shaun Harris

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owever, private equity is going public in the sense that investors have become aware of the asset class and are learning more about it. Private equity long lay in the realm of institutional investors. It was just too expensive to invest in for individual, retail investors.

Old Mutual Investment Group says that, with minimum investment requirements of around R100 million, private equity has traditionally only been accessible to institutional investing and individual investors with portfolios in excess of R1 billion.

However, this has been gradually changing over the past decade, with investment managers lowering minimum investment requirements and thereby allowing retail investors access to private equity.

“Old Mutual Private Equity launched its first retail fund of funds in 2006, enabling investors to access private equity for a minimum of R100 000,” the group says.

Many other investment managers have launched similar funds, opening up private equity to individual investors.

The JSE is acknowledged as one of the most sophisticated stock exchanges in the world, but it might surprise readers to find out that the private equity industry in South Africa is also highly regarded internationally.

“It is argued that South Africa has one of the most sophisticated private equity industries in the world, with private equity funds at all investment stages, from start-up venture capital funds through to late-stage buy-out funds,” says Gray Swan Investments. It adds some interesting facts on private equity.

For instance, there are (noting that this study’s latest year of research was 2012) over 126 private equity funds in South Africa with a total of R126.4 billion in assets under management, compared to R86.3 billion in 2008 and R39.3 billion in 2003. Also, during 2012, South Africa had the second highest number of private equity transactions, with the United States in first place.

This evolution of private equity has most asset managers offering private equity funds, much like unit trust funds (though some are closed funds), and there is now plenty of scope for private, smaller retail investors interested in private equity.

So what sort of retail investor should be looking at private equity? All investors, except perhaps the most risk averse or investors not prepared to take a long-term view (long term being around 10 years). There are two main reasons why investors should include private equity in a portfolio.

It’s a fairly good diversification asset, generally not following the same cycle as

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listed investments. And returns, over certain periods of time, do outperform the JSE. But there are risks.

This is not to say that the risks in a quality private company should be any greater than for listed investments, but there are risks in less disclosure and less available information about private companies.

Interested investors and their financial advisers need to do their homework and learn as much as they can about a private equity company, or even a fund, they are considering investing in.

The easiest way to access private equity is through a private equity fund or fund of funds, of which there are many available. But there are other routes as well, like making a direct investment in a private company.

This can be difficult, as some private companies only make investment available at certain times, like when they are looking for capital to launch a new product or expand into a new market.

However, in many other private companies, especially the larger ones, shares are always available on an over-the-counter basis.

What is the sort of private company investors should be looking at? There are many, but the better known companies in South Africa would include Pepkor, Consol, Tourvest, Bain Capital, Metcash, Primedia, SA Home Loans and Cyril Ramaphosa’s old company, Shanduka. Getting over-the-counter shares in companies like these should not be difficult. But here’s what investors have to look out for.

“Public companies are highly liquid and tradable daily and settlement is guaranteed through a regulated exchange. Private companies are difficult to trade, as any transaction must be negotiated directly between the buyer and seller,” says Gray Swan Investments. So apart from the need to hold a private company investment for a long time, the investment is largely illiquid and, should an emergency arise, and the investor need their capital back quickly, it might be hard to sell the private company shares.

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Here’s another possible danger investors must be aware of. Private companies, unlike listed companies, are not compelled to publically publish their financial statements.

The potential retail investor might, therefore, find it difficult to find out financial information about the private company they are considering investing in. However, many of the larger private companies are quite happy to publish financial results.

Apart from disclosure, there are some issues around corporate governance at some private companies. Without a publically accountable board of directors, executive management does not have to say much if it does not want to, nor conform to the corporate governance regulations imposed on listed companies.

This does not happen often, though, as many private companies will have members of an institutional investor on the board, who will keep an eye on corporate governance.

Apart from offering an investment alternative for investors, private equity companies also play an important role in helping to grow the economy. This is done in a few ways, but the most important is probably the creation of employment, something the government consistently fails to do despite many promises.

“It is important to emphasise that the benefits of private equity and venture capital transactions are not confined to investee companies,” says Aubrey Shabane, the manager of equity investments at the Development Bank of Southern Africa.

“As we face several economic challenges, including exceptionally high and persistent unemployment, it is rewarding to note the effect of this type of investment on job creation.”

Shabane goes on to say a survey conducted by the bank shows that private companies have grown their staff by around 40 per cent in the two-year period covered by the research.

Private equity plays an increasingly important role through Africa, including South Africa.

“As growth rates declined across most of the developed world in the aftermath of the credit crunch, private equity firms turned to emerging markets as an engine of growth.

Just five years ago, the emerging markets represented approximately 12 per cent of total private equity fund-raising. Now, they account for more than 20 per cent,” says the Ernst & Young Private Equity Roundup Africa.

It also notes that private equity fund-raising for Africa increased by 136 per cent in 2013 to US$3.3 billion, up from US$1.4 billion a year earlier.

How much should private equity account for in an investment portfolio? That’s hard to answer, so it’s probably best to look at what many large, international pension funds have done.

The general statistic is that these funds have grown exposure to private equity to more than 20 per cent over the past five years.

That should be a reliable yardstick for private investors in private equity.

OGILVY CAPE TOWN 70788/E

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

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Artist’s impression.

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Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. Commission and incentives may be paid by investors to third-party intermediaries and, if so, would be included in those investors’ overall costs in investing in the Fund. Subscriptions are only valid if made on the basis of the current prospectus, which is available upon request from Allan Gray Unit Trust Management (RF) Proprietary Limited, a member of the Association for Savings & Investment SA (ASISA). A schedule of fees and charges and maximum investsa 9 commissions is also available on request. Allan Gray Proprietary Limited is an authorised financial services provider.

Private equity on the rise locally and into Africa

By Vivienne FouchĂŠ

As an asset class, private equity consists of equity securities and debt in operating companies that are not publicly traded on a stock exchange. Investors make investments directly into private companies and/or conduct buyouts of public companies that result in a delisting of public equity.

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apital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions and strengthen a balance sheet. More and more capitalised players are raising funds and positioning capital across South Africa, while a pattern also seems to be emerging of private equity investors entering into African opportunities, as potentially good returns over the next three years are envisaged in this space.

Doing well and breaking into Africa The RisCura-SAVCA South African Private Equity Performance Report, released in August, confirms that the private equity asset class continues to deliver a vibrant performance which also compares favourably with listed equity. In addition, the report includes a discussion of the growing role of Africa in the private equity environment.

Erika van der Merwe, SAVCA CEO, says, “In our view, the resilience of private equity returns is in part owing to the long-term focus of the industry, and its strategic and active partnerships with the companies in which fund managers invest. “Moreover, South African private equity fund managers increasingly set their sights on benefiting from growth across the African continent, whether by way of cross-border deals which add to their portfolio of investments, or

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marked increase in local and international interest over the past few months.”

Changing international attitudes towards investing in Africa are succinctly summed up in cover stories of The Economist.

The publication famously portrayed Africa as ‘The hopeless continent’ in its 13 May 2000 edition. A decade later, The Economist had changed mind-set completely, with the positive 3 December 2011 cover ‘Africa rising’ and even more recently, its 2 March 2014 cover reading ‘Aspiring Africa’.

Africa as a continent has a substantial demand for goods and services. South Africa with its solid infrastructure, highly advanced financial system and wellregulated economy, is often a springboard for expansion into the rest of Africa. through providing their investee companies with the capital needed for operational expansion into new territories. Institutional investors in various markets now recognise the valuable exposure that private equity can give them to African growth, in a way that ensures they have a positive, developmental impact in the region.” Richard Pople, managing

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director of Xigo, a specialist in selling privately owned companies, adds, “Africa is an exciting investment destination at present. There is considerable interest in the large consumer market that the continent represents, and investors are looking for ways to mine it. We have an extensive database of potential buyers for businesses in Africa and we have noticed a

“This interest in Africa can provide a tempting opportunity for private business owners to sell their companies to international acquirers,” notes Pople. But he cautions that sellers should not be too hasty in accepting offers.

“A business needs to be carefully and strategically positioned to maximise its

selling price. We have multiple clients who approach us after having received an unsolicited offer, and a speculative buyer – someone who makes you an offer without having understood the strategic benefits to the acquisition – is unlikely to be the best buyer.

“This is because acquirers should not buy your business based on its history, but rather on its future potential. A critical aspect of selling a business is correct valuation. We work with prospective sellers to produce a unique synergy business plan which outlines what the business will look like in three years’ time under new ownership. By doing the proper ground work, and illustrating the potential future of the business, it is possible to position the company for an optimal selling price.”

Facts and figures The latest RisCura-SAVCA South African Private Equity Performance Report shows that private equity returns for the ten-year period to March 2014 were at 21.2 per cent (annualised internal rate of return, net of fees).

These returns compare with the 19.6 per cent yielded by the JSE’s All Share Index over the same period, and the 20.5 per cent tracked by the JSE Shareholder Weighted Index. Private equity trailed the FINDI, which returned 23.0 per cent.

Van der Merwe comments, “These latest numbers confirm the returns-boosting role of private equity in a diversified institutional portfolio and especially so in a global context where institutional investors are seeking sustainable avenues for shoring up performances. The performance is also one of the reasons why South African-based private equity funds have reported success in their recent fundraising programmes.”

In addition, the SAVCA-KPMG Private Equity Industry Survey 2014 shows that South African funds raised R27.3 billion in 2013, helping to take funds under management in the industry to a new high of R162.2 billion.

“We are seeing a new wave of private equity funds being formed and expect more deal flow in the near future as capital is deployed by these funds. This is in the context of a market that has seen recovery since the 2008 financial crisis,” says Rory Ord, head of private equity at RisCura.

“This recovery – and indeed resilience – is evidenced by the fact that that private equity returns are holding their ground against JSE-listed equity returns, despite the listed market hitting record highs,” Ord says. The resilience of private equity returns is in part owing to the long-term focus of the industry and its strategic and active partnerships with the companies in which fund managers invest.

In addition, as outlined, South African

private equity fund managers increasingly set their sights on benefiting from growth across the African continent, whether by way of cross-border deals that add to their portfolio of investments, or through providing their investee companies with the capital needed for operational expansion into new territories.

“Institutional investors in various markets now recognise the valuable exposure that private equity can give them to African growth, in a way that ensures they have a positive, developmental impact in the region,” van der Merwe says.

“For these institutional investors, whether pension funds, development finance institutions, sovereign wealth funds or family offices, this is an opportunity to do good while reaping financial benefits.”

With a population of over one billion, the continent is the world’s second most populous after Asia. It is also a very youthful population: it has been estimated that by 2040, Africa will have the world’s largest working population.

More and more Africans are moving into the ranks of the middle class, notably in the commodity-rich countries, and this is reflected in rising per capita GDP figures as well as mounting disposable income levels. In combination, these factors all speak to Africa’s growing appeal as an investment destination.

The Southern African Venture Capital and Private Equity Association (SAVCA) is the industry body and public policy advocate for private equity and venture capital in South Africa, representing about R160 billion in assets under management. SAVCA promotes Southern African private equity by engaging with regulators and legislators on a range of matters affecting the industry, providing relevant and insightful research on aspects of the industry, offering training on private equity and creating meaningful networking opportunities for industry players.

The RisCura-SAVCA South African Private Equity Performance Report, released quarterly, tracks the performance of a representative basket of South African private equity funds.

Its purpose is to provide stakeholders in South African private equity with more transparency into historic returns and a way to benchmark private equity funds’ performances. All private equity returns shown in the report are net of all fees and expenses, and are computed in South African rands as well as US dollars.

Laurium Flexible Prescient Fund.

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

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Ploughing

into Africa

Ten years ago ploughing money into the agricultural sector was as fashionable as wearing ‘veldskoene’ to go clubbing.

By Marc Hasenfuss

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hese days, however, investing in agribusiness is very much an integral part of a sophisticated investment strategy. The simple premise feeding the (increasing) appetite for agricultural investing is global food security. The equations are quite compelling – rapid world population growth should see a steady increase in food demand – especially with household incomes rising fairly briskly in large developing markets.

Coupled to this growing demand for nutrition is the relatively limited production resources – remembering that total farming land worldwide has, over the long term, been growing at a much slower rate than populations’ growth.

The reason this particular set of circumstances is compelling for local agribusiness investment initiatives lies in the fact that sub-Saharan Africa is one of the few regions in the world where more land can be farmed commercially in the future. The region still offers abundant under-utilised acreage and water for increasing agricultural production to meet growing global food demands.

This African ‘sweet spot’ is something that appeals to large global farming entities and the increasing number of agribusiness investors.

In truth, the JSE has traditionally hosted a good number of agribusiness, by broad definition.

Sugar companies like Illovo as well as Tongaat Hulet and Crookes Brothers (which have both diversified into new agribusiness fields) have been JSE stalwarts. Poultry businesses like Astral Foods, Country Bird Holdings and Sovereign all have a huge element of farming to them while Remgro-controlled RCL Foods owns poultry farming and sugar farming interests.

Other listed companies that have aspects of agribusiness in their operational profile would include fertiliser and chemicals group Omnia, shipping and logistics group Grindrod, investment group Sekunjalo (it owns abalone farms) and timber group, York.

A diversified fishing company like Oceana and a diversified liquor group like Distell may – at a stretch – also be deemed agribusinesses, while consumer brands giant Pioneer Foods most certainly has its roots in the fertile soils of the Swartland farming community.

For the most part, however, agricultural investment endeavours have taken place in the unlisted realm. This stemmed from the conversion of the many former co-operative companies to commercial enterprises, which saw farmer members converting their membership rights into shares.

Agribusiness stalwarts like Senwes, Kaap Agri, KWV, BKB, NWK and Suidwes all had their roots in co-ops that were either merged or acquired in a gradual consolidation process

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as an influential backer. Remgro has already showed its willingness to push into Africa at RCL Foods, which recently entered the Zambian chicken market and has taken an interest in African fast moving consumer goods distribution via Senn Foods Logistics.

Although Crookes Brothers has long held sugar cane interests in Swaziland and Zambia, the company has recently also made a cautious entry into select African agri-markets – most notably macadamia nut farming in Mozambique.

Writing in the company’s latest annual report, Crookes chairman, Guy Wayne, said the strategy for expansion into southern Africa continued to be driven by global food security concerns, with only Africa and South America still offering abundant unexploited land resources for large-scale agricultural development.

that started in the nineties. Interestingly, only two former co-ops (if we ignore Pioneer Foods) ever made it to the JSE – that being agri services specialist Afgri (which was recently bought out by an international investor) and meat group Kolosus (which endured a tough tenure on the JSE before being swallowed, in part, by KAP Industrial). Bull Brand, one of the best-known brands in the old Kolosus, will soon return to the JSE as part of new agribusiness listing, the Rhodes Fruit Group.

The game changer in the local agribusiness sector was PSG, which cleverly spotted an opportunity to snap up valuable assets (most notably shares in Pioneer foods) held in various unlisted agribusinesses. In most instances PSG paid a smidgen of the real underlying value for these shares, and was so successful in these endeavours that it created its own separately listed agribusiness investment vehicle called Zeder Investments.

While Zeder – now with a market capitalisation of over R5.4 billion – has notched up enormous success, there have been failures in agribusiness that have highlighted the inherent risk of investing in a sector where changes in the weather can mean the difference between bumper profits and an empty earnings silo.

Small agribusiness company Ububele, which specialised in farm gate services like pesticides and fertilisers, was placed into business rescue after a large loan from the Land Bank weighed too heavily on the company’s fortunes. The great irony at Ububele was that scarcely a year ago, two rival bidders were fiercely tilting to gain control at Ububele.

Looking ahead for agribusiness opportunities these days sees investors enthusiastic for ventures that are targeting Africa. One only has to look at the endeavours of Sanlam-aligned private equity vehicle Agri-Vie, which has already accumulated a compelling spread of diverse investments across the African continent.

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Africa is not only attractive as an operational centre, but some countries offer a respite from the non-operational challenges faced by local farmers. Lately, South Africa has become a rather fractious farming environment – affected by land claims, hints at enforced black economic empowerment ownership quotas as well as the rather unstable labour situation.

Zeder – arguably the default option for new agri-business investors, as it offers exposure to a handful of interests – has also made a telling tilt at Africa. Its interests include a majority holding in Pioneer Foods, outright control of fruit marketing and logistics group Capespan and influence at highly profitable farmers’ retailer Kaap Agri and promising seed marketing business Zaad.

Zeder offers an entry into numerous African markets, but the company’s most direct thrust comes in the form of a sizeable investment made in the Chayton commercial farming enterprise in Zambia.

To date, there have been no cash flows generated by this large farming enterprise to justify Zeder rerating the value of the cost of the investment. However, investors buying the Zeder share – trading at a marked discount to Net Asset Value of 681 cents/share – can assume they are buying a substantial option in Africa for free.

African expansion will be key for Zeder – who can also be looking to push Zaad’s seed offering into various markets on the continent. It seems safe to assume that once Chayton is generating meaningful cash flows, further advances into new African markets will take place.

Grindrod, which owns influential stakes in unlisted agribusinesses Senwes and NWK, also offers a ticket into fast-growing African markets.

It’s also worth remembering that Grindrod now has large investment conglomerate Remgro

He noted strong competition for land in the southern African region. “Several promising projects are currently under evaluation for acquisition or investment in line with our goal to invest R500 million in new projects between 2014 and 2018.”

But Crookes also highlighted the challenges of operating in Africa. Wayne said that while the company had made steady progress in developing its macadamia project in Gurue in northern Mozambique (planting the first 100 hectares of macadamias, 140 hectares of maize and 15 hectares of potatoes), delayed clearance of imported irrigation equipment and the slow approval of work permits had caused some frustration.

Overall, Africa seems well worth the risks and frustrations. Recently Herman Marais, the managing partner at agribusiness investment fund Agri-Vie, highlighted Africa’s growing importance for local agricultural companies.

He noted the local food manufacturing sector was, to a large extent, built on the basis of competitively priced electricity and labour costs. “However, South Africa’s increased labour and energy costs have become less competitive in comparison to global peers.”

Marais says the input costs that have mainly contributed to this increase are fertilisers, herbicides, pesticides, energy and equipment.

“Therefore farmers, who by nature stand at the back of the local food value chain, are currently in the weakest position as they bear the brunt of rises in input costs while having little leeway to pass on higher prices to food processors and retailers.”

But Marais points out that many economies of sub-Saharan countries are growing consistently at six to seven per cent annually, fuelled by rapid urbanisation and a rising middle class.

“This creates opportunity for food value chains originating in South Africa to enter new, high growth markets either through exporting or through setting up operations in-country.”

Alternative investment

Can investors afford not to invest in hedge funds?

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arkets around the world have been in bull-market territory for five years now, with stocks trading at record highs in the wake of the big global crash of 2008. However, at some point, markets will turn. Some wonder why they have not turned already: Current economic data in South Africa is not encouraging. Alternative asset classes, including real estate, private equity and hedge funds, offer a different dimension to investor portfolios that can help add value and diversification benefits over time.

Research from the Alternative Investment Management Association (AIMA), the global body that represents hedge funds, shows that between 1994 and 2011 hedge funds significantly outperformed the main asset classes such as equities, bonds and commodities.

The report, called The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy (commissioned by the AIMA and KPMG; published in April 2012), found that, per annum, hedge funds returned 9.07 per cent on average after fees over that 17-year period, compared to 7.18 per cent for global stocks, 6.25 per cent for global bonds and 7.27 per cent for global commodities.

These returns also came with considerably lower volatility as measured by value at risk (VaR) than either stocks or commodities and with similar volatility to bonds. Addressing concerns about hedge funds’ relatively high costs, the report confirmed that the large majority of the funds’investment returns went to the investor, rather than the manager.

South African hedge funds have returned a median annualised 10.94 per cent net of fees

in the seven years between January 2007 and December 2013, according to HedgeNews Africa, which tracks monthly numbers from South African managers, versus the FTSE/ JSE All Share Index (ALSI) annualised return of 9.23 per cent over the same period (total return 12.4 per cent).

When the markets crashed in 2008, South African hedge funds delivered a median +9.03 per cent, according to the HedgeNews Africa South African SingleManager Composite, when the ALSI fell by 23.23 per cent. The Composite went on to gain 12.32 per cent in 2009 as the South African market bounced 32 per cent.

As a group, hedge funds do not typically keep pace with the equity markets on the upside, although some individual funds may do so. However, managers add protection to their portfolios to generate positive returns when markets fall. It is worth noting that South African hedge funds are highly regulated and transparent.

Hedge funds also compare favourably to other asset classes. This year to the end of July, the HedgeNews Africa Composite has gained 6.52 per cent net of fees, while the ALSI has risen 12.82 per cent (total return), the All Bond Index is 4.42 per cent higher and cash has added 3.28 per cent. Even though hedge funds have delivered lower returns than bullish stock markets in the past few years, big global allocators have been adding to their hedge fund allocations.

Deutsche Bank’s 12 annual Alternative Investor Survey, released in February, surveyed 400 investor entities representing more than US$1.8 trillion in hedge fund assets and th

over two-thirds of the entire market by AUM. It found that institutional investors now account for two-thirds of industry assets, compared to approximately one-third pre-crisis, illustrating a growing conviction.

We believe investors should consider allocating a portion of their assets to such uncorrelated asset classes, and then do their homework regarding those funds and managers that can help protect and grow capital in all market cycles. Rather than asking: “Can I afford to invest in hedge funds?” investors should perhaps instead be asking, “Can I afford not to?”

Laurium Capital’s flagship Long Short Fund, launched in August 2008, had a drawdown of only 10.8 per cent (net of fees) by February 2009, the market’s low point. The ALSI fell 31.8 per cent over the same period on a total return basis.

The Laurium Market Neutral fund has generated a return of 12.8 per cent per annum over five years with the biggest ever drawdown of less than two per cent.

Kim Hubner, marketing and business development, Laurium Capital

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Asset management

Equities remain tops

for the long term Equities remain a better investment for the medium to long term. More conservative investments are important to protect short-term cash flow in a portfolio, but are not geared for generating longterm earnings.

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nvestors who revert to more conservative investments when market volatility increases are paying a high price that will have a negative impact on long-term investment objectives.

A fairly common measurement like the price-earnings (P/E) ratio can be used to illustrate this. It is usually used to determine the relative value of equities, but its usefulness can be extended to other investments.

A high P/E implies that investors are paying

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a relatively high price for the earnings being generated by the listed entity. A low P/E implies that investors are paying a relatively low price.

The ratio also tells us roughly when investors may get their money back. If the P/E ratio is 20, for example, it means that the current price per share is 20 times the current earnings per share. If the price of the share is R20 per share, the earnings would be R1 per share.

This implies that the investor would

need 20 years’ earnings (assuming earnings remain unchanged) to recover the money they spent on initially buying the equity. This provides us with a handy estimate of whether an investment offers value for money.

The P/E ratio can also be applied to cash, bonds and property, which also have a price and expected earnings.

Currently, the effective yield on a cash investment is roughly 5.6 per cent. This means that for every R100 invested,

Global and domestic asset classes: number of years to recover an initial investment

remains to invest for the long term and have patience and discipline. Look for companies that have good management and a sustainable business model, and where the price of the company is trading at an attractive margin of safety.

Also look for those companies in which the management team members have significant equity holdings themselves.

This is a strong indicator of an appropriate alignment of interests in the long-term success of the company.

earnings of R5.60 are being generated.

The implied P/E ratio for cash would, therefore, be 17.9 (R100/R5.60).

When applying the same methodology to offshore and South African cash, bonds, and property, the results can be summarised in the chart. The P/E ratios are indicated in black. To provide context, the gold bars represent the historic average P/E ratios.

Interestingly, the chart shows that global

cash (as measured by the three-month US$ interbank rate) has a P/E of 424, derived from the low current yield of 0.24 per cent per year. At the current earnings yield, investors would implicitly wait 424 years to recover their initial investment.

Global equities have a P/E of 17.9, and South African equities a P/E of 17.8. At first glance, this seems like a much better investment than global cash. Best practice advice for investors

Adriaan Pask, CIO PSG Wealth

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03/09/2014 14:40

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Barometer

HOT

NOT

SA GDP increases Real gross domestic product (GDP) at market prices increased by 0.6 per cent during the second quarter of 2014, compared with a decrease of 0.6 per cent during the first quarter of 2014. According to Statistics South Africa, the main contributors to the increase in economic activity were general government services and the transport, storage and communication industry (each contributing 0.4 of a percentage point) and finance, real estate and business services (0.3 of a percentage point).

Algeria economic investment plan According to the Algerian Government, the country will launch a new five-year investment plan worth $262 billion (R2.8 trillion) to boost domestic production and move its economy away from its reliance on oil and gas. A major gas supplier to Europe, Algeria depends on oil and gas for about 97 per cent of its export earnings and spends over $50 billion per year on imported goods, including food and pharmaceutical products.

Nairobi one of top investment hubs in SSA A report from consultancy firm PricewaterhouseCoopers (PwC) entitled Africa: Growth is on the horizon but where should you look? has revealed that Nairobi is among the top 10 cities in sub-Saharan Africa that promises the best investment returns for business by 2040.

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British manufacturing cuts growth The EFF association, Britain’s main manufacturing trade association, cut its growth forecast for 2014 from 3.5 per cent to 3.3 per cent after its members reported the first fall in export orders since early 2013.

Business confidence drops to lowest in 15 years South Africa’s business confidence fell to its lowest level since September 1999. The South African Chamber of Commerce and Industry (Sacci) index dropped to 87.9 in July from 89.7 in June. The drop was amid fears that rising wage demands by unions will lead to higher unemployment.

German economy contracts The German economy has contracted for the first time in over a year in the second quarter due to weak investment spending and slow trade. Germany’s Federal Statistics Office confirmed a 0.2 per cent contraction in the seasonally-adjusted gross domestic product (GDP) on the quarter. The poor performance of the country’s economy, once considered the last bastion of growth in the Eurozone, now echoes the region’s second and third largest economies, France and Italy, which respectively stagnated and fell back into recession over the same period.

New vehicle sales drop, but export sales report growth The National Association of Automobile Manufacturers of SA (Naamsa) reported that new vehicle sales dropped by 1.3 per cent year-on-year in August. The aggregate new vehicle sales were 55 751, 738 less than August last year. Export sales, however, showed a strong 18.5 per cent improvement with 25 027 vehicles exported, compared to 21 116 in August last year.

Economic commentary

Adjusted Big Mac Index shows rand to be deeply undervalued

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he recently launched Adjusted Big Mac Index (see sidebar) shows that the rand is currently one of the most undervalued currencies in the world. The Adjusted Index shows the rand is undervalued by 23.6 per cent against the dollar.

While this is significantly better than the rand’s 53 per cent undervaluation reflected in the original Big Mac Index, it still places the currency as the fifth most undervalued currency against the dollar and the euro, after the currencies of Hong Kong, India, Japan and Malaysia.

Certain key technical flaws constrain the usefulness of both the Big Mac Indexes as an accurate gauge of relative over- or undervaluation of currencies (see sidebar).

Nonetheless, we agree that the rand is undervalued, although the quantum is debatable.

Local factors contributing to our undervaluation include labour unrest, a large output gap in our economy, massive structural deficiencies in our education and health care sectors, labour market rigidity and the threat of land reform.

As a result, the rand has deteriorated and continues to remain weaker than its long run average. A persistently weaker currency erodes the real purchasing power

of the South African consumer in global terms and because we remain a large net importer. This is a negative for the economy as a whole.

Much negativity is currently being priced into the rand. Any further deterioration in domestic macroeconomic fundamentals or social and labour unrest will likely continue to taint its outlook. That being said, provided that no further slippage occurs, it is likely to remain rather range-bound and take direction from global developments.

As the rand remains a largely liquid emerging market currency, global sentiment toward emerging markets is also a large determining factor.

The best outcome for business is not a ‘strong’ or a ‘weak’ rand, but rather a stable exchange rate. Volatility erodes confidence and constrains business activity and investment. Also, with history as a guide, the rand strengthens slowly but tends to weaken quickly and violently. As such, the risks are always disproportionately skewed towards the rand with further weakness regardless of an absolute level.

A proactive strategy to hedging rand risks is, therefore, critical. Businesses need to work out at what levels they can profitably operate. Around these levels they should then optimise their outcome with a variety of hedging strategies.

The Big Mac Index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their ‘correct’ level. It is based on the theory of purchasing-power parity (PPP): The notion that in the long run, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services in any two countries. The Adjusted Index addresses the criticism that you would expect average burger prices to be cheaper in poorer countries than in rich ones because labour costs are lower.

PPP signals where exchange rates should be heading in the long run, but says little about today’s equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The Adjusted Index uses the ‘line of best fit’ between Big Mac prices and GDP per person for 48 countries plus the Eurozone. The difference between the price predicted for each country, given its income per person, and its actual price gives a measure of currency under- and over-valuation.

Big Macs are produced locally, and the price depends on various input costs, including local labour. For purchasing power parity to hold, the goods need to be freely tradeable across borders. Also, domestic taxation differences, fixed currency pegs (in some countries) and upstream subsidies of certain agricultural sectors can further complicate a ‘clean’ view of what the true burger price would be in a free market.

As such, measuring a single product cannot infer the complexities of relative underor overvaluation of a currency, which is largely an amalgamation of numerous macroeconomic considerations ranging from perceptions of risk to liquidity, credit worthiness and so on.

Source: The Economist

Mohammed Nalla, head of strategic research at Nedbank Capital

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Putting the ‘employer’ back into employer-sponsored

retirement funds

By Vivienne Fouché

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Employee benefits

Historically, South African employers provided employee benefits as much out of a sense of responsibility towards their staff as a means to attract and retain them. However, offering employee benefits as part of the total rewards system (also made up of pay and other nontraditional benefits) has become more about remaining competitive in an increasingly difficult economic environment.

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elsy Moodley, actuarial analyst with Alexander Forbes Research & Product Development, says research done by the Gallup organisation shows that an engaged work unit is 38 per cent more productive and 27 per cent more profitable than a disengaged one. “Another study by Towers Perrin found that over a 12-month period, organisations with high levels of employee engagement showed an improvement in operating income of 19.2 per cent. In contrast, organisations with poor employee engagement levels saw a decline in operating income of 32.7 per cent. So there is a clear relationship between employee engagement and financial results.”

But what constitutes a set of benefits that adds real value to the lives of employees?

Moodley clarifies that, according to the Pension Funds Act, the purpose of a retirement fund is to provide a benefit to the members of the fund when they reach their retirement date or to pay a benefit to the dependants of any members who should die while on the fund.

“The act says nothing about the level the benefits funds should provide, whether these benefits should be insured or not, or whether the fund or the fund sponsor should provide additional insured benefits.

“Given the requirements set out by the act, trustees generally focus on the retirement savings outcomes of individuals. Most funds implement a basic level of insured death cover, disability benefits and funeral benefits on a group basis, with members left to fill the gap between what they need and the level of cover offered by the fund. At a recent seminar hosted by Alexander Forbes, 75 per cent of trustees and principal officers said they believed they should aim to

secure optimal financial wellness over the members’ lives and not focus exclusively on securing an adequate replacement ratio above all else.”

But a number of issues open up when trustees and/or employers try to put this idealistic aim into practice. Key questions arise around employer responsibility versus member choice. It should also be noted that these conversations take place in a landscape in which the obligation of managing the many obstacles towards retiring financially secure, while simultaneously managing other short- and long-term financial needs holistically, has been shifted from employers to fund members. This is largely because of the general trend over the past few decades to switch from defined benefit funds to defined contribution funds (see sidebar).

Viresh Maharaj, chief marketing actuary at Sanlam Employee Benefits, says Sanlam’s BENCHMARK research has clearly shown that employees are apathetic about saving for retirement.

“They still trust that their employers are taking care of their retirement and expect them to play a big role in ensuring their golden years are comfortable ones.”

Maharaj says he believes employers are in an excellent position to help employees to a better retirement.

“Employers are best positioned to influence employees’ choices when they join a fund, to keep them abreast of their retirement provision, to assist them in making appropriate financial decisions while employed, to encourage them to preserve their contributions when they withdraw it and to choose wisely when retiring.”

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sensible product that provides retirement income at a low cost. The default offerings are also beginning to reduce the level of member choice available, thereby simplifying the default offerings and making them more suitable and easier for members to understand.

“It is up to trustees to ensure that members have enough information to make the correct choices. While trustees should ensure that the members are given the correct advice upon retirement, sometimes this means not giving the member too much choice.”

However, this may require a delicate juggling act in a consumer-driven world in which more choice is becoming the general expectation. Moodley says Alexander Forbes’s employee benefits thought leadership report, Benefits Barometer 2014, has shown that current employee benefits design, analysed across different industries, often seems to be off the mark when compared to the employees’ actual needs and desires.

For instance, Maharaj says that while employees recognise the need for appropriate financial advice to plan adequately for retirement, they don’t actually seek such advice, as 62 per cent do not use a financial adviser when planning for retirement.

“Employers can overcome this by running annual retirement weeks where they hire financial advisers who are paid flat fees by the employer. In this way, employees have access to the advice they need and are able to get it free of charge. Another option is to send groups of employees, along with their spouses, to retirement workshops to raise the profile of retirement planning and to provide contextual information.

“Human resources departments also need to step up and play a more active role in getting employees to a better retirement by bridging the gap between the fund and the employees. In essence, employees want help with retirement planning from HR and the infrastructure already exists – the employer simply needs to close the gap in order to become more relevant in the retirement funding processes and in employees’ lives.”

In the wake of the trend towards defined contribution funds and with it a less paternalistic attitude from employers, trustees of retirement funds have become accustomed to giving members choice with regards to their benefits and investments.

But, says Michelle du Toit, principal consultant at Old Mutual Corporate, while it may please members to be given these

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choices, this approach, if not carefully assessed, may actually be to their detriment.

She says, “Retirement fund members who have greater choices often make decisions that are not always in their best interests.

Choices are often given to members by trustees regarding retirement fund contribution levels, flexible risk benefits, investment options, retirement decisions and whether to preserve their retirement savings.

“The question that should be asked before offering the member an array of choice is whether it adds value to the member’s retirement fund. Choice should encourage members to consider the long-term repercussions of their decisions, but often too much choice allows members to make a decision that negatively impacts on their retirement savings by eroding their contributions.

“Trustees need to look at the value every choice adds to the member’s retirement fund.

Does the choice encourage the member to save more? If the answer is no, then the choice offered may not deliver the best value to the member’s retirement savings.”

Du Toit says the retirement reform proposals initiated by the Treasury will address the high cash-out rate of retirement savings on leaving an employer’s retirement fund and ensure that members do not make incorrect choices that will deplete their savings.

“The Retirement Reform proposals with regards to default annuities will ensure that the majority of members end up with a

“What we propose instead is a needsbased approach to benefits design. This approach looks holistically at the needs of the individuals and should afford them the ability to structure their benefits, such as retirement, risk and healthcare, within the confines of a group arrangement. The ultimate objective is to enable individuals to optimise consumption, saving over their entire life cycle and protection against risks.”

Implicit in this needs-based approach might be, interestingly enough, a situation in which the fund still offers members less choice overall, combined with more structured support from the employer. Perhaps it is time to put the employer more strongly back into the employer-sponsored retirement fund and, with it, improve productivity and profitability – a win-win for all.

Defined benefit funds provided a pension based on the member’s final salary at retirement and their years of employment. The employer carried the investment risk and gave the employee a ‘promise’ to provide a final retirement fund benefit that was worked out according to a set formula.

Defined contribution funds have the employer and the employee contributing according to defined contribution percentages. The final retirement fund benefit depends on the contribution levels and the performance of the investment market. The member bears the investment risk.

Global economic commentary

US rebounds

while the Eurozone is gloomy US economic growth rebounded sharply in the second quarter, with GDP recording a four per cent annualised growth rate. The disappointing first quarter reading was revised upwards by almost one per cent.

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rowth continues, but not at a rate that would accelerate the Federal Reserve’s normalisation process, leaving us with abundant liquidity. This liquidity is working its way through the economy, with lending growth having picked up sharply. This should lead to the improvement of the velocity of money and economic growth. Surprisingly the 10-year Treasury yield was below 2.4 per cent in midAugust, a 14-month low.

Fed Chairperson Janet Yellen seems set on assuring the markets that the first hike is unlikely to occur until mid-2015. The Federal Reserve maintained its tapering of quantitative easing, but with labour market conditions getting tighter, inflation could become a bigger concern if wage gains pick up.

Non-farm payrolls rose 209 000 in July, missing expectations of 230 000. However, employment has now increased by more than 200 000 for six straight months. The unemployment rate ticked up to 6.2 per cent in July as the labour force participation rate rose slightly. The second quarter employment cost index showed a 0.7 per cent quarterly gain, the largest since the recovery began and a possible sign of wage pressure.

The ISM manufacturing index showed strong gains in July, rising to 57.1 from 55.3, the highest level since April 2011. Importantly, the ISM non-manufacturing index jumped to 58.7 in July, better than expected and the highest level since 2005. US factory orders had a strong rebound in June, rising 1.1 per cent after May’s 0.6 per cent decline. Personal spending

rose 0.4 per cent in June. The trade deficit continued to narrow in June, falling to $41.5 billion from $44.7 billion, mostly due to falling imports.

that reading was still indicative of a strong expansion. UK industrial production rose less than expected in June, up 0.3 per cent following May’s 0.6 per cent drop.

The recent volatility in early August was healthy as consolidation was overdue, and this should set us up for a nice recovery later this year.

The equity risk premium sits at 5.4 per cent, above the long-term average of 2.8 per cent, suggesting equities are offering a reasonable return for risk. The S&P 500 Index’s priceearnings multiple of 17.3 times also seems fair given low inflation levels.

Amid the negatives, there are areas of support. Lending may be bottoming as Eurozone banks have been deleveraging.

Additionally, the Euro has fallen, which could improve demand for exports, as well as corporate earnings, and diminish the drag on inflation. We remain positive on European equities longer term.

In contrast to the United States, the stagnation in the Eurozone is weighing on confidence.

Declining German business confidence about future conditions could restrain investment and hiring, diminish consumer spending and further weaken economic activity. Europe’s leading economic indicators have started to stall. At nearly 30 per cent of Eurozone GDP, what happens in Germany matters for the region.

German GDP shrank an annualised 0.6 per cent from the first quarter. Geopolitical risks have intensified the dour mood of businesses in the region. Over the past year, the Eurozone’s economy expanded just 0.7 per cent.

The French economy, the bloc’s second largest behind Germany, stagnated for a second straight quarter. Spain and the Netherlands posted some growth, but not enough to offset weakness in their neighbours’ economies. Italy fell back into recession in the second quarter, with GDP down 0.2 per cent following a 0.1 per cent decrease the previous quarter. UK manufacturing PMI was weaker than expected in July at 55.4, but

China’s official manufacturing PMI rose to 51.7 in July, the highest level since April 2012. China’s official non-manufacturing PMI declined for a second consecutive month in July, decreasing to 54.2. China’s HSBC services PMI fell to 50 in July from 53.1, a five-and-a-half year low. China’s improved performance bolsters our view that Chinese equities remain quite attractive for a risktolerant investor.

Lisa Segall, MD Southern Africa and Mauritius, GinsGlobal Index Funds

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Industry associations

IIA SA launches 2014

Corporate Governance Index The launch of the second edition of the Institute’s Corporate Governance Index took place in mid-August at the conclusion of the IIA SA’s Annual National Conference, during which the Institute celebrated its 50th anniversary.

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he Corporate Governance Index is intended to present management, boards and audit committees with a credible perspective on the state of governance and emerging corporate governance trends in South Africa.

The annual Index was produced in collaboration with the University of Pretoria’s Centre for the Study of Governance Innovation, and is a reflection of South Africa’s performance in various dimensions of corporate governance as viewed from the perspective of chief audit executives (CAEs).

CAEs are especially well positioned to provide a relatively impartial view of the state of corporate governance, as they provide independent assurance on governance, risk and control within the organisations they serve, and are required to operate according to the highest professional standards of independence and objectivity. The research survey included respondents from all sectors of the economy and covered the following critical dimensions

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of governance, namely ethics, compliance, leadership, risk management (operational and external risks), performance and internal audit.

The main findings in the Index report included the following: • The overall Country Index for Corporate Governance in South Africa fell from 3.2 in 2013 to 2.9 in 2014 (out of a maximum score of 4). This corresponds to a drop of 9.4 per cent, indicating a perception that corporate governance may have declined somewhat over the past year.

• Organisational leaders appear to be strongest at setting the right ethical tone required for the execution of good corporate governance, albeit that the index score for this dimension is slightly less impressive for 2014.

• The most challenging areas of corporate governance for South African organisations seem to be performance and risk management, in particular the identification of external risks, though organisations fare somewhat better at operational (or internal) risk management.

• Respondents also perceive that organisations are generally under-performing. The two weakest specific areas under the dimension of performance are human resource management and information communications technology (ICT) governance.

It appears that the leadership usually sets the right ethical tone required for good corporate governance, which is encouraging. However, the effectiveness of leadership teams is being questioned, and concerns have arisen around issues such as the management of human resources, compliance, risk management and ICT governance. The findings suggest that organisations are becoming less effective at corporate governance. This should be an issue of concern to the leadership of all organisations and the country as a whole.

South Africa is acknowledged as a global thought leader in the field of corporate governance, but it seems we are lagging behind in implementing our own best guidance, thereby often letting down our shareholders and key stakeholders. This could be attributed to the fact that there is a significant skills shortage in the country, as well as people being advanced into leadership positions without adequate preparation for the role and without a real understanding of the principles of good corporate governance.

The IIA SA aims to address relevant findings through internal audit training programmes wherever possible. We urge other related professions to use the Index as a basis for internal dialogue and debate, with a view to addressing the gaps that have been identified.

Dr Claudelle von Eck, CEO, Institute of Internal Auditors of South Africa (IIA SA)

Investment solutions

Passive approach not the ‘silver bullet’ of investing The JSE All Share Index comfortably breached 50 000 earlier this year and has delivered a spectacular return of 28.3 per cent for the 12 months to 31 July 2014.

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he debate on whether active managers can add value is alive and well, partly driven by recent underperformance of active managers and partly by a general increased focus on asset management costs.

Rampant bull markets are friendly to passive portfolios because momentum, rather than fundamentals, often drives the market.

Expensive shares become more expensive and cheaper shares (generally favoured by active managers) underperform. The end result is that the elusive index which is supposed to be a proxy for the market beats the active managers, as it holds an ever-increasing allocation to expensive shares that are performing well and becoming ever more expensive – consider Naspers as an example.

PwC predicts in its report Asset Management 2020, A Brave New World that the passive industry will increase its market share from around five per cent of total assets under management in 2012 to just over 10 per cent by 2020. Clients are expected to focus more on costs and interrogate the value-add of their active managers. However, while passive investing is likely to gain traction in the future, it is not the ‘silver bullet’ of investing, or a simple solution to a complex problem.

Investors should consider the following before investing in a passive portfolio: • South Africa has seen an increase in the number of passive providers and products available in the market. There is a strong argument in favour of using established providers rather than new entrants, as

these providers have scale and experience in tracking the index. Passive investing is about scale and efficiency to manage a portfolio so that tracking error (the difference between actual return earned and the index) is minimised. Investment firms who offer index tracking portfolios cannot simply ‘invest in the index’. They need to physically buy shares in line with the index, and it is impossible to perfectly track the index at all times. It is important to assess the provider’s systems, processes and experience in tracking the index.

• Passive portfolios need to deal with cash flows into and out of the portfolio. These cash flows trigger the purchase or sale of underlying shares, resulting in transaction costs and movements within the portfolio that are not perfectly aligned to the movement of the index. Passive equity investment portfolios receive dividends in cash and need to re-invest them. Once again there are trading costs and timing differences to the index. The index return usually assumes dividends are reinvested immediately and at zero cost.

• Tracking errors on equity portfolios are higher than many investors realise. It is not unusual for a passive equity portfolio to underperform the index by 0.5 per cent per annum. This is significant when considering that the fee saving for institutional investors is often less than the tracking error.

• To reduce the impact of tracking error, passive investment providers engage in scrip lending. The provider usually shares the income on scrip lending with investors in the portfolio, but often takes a sizeable share of this income. This practice exposes the investor to counterparty risk.

• Trustees of retirement funds are required by law to apply their minds to responsible investing. This issue cannot be ‘left to the market’ to resolve. Trustees can delegate this duty to professionals, but effective passive investment means the institutional investor is relying on the rest of the market to ensure that management of companies are held accountable by investors.

The recent heightened focus on the benefits of passive management will benefit investors, especially as we have seen some players in the market make aggressive calls on fees.

This in itself is likely to make the industry take notice and pay careful attention to the fees they charge. Any investor choosing to invest in a passive portfolio should follow a measured approach and be sure that recent cyclical outperformance of passive portfolios is not the main driving force behind the decision to follow a passive approach.

Alan Wood, head: institutional business

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Investment strategy

Planning for income and capital growth in 2014 and beyond

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he current investment environment, characterised by economic uncertainty and volatile markets, coupled with a choice of over one thousand unit trusts and a myriad different products, has made the act of investing for the non-professional investor a difficult and often stressful endeavour. An exclusive focus on capital growth has further complicated this process. To simplify investment decisionmaking, Marriott recommends that investors adopt an income-focused approach.

It is important in to recognise that the major drivers of return relate to the income characteristics of an investment: income yield and income growth.

• Income yield: the majority of investments produce income such as dividends or interest. Reinvesting this income allows for the accumulation of more incomeproducing capital. Consequently, the process of reinvesting income can be a major contributor to return over time.

Bonds and cash are typically high yielding asset classes.

• Income growth: income growth from an investment is the primary driver of capital value growth over time. This is evident when looking at the dividend and price history of Mr Price in the chart.

Income Growth (p.a.)

Price Growth (p.a.)

Consequently, growth in income can also be a major contributor to return over time. Equities produce the highest level of income growth; however, the trade-off is that this asset class offers investors a relatively low income yield.

Re-investing the income from high-yielding asset classes is the most predictable way of generating an investment return as the income yield is known upfront so the rate of capital accumulation is predetermined. The return from asset classes which generate income/capital growth has the potential to be higher; however, the outcome will be less certain. This is particularly relevant in the current economic environment.

Recent GDP data released by Stats SA revealed that the South African economy contracted in the first quarter of 2014, and some economists are warning of a potential recession due to ongoing industrial action.

In such an environment, the income growth prospects of South African companies may diverge considerably. It is, therefore, critical for investors to be selective with regard to their choice of domestic equities.

Marriott is of the view that equity investors looking for predictable inflation beating returns will be best served over the next five

years by investing in companies that produce basic necessities or offer value to consumers.

These companies have track records demonstrating an ability to grow their profits and dividends irrespective of interest rate or business cycles significantly reducing the likelihood of an unsatisfactory outcome.

In summary, knowing the income yield and having a reasonable expectation of the likely income growth from an investment portfolio will significantly reduce the complexity and unpredictability associated with investing.

For more information on an income-focused investment plan, visit Marriott’s website (www.marriott.co.za) and try Marriott’s simple and intuitive Investment Planning Tool.

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now… Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

Warren Buffett on long-term investing

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Duggan Matthews, investment professional, Marriott Asset Management

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the roundtable convergence of great minds

Key speakers at the event Patrick Mathidi BCom (Acc), HonsBCompt (Acc), MScFin Portfolio Manager: Equities and MultiAsset Products at Momentum Asset Management Patrick joined Momentum Asset Management in June 2007 as portfolio manager on segregated equity mandates and has 15 years’ industry experience. In 2011, he took over as the lead portfolio manager on the core equity, Momentum AM balanced and optimiser aggressive balanced portfolios and is also the lead portfolio manager on the top-performing Momentum Top 25 Fund. He was appointed head of Core Strategies in April 2014.

Herman van Papendorp MCom (Econometrics) (Cum Laude) Head of Macro Research and Asset Allocation and *Co-Portfolio Manager of Multi-Asset Products at Momentum Asset Management Herman has worked in financial markets for the last 22 years as both an economist and investment strategist. He was South Africa’s Economist of the Year in 1998 and has been rated in the top five of the Financial Mail Investment Analyst ratings during most of his career, occupying the number one investment strategist spot a couple of times. Herman joined Momentum Asset Management’s Core Strategies team in May 2013, where he heads up macro research and asset allocation and is co-manager of Momentum’s AM balanced funds. * Under supervison

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Four Momentum Asset Management roundtable discussions were held in August: in Centurion, Sandton, Cape Town and Durban. Portfolio managers Patrick Mathidi and Herman van Papendorp, from the Momentum Asset Management Core Strategies team, discussed the outlook for the local and global economies and markets, as well as the investment philosophy and positioning of the Momentum AM Balanced Fund and top-performing Momentum Top 25 Fund.

The presentation was introduced by Quaniet Richards, Chief Client Officer of Momentum Asset Management, who gave a brief overview of the company, its background and multi-strategy approach, with niched, yet complementary, investment capabilities.

Herman van Papendorp opened his presentation by clarifying that we have recently experienced the conundrum of a low-volatility investment world that produced high returns, whereas the world itself has become a risky place, with rising geopolitical fears, as evidenced by a recent Merrill Lynch survey of asset managers, which saw concerns around geopolitical risk rising from 28 per cent to 45 per cent in just one month (from July to August 2014).

Van Papendorp said, “Investment is always a challenge, but now is a particularly demanding period, with asset class volatilities at historic low levels. In our view, fundamentals and valuations are stacked in favour of global equities, where we are overweight in our exposures to both developed and emerging equity markets. We are underweight South African bonds and equities. US equity returns are supported by earnings and low inflation, while we find that Eurozone equities are still attractively priced relative to the US. Japan and emerging markets are best geared to global recovery as they are export driven. Japan is cheap, and the fundamental underpins are starting to change.

On the other hand, South African equities are vulnerable to higher US interest rates, expensive when compared to those of other emerging markets and have weaker fundamentals.

“The driver of the rand is global capital, not the current account deficit. As long as there is an abundance of global capital searching for extra

Momentum Asset Management

yield, countries can afford to run large current account deficits. It is when the global liquidity taps get turned off that you have to worry about the repercussions for South African assets. We find South African equities to be at fair value to slightly cheap when compared to local bonds. Property returns are at risk in a higher bond yield scenario.

Currently, cash is a grudge asset class, but sometimes you have to own it. Cash becomes more attractive when other asset class returns are low.”

Van Papendorp was scathing about South Africa’s economic fundamentals. “South African equities are not looking that great. South Africa is fundamentally weak. We are vulnerable to rising interest rates in the US. Indonesia and India, co-members of the so-called ‘Fragile Five’, have made structural changes to their economies and shown huge improvements in their current account deficits within one year. In contrast, South Africa has not made any significant improvements.”

Patrick Mathidi opened his presentation by briefly outlining the Core Strategies investment team’s philosophy: “We are judicious investors and don’t focus on returns only, but also on risk.

Our process seeks to marry fundamentals with valuations. We are long-term, process-driven, team-based investors seeking steady alpha generation through all market cycles.

“We take a style-agnostic, high-conviction, risk/reward approach to our investments and emphasise downside risk management by ensuring a well-diversified portfolio with sufficiently independent sources of alpha, as well as by constantly asking ourselves ‘where could we be

Outlook for the local and global economies and markets wrong’ and quantifying the likely impact on the investment thesis by visualising the risk/reward skew through scenario analysis.

“Our stock-pick investment decision framework, which focuses on valuation, quality, investment themes and business cycles, leads us to buying high-conviction stocks that are not only cheap, but also expected to benefit from one of our investment themes and be of above-average quality.”

When it comes to preferences by sector, Mathidi said, “We are struggling to find value out there.

We follow a bottom-up process to pick stocks we like, which currently include rand-sensitive stocks and banks, particularly Standard Bank, which has moved away from a high-cost, low-growth global strategy back into Africa. We are underweight iron ore and gold and avoid food and retail counters.”

Mathidi paid particular attention to holdings in Naspers, Steinhoff, the Standard Bank Group, Sasol and British American Tobacco.

“Steinhoff’s vertically-integrated business model allows the company to control the value chain and extract margin at different points. This is a key competitive advantage. The core business of Naspers is defensive and cash generative (printing and pay-tv), on which the current share price of Naspers places zero value. The internet and e-commerce businesses (via Tencent) are high-growth earnings drivers for Naspers, and we continue to favour the extent to which management is able to monetise the vast number of subscribers currently on their platforms (gaming, messaging and now, e-commerce).

Momentum Top 25 Fund The fund’s objective is real capital growth and top-quartile performance relative to peer returns throughout all market cycles.

The investment process is style-agnostic; however, the fund may exhibit a value or growth bias, depending on the stage of the economic and market cycle where we are able to find value in our stock picks.

Key facts

• Fund manager: Patrick Mathidi • Benchmark: FTSE/JSE Shareholder Weighted Index 40 (SWIX) • Peer group: SA – Equity – General Sector • Fund size: R469 million • Annual management fee: 1.25 per cent + VAT • TER: 1.43 per cent • Maximum number of stocks: 25 • Offshore: None • Risk level: High • Inception date: 1 April 2012

Momentum Balanced Fund The fund seeks to provide investors with high levels of income and moderate capital growth through a blend of domestic and offshore asset classes that include equities, fixed income, property and commodities.

Key facts

• Fund managers: Patrick Mathidi and *Herman van Papendorp • Benchmark: CPI + 5 per cent • Peer group: SA – Multi Asset – High Equity • Fund size: R4.40 billion • Annual management fee: 1.25 per cent + VAT • Performance fee: (0-1 per cent) + VAT • TER: 1.70 per cent • Maximum equity: 75 per cent • Offshore: 25 per cent global, 5 per cent Africa • Risk level: Moderate to high • Inception date: 1 February 1995

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Morningstar

Active share:

what you need to know

Of all portfolio measures invented over the past decade, active share has become by far the most popular. Developed by Morningstar, meaning that it was developed by academics rather than consultants, the measure addresses the key investment question of how far the fund deviates from its benchmark.

T

he calculation is intuitive. Active share compares a fund’s portfolio holdings against those of its most appropriate benchmark. When the two diverge, the difference is credited to active share. For example, if Stock A makes up three per cent of a fund and is not held by the benchmark, then it contributes three percentage points to the fund’s active share score.

complexity of its interpretation. In Active Share: A Misunderstood Measure in Manager Selection, published earlier this year, Fidelity’s research group draws out the difficulties.

ACTIVE SHARE, ALL FUNDS

Stock B also makes up three per cent of the fund and is one per cent of the benchmark. Stock B thus contributes 2 percentage points to the fund’s active share, namely the 3 percentage points that the fund owns, minus the 1 point of overlap with the index.

A perfectly executed index fund receives an active share score of 0. In contrast, a fund that has no overlap whatsoever with an index (suspend disbelief for a moment) would have an active share score of 100.

Adding to the appeal of the active share measure was the paper’s finding that fund managers with high active share scores outperformed those with low scores. Perfect! The calculation not only showed which fund managers were truly differentiating their funds and thus earning their keep, but it also helped to identify future winners. You can’t ask for more from a statistic than that.

Source: Fidelity Investments

However, the apparent simplicity of active share belies the

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As Fidelity’s paper points out, the level of a fund’s active share score depends heavily on the structure of its benchmark. If the benchmark contains few companies, with the largest firms accounting for much of the assets, then the fund will likely have a lower active share score.

The NASDAQ 100 index, for example, has one-third of its assets in its four largest positions: Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Amazon.com (AMZN). A fund that uses that index as a benchmark and that holds only half-weighted positions in those four stocks is being quite active. Yet its active share score will almost certainly be below 80.

In contrast, it’s easy to receive a high active share score when the benchmark is diffuse. The 10 largest holdings in the Russell 2000 index account for only three per cent of its total assets, with the index’s top position registering at less than 0.5 per cent. A timid manager could purchase 200 of the Russell 2000’s holdings while matching the index’s sector weightings, thereby building a widely diversified portfolio that would closely track the index - and receive an active share score of 90. Here are the active share scores of all US diversified stock funds, courtesy of Fidelity.

However, Fidelity does ask another relevant question. If the most successful large-company stock funds are those that have high active share scores, and small-company stocks tend to outgain large-company stocks, does that mean that ‘high active share score’ may be a proxy for ‘diversifies into small-company stocks’?

Yes, it may. Fidelity’s researchers find that this is exactly what is happening.

LARGE-CAP FUNDS: BARRA RELATIVE SIZE EXPOSURE

Now the same picture, distinguishing between large- and smallcompany funds.

ACTIVE SHARE, BY SIZE CLASSIFICATION

MSCI Barra USE3L model used for relative size exposure; see methodology for definition. Large-Cap: subset of funds in study classified as large-cap and benchmarked to a large-cap index. Fund data used is quarterly from Dec. 1997 to Mar. 2013. Sources: MSCI Barra (size factors), FactSet (benchmark constituents) Morningstar Direct (fund data), Thomson Retuters (holdings), Fedility Investments.

Source: Fidelity Investments

You get the point. It is difficult indeed to distinguish between the small-company effect and the active share effect. The two are closely entangled. As that final chart demonstrates, the issue cannot even be resolved by separating funds into size groups. The smallcompany effect leaks into studies of funds that have large-company benchmarks, too.

Source: Fidelity Investments

Now that is a pattern.

Curiously, Fidelity does not follow this observation to its logical conclusion. If funds with high active share scores are mostly smallcompany funds, and funds with high active share scores are better at outperforming their benchmarks, does that mean that small-company funds are superior at beating their benchmarks?

Active share is a fine descriptive tool. It accurately describes how much a fund’s holdings differ from those of its benchmark. Even there, one must be careful with the interpretation as seen by the timid-manager example. It is quite possible to run an index-focused portfolio while still receiving a high active share score. It is not clear that it is a useful prescriptive tool.

Yes, it does.

Fund Category Vs. Benchmark Total Returns, Trailing 15 Years throughout April 20, 2014 U.S Mutual Fund Categoryt

Benchmark

Fund Performance

Benchmark Performance

Large Blend

Wilshire 5000

4.63%

4.96%

Large Growth

Wilshire 5000 Growth

4.16%

3.45%

Large Value

Wilshire 5000 Value

5.59%

6.23%

Large Blend

Russell 2000

9.59%

8.00%

Large Growth

Russell 2000 Growth

8.10%

5.66%

Large Value

Russell 2000 Value

10.76%

9.86%

Source: Morningstar

John Rekenthaler, vice president of research, Morningstar

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Profile

Khanyi Nzukuma CEO Metropolitan Retail What would you describe as your major challenges?

change will make their lives better, they are that much quicker to accept it.

My first task and major challenge is to align Metropolitan Retail’s structure to MMI Holdings’ new business model, as part of our drive to achieve genuine client-centricity across the group.

What is it about your job that most excites you as you come to work every day?

Part of this job includes up-weighting financial education programmes, ensuring that all company communication is clear and understandable, improving service channels across the board, and providing innovative solutions which demonstrate transparent value for money.

This is critical as it will allow us to reshape our business towards not just ‘selling product’, but rather providing solutions. This is what will make our business sustainable for years to come.

The second part of this challenge relates to our talent. People adapt to change differently; there are some who thrive and others who need some coaxing and reassurance.

Thus, my challenge is not only to shift us closer to a client-centricity model, but also to educate, inform and guide our staff in understanding the reasons behind this move. I find that if people understand how a

It may sound like a cliché but what motivates me every day is seeing the tangible difference we can make in people’s lives, through our financial education, CSI and sponsorship initiatives. I find it so rewarding to see people take control of their finances and their lives... if I can help one person do that, I will feel like I have made a difference.

What do you regard as your greatest business success to date?

Aside from being appointed CEO of Metropolitan Retail, a personal source of professional pride is having been appointed the first black general manager for the sales division of Sanlam in Gauteng, at the age of 32.

…and your greatest personal success to date?

Being a good dad and husband! I have always believed that no matter what you achieve in your career, if you can’t get the work-family balance right, you will never have long-term satisfaction.

If you had R100 000 to invest (excluding through Metropolitan products), what would you do with it?

It would have to be travel. I believe travel is the best personal investment one can make in one’s self. By exposing yourself to new places and cultures, you gain a far better understanding of people, allowing a broader view of the world. I try to travel with my family as often as work permits. Aside from this, paying off debt and investing in property is always a good idea.

How do you strike a balance between your personal life and your work schedule?

I try to switch off from work when I get home – both laptop and cell phone where possible – and ask my team only to contact me in emergencies.

To be a good leader you have to trust your management team, and I encourage them to lead and make good judgement calls.

I believe that when it comes to time, quality is more important than quantity so when I am with my family I want to be 100 per cent present. To unwind and switch off I run, read, play golf or take my motorbike out for a spin.

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Practice management

Caveat

intermediator Loosely translated this means ‘Beware the intermediary’. In the old world of commercial activity the Latin maxim read ‘Caveat emptor’, meaning ‘Let the buyer beware’.

T

his rule, finely tuned through millennia of commercial trade and interactions, has been thoroughly trashed in today’s world by the rising tide of consumerism and political expedience. Legislators, anxious to prove that they are ‘doing something’ for their constituencies, fall over each other to outmanoeuvre their global fellows in passing increasingly uncertain and unworkable rules for the commercial world.

It was enlightening to read recently that, in Australia, one of the last remaining professional indemnity insurers abandoned the provision of cover for our Australian financial planning counterparts. Suncorp Commercial Insurance executive general manager, Darren O’Connell, told IFA (an Australian intermediary magazine) that “A recent product review has determined that the financial planners segment of the professional indemnity market is no longer within our risk appetite.”

Sound business activity requires certainty in dealing with markets. Uncertainty results in service providers, especially the professional indemnity (PI) insurer, leaving the market.

In this regard, the provision of financial advice in South Africa has become fraught with uncertainty. In addition to PI suppliers and advisers themselves leaving the market, uncertainty also results in escalating disclosures to clients to secure certainty.

This renders the paperwork more and more complex, thus negating the advice given.

Consider the recent ombud ‘case study’ in which a financial adviser was forced to settle R100 000 arising from an incorrect calculation of a tax lump sum. The Ombud stated, “We decided that although the provider was not

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a tax practitioner, he ought to have known of the tax implications, given the information furnished by the complainant.”

The ombud gives some useful lessons to the planners: 1. “Relevant information should be sought prior to providing financial services to clients.” In other words, you have to insist that your customer tells you everything or insert a clause disclaiming liability for what he did not tell you.

2. “Limitations on the part of the provider should be clearly conveyed to clients.” In other words, insert significant disclosures as to how stupid you are.

3. “Tax implications relating to withdrawal of lump sums at retirement should be discussed and verified from SARS.” Be aware also that you will not live long enough to secure a response from SARS. Your most useful feedback from SARS in these circumstances is that the client ‘should visit our offices in person’. This you can then convey to your client with suitable documentary proof.

4. “All matters are decided on based on documentary evidence provided.” Another lengthy disclaimer related to the first point.

The most important advice to be implemented by financial advisers as a result of this settlement and its related advice is as follows: Don’t ever calculate an accurate figure in presenting such advice to your clients.

Always at least precede any figure with the words ‘approximately’ or ‘about’. Always add a paragraph stating that: “All figures in this document are to be regarded as a ‘best guess’. They are finally determined by SARS, another financial institution or other entity over whom I/we have no influence or

control. I/we furthermore usually have no independent way of determining whether the figures finally calculated by these entities are accurate or whether they are the figment of some corporate flight of fantasy by an external financial services provider. If they are projected any further than six months into the future or are linked to the charges levied by administrators they are immediately to be regarded, at best, as possible approximations of an uncertain future.”

A paragraph like this will render the advice you provide your client with sufficient vagueness to ensure that the advice document is meaningless but, more importantly, can never be used to extract a settlement of the kind described above. Your client will then, correctly, question what it is that you are actually responsible for. You can then advise that you are responsible for the guesses relating to his very long-term chances of adequately funding his retirement in 25 years’ time, but, of course, there are some caveats that need to be considered.

Gavin Came, financial planner, Sasfin Wealth

You’ll earn around 480 paychecks in your life.

We know how to make them count. www.mypaycheck.co.za

The Advantage of Knowing

Liberty Group Ltd – an Authorised Financial Services Provider in terms of the FAIS Act (Licence No. 2409). T’s and C’s apply.

Retirement investing

The reality of a

sound retirement

W

hile the first principle of retirement savings is to match your assets to your liabilities and, in doing so, generate sufficient capital at retirement to buy a pension, the reality is often difficult to achieve.

To achieve a retirement that will support a retirement fund member’s standard of living, they need to secure a net replacement value of 75 per cent. Retirement fund investment strategies range from conservative, balanced, aggressive, member choice to life staging, generating controversy in the process. These investment strategies are often promoted by providers based on their house views.

Choosing the one that best suits the first principle goal is not an easy task.

retirement savings growth secured by various investment strategies to achieve a retirement lump sum (depicted by the blue line) to purchase an annuity at retirement. In all cases industry averages were used, and the member started saving for retirement at the age of 25, based on the following specific assumptions: • Retirement salary of R120 000 per annum.

• Contribution rate of 14 per cent throughout.

• Annuity rate of 7.5 per cent.

• Salary growth rate of 4 per cent per annum above inflation.

• Retirement age 65.

Big losses

Sadly, only six per cent of South Africans have accumulated enough savings to retire comfortably. Additionally, mirroring global trends, South Africans are living to be older and, as a result, need to work longer or save more to maintain their standard of living during retirement.

The member choice investment strategy yielded a low return, which could be attributed to the significantly higher fees.

Members are often ill-equipped to make informed decisions and frequently change between conservative and aggressive strategies, thereby losing return.

Below illustrates the difference between these retirement investment strategies by considering the past performance of the major asset classes based on typical asset allocations and fees. The model depicts the

Too conservative A conservative strategy is incapable of achieving the returns required for a retirement with a sufficiently high net replacement value.

A retirement model depicting the return secured by various investment strategies

Mediocre retirement The model reflects that life staging presents a mediocre return. It is based on the principle of matching asset allocation to age based on life stages, with a more aggressive strategy for younger members and a more conservative one for those moving closer to retirement. While life staging can, in some cases, allow a member to be better off, the associated fee often results in a member losing out on performance.

Aggressive gold?

In theory, an aggressive strategy rewards an investor with high returns. The calculated retirement lump sum from an aggressive strategy is the highest. However, when it comes to balancing risk, there seems to be little gained for the extra risk when compared to a balanced strategy.

The key to success A balanced strategy secures a return just below that of an aggressive strategy, without the added risk. A balanced strategy aims to allocate assets across conservative and aggressive asset classes.

In doing so, it reduces the risk and produces a stable, balanced growth.

To ensure that old age is provided for, and quality of life maintained, retirement savings should be balanced across conservative and aggressive asset classes. A balanced investment strategy should secure a net replacement value greater than 75 per cent.

In a nutshell: • Aggressive and balanced investment strategies surpassed required lump sum saving.

• Other investment strategies fell short.

• Worst result: conservative and member choice strategies.

Walter van der Merwe, CEO, FedGroup Life

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Regulatory development

Regulatory changes

will allow retail investors to participate in hedge funds Regulatory changes will increase demand for South African hedge funds as this asset class becomes accessible for retail investors. To date, these investments were largely open to institutional investors in an unregulated market.

T

he final regulations in terms of the Collective Investment Schemes Act are expected to be in place this year, and hedge funds will have up to 12 months to comply with the new regulations.

The South African hedge fund industry had R42 billion in assets under management in 2013 and currently manages R55 billion, making it the fastest growing asset class in terms of inflows.

There have been inflows of $56.9 billion globally this year, valuing the industry at $2.8 trillion (2013: $2.7 trillion).

Inflows into South African hedge funds are lagging behind their international counterparts but the new regulatory changes will ensure substantial growth.

The traditional challenges which relate to hedge fund investments are:

of their gains while still letting them participate in further upside.

• Lack of liquidity (hedge funds are priced monthly, which leads to around 45 days liquidity on average). • Fees have been unregulated and perceived to be high. • Minimum investments of around one million rand.

In what is likely to be a particularly challenging time for traditional asset classes, the case for hedge fund inclusion in many portfolios is now strong, and the regulatory environment will make this alternative asset class more accessible.

Local hedge funds will look to combat these challenges with weekly pricing and liquidity, transparent fee structures and the creation of retail offerings with lower entry minimums.

Our clients are growing increasingly nervous about their equity investments.

Retail appeal for hedge funds is increasing as investors seek ways to grow capital by generating absolute returns rather than returns as a function of the market. The regulatory changes will certainly support additional growth in the industry.

Many want to achieve equity-like returns but with less risk. Hedge funds constitute an asset class that offers returns with lower correlation to equity markets than traditional equity funds. They provide additional diversification when included in traditional portfolios of equities and bonds, increasing the expected return and lowering the risk.

When similar regulations were introduced in the US and Europe, it resulted in considerable investments in the hedge fund industries there.

Equity-based hedge funds are also useful for traditional equity investors when markets are trading at elevated valuations, by effectively allowing them to lock in some

Two classes of funds will be distinguished in South Africa: retail hedge funds available to the public and qualified hedge funds only available to investors who meet certain criteria or those using financial advisers.

Andrew Flavell, wealth manager at AlphaWealth

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NEWS Investec brings South Africans banking and investing beyond borders With the announcement of its pioneering One Place strategy, Investec now offers clients seamless, integrated access to private banking as well as wealth and investment services anywhere in the world.

PSG Konsult chairman Willem Theron and CEO Francois Gouws at the company’s listing on the JSE main board.

PSG Konsult lists in Namibia PSG Konsult, the South African independent financial services provider which recently made its debut on the JSE, has had a secondary listing on the Namibian Stock Exchange. The listing took place on 16 July 2014 under the share code ‘KFS’.

PSG Konsult is a subsidiary of JSE-listed PSG Group and has the largest independent financial advisory network in South Africa, operating since 1998. At the end of its financial year in February, the company had approximately R112 billion in funds under management and about R235 billion in assets under administration. PSG Konsult is structured into three operating divisions: PSG Wealth, PSG Asset Management and PSG Insure.

PSG Konsult’s long established presence in Namibia was strengthened in September 2012 when the Windhoek based financial service firm, Investment House Namibia (IHN), was brought under the PSG banner as PSG Namibia.

PSG Konsult’s Namibian operations currently consist of PSG Namibia, a holding company

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for the stockbroking and financial planning businesses, PSG Wealth Management Namibia and PSG Financial Planning Namibia as well as Western National Insurance (Namibia) which provide short-term insurance services.

PSG Konsult CEO Francois Gouws said the primary objective of seeking a secondary listing on the Namibian Stock Exchange was to build an investment track record with Namibian investors.

“This is in order to provide us with maximum flexibility to execute on our long-term strategic plans, which include the expansion of our subSaharan Africa operations.

“It will also provide Namibian investors with an opportunity to invest in PSG Konsult by using a portion of the prescribed investment portfolio assets.

“A listing in that part of the world will raise the profile of our Namibian-based operations, which currently include wealth management, short-term insurance, stockbroking and financial planning.”

The creation of One Place has brought together the top minds across the business to deliver a fully integrated service offering internationally that includes banking (lending, cash investments, transactions, Forex, private capital and property finance), as well as investments (wealth management, portfolio management, stockbroking and offshore investments).

Investec clients can now bring the management of their international finances together under one roof through their preferred channel – whether it’s mobile or tablet apps, the Investec online platform, the 24/7 global client support centre or specialist private bankers and investment managers.

The introduction of the One Place digital facility further enables and enhances Investec’s objective of providing seamless service in banking and wealth management and protection on a global basis

Momentum Asset Management wins Performance Award Mishnah Seth, who heads up the Frontier Strategies discipline for Momentum Asset Management, was recently awarded a Top 10 position in the Africa Asset Management Performance Awards.

fund management space. Seth, who manages the Africa (ex-South Africa) Equity Fund, said, “I am thrilled with the accolade and feel honoured by the industry’s recognition of my efforts”.

The annual awards hosted by Africa Asset Management magazine recognise the Top 50 heavyweights in the sub Saharan Africa’s

Seth boasts over eleven years of investment experience, during which time she built up an extensive network across the continent and has been privy to the changes and improvements that have taken place on the continent since the early 2000s within the macro, political and operating landscape.

Nicky Nairn

Masthead appoints new compliance head Masthead, South Africa’s largest support organisation for independent financial advisers, has appointed Nicky Nairn as the company’s new head of compliance. Nairn, who assumed the position from 1 August 2014, will also form part of the Masthead exco. Previously a compliance officer with Masthead in Durban, Nairn has a wealth of experience in the financial services industry. She has been with Masthead since 2010, having been in the financial services industry since 2003.

Before her tenure with Masthead, Nairn served as a research analyst, an active member of the investment committee and, later, internal compliance officer at a boutique asset management company that specialised in the management of funds, hedge funds and multi-manager funds. Through this exposure she has gained valuable key insights and an all-round perspective of the industry. As a qualified and experienced Cat I, Cat II and Cat IIA compliance officer, Nairn is well suited for her role. She holds a BCom degree majoring in economics and financial management, as

Mark McGowan well as an Honours degree in economics and risk management. She is also qualified as a chartered alternative investment analyst.

Nairn’s key responsibility will be to set and implement Masthead’s compliance direction and strategy. She will also help to define the development and delivery of compliance, focusing on the strong synergies between the company’s business, risk and compliance offerings.

JSE-listed Metrofile appoints new chief financial officer Mark McGowan has officially joined JSE-listed Metrofile Holdings Limited as a director and chief financial officer (CFO), effective 1 August 2014.

According to Graham Wackrill, chief executive officer of Metrofile Holdings Limited, McGowan is well known to Metrofile, having been the audit partner of the group’s operating subsidiaries some years ago and having subsequently undertaken various projects for the group.

McGowan, a chartered accountant, leaves auditing and consulting firm RW Irish–Alliott

Hennie Loubser Incorporated where he has been a director for the past 18 years.

Wackrill says McGowan’s business experience gained, paired with the fact that he has established an understanding of the industry and the dynamics of the business from working with Metrofile in the past, made him the ideal candidate for the role.

The appointment of McGowan follows the resignation of previous CFO, Richard Buttle, who will remain with Metrofile in a supportive capacity until 31 October 2014 to ensure a smooth transition.

36ONE appoints star investment analyst Hennie Loubser joined 36ONE in 2014 from Peregrine Capital, where he was an investment analyst. Prior to that, he worked as a sell-side analyst at SBG Securities and Online Share Trading and as a buy-side analyst at Melville Douglas Investment Management, all within the Standard Bank Group. Hennie is a chartered accountant and a CFA charterholder. He finished first in SAICA’s final qualifying exam.

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Products

SANLAM UMBRELLA FUND

(based annexure C to

annexure A to PF 130

and PF 129).

A protocol on the acceptan ce of gifts (a departure from the narrow provisions of annexure B to annexure A to PF 130) has been implemented.

A system of appraisal has been adopted by the board (based annexure B to PF130).

An Investment Policy

LEGAL AND TECHNICAL

Revised draft adopted 7 November 2007

Statement is in place.

a FSB on-site visit, which

6

Revised draft adopted 7 November 2007

Revised draft adopted

March 2012 In 2013 the Fund had

COMPLIANCE

November 2007

was met with generally

1

complementary results.

2. INTERNAL CONTRO LS AND CHECKS AND BALANCES IMPLEM ENTED In this section we consider the sub-committee structure s as constituted by the approach to monitorin Board and the Fund’s g and managing contracto rs to ensure complian also consider the monitorin ce with service level agreeme g and the proper impleme nts. We ntation of processes and procedur adopted by the Fund. es and strategies as Fund governance and

Sanlam Umbrella Fund

risk management plan

All compliance, legislativ e and statutory requirem ents and fund governance issues are captured in the plan.

It also contains all the fund management informati on. This includes details of all the trustees, fund officials, service providers and their service agreements.

It identifies and spells out as action items, the duties of the trustees over the next year to the next three years. It reflects whether the items have been complied with and if not, it identifies the responsi ble person and the time frame within which it needs to be done.

This approach, (initiated by this Fund) has been in operation for approximately ten years.

The preparation of a fund

register that contains all the legal and contractual documentation of the Fund.

A year planner in which meeting Board dates and action items are identified.

This is the heart of the governance strategy.

It lists all the tasks, when it was performed or by whom and by when in will be performed.

Monitored and managed by the Risk –Sub-committee Maintained by the Fund

Dawie de Villiers, CEO of Sanlam Employee Benefits,

Sanlam Umbrella Fund wins top prizes at IRFA Awards The Sanlam Umbrella Fund walked off with the top prize in two categories at the Best Practices Industry Awards of the Institute of Retirement Funds Africa (IRFA) in late August. In addition, the fund was awarded a gold standard for operating at a level other funds aspire to.

The Sanlam Umbrella Fund was named the winner of the categories ‘Legal and Technical Compliance’ and ‘Financial Reporting’. In the first category, the judges found the fund had adopted a governance assurance approach based on a very comprehensive set of reports, checklists and opinions, offering maximum assurance to stakeholders.

In the second category, the fund scored very

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Investors can now have direct exposure to gold, without storage or administrative costs, while earning interest at the same time. The FirstRand Gold Bond launched by Rand Merchant Bank (RMB), a division of FirstRand Bank Limited, is a five-year, interest-bearing, Krugerrand-denominated note, which listed and began trading on the main board of the JSE on 12 August under the code FRK01. The first issue amounts to R2 billion.

Secretary

Maintained by the Fund Secretary

Legal and Technical compliance 2014

Dawie de Villiers, CEO of Sanlam Employee Benefits

The FirstRand Gold Bond: investors can now invest directly in gold without the associated costs

high on the King III governance assessment instrument and made efficient and detailed disclosure in its financial reporting.

In the category ‘Stakeholder Communication – Best Communications Strategy’, the Sanlam Umbrella Fund was judged to have met the gold standard, which recognises funds which are not only compliant with the law but also apply best industry practices.

The fund also received a special mention for its ‘Umbrella Chat’ as a medium in the communication project division.

The IRFA’s Best Practices Industry Awards are open to all funds, irrespective of size, and aim to encourage excellence in communication between funds and their members.

“The Gold Bond offers investors an alternative exposure to gold, offering both inflation and rand/US$ protection while avoiding the significant storage and administration costs associated with other direct gold investment options available,” says RMB Debt Capital Markets co-head, Dale Wood. “The notes provide direct exposure to the rand gold price and a positive yield in the form of interest ounces payable on maturity. Furthermore, at maturity, investors can choose whether they want to take settlement in cash, or in Krugerrands.”

The value of the Gold Bond is determined by the current gold price, the US$/rand exchange rate plus the interest earned. “Current market conditions are particularly attractive for gold investment because of rand/US$ weakness and expectations of higher inflation,” Wood says. “Investors also benefit as they are able to buy and sell the Gold Bonds on the JSE, with RMB acting as a market facilitator to ensure liquidity and price transparency of the notes.”

The initial minimum investment was 100 one-ounce Krugerrand coins. However, to facilitate trade and improve liquidity, one Gold Bond represents 10 one-ounce Krugerrand coins so that investors can buy and trade Gold Bonds on the JSE in increments representing 10 one-ounce coins.

Though the initial issue was R2-billion, Wood says: “Due to strong initial demand, RMB expects to issue further notes over time as the market for this product grows.”

“The Gold Bond is a great innovation and represents a welcome addition to the commodity investment products that RMB has already introduced to the South African market,” says Henry Collins, trading head at RMB. “We look forward to seeing this product grow in size with demand over time.”

The world

JAPAN, GERMANY, MEXICO, CUBA, US, RUSSIA, SWITZERLAND

GDP drops in Japan The Japanese economy has seen a 1.7 per cent decrease in GDP in the second quarter, making this Japan’s biggest decline since the 2011 earthquake and tsunami. Japanese Prime Minister, Shinzo Abe, says, “As a government, we’re going to analyse it and do our best to bring the economy back on a recovery path.” Another sales tax increase may be on the cards for 2015 as the rise of sales tax halted growth and the country would need to find new financial resources to decrease the immense national debt.

Germany worried about deflationary spiral build Due to the negative state of its inflation rate, Germany is close to becoming part of an ‘exclusive club of nations’ that will be able to borrow money for ten years at less than one per cent interest rate. Market inflation prospects are decreasing, and the refinancing rate is at a record low even after negative deposit rates and targeted lending were introduced. Benchmark 10-year yields are at 1.06 per cent. Investors are uneasy as a negative yield means that they will receive less in return than they paid for the security.

1938 that Mexico will be open to foreign investment. Senator David Penchyna says that by increasing oil profits, the reform will help boost growth and create jobs. Landowners will be given three per cent from profits earned from oil or gas extracted from their properties.

Raised duties and restrictions on consumer goods in Cuba Cuba has raised duties and placed restrictions on consumer goods entering the country either by air transfer or via mail. The new restrictions have been implemented to stop black market dealers and help Cuba control the selling of imported items, as well as ensure that the country is not deprived of tax money owing.

Global trade pact set in motion India has agreed to approve the trade pact with the World Trade Organisation (WTO) which will help ease trade restrictions among WTO members.

According to experts, the trade pact could help to increase global commerce by one trillion dollars (R10.5 trillion) each year, helping to modernise trade rules which could allow goods to pass more easily through customs.

Mexico opens to foreign investment

US president announces African investments

Mexico is nearing the implementation of a historic energy reform that will allow foreign companies to drill for oil and natural gas. This will be the first time since

US President, Barack Obama, has announced that the country, from the private sector and government, would be investing US$33 billion in Africa. A

total of $12 billion will go towards Africa’s power sector with contributions coming in from Sweden and the World Bank. Another $14 billion will go towards investment deals and a further$7 billion in loans to support US exports to Africa. President Obama said, “I made it clear that the United States is determined to be a partner in Africa’s success, a good partner, an equal partner and a partner for the long term.”

Russia’s retaliatory food ban Russia has banned all meat, fish, dairy, fruit and vegetables for one year from the United States, European Union, Canada, Australia and Norway. The decision came in retaliation to Western economic sanctions due to Moscow’s actions in the Ukraine.

First report in 209 years from Swiss bank Pictet Group, a private Swiss bank, has released its first half-year report in its 209-year history. Although the bank did not reveal any history data, it showed an operating income of 975 million Swiss Francs and a net profit of 203 million Swiss Francs for the first six months this year. At the end of June 2014, assets under management amounted to 404 billion Swiss Francs. Pictet is one of around a dozen Swiss banks under criminal investigation by the United States for allegedly helping American citizens evade taxes. The bank has declared its commitment to cooperate fully with the investigation.

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They said

A collection of insights from industry leaders over the last month

value on the JSE, commenting that banks would most likely be able to increase their profits by more than 10 per cent a year over the next few years.

“Ultimately, National Treasury is trying to add an advisory component to ensure that members who want to withdraw their funds will first seek advice to fully understand the consequences of withdrawing the funds. The reforms are nothing to be alarmed about: they are designed to encourage members to preserve their retirement funds in an investment vehicle for retirement, when the funds will be needed most.”

Principal consultant at Old Mutual Corporate, Michelle du Toit, comments that the rights of retirement fund members are completely protected, and the rumours currently circulating about members’ savings being locked up, taken or used elsewhere, are simply not true.

“We’ve escaped the recession but we’re still not out of the red considering how stagnant GDP growth is.”

Economist at Renaissance Capital, Thabi Leoka, comments following Statistics South Africa’s announcement of a 0.6 per cent growth in GDP in the second quarter, an increase from the contraction of the same amount in the first three months of the year.

“What they (Moody’s) say is, if you are invested in a South African bank bond and there is a risk of a default, the risk of a haircut is now real. Maybe the Reserve Bank did not spell out enough to the bondholders why they imposed the 10 per cent haircut, and under what circumstances they would do it in the future.”

Head of Sanlam Investment Management Global, Kokkie Kooyman, comments that the recent downgrade by credit agency Moody’s could discourage investors in South African bank bonds because of the risk of loss introduced by the 10 per cent haircut enforced on bondholders.

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“It takes more time and it means more work and there’s probably less bang for your buck.

We can probably go a year without selling a bond. It’s been a tumultuous time, and the South African capital markets are going to be a tough place for businesses like ourselves.”

Neil Grobbelaar, chief executive officer at Real People Investments Holdings, a South African provider of small loans, says they are in funding talks with development finance institutions after the collapse of African Bank Investments Limited (Abil) wiped out corporate bonds demand.

“Being well capitalised, they should be able to keep growing dividends faster than earnings, so what is already an attractive dividend yield for the sector at more than four per cent should keep growing.

Double-digit earnings [growth] should also be possible.”

Head of financials at Investec Asset Management, Chris Steward, urged that now is not the time for investors to pull the plug as bank shares could still deliver good

“I honestly would like our boards and strategic managers to parachute into African countries with some foresight.”

The head of compliance and prevention at the Financial Intelligence Centre, Christopher Malan, comments that South African banks who venture into Africa should be more compliant in countering terrorism financing and money laundering or face stiffer fines.

“We should not get too complacent about food prices.”

Economist at Barclays Africa, Peter Worthington, comments that although food prices remain high, they have decreased significantly due to the support of surplus grains during harvests and a firmer rand.

“That’s a clear opportunity for the types of companies that are looking to allocate investments to try and capitalise on that.”

Senior political economist at Standard Bank, Simon Freemantle, comments on the company’s recently released report titled Understanding Africa’s Middle Class, which will see a number of middle-class households in certain sub-Saharan African countries increase significantly in the next 15 years supported by income growth, ultimately encouraging more companies to invest in the region.

You said

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

@SureKamhunga: “Nedbank CEO Mike Brown: World Economic Forum rates SA banking system number 3 in the world in the category of ‘Soundness of banks’” Sure Kamhunga – Financial Journalist, Public and Media Relations Practitioner. Mentor.

Avid Reader. Inspired.

@TheBubbleBubble: “When these bubbles inflate even further, they may not even need rate increases to pop; they can simply implode under their own weight.”

Jesse Colombo – Analyst warning of dangerous new economic bubbles that started inflating after the 2008 financial crisis; Forbes contributor.

@WilhelmHertzog: “’Most of the time that an opportunity starts out looking like Alpha, it winds up seeming more mundane as you do more research’. Ben Inker” Wilhelm Hertzog – Full-time value investor and father. Part time golfer, wakeboarder, snowboarder, motocross rider, fly fisherman and petrolhead.

@ColenGarrow: “Retail has relied on the support of unsecured lending and the welfare payment system for too long.”

Colen Garrow – Making head or tail of what’s happening in South Africa has never been trickier. Meganomics is the platform for this journey of discovery.

@Hedgeye: “‘That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.’

A. Huxley” Hedgeye – Hedgeye is an independent investment research and financial media company.

@lingskevin: “BIS annual report today warns that financial markets have become detached from economic reality.”

Kevin Lings – Economist.

@WarrenIngram: “Should fund managers of money market and income funds that had more than 5% invested in ABIL bonds be fired for recklessness? I think so!”

Warren Ingram - Author of Become Your Own Financial Advisor. Award winning Wealth Manager, regular on 702 Radio with Bruce Whitfield.

@modestproposal: “Money never sleeps. It just wakes up late.”

Modest Proposal – I shall now therefore humbly propose my own thoughts, which I hope will not be liable to the least objection.

@ShaunleRoux: “On active vs passive: passive will always look good after a narrow large-cap led bull market.”

Shaun le Roux – Market watcher, equity fund manager, Cape Town. Tweeting in my own capacity.

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And now for something completely different L’Oiseleur doll -

$6.25 million

The toy collecting game

Why investing in toys is not child’s play

D

o you remember your favourite toys as a child? Your Teenage Mutant Ninja Turtles collection, Cabbage Patch Kids doll, or even your Lego collections and dinky toys?

If you have kept these, you may have a treasure trove on your hands.

Getting the best price for a dinky car or antique doll is crucial. Dealers are usually a good place to start. However, buying from them may often result in decreased profit margins. Instead, investors could search online, in second-hand stores, flea markets and garage sales to find hidden gems.

The 1966 Opel Diplomat Matchbox Car, which was once sold for 48 cents, recently went up for auction for $9 000 – proving that sometimes even the smallest toys are worth keeping.

You may want to consider storing your collectibles in a safety deposit in a local bank, or in a warehouse. This ensures that your collectible collection is protected while the toys grow in value over the years.

If you are ready to sell some of your toy collectibles, you should search online for an estimate of what they are worth. There are several sites and message boards that are dedicated specifically to this market, many with potential buyers.

In the world of investing, toy collectibles is a relatively new phenomenon. It started in the early 1960s and by the mid-1980s, collectible toy prices had started escalating at an incredible rate at auctions around the world. To invest wisely in toys as collectibles, investors are often encouraged to have a broad range of toys within their investment portfolio – similar to how investors would ordinarily construct a basket of share options.

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Most importantly, if adding toys to your investment portfolio appeals to you, make sure you resist the urge to play with them – the moment you do, the less value they will hold.

is The most expensive doll in existence Bird the ns mea h whic , eleur L’Ois called e Trainer. Measuring just over one metr in ed dress is e figur d mate auto the high, flute. It also renaissance clothing and plays the birds that carries a sword and holds a pair of is the fact sing. What adds to the doll’s value rs, but that it doesn’t need batteries or moto s. This doll works by a system of cogs and gear out of took more than 15 000 hours to build budget nal origi 2 340 polished steel parts. The ious prec for costs but 000, $400 y was a paltr llers, materials, dressmakers, sculptors, jewe lled out wig-makers and other specialists spira , who is of control. Its creator, Christian Bailly rities like known to have made toys for celeb r Dustin the magician David Copperfield, acto n Steve tor direc and ucer prod Hoffman and 19th Spielberg, sold more than a hundred over 40 Century automatons he’d collected ey to create years in order to raise enough mon the doll.

Madame Alexander Eloise – $5 million With the amount of diamonds encrusted into the doll, weighing nine carats in total, some have argued that it should be considered a piece of jewellery instead of a toy. The Madame Alexander Eloise doll is one of five hand-made one-of-a-kind Eloise dolls, which were created especially to benefit several charities in 2000. Each one of the five dolls is identical, wearing the same clothes designed

by Christian Dior and Katherine Baumann.

The doll is also covered in fur made by Oscar de la Renta and decorated with Swarovski crystals. The unique 91 cm tall dolls were created and dressed by prestigious 78-yearold doll manufacturer, Madame Alexander.

GI Joe Action Figure –

$200 000

The first prototype GI Joe action figure (with a Sean Connery inspired face) was hand-carved in 1963 by the designer of the famous toy, Don Levine. Levine created GI Joe 40 years ago while he was an executive for Rhode Island-based Hasbro toys. He said the name came to him while watching an old black and white movie called The Story of GI Joe.

I/D 75379

Asset Management

Putting your success front and centre Investec Investment Management Services works hand in hand with independent financial advisors, ensuring they are at the forefront of servicing their clients’ needs. With a large range of investment solutions, web-based tools and a highly experienced team, we help advisors build wealth for their clients.

For more information, call our Advisor Service Centre on 0860 444 487 or visit investecassetmanagement.com

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FROM A LOCAL TO A GLOBAL INVESTOR HOW DANIEL JACOBS* INVESTED IN ADVENTURE

“I’ve always dreamed of one day travelling the world. But it wasn’t something that would happen overnight and so I began planning for it. I decided to diversify my portfolio by investing offshore. I put away a lump sum of R50 000 and contributed R1 500 a month to the Old Mutual Global Equity Fund. Ten years later my investment has grown to R739 254 (that’s a 16.3% return a year). I’m now travelling the world, seeing the places I’ve always wanted to see.”

GREAT THINGS HAPPEN TOMORROW WHEN YOU START INVESTING TODAY Make Old Mutual Investment Group your investment partner today. Contact your Old Mutual Financial Adviser or Broker, call 0860 INVEST (468378) or visit www.omut.co.za/myglobaltravel

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

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