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LINKED INVESTMENT SERVICE PROVIDERS
The Missing Link
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R37,50 | September 2013
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LINKED INVESTMENT SERVICE PROVIDERS
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THE MISSING LINK
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LISPs: Rebates versus clean pricing: which structure benefits investors the most?
The Missing Link
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Investment platforms offer valuable service
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Why a LISP?
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HEAD TO HEAD: John Field, CEO FedGroup; and David Knee, Head of Fixed Income and Asset Allocation at Prudential
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INVESTING FOR RETIREMENT
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MARRYING STOCKS
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Momentum Roundtable: Fixed income
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2013 Mid-year unit trust performance review
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Profile: Steven Nathan, CEO 10X Investments
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News
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A bigger bang for your buck with REITS
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yes
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From
the editor We’re at a strange point where we have contradictory forces at work. It must puzzle investors; it puzzles me. But like a jigsaw, if you can fit the pieces together, there could be good investment opportunities. The riddle is that while economic growth is declining, and not looking much better next year, the local stock market keeps on hitting new highs. We know that consumers are under pressure and retail spending is down. Companies are also under pressure. Look at the failures and liquidations we’ve had in the past few months. Yet share prices are setting new records. Something is amiss. I suspect it will only be a matter of time before the stock market readjusts to economic reality. Maybe not a crash but a slump in share prices that will raise opportunities for the vigilant investor. For an analysis of South Africa’s declining rate of GDP, read the everarticulate Kevin Lings of Stanlib on what’s got wrong. It might send you back to your investment portfolio to reassess whether you might need more defensive stocks. Linked investment service providers (LISP) are well covered in this issue. I’ve been critical of LISPs because of the layers of costs for the investor. They do, however, offer advantages for certain investors. A number of experts offer a rundown on the good and bad of LISPs. In particular, read the article by Richard Carter of Allan Gray Life on the complexity of fees and how to work out the total cost. Investing for retirement is another theme with a host of expert articles. Pieter Koekemoer from Coronation Fund Managers offers good tips for retirees on drawing income. Duggan Matthews of Marriott Asset Management looks at the risks in retirement products, and how to get the best out of your retirement capital. Marc Hasenfuss walks down the aisle of marrying stocks, a great piece on what long-term investing really means, with examples of companies that have been worth marrying. As that awful pop star David Cassidy once sang, “Breaking up is hard to do”, Marc tells you why you shouldn’t. With defensive stocks in mind, read Naledi Mongoato of Novare Equity Partners on all you need to know about investing in listed property. There’s a lot more useful financial advice on the pages that follow. Justus van Pletzen, CEO of the FIA, tells us that more investors seek advice from family and friends than financial advisers. I get a lot of unrequested financial advice from my wife, but I’ve learned to ignore her, much to my peril. Enjoy this issue as you fit the pieces of the puzzle together.
Shaun Harris 4
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www.investsa.co.za Editor Shaun Harris | investsa@comms.co.za Publisher Andy Mark Managing editor Nicky Mark Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Design Randall Arries Editorial head office Ground floor Manhattan Towers Esplanade Road Century City 7441 phone: 021-555 3577 fax: 086 6183906
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Copyright COSA Communications Pty (Ltd) 2013, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.
THERE’S MONEY TO BE MADE
IN COMMERCIAL PROPERTY…
BUT ONLY IF YOU CAN GET FINANCE. FEDGROUP GUARANTEES A DECISION IN PRINCIPLE WITHIN 48 HOURS ON ALL PROPERTY FINANCE APPLICATIONS.
FedGroup is an authorised financial services provider. Terms and conditions apply.
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The
missing Linked Investment Service Providers By Shaun Harris
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nvestors requiring the construction and ongoing maintenance of a complex investment portfolio might consider taking their business to a linked investment service provider (LISP). Or, they may be asking their financial adviser to take their investment money to a LISP, as some LISPs will not do business directly with investors, arguing that the choice of underlying investment products can be complicated and therefore need specialist investment advice.
As with multi-managers, LISPs can offer advantages to the investor who wants a single point of contact to a variety of funds and insurance products. But this comes at an additional cost, paid to both the financial adviser as commission and to the LISP. The question for investors is whether these additional costs are worth paying. While there are many similarities between LISPs and multi-managers, there are some important differences. The Association for Savings and Investments SA (ASISA) describes a LISP as “an investment administration and product packaging business”. Where LISPs differ from multimanagers is that apart from investment funds like unit trusts, LISPs offer access to traditional life insurance products such as endowments, retirement annuities, preservation funds and living annuities. For example, Momentum Wealth (part of the MMI Group) is the one of the largest LISPs in South Africa with around R120 billion combined assets under administration. “We provide a comprehensive range of investment and retirement products. This includes various types of fund solutions across a diverse product range, and extends beyond that of
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being a unit trust platform provider. We are effectively positioned to provide pre- and post-retirement products solutions that meet clients’ needs, ranging from capital preservation, income generation to capital growth,” says Momentum Wealth. A further difference with LISPs, according to ASISA, is that while it will buy and sell products on your behalf, effectively acting as your agent, it will not hold any money itself. “By law, all money received by a LISP from clients must be held in a trust account until invested and similarly the proceeds of all sales must be paid into a trust account. Under no circumstances may your money be mixed with LISP assets.” But are LISPs still viable? Maybe these investment platforms aren’t as popular as in the past, but that could have more to do with market conditions and the economy than the actual LISPs. One thing that still makes them relevant is that LISPs are operated by all the large asset managers. These include Allan Gray, Investec Asset Management, Absa Investment Management, Stanlib and Momentum Wealth. And while fund flows might have declined, a lot of money is still invested through LISPs. Just for the quarter to end-March 2013, total new business transaction reached R45.5 billion. After deducting total withdrawals of R28.7 billion, net new business through LISPs still stood at R16.8 billion. These statistics are according to ASISA. LISPs used to have their own association, but it was merged into ASISA when it was formed in 2008. One thing LISPs have in common with multimanagers is that some asset managers will pay kickbacks to get onto a LISP platform.
Better transparency regulation nowadays means that these kickbacks have to be disclosed, often under an innocuous name like fees or administration income. The further question for investors is whether these kickbacks are retained by the LISP or passed on to the investor. In many cases they are but this is something the investor or financial adviser should investigate before selecting a particular LISP. Kickbacks, as well as being tied to an asset manager or insurance company, calls into question the true independence of choice offered by LISPs. In some cases it seems pretty good. Allan Gray, for instance, launched its focused suite of unit trusts into the retail market in 1998. After that it developed a range of insurance-type products, including a retirement annuity, living annuity, an endowment policy and preservation funds, with its unit trusts as the underlying investment options. With this range of products up and running, Allan Gray decided to launch a LISP in 2005. “The platform provides independent financial advisers and their clients with access to Allan Gray’s funds as well as to a focused range of funds from other selected fund providers. It offers consolidated reporting on total portfolios and the ability to buy, sell and switch between the funds offered,” Allan Gray says. By including other selected fund managers, coupled to Allan Gray’s reputation, it seems that this is one LISP that does offer independent choice. But once again this is something that has to be investigated by investors and their financial advisers. Some LISPs will only pay lip service to an independent choice, while the investments on offer are mainly in-house and
link outside fund managers will be those who have paid kickbacks. Before getting to the additional costs of using a LISP, where is the value for investors? ASISA lists a few benefits of LISPs. “A LISP provides an efficient platform, enabling you to invest across a wide range of collective investment schemes offered by different companies. With a LISP, you have one relationship and one point of contact.” ASISA adds that a LISP will also provide investors with a capital gains tax certificate for all transactions that took place during the year. Stanlib Wealth Management claims its LISP “offers the investor freedom in their choice of, and flexibility in the construction of, an investment according to their particular needs and risk profiles”. To this end, Stanlib has produced four of what it calls Classic plans that cover a range of products, including retirement annuities and preservation funds. Absa Investment Management Services (AIMS) says it is “structured as an independent, open architecture linked investment service provider that provides its clients with the administration and management of unit-linked investments, a full spectrum of investment solutions, multi investment management as well as investment advisory services and tools”. There’s no doubt some PR-speak in the above but these are all reputable companies linked to reputable asset managers. That’s what the investor and financial adviser should be looking for. The most difficult decision to be made will be choosing the most appropriate LISP. Turning back to Allan Gray, it seems that LISPs, rather than becoming redundant, will
still be around for a long time. “Allan Gray believes that platforms will increasingly dominate distribution as investors want choice of funds and managers and the flexibility to adjust portfolios.” The other big decision for investors and financial advisers when looking at LISPs are the additional costs. Can they be justified? Once again, better regulation means that all costs have to be fully disclosed. “By law, a LISP must disclose all costs to you upfront. This includes the fees levied by the LISP as well as the fees of the underlying investments. When investing with a LISP you can expect to pay the initial fees and the annual fees of the collective investment schemes you have selected, as well as the LISPs administration fee and the adviser’s fee,” says ASISA. That can add up to a lot and the contentious part is the adviser’s fee. Financial adviser’s commission on LISPs can be crippling. AIMS fee schedule includes the maximum adviser fees permitted per product. For a range of products including retirement annuities and preservation funds, the maximum fee for an independent financial adviser is five per cent upfront and one per cent on an ongoing basis. That’s the tough question for the investor. Are these adviser fees worth it after the additional costs of investing through a LISP?
We are effectively positioned to provide pre- and post-retirement products solutions that meet clients’ needs, ranging from capital preservation, income generation to capital growth.
For many investors probably not. The exception is the very top end of the market, the HNW investor. The cost might be worth putting a complex portfolio in the hands of a single point of contact. And money talks. Investors committing large amounts of investment money can negotiate fees down, both from the LISP and the financial adviser.
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LISPs
Rebates versus
clean pricing Which structure benefits investors the most?
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key problem in the LISP industry is that fees are complex, and different platforms use different fee structures. Many investors do not understand how much they are paying, whom they are paying and what they are paying for. This makes it very challenging to identify the price tag and to compare charges. A good starting point is for investors to understand who is earning a fee, why they are earning a fee and what impact the fee has on the performance of the investment. 8
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Transparent disclosure of all the costs associated with investments, in clear understandable language should be a nonnegotiable. The industry has come a long way towards achieving this goal and there is a collective effort to empower investors to make better investment decisions by providing them with the information they need to do so. There is a current move in the industry towards clean-priced funds. This is to be welcomed to the extent that it improves transparency. However, rather than introducing new fund
classes when there is no clear cost benefit, it would surely be simpler to improve disclosure to make it clear for investors to understand the various components of their fees. The proponents of clean pricing will argue that it brings clarity and doesn’t allow any opportunity for abuse. Rather than try to argue for or against these structures, we will continue to assess what is in the best interests of our clients in different scenarios. This currently involves maintaining the rebate structure of our platform, but being open to clean-priced
Rebates versus clean pricing: slicing up the same pie in a different way Fund fee 1.5%, rebate of 0.4% Rebate paid to LISP
Fund fee 1.1% No rebate Discretionary clients may pay additional tax on higher fund income distributions
1.1% kept by manager
1.1% kept by manager 1.5% total fund fee
0.4% paid to LISP
No rebate
No rebate to pass on
Admin fee paid by fund manager Admin fee deducted from account Fund fee Admin fee Less: Rebate Total cost 1
0.4%
0.5% total admin fee
0.5% total admin fee
0.5%
0.1% 1.5% 0.5% 0.4% 1.6%
Fund fee Admin fee Less: Rebate Total cost
1.1% 0.5% 0.0% 1.6%
Allan Gray Proprietary Limited is an authorised financial services provider.
When administration, advice and fund management fees are segregated and clearly disclosed, rebates are a good way for LISPs to lower the total cost to clients since they effectively make the fund manager’s share of the total fees more negotiable for bulk buyers. At Allan Gray, we have always tried to educate our clients and to disclose administration fees and rebates in a way that is easy to understand. This is not always the case with rebates. The payment of rebates can be opaque and blur the lines between the different fee types, making it harder for clients to get the best deal. There are even instances where the rebate structure has been abused, to the detriment of clients, by inflating the administration cost or to fund the solicitation of business. This has led to some debate in the industry as to whether or not rebates should be allowed at all.
funds on our platform (where there is a cost benefit) and developing new clean-priced fund classes for other platforms when it benefits clients.
What about clean pricing? A clean-pricing structure clearly segregates the different fees applicable. With clean pricing, fund management fees are paid to the fund manager, administration fees to the administrator and advice fees to the adviser. Proponents of clean pricing argue that this is in the best interest of clients as it is transparent and easy to understand. Clients can see and compare how much they are paying to each party.
How does the rebate structure work? A part of the management fee which fund managers charge is to pay for administration. Many fund managers pass on all or part of this administration portion to the LISP. This is done to remunerate the LISP for administering the investment as well as for marketing the fund manager’s funds.
Clean pricing does not directly translate into lower costs to the client, and while the disclosure of fees will be different, it may not necessarily be more effective. For companies where the different fee types have been adequately segregated and disclosed in the past, clean pricing may simply be a case of slicing the same-sized pie in a different way
as shown in Graph 1. The tax implications could, in certain scenarios, result in a higher tax drag on the investment than in the past. And if fund providers are less free to respond to buying pressure from LISPs, the competition for investors may be less fierce and the total fees charged can end up being higher. Which kind of platform should you choose? What matters most is not the structure of the platform or the fund, but the total cost that the investor is paying for administration and the value they get in return. Part of the value may be in the form of lower fund manager fees through the LISP’s bulk buying power. At the end of the day, the lower the total charge, the better. The other thing that really matters is transparency; if you can’t see and easily work out what is being paid for administration, for fund management and for advice, it is probably higher than you think. A transparent platform, with clear disclosure, should be preferable to an opaque one every time.
Richard Carter, Director, Allan Gray
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LISPs
Investment platforms offer valuable service
T
product administrator typically receives a rebate from the fund manager and uses this to offset the cost of administration. So while the client receives the benefit of the rebate, the perception that is created is one of low product administration costs. In reality, all that has happened is that the fund manager has provided a discount.
he investment platform industry has faced a host of challenges in recent years, having had to contend with mounting regulation and rising cost pressures, while continually investing in system development to keep abreast of regulatory changes and increased functionality demands. Daryll Welsh, head of product at Investec Investment Management Services (IMS) discusses the implications.
There has been a lot of focus on the fees investors pay. Are they reasonable? Costs are an important consideration in the investment decision-making process, but the current obsession with costs distracts from the benefits of saving. In recent years, consumers have been beneficiaries of a price war in the local platform industry, which has resulted in a dramatic reduction in fees charged by platforms – in some instances by more than 50 per cent. However, the risk is that as the smaller players struggle to remain competitive and achieve scale, further consolidation takes place. Interestingly, the fees charged by platforms in SA (on average between 25 and 75 basis points) are comparable to those charged in the UK, a market almost five times our size. What has driven this price war in between platforms? A number of new platforms entered the market in recent years because the increasing flows onto platforms created the impression that it is an attractive part of the savings industry. New entrants often compete on the basis of cost in an effort to gather assets quickly. The ability to compete on price, off a relatively low asset base, is often driven by a cross subsidisation from other parts of the business, such as the parent life company or asset manager. Is this sustainable? Cross subsidies work only when the party providing the subsidy benefits materially in some way. At some point, shareholders start to question the value being added to the subsidy provider. We believe that platforms need to be sustainable in their own right. Investec IMS has and will continue to invest heavily into the business to ensure this. 10
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What value do platforms add? Investment platforms are just one of the components in the savings chain, along with advisers and asset managers. Besides providing for the safe custody of assets and the relevant legal vehicles (RAs, preservation funds and living annuities), platforms allow investors and their advisers to access and transact on a large range of funds, offer tools to analyse investment options and to help in decision-making, regulatory, compliance and advisory support and a call centre. What impact has regulation had on the platform industry? We have had to contend with a slew of regulation, with more to come. FAIS and Regulation 28 have been rolled out; TCF, SA’s version of the UK’s Retail Distribution Review and changes to existing retirement and tax legislation are waiting in the wings. In a nutshell, maintaining regulatory compliance has a significant impact on system requirements and the cost line of platforms. How do you see the UK RDR playing out in South Africa? One of the issues the RDR aims to address is transparency with respect to fees and charges levied within the UK retail investment industry. By unbundling fees, the value-add in the individual components of the cost chain would become significantly clearer to investors. We may also see fund rebates being banned locally as they are in the UK. Rebates make it difficult for investors to understand what they are paying for each component. For example, a
How are fund managers and platforms positioning themselves for this change? Many fund managers in SA have launched clean classes in anticipation of similar legislation being implemented locally. Clean classes can be thought of as accurately priced fund fees where the total cost accrues to the fund manager. It also negates the scope for rebates to lead to potential conflicts of interest. Some platforms are following suit by offering clean-priced platforms, where the product administration and advice costs are charged explicitly. Investec IMS has supported the initiative of clean pricing and is the first local provider to have done away with rebates on the funds offered in our iSelect fund range. We are confident that this will result in improved transparency and simplicity. How important is it for investors to get independent financial advice? We firmly believe that investors should seek investment advice. Investors are often reluctant to pay for it, but the returns and comfort provided by a well-constructed investment plan managed on an ongoing basis dwarfs the cost of advice over the long term.
Daryll Welsh, Head of Product at Investec Investment Management Services (IMS)
WHY A LISP?
Since their launch in 1986, linked investment service providers (LISPs) provide the convenient answer to your clients’ investment needs by packaging, distributing and administrating a broad range of investment products.
T
his is because they operate like an investment supermarket which makes it possible to combine the investment offerings of a number of different companies and to switch between them at low cost, or even for free. A LISP also provides investors with a regular single statement of all these different investments (online, electronic or printed), as well as other convenient services like making sure that retirement investment portfolios are Regulation 28-compliant and the issuing of a single tax certificate for all the transactions during the year that attracted income tax and/or capital gains tax.
sometimes offset against the platform’s annual administration fee.
n A full range of tax and fiduciary • advisory services.
In addition, it is worthwhile to know that with a few LISPs, investors also pay less when they invest all their investments with one platform. This is because these LISPs calculate the annual administration fees on the total amount that is invested across their product range. This means that investors pay less compared to if they calculate their fee on each individual investment.
Access LISPs do not make investment decisions on the investors’ behalf – they are purely administration companies or product providers. Investors must make their own investment decisions, or they must use a licensed financial adviser to help them with their investment via the LISP platform. It is better to use an adviser if investors do not have the necessary investment skills or the time to manage their investments.
Investing though a LISP, therefore, not only takes the effort of investment administration away, but also makes it a more cost-effective financial services provider for your clients.
Investment choice Far gone should be the days of LISPs offering only unit trust funds. Whether investing a lump sum or a regular savings amount, LISPs nowadays offer investors an extensive range of local and international investments, catering for their investment needs through all the changing seasons of life. This can include:
Transparency and cost-effectiveness Investors should always insist on full transparency and disclosure of fees associated with their investment, so that they know exactly what they are paying for. With a LISP, investors can currently enjoy a lower ongoing fee as rebates received from asset managers are
• n Unit trusts (managed by South African and offshore investment managers) • n Local and international shares (personal share portfolio) • n Passive investment strategies via exchange traded funds (ETF) • n Structured products
Ryan Jamieson, Head of Momentum Wealth Marketing investsa
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Alternative investments
Interpreting listed property companies’ financial accounts
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or many investors, interpreting a company’s financial accounts can be a daunting challenge. In the listed property sector, the task appears no less formidable, given the number of accounting standards that create a great deal of noise, but shed little light on the financial well-being of the company. In reality, the analysis of a listed property company’s financials is actually quite simple because the business model is easy to understand.
Listed property companies all own, buy, sell, develop and redevelop properties (the assets). Some companies will have investments in other listed property companies, which would also form part of the asset base. The assets are the source of all revenue, either in the form of rental income, the recovery of operating expenses from tenants or from distributions if they have investments in other listed property companies. Listed property companies will incur expenses relating to the production of revenue, including maintenance of the properties, commissions paid to brokers, municipal rates and utilities (some of which will be recovered from tenants). These expenses are lumped together on a single line in the income statement as operating expenses. The ratio of operating expenses to revenue will vary from company to company and is dependent on factors such as the mix of properties within the portfolio. The difference between revenue and operating expenses is referred to as net operating income (NOI) and reflects the performance of the property portfolio. The level of NOI growth, after adjusting for property acquisitions and dispositions, gives analysts a clear indication of the quality of the property portfolio, as well as the effectiveness of company management. The company will also incur administrative expenses, like staff salaries and the expenses associated with being a listed entity. Those companies with internalised management structures can control increases 12
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Typical income statement (excluding noise) Revenue - contractual rental - tenant recoveries Less: Operating expenses Add: Distributable income from listed property investments Less: Administrative expenses
xxx xxx xxx xxx (xxx xxx)
xxx xxx (xxx xxx)
Less: Net finance income (excluding (xxx xxx) linked debenture interest) Distributable income
xxx xxx
in administrative expenses, while external management arrangements are based on a set percentage of company enterprise value (the value of the company’s issued share capital on the JSE plus the value of the company’s debt) and are influenced by changes in the share price and the issued share capital. The final significant line in the income statement of most listed property companies is net finance costs – the difference between interest earned on cash holdings and the interest paid on borrowings. The typical listed property company in South Africa has borrowings equal to 30 per cent of the value of the assets, typically referred to as gearing or the loan-to-value ratio. Most income statements will have an element of noise that does not impact on the distributions payable or the cash flows produced by the company. These typically include an adjustment for straight-lining rental revenue and fair value adjustments on the property portfolio, as well as on derivative instruments used to hedge out interest rate risk. Most companies will provide a reconciliation of accounting profits (including the non-cash items) to distributable income.
The balance sheet is also fairly simple to understand, dominated on the assets side by the property portfolio and investments in other listed property companies, funded through a combination of equity and debt capital. Occasionally, there will be slightly more confusing balance sheet entries, usually as a result of black economic empowerment (BEE) transactions entered into and where loans or financial assistance has been provided to the BEE partners. The deferred tax liabilities raised on the sale of properties will be removed from balance sheets due to the introduction of real estate investment trust (REIT) legislation which exempts REITs from capital gains tax. All South Africa’s property loan stock companies are expected to apply for and be granted REIT status by the JSE Limited. Apart from financial metrics, listed property companies will also disclose property portfolio metrics, which may include a lease expiry profile, average rentals per property type, geographic spread, average cost per square metre by property type, as well as an in-depth analysis of leasing activity in the period under review. Over the past decade, disclosure by South Africa’s listed property companies has improved dramatically and our companies rank among the world’s best in terms of transparency. This makes the job of forecasting future distribution growth far simpler and is one of the reasons why analysts covering the listed property sector are never far off the mark with their forecasts.
Ian Anderson, Chief Investment Officer at Grindrod Asset Management
Allan Gray
Protect your clients’
personal information Jeanette Marais, Director of Distribution and Client Service at Allan Gray
In a world where client information is often misused for direct marketing purposes and fraudulent activity, financial services providers (FSPs) have a duty to protect their clients’ personal and financial information. As a financial adviser, you are obligated to make sure your clients know and understand how their information is being used. Failure to do this could put both you and your clients at risk and may jeopardise your licence.
Understand the legislation surrounding data protection
risk in outsourcing a particular function than if you were performing the function yourself.
There is currently a great emphasis globally on how personal information is handled in the financial services sector. While locally some of these acts and initiatives are not yet law, their implementation is imminent and it is a good idea to remind yourself about what is expected of your practice.
At the end of the day, although outsourcing various aspects can bring you greater flexibility and drastically enhance your ability to service and advise clients, you must make sure that your clients are comfortable with these arrangements. You can do this by including a line item on client contracts, or asking them to sign a disclosure document.
The Financial Advisory and Intermediary Services Act (FAIS Act) was introduced in 2002 to, among other things, protect investors’ interests within the financial services industry. To comply with FAIS, you are probably already implementing certain compliance reporting and disclosures. As you are aware, the act speaks directly to the need for explicit client consent to disclose confidential information, which includes making data available to third parties. What this means is that if you use any service that involves sharing clients’ sensitive information with a third party, it is essential that you get permission from your clients to pass this information on. Third parties include any vendors you may use in the day-to-day running of your practice, for example, storing client data on an outsourced software system or website, outsourcing the printing of client statements or outsourcing the administration of clients. FAIS obligates you to make sure that the third parties you are using are completely secure. The onus is on you to ensure that they respect your clients’ data and that there is no greater
Based on a similar initiative in the UK, TCF is aimed at overhauling the way customers are treated by focusing on cultural change and the demonstrable delivery of fair outcomes. The initiative, which is also not yet legislation, will take a principles-based approach to ensure that companies cannot simply comply with the ‘letter of the law’; they need to be able to prove that clients’ best interests are respected at all times.
While the FAIS Act governs the financial services sector, and tells financial advisers what they can or cannot do, the Protection of Personal Information Bill (PoPI), which is still before parliament, explains your obligations in more detail. PoPI affects all consumerfacing sectors, not just financial services, and provides for conditions that ensure client data is protected and that clients consent to their personal information being used.
In the financial advice arena, TCF outcomes focus primarily on the type of advice you give, the regularity of your interaction and your transparency. But, by enforcing a culture of fairness in general, it also increases your obligation to be transparent and to let your clients know how their financial and personal information is stored, represented and used.
Always act in your clients’ best interests The trouble with legislation is that many players take a tick-box approach, getting the basics into place to make sure they are not doing anything wrong or jeapordising their licences in any way. But this is often not enough to make sure that clients’ best interests are protected, and the powers that be in our financial services sector are waking up to this, and growing more determined to bring our industry in line with international standards. This is where Treating Customers Fairly (TCF) comes in.
This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services short lists third party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the short list of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website. investsa 13
Anthony Ginsberg
Gl bal Investment Outlook
G
lobal equity markets retreated during June, due to fears of the Fed ‘tapering’ – the US Central Bank’s stimulus possibly being withdrawn sooner than previously expected. By mid-July, such fears were put to rest and equity markets in the US were again at new all-time highs. For now it appears that the Fed’s Bernanke is trying his best to ensure a soft landing in 2014 as it withdraws from its massive $85 billion monthly bond buying programme. Key benchmark interest rates such as the 10year Treasury and 30-year mortgage rates have already bounced up almost 100 basis points from their lows of earlier this year. The US property market has certainly enjoyed a robust past 12 months, with prices up across the country – on average 12 per cent in residential properties. However, there are fears that a big spike in mortgage rates could dramatically reduce housing activity and reduce economic growth prospects. With GDP figures still tepid at best – expected around 2.5 per cent for 2013 and stubborn levels of unemployment – Bernanke is not expected to stop the stimulus programme until well into 2014. A dramatic cut back in the monthly $85 billion bond purchases will likely see rates rise another 75 to 150 basis points in short order. The consensus appears that until monthly jobs data consistently hits over 200 000 jobs, the Fed will continue with its stimulus programme in various ways. Were it not for the government sequester earlier in 2013, US growth would be at least 0.50 per cent higher according to most analysts. The private sector is beginning to hire steadily, but the public sector is now a drag on the economy and the employment numbers, due to the sequestration cut backs. The global equity market rally stalled in June across the board. The MSCI World Index lost 14
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2.5 per cent in June while remaining up 8.4 per cent for the year. The benchmark is up a total of 18.6 per cent over the past year. The global consumer staples sector retreated 1.5 per cent in June, but remains up 10.5 per cent in 2013, and 16.9 per cent over the past 12 months. The Japanese rally ended in May and remained stalled in June with the MSCI Japan flat for the month. Nevertheless for 2013, the Japan market remains up an impressive 33.9 per cent in Yen terms. Measures in Japan to generate two per cent inflation, so-called Abenomics, has seen the Japanese equity market rise 52.2 per cent over the past 12 months. Further structural reforms are expected with Abe’s recent victory in a parliamentary election in July. The MSCI Emerging Markets Index gave back 6.4 per cent in June and is now down 9.6 per cent for the year to date. Over the past 12 months, the index achieved just a 2.9 per cent growth rate. With PE ratios trading at low levels of just 10 times earnings and a price to book ratio of 1.5, emerging markets contain numerous bargains and are seriously underpriced by the standards of the past decade. Unless one expects the Middle East to fragment or China to enter a significant long-term downturn or malaise, the pessimism apparent in the emerging market index prices appears to have been considerably overdone.
form of loans and infrastructure investments, and more organic growth. On the backs of Bernanke’s comments in June, global bond markets also faltered in June with the Citigroup World Government Bond index losing 0.6 per cent in US$ terms and the European Government bond market down 1.5 per cent. Nevertheless, the fear of inflation has not reared its head in the US or Europe for now. This permits the Fed to taper off its bond buying, perhaps more slowly than markets may expect. Continued bond buying by the Fed may extend well into 2014 but at a far slower pace than $85 billion monthly. Until employment data is consistently above 200 000 jobs monthly, there is little hope that the unemployment rate with fall sharply to the noted 6.5 per cent level required by Bernanke. With European austerity and weak growth in emerging markets continued, inflows of portfolio investment into the US will likely underpin a modestly bullish equity market and relatively low Treasury rates. It is unlikely we will see a weak US Dollar given the inflows into the US and its economy being the least ugly of all the industrialised regions.
By comparison, Europe is trading at 12 times earnings, while the US trades at close to 15 times earnings, as measured by the broader MSCI US Index. We are not concerned about the perceived credit crunch in China as it remains one of the world’s largest savers and richest economies. China is trying to change the composition of its GDP growth; with less state intervention in the
Anthony Ginsberg and Lisa Segall, Directors GinsGlobal Index Funds
Asset management
Can you
have your cake and eat it?
SA money managers debate the merits of holding cash
W
orldwide economic turmoil continues to force experts to revise their forecasts. So much so that in June, the International Monetary Fund trimmed its global growth forecast for the fifth time since early last year. While the pressure is significant, asset managers agree that locally there are some investment opportunities to be had – although opinion is divided on the merits of holding cash versus investing it. In its midyear update of the World Economic Outlook report, the IMF stated it had underestimated the depth of the recession in Europe, and had not expected the United States to go ahead with growth-stunting spending cuts. Surprisingly, emerging markets, which had previously been the engine of the global recovery, also added to the overall subdued picture in the latest outlook, entitled ‘Growing Pains’. The IMF cut its 2013 growth forecast for developing countries to five per cent, including a lower forecast for China, Brazil, Russia, India and South Africa, often called the BRICS. “After years of strong growth, the BRICS are beginning to run into speed bumps. And while growth in emerging countries has slowed, inflation has not fallen with it, suggesting the economies are already growing close to their potential,” said Olivier Blanchard, the IMF’s chief economist. Given this backdrop and in the face of increasing regulation, Sean Segar of Nedgroup Investments says South African businesses need to ensure that they are invested in such a way that they get the best return they can. He believes that by strategically forecasting cash balances, treasurers can take advantage of opportunities to invest the cash portion of
their balance sheets and generate valuable incremental returns. “Interest rates in South Africa are currently at their lowest point in approximately 40 years. However, this does not seem to have affected the way in which corporates are managing and investing their money,” he says. Segar refers to the Nedgroup Investments Cash Solutions Treasurers Survey, which gauged perceptions of current issues facing corporate treasurers, CFOs, financial managers and other financial decision-makers, in which 82 per cent of respondents said the low interest rate environment had not had any effect on the way in which they managed their companies’ finances.
In fact, the survey results indicate that treasurers are currently sitting on more cash than they were a year ago and expect to increase this in the near future. Segar believes corporates are likely holding on to higher cash balances because banks are not lending as freely as they used to. However, Cees Bruggemans, consulting economist to FNB, says the corporate cash conundrum is a wider phenomenon, particularly also in the US. “It, too, is on a slow boat with limited investment opportunity, but it may be there is a bigger internal explanation for all that cash on their corporate balance sheets.” Bruggemans refers to research conducted by Finn Poschmann of the Rowe Institute in Toronto, who analysed historical data for Canadian corporate balance sheets and came to some striking conclusions. Bruggemans says the study, although a set of reasoning that applies to the US and Canada, may find application in the South African situation. “It seems that changing trade conditions, improvements in technology and logistics and responses to market incentives are the main reasons why cash holdings are increasing. The spread of just-in-time manufacturing and ever more sophisticated supply chains mean that companies no longer need as many inventories and accounts receivable on their books. In need, they can source stock in a hurry from their suppliers, while the same applies to their clients,” he says. According to Bruggemans, the study concludes that possible factors that facilitate this process is having enough cash on hand to do so. “Recent recessions and financial crises have shown the usefulness of maintaining precautionary savings, with the variability in access to bank lending in difficult times another consideration,” he concludes.
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15
Barometer
Hot
FDI into Africa grows The latest annual survey of investment trends by the United Nations Conference on Trade and Development (UNCTAD), the World Investment Report 2013 revealed that foreign direct investment (FDI) flows into African countries increased by five per cent in 2012 to US$50 billion, while global FDI fell by 18 per cent. The report found that there was increased investment in consumer-oriented manufacturing and services, reflecting the growing purchasing power of Africa’s emerging middle class. Funding to grow the SME sector In an effort to grow the economy and develop entrepreneurship in South Africa, Business Partners
Limited, a specialist risk finance company, has earmarked over R1 billion to invest in small and medium enterprises (SME) in 2013/2014. The funding will further develop the SME sector by financing and providing business infrastructure, advice and after-care service. SA bank named best in Africa International finance magazine, Euromoney, named Standard Bank the best investment bank, best risk manager and equity house in Africa at its 23rd annual Awards for Excellence ceremony. The judges selected the winners by examining key performance indicators, financial ratios and innovations.
SA economy continues to grow at a slower pace BankservAfrica’s Economic Transaction Index (BETI) revealed that the economy appears to be growing at a normal pace every two months and at a stagnation rate every other month. Normal growth, equivalent to around three per cent to 3.5 per cent of gross domestic product (GDP) was shown in February, April and June, while January and March indicated much slower growth rates and May recorded a slight slowdown from a very strong April.
s y a w Side
Not 16
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Bleak platinum production forecasts According to Johnson Mathey’s Platinum 2013 report, South Africa’s platinum production fell in 2012 to its lowest since 2001. The report states that there is no definite outlook of significant recovery in output in 2013 due to many of the mines remaining under serious cost pressure. China’s exports decrease A report from the General Administration of Customs in Beijing revealed weak trade figures for China as exports to the US and the European Union declined for a fourth straight month. Exports decreased by 3.1 per cent in June, against an
estimated four per cent rise, and imports dropped 0.7 per cent, compared with a projected six per cent jump. IMF cuts global growth outlook The International Monetary Fund has cut its global growth outlook for this year and 2014 by 0.2 per cent from its last assessment in April. Growth is now expected at 3.1 per cent in 2013 and 3.8 per cent in 2014. The turning emerging-market forecast is as a result of a deepening Eurozone contraction and a downward revision of US growth.
Chris Hart
South Africa:
To buyor not to buy? comes to strength of auditing and reporting standards, efficacy of corporate boards, regulation of securities exchange, and legal rights index. SA ranks second in protection of minority shareholder interests and availability of financial services and soundness of banks, and third in the ability to access finance through the local equity market.
Chris Hart, Chief Strategist, Investment Solutions
T
he 2012/13 Global Competitiveness Report published by the World Economic Forum paints a provocative picture of the state of the South African economy and investment environment. There is much food for thought for pessimist and optimist gluttons. SA features at the top of the competitiveness rankings and also at the bottom; probably the most schizophrenic of all 144 countries ranked in the survey.
Pessimists would take macabre delight in highlighting SA’s position at 140th in the quality of the education system, or 143rd in the quality of maths and science education. Primary education quality comes in at a marginally better 132nd and the negative effect of poor health also places the country close to the bottom of the table. Labour market efficiency is highly problematic, with SA taking the wooden spoon for labour relations co-operation and 140th place for wage-determination flexibility. However, in stark contrast, SA also ranks at the top, or near the top, of the competitiveness rankings in a number of other measures. It is in first place when it
While these measures suggest SA is highly investor friendly, the country languishes closer to the bottom of the rankings regarding the burden of government regulation and the cost of crime and violence to businesses. The competitiveness report exposes the weaknesses and strengths of SA as an investment destination and a place to do business. From an investment perspective, the country has a high degree of credibility as its financial markets enjoy a significant degree of foreign interest and support. However, as a place to do business, SA is lagging behind its peers as a result of lower levels of foreign direct investment and an underperforming economy. The contrasts are many and this generates the investment dilemma: is SA a buy or a sell? The country’s corporate performance through the global financial crisis of 2008/09 was in many ways better than that of Europe and the US. Profitability held up relatively well and
the post-crisis recovery was relatively strong. However, the economy has lagged behind and continues to struggle for growth. The strength and superior ranking of the financial services sector helps to place SA in an attractive position from an investment perspective, but the languishing economy means this may not be maintained. Also, government intention is to increase the regulatory burden – where SA already scores very poorly. Overall, SA is ranked 52nd, but this has been deteriorating over the long term. A problem is that many strong areas are being eroded, with little improvement being made in areas where the ranking is poor. Labour market efficiency is an area where an uncompetitive position is being made even more so. The macroeconomic environment is deteriorating, putting the country at risk of its sovereign credit rating being downgraded. SA ranks in the bottom half of the competitiveness ranking. Regarding infrastructure, SA features in the top half of the table and this is set to improve through measures such as the increasing availability of electricity. The essential issue for SA investors is that the investment environment is complex, with strong redeeming and detracting features. The JSE’s performance over the past 10 to 15 years suggests the positive factors have outweighed the negative ones. But the local financial markets may well be at a crossroad regarding the long-term outlook. If business conditions, along with overall economic growth, improve to the point where the economy starts to perform in line with its peers, the strong past performance of the JSE might result in a welcome extension to the strong gains already in the bag. However, if the economy continues to languish under the burden of the detractions, the financial markets may also start to struggle. Getting this call right will be essential for the long-term investment performance.
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Economic commentary
South Africa in search of
growth
I
n the first three months of 2013, SA GDP rose by a mere 0.9 per cent quarter on quarter, annualised. This compares with an increase of 2.1 per cent quarter on quarter in the final quarter of 2012. The latest growth rate was well below market expectations. During 2012, as a whole the SA economy grew by 2.5 per cent, down from 3.5 per cent in 2011 and 3.1 per cent in 2010, and is currently forecast to grow by only around 2.2 per cent in 2013, with risk to the downside. The latest growth rate has been revised down from an earlier estimate of 2.6 per cent. The recent increase in labour market unrest, especially within the mining sector, is clearly hurting the SA economy. The mining sector is likely to systematically restructure their existing operations, leading to further job losses and a scaling back of operations. It also raises questions about the future expansion of the mining and manufacturing sector at a time when Transnet is spending billions improving the port and rail capacity of the country. Retail activity played a dominant role in helping South Africa emerge from the 2009 recession. This is mostly explained by relatively high wage increases, as well as an increase in government employment. The combination led to a strong rise in real household disposable income and consumer spending.
Unfortunately, on a trend basis, there is clear evidence to suggest that South Africa’s consumer activity is facing increasing strain. Consequently the South African economy is now in desperate need of another source of growth. Under ideal circumstances, the economy could expect some improvement in exports as well as fixed investment. Unfortunately, these sources of potential growth are not evident at this stage of the business cycle. This partly reflects the still weak global economy as well as a general lack of domestic investor confidence, especially within the corporate sector, which is aggravated by a fractious labour market. Instead, many South African businesses are increasingly focused on Africa as a source of revenue growth. 18
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South Africa’s consumer inflation rate is forecast to breach the upper end of the target band within the next couple of months. While the breach of the target band is generally expected to be temporary and inflation is expected to return within the target band by the end of 2013, the key risk is the performance of the Rand exchange rate. Sustained Rand weakness typically leads to higher domestic inflation. United States has been able to maintain a solid recovery The US economy has maintained solid economic progress over the past few months, despite higher taxes and the introduction of the sequester. The household balance sheet has improved meaningfully, retail sales have maintained solid growth, industrial production is almost back to historical highs, employment continues to trend higher, and house prices have increased in each of the past 12 months. As a result of the strong rise in asset values during the past few quarters, the net worth of US households rose to a record high of $70.349 trillion in Q1 2013; an increase of $3.0 trillion relative to the end of 2012. Japan is trying to create an inflationary environment In the first quarter of 2013, Japan GDP grew by an impressive and revised 4.1 per cent, easily beating market expectations. During 2012, Japan grew by 2.0 per cent, up from -0.6 per cent in 2011, and is now expected to grow by around 2.0 per cent in 2013.
fell by 0.2 per cent quarter on quarter, and by 1.0 per cent year on year. Euro-area GDP has declined in each of the past six quarters, signalling that the recession has broadened and deepened. For 2012, the Euro-area declined by 0.5 per cent year on year, after growing by 1.6 per cent in 2011. We continue to forecast a GDP decline of -0.2 per cent for the Euro-area in 2013, with the second half of the year expected to be slightly stronger than the first. China under pressure as it tries to re-balance the economy After weakening in mid-2012, the Chinese economy started to improve towards the end of 2012. Unfortunately, the improvement remains a little subdued and patchy by historical standards, but should still allow the country to achieve an annual growth rate of around 7.0 per cent to 7.5 per cent in 2013 after growth of 7.7 per cent in 2012. Chinese inflationary pressures remain well contained at around two per cent to 2.5 per cent, which is well inside the target rate of four per cent. The Chinese exchange rate continues to appreciate at a gradual pace. Given that China’s surplus on the current account has systematically narrowed from 10 per cent of GDP in 2008 to about two per cent of GDP in 2012, it is possible that the Renminbi is no longer that excessively undervalued.
Recently, the Bank of Japan raised their inflation target from one per cent to two per cent and introduced a massive open-ended asset purchasing programme that rivals the US in size. The increased monetary stimulus forms part of a ‘Three Arrow’ strategy to revitalising the Japanese economy. Euro-area recession has broadened, but could be reaching a turning-point In the first quarter of 2013, Euro-area GDP
Kevin Lings, Chief Economist of STANLIB
Industry associations
The
value of advice The 2013 Old Mutual Savings Monitor reveals a great deal about the financial behaviour of South Africa’s metropolitan households.
A
mong its findings is that consumers favour two sources for financial information: word of mouth (conversations with family, friends or colleagues) and financial advisers.
“The trend to seek financial advice from family and friends (50 per cent of respondents) over financial advisers (41 per cent) is cause for concern,” says Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA). “It is also worrying that consumers struggle to distinguish between professional financial advisers, bank consultants and other sellers of financial product.” As the representative body for South Africa’s financial advisers, the FIA believes it is crucial for consumers to understand what financial advice is as well as from whom they should seek it. Consumers should as far as possible deal with professional risk and financial advisers whenever seeking assistance on financial matters. Where should consumers turn to for financial advice? If they need life insurance or investment advice, they should seek out a financial adviser or financial planner; if they are looking for short-term insurance, they would turn to an insurance broker; and for assistance with medical aid, they would approach medical scheme brokers or their employee benefits consultant. A professional insurance broker is the consumer’s best bet to ensure that the
cover they purchase matches their unique needs. They will assess the consumer’s financial position, analyse the risks they are exposed to and make sure that they disclose all the necessary information to the insurer when they take out cover. The broker – whether in the life or short-term space – acts as a gobetween between the consumer and the insurer and is always on hand to support the consumer should they have to make a claim. According to Van Pletzen, consumers should take the time to know and understand what their financial adviser or broker can and cannot assist with. An important distinction to make upfront is whether the preferred financial adviser is independent or ‘tied’. An independent adviser will work for the consumer to secure the best possible financial product from a range of product suppliers. The financial plan should not be affected by any inducement or the requirement to use solutions from a specific financial institution. The tied agent works for a single insurer and typically builds a financial solution from the products offered by that company – though they may offer products from other insurers and investment houses. Consumers should then consider whether they want to conduct their financial business with the assistance of a professional adviser (whether independent or tied) or with a sales consultant. If they choose to go direct then they will typically deal with a sales agent. If they go the broker-assisted route, they transact with a knowledgeable and professional adviser whose actions are subject to extensive regulation. An adviser – referred to in law as a key individual or representative – is regulated in terms of the Financial Intermediary and Advisory Services Act of 2002. This Act requires that each adviser be licensed with
the Financial Services Board (FSB), give advice that is fit and proper and can be held accountable for bad advice. The Act also requires that risk and financial advisers pass a Regulatory Exam to ensure that they understand their obligation to consumers. “When a consumer chooses a risk or financial adviser, they must make sure they are dealing with someone who is licensed with the FSB or is giving advice under supervision at a licensed FSP,” adds Van Pletzen. “If they want the best of the best they should be sure to ask the adviser about their professional designation.” South Africa’s financial advisers have a professional accreditation body in the Financial Planning Institute (FPI) which issues the Certified Financial Planner ® CFP designation while the Insurance Institute South Africa (IISA) designates fellows, associates and licentiates based on education in the short term and risk disciplines. Each of these organisations runs a Continuous Professional Development (CPD) programme to ensure that the financial planner or insurance broker is up to speed on industry developments. The FSB will soon introduce a CPD system for all licensed representatives, which means ongoing financial education will become compulsory for all risk and financial advisers.
Justus van Pletzen, CEO, Financial Intermediaries Association of Southern Africa (FIA)
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Head To Head Emerging vs developed markets
FedGroup CEO
John
There has been a lot of optimism for emerging markets over the past year. However, do poor year-to-date returns for emerging market equities illustrate a trend that will continue this year and beyond? It is unlikely that we will see a material improvement for emerging markets in the foreseeable future. Together with the weakening of currencies against the Dollar, the emerging market equity investment horizon does not look promising. Even China is showing signs of a slowdown. Today’s objective for investors should be to secure your asset value. It is important to note that the poor returns are not limited to emerging markets but extend to markets across the board. Are the risks becoming too apparent to invest in emerging markets? Globally, growth has been poor and, as a result, risk is expected to be high. When prospects are low, risks should be minimised and seen in relation to your liabilities or return expectations. An investment into the US from South Africa which had little growth would generate exceptional returns from the change in exchange rates. The risk is not the same in all emerging markets. Some are definitely a higher risk than others. With SA, the exchange risk could be greater than the equity price fluctuation. What should investors and their advisers consider when investing in emerging markets? Investors and advisers should consider all aspects when investing not only in emerging markets, but all markets. Let’s take investing in Australia as an example. Their economy is driven by mining and exports to China.
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F i e ld
However, China is setting up alternative suppliers in Africa. To compensate, Australia is preparing to develop its manufacturing sector. Therefore, when considering where to invest it is necessary to assess how the country reacts to changing circumstances. Before investing in emerging markets, investors should question how competent a country’s reserve bank is and how productive a government is within its business community, to name but two. Is the Eurozone out of the economic headwinds or do these developed markets potentially offer more risk than some emerging economies? When comparing the dismal condition of the Eurozone investment potential, the advice should mirror that of investing in emerging markets. Secure your assets in the same currency as your liabilities or return expectations. Eurozone is still a long way from economic health and any recovery will be slow. There is also the question as to whether the Eurozone will survive at all. How different is the investment case for the US and Asia? The US has a debt burden which will dictate its future. Asia has investments in the US which it must protect. These are two very different problems that are linked and will not be resolved easily and quickly. As the US begins to recover, its reserve bank is likely to reduce its support which will subsequently weaken the Dollar. Should this scenario play out, Asia may decide to move out of US Dollars. Is there still value to be had in the South African equity market in comparison?
The South African equity market is fairly valued in terms of Rand. The problem resides in the depreciating value of the Rand which will eventually surface as inflation. Property and bonds should be considered as investments. For example, the cost of labour, cement or steel is not decreasing and replacement value will track inflation. Seemingly, the problem is that South Africa does not stand up against the other emerging markets let alone the developed markets. Unless changes are seen to develop the economy, further overseas investments will be minimal. Similarly, growth in the equity market will be limited. Should investors diversify by going offshore; if so where should they be looking? At this time, in the world economy, you should go offshore only if your liabilities (current and future) lie offshore. For example, if your main business is to purchase machinery from China, then invest in China. This effectively hedges the future costs of your purchases. However, before investing locally or offshore, an investor’s risk profile should be analysed. On the one hand, funds investing in pension funds should look to limit their risk. While on the other hand, funds looking for abnormal growth might look for a spread of risk through offshore investments (due to the fact that high risk can result in high growth).
The risk is not the same in all emerging markets
Head of Fixed Income and Asset Allocation at Prudential
D av i d
There has been a lot of optimism for emerging markets over the past year. However, do poor year-to-date returns for emerging market equities illustrate a trend that will continue this year and beyond? Emerging markets (EM) overall have been underperforming their developed counterparts since late 2010, so the experience observed this year is a continuation of that trend. There are a number of potential explanations, the most influential of which is, in our view, the fact that the export-led EM growth model adopted after the Asian crisis of the late 1990s is under threat from a permanent impairment in developed world growth as a result of the global financial crisis. This raises questions about how fast EM can grow on a sustainable basis and fears that the transition to this ‘new growth model’ may be less than orderly. We would also highlight that it is increasingly unhelpful to view EM as a unitary concept, since a number of powerful individual stories can be identified: Brazil, a commodity exporter, is clearly very differently exposed than Korea, a commodity importer; and we see considerable variation in market valuations. Indonesian equities are on a forward price-to-book ratio of nearly three compared to Taiwan at 1.6 and Korea at barely one. Investors need to respond to this by being increasingly discerning in their allocation of capital within the EM universe. Are the risks becoming too apparent to invest in emerging markets? There have always been risks in EM and, indeed, as the global financial crisis has shown, in developed markets (DM) too. The fact that the future is uncertain tends to make things feel risky; we are yet to see any compelling evidence that the distribution of
Knee
future outcomes is any more uncertain that in the past.
market level and avoid the temptation to paint with an overly broad brush.
What should investors and their advisers consider when investing in emerging markets?
How different is the investment case for the US and Asia?
As we have noted earlier, investors need to discriminate in their strategies across emerging markets since these are not homogenous. Markets where the equity valuation is historically cheap, where the dividend payout ratio is reasonable, and where the currency is undervalued are clearly first prize. Low dividend rates often go hand in hand with poor corporate governance and can be a warning sign.
Asia and the US are intimately connected; the aftermath of the global crisis debunked the myth of EM decoupling. While economic stories come in different flavours, there are common themes which begin with Western demand for cheap manufactured goods. With this source of demand impaired, Asia faces a period of economic rebalancing and transition which will no doubt present opportunities to invest. Our starting point is always analysis of each market’s valuation: the current price is fact, everything else is conjecture.
Is the Eurozone out of the economic headwinds or do these developed markets potentially offer more risk than some emerging economies?
Is there still value in the South African equity market in comparison?
Short answer: It is impossible to compare the risks in Europe against the risks in EM. Neither Europe nor EM is homogenous and therefore investors must assess risks at the individual country level. Long answer: The consensus is that Europe will return to positive economic growth in 2014 and to that extent could be argued to be past the worst. However, there remain substantial economic challenges ahead, including ageing populations, high debt levels – public and private - poorly capitalised banks, stubbornly high rates of unemployment, low productivity, a one-size-fits-all monetary policy and radicalisation of the political environment. Emerging markets face their own challenges, some of which are alluded to in other answers, but the essential message is that investors must make their assessments at the individual
South African equities have, as a whole, outperformed global markets since the end of the financial crisis and consequently appear modestly expensive relative to most DM and many EM peers. However, in an absolute sense, against its own history, the SA equity market appears about fair value and significantly cheap against SA bonds and cash. Should investors diversify by going offshore and, if so, where should they be looking? There is a substantial body of research that supports allocation to hard currency assets from SA portfolios as a diversifying component. Our analysis points to developed equity markets as offering the best value, although selected EM have also moved into cheap territory.
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Investing for retirement
Sustainable income in retirement
O
ne of the toughest financial planning trade-offs is ensuring that a retiree’s post-retirement income is sustainable over the full period of their retirement, without compromising more than is necessary on their standard of living in the first half of their golden years. This task is further complicated by the current market environment – local interest rates are at their lowest in 40 years and while domestic growth assets produced stellar returns over the past 10 years, we don’t expect that to be the case in the next decade. Added to this is the scarcity of capital available for the task as most South Africans do not save enough during their working life to comfortably sustain their living standard through retirement. Current market preferences Retirement savers currently have two main options when it comes to providing a postretirement income: a market-linked income withdrawal plan (most often called a living annuity) or a guaranteed annuity underwritten by a life office. A guaranteed annuity allows the investor to manage the risk of living longer than average as these products transfer that risk to a life office, where the excess contributions made by those individuals who live less than the 20-year average, fund the additional income needed by those who live longer. A key feature of guaranteed annuities is that the underlying investment portfolios are invested in income assets only. This renders them an unpopular choice at the moment. Investors choosing a market-linked income withdrawal plan are not restricted in terms of their underlying investment options. While this flexibility allows the investor to potentially earn a higher return from their underlying portfolio than in a guaranteed annuity, there are some key risks to bear in mind. Longevity risk The average South African retiring in their early 60s can expect to live for another 20 years. It follows that half of retirees will live longer; and the other half, less than the 20-year average. The problem, in a planning context, is that most people do not 22
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plan would have been impaired by a massive 30 per cent, permanently reducing the level of sustainable income over your entire retirement. What this means is that you can’t afford to have too much exposure to growth assets so as to minimise the risk of short-term losses. Inflation risk and sequence-of-returns risk can, to a large extent, be managed by investing in an appropriately constructed portfolio, one that has the right balance between income and growth assets to achieve the dual objectives of reasonable growth after inflation (over the long term) and preserve capital (over the short term).
know in which half they will fall. Consequently, if you want to fund your income from a market-linked portfolio, it is not prudent for the average retiree to assume a planning horizon of less than 30 years. If the 30-year planning horizon justified above sounds unpalatable, a guaranteed annuity may be the better option for you. Inflation risk If you assume that prices will increase by on average six per cent per year, you will need R1 800 in 10 years’ time and R3 200 in 20 years’ time to buy the same basket of goods and services that R1 000 buys today. You therefore need to ensure that your future income stream can keep pace with inflation. In our view, one of the best ways to do this is to have adequate exposure to growth assets in your retirement funding portfolio. Sequence-of-returns risk If you draw an income from a market-linked annuity portfolio, you need to avoid big market losses early in your planning horizon. If you were unlucky enough to retire at the start of 2008 and invested all your capital in the equity market, you would have lost 23 per cent of your investment after just 12 months. When you add in an income withdrawal of five to six per cent and one to two per cent in fees, your retirement income
Coronation offers two funds that meet the needs of income and growth investors: Balanced Defensive and Capital Plus. While both funds are designed to provide optimal outcomes by balancing the quest for attractive levels of real return over the long term with minimising capital loss over the short term, their risk budgets are different. Capital Plus, which can invest up to 60 per cent in growth assets, is more suitable for clients in the early stages of retirement and therefore have a longer time horizon, while Balanced Defensive can invest a maximum of 40 per cent in growth assets and is therefore more suitable for cautious investors with a low-risk budget and shorter time horizon.
Pieter Koekemoer, Head of Personal Investments. Coronation Fund Managers
Investing for retirement
Offshore exposure and retirement savings go hand in hand
W
hen saving for retirement, it’s best to include at least 40 per cent of offshore exposure in your investment portfolio, according to Marius Fenwick, chief operating officer of Mazars Financial Services. This means having additional investments outside of your pension fund or RA, as these vehicles are limited to an offshore exposure of 25 per cent by Regulation 28 of the Pension Funds Act. “You’ll have to find a further 15 per cent elsewhere; for example, through offshore listed property funds, offshore unit trusts, or exchange traded funds (ETF). This can be done by investing direct offshore or via local feeder funds that invest into the offshore funds,” says Fenwick. “Too often investors think retirement means the end of investing, and the beginning of spending. But this is no longer the case, as people are living longer and retirement can mean a further 20 to 30 years of investment or more. The current low interest rate environment supports this view even further,” he says. When saving during retirement exposure to growth assets is essential. “Investors need a return 24
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that beats inflation, and growth assets or exposure to inflation-linked bonds provide the best chance to achieve this.” Investors in early retirement can still afford to have 40 per cent equity exposure in their investment portfolio, 25 per cent of which should be offshore at the current valuations. “Equities are volatile and offshore equity exposure, in particular, can affect income as currency fluctuates easily.”
balanced funds are currently invested up to their maximum offshore limit of 25 per cent. “If you’re invested in an equity fund or in some of the JSE Top 40 shares, you’re also likely to have offshore exposure indirectly, as some of the shares in your equity fund and many of those that make up the Top 40 Index, are companies that enjoy revenue streams from their business operations in other countries,” Fenwick concludes.
Fenwick believes Regulation 28’s offshore asset class limits are the wrong way round. “Investors saving up to retirement should not be limited to just 25 per cent offshore exposure, while investors in retirement should be limited to a maximum of 25 per cent. However, postretirement investors have no limit to the amount of offshore exposure they can take, while younger pre-retirement investors could really benefit from a lot more offshore exposure than prudential regulations allow.” You may already have offshore exposure without even realising it. “If you are invested in a local balanced fund, it’s likely you already have some offshore exposure in your portfolio as many
Marius Fenwick, Chief Operating Officer of Mazars Financial Services
Invest for income and the capital will take care of itself
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Investing for current income
lthough capital growth receives a great deal of investor attention, investing is ultimately all about income. Retired investors invest to generate an income stream while pre-retirement investors invest to provide for their future income needs. Investors therefore need to consider two aspects: current income needs and future income needs, each of which will have different influences on their portfolio decisions.
Investing for future income
An investment portfolio providing for current income needs, such as a living annuity, should ideally provide this income without eroding capital. Capital erosion occurs when an investor draws more income than the income produced by the investments. By eroding capital, an investor reduces future income, so it is vital in the early stages of retirement that capital is preserved as far as possible. Capital preservation can be achieved by selecting investments that produce the desired income yield.
Adopting a balanced approach By combining high yielding investments (bonds) with investments that have the ability to grow their income (equities), it is possible for an investor to attain a reasonable level of income with inflationhedged income and capital growth. The income can be used to fund a lifestyle or can be reinvested to accumulate more capital. Although capital growth receives a great deal of investor attention, investing is ultimately all about income. Marriott’s advice for investors is to focus on income and let the capital take care of itself.
Where income is not an immediate need, investment decisions are driven by a need to maximise investment value upon retirement. This can be achieved by: • Capital accumulation – When income is not required to fund a lifestyle it should be reinvested. Reinvesting income will increase an investor’s capital base which will in turn produce more income to reinvest. This increases the size of your portfolio over time. • Capital value growth – The value of a company grows over time at the rate at which its profits grows. In the same way, the value of an investment grows over time at the rate at which its income grows. Therefore investments that grow their income will increase the value of your portfolio over time. This relationship is clearly evident when looking at the dividend and price history of Mr Price in chart 2.
Constructing a portfolio for current income involves determining the required income level and then acquiring a blend of cash, bonds, real estate and equities which will generate the required income – cash, bonds and real estate providing a reliable high income – equities, enabling the income to grow. Crucially, the choice of equities should include only those which generate a reliable, growing income stream.
Constructing a portfolio for future income involves determining an investor’s risk tolerance and recognising that investment risk lies with income growth. Unlike income yield, which is known at the time of investment, income growth is less predictable.
Chart 1: The income yield/income growth trade- off
Chart 2: Mr Price dividends (c/sh) and share price (c/sh)
Income Growth (p.a.) 26% Price Growth (p.a.)
25%
Therefore, capital accumulation by re-investing income is a more certain and predictable way of increasing the size of an investment. Over the long term, however, capital value growth resulting from income growth will generally produce a greater increase in value. investment
Duggan Matthews, Investment Professional at Marriott Asset Management
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Investing for retirement
Cash, an unsafe retirement investment
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ash has traditionally been considered a safe investment as it provides relatively consistent returns and protects capital. However, from a retirement portfolio perspective, cash is anything but safe, says Prasheen Singh, head of investment consulting at RisCura. “Cash is risky because its purchasing power is eroded by inflation. Retirement funds should avoid holding cash over the long term because its returns will seldom outperform inflation, particularly in the current low interest rate environment,” Singh says.
returns until you get to equities as the highest volatility but correspondingly one of the highest potential return asset class. “Instead of looking at return profiles in the nominal space, they should be viewed in the real space, with inflation factored in, and in relation to the liability profile of a pension fund. Looked at this way, cash becomes inefficient – it’s no longer the lowest risk, lowest return asset class. In fact, the risk level of cash increases while still offering low and sometimes negative real returns depending on inflation.
Even if a fund is able to invest its cash at five per cent per annum, it doesn’t compete with the current average inflation rate of 6 per cent. Yes, the capital amount will never disappear, its nominal value will always remain, but its real value and the real value of the interest it earns will become less and less over time as inflation drives costs up and erodes the value of that cash. In addition, if interest rates were to drop even further, the income that capital could produce would be significantly reduced.
“Over the long term, income preservation should be top of mind when putting together a pension fund investment portfolio and strategy,” Singh says. Focusing on income preservation means focusing on three main risks to members’ income and its purchasing power; namely interest rates, inflation and longevity. “Accordingly focusing on income preservation as opposed to capital protection means looking carefully at alternatives to cash.”
In the traditional retirement fund space, cash has been considered a low-risk asset, with corresponding low levels of return. Then, as you get increasing levels of volatility, so you are likely to experience increasing levels of
From a liquidity point of view, retirement funds are likely to hold some cash but this should be kept to the minimum required to meet the monthly liquidity needs of the portfolio. A portfolio that is positioned to adequately
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deal with the requirements of retirement fund members, will include exposure to growth assets that are able to deliver returns that at least keep pace with inflation such as equities and inflation-linked bonds. “Retirement funds holding inflation-linked bonds will see some capital depreciation and appreciation over time with the price of bonds fluctuating, but the coupons included in inflation-linked bonds are steadily increasing at the rate of inflation. Inflation-linked bonds have coupon growth that is linked to inflation. This means that as an investor you’ll have an income stream that actually has a link to inflation,” Singh concludes.
Prasheen Singh, Head of Investment Consulting at RisCura
Members need more guidance Earlier this year, National Treasury stated that the primary purpose of a retirement fund is to provide income in retirement to members.
A
re you buying a guaranteed, withprofit or living annuity when you retire? For most retiring pension, provident or retirement annuity members, the question could be asked in a foreign language and they would still be hard pressed to give an informed response. Trustees of retirement funds are confronted with the difficult task of trying to advise members to make the best possible decisions when they get to retirement. For most members, the choices they make are uninformed because of the complexity. The concept of nudging people to make more appropriate decisions proposes a better way for choice architects like trustees. The concept was most notably developed in Nudge: Improving Decisions about Health, Wealth, and Happiness, a book by Sustein and Thaler. Retirees need to choose an adviser to help them identify the most appropriate type of annuity, provider and often investment. The advice and products are generally expensive and can be inappropriate. A further issue is that many retirees don’t buy annuities where they can take their whole benefit in cash. Where an annuity is purchased it is hardly ever done without advice, ASISA reported that in 2012 only 2.92 per cent of annuities were purchased without advice. Further, the costs associated with the purchase usually include an upfront fee (generally up to 3 per cent of asset value plus VAT), ongoing advice fee for living annuities (again in the region of one per cent of asset value annually), investment management fee and administration costs (which can be as high as three per cent).
Retirees invested in living annuities can end up paying high annual fees; if a person pays three per cent of asset value per annum and they need inflation protection, their investment needs to earn a return of inflation plus three per cent and then some to cover their annual drawdown. The picture for the average person trying to make the best investment choice at retirement looks bleak and is very complicated. Government has recognised this. Proposed reforms will see trustees guide members through the retirement process and select a default annuity product with prescribed features. Members will be moved into the products unless they opt out: the nudge principle in action. For this trustees will receive protection. A further potential benefit is cost savings which is in line with the latest reform papers released by Treasury. Trustees will have to consider whether they will house the annuities in the fund or choose an appropriate product. In addition, fund investment strategies will have to ensure that they are appropriately managing the various risks as members move closer to retirement.
process can be developed for retirees. The lower costs are positive for retirement capital. Other options can also be developed; for example, start the annuity as a living annuity and transition it into a guaranteed annuity when the income levels become similar. This will assist members in managing their longevity risk. The benefits of this approach are that appropriate defaults should reduce the need for advice as many members have similar needs and circumstances and, if possible, add to this appropriate education. This combination reduces the need for advice and members with special needs will know to seek advice and pay the extra fees for appropriate alternatives. Trustees taking this approach will develop more appropriate benefits and will need to develop investment strategies that see the investment time horizon extending beyond retirement age and seriously enter into the discussion on how retirement income will be provided to their members.
Although the proposed reforms have not yet come into force, trustees may want to consider introducing these principles into their benefit design and investment strategies; nudging members to make better choices when they retire. A solution available to trustees is to introduce a seamless transition into a living annuity. This practice has been in place for some time in relation to pre-retirement preservation options. Exiting members transfer to a retirement vehicle with the same investments as the retirement fund and the investor generally pays a lower investment management fee. A similar
Wayne van Rensburg, Managing Director, of 27four Individuals (Pty) Ltd. investsa
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Investing for retirement
Busting the myth
W h i 5 l
Market returns will no longer compensate for inadequate savings.
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he 2013 Sanlam Benchmark Survey confirms a long-standing disconnect between what retirement fund members expect to earn in retirement and what they actually achieve. It also reveals that half of new retirees struggle to cover their monthly expenses post-retirement. Against this backdrop, National Treasury’s desire to nudge savers towards better outcomes is understandable. One of the central debates at the 2013 Benchmark Symposium was which industry stakeholder should be held accountable for poor retirement outcomes. Although Sanlam is on record that employers must accept greater responsibility where their employees’ retirement is concerned, it is clear that trustees, financial advisers and the regulators all have a role to play in positively influencing member behaviour. A major challenge for these role players is to address the legacy of South Africa’s defined benefits system. “Members have an expectation that, once their retirement fund membership forms are filled out, their fund trustees or employer will take care of everything,” says Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions. “These individuals believe that someone else will see to it that there is enough capital for their retirement.” Another myth is that individuals who neglect their savings during their early working years will be able to make up the shortfall in later years. This misconception arose from the fantastic inflation-plus returns earned across asset classes in the 15-years prior to 2009. Nowadays the retirement funding industry must generate returns in a low yield world.
Dawie de Villiers, chief executive officer of Sanlam Employee Benefits captures the present day retirement funding sentiment perfectly with the phrase: “Gone are the days when high returns would make up for inadequate savings.” But fund members seem unaware of this. Study after study confirms that the average retirement fund member is apathetic, lacks understanding of financial products, defers critical financial decisions and refuses to consider the long-term nature of retirement savings. The 2013 Survey offers many examples of this apathy. While only one-third of fund members voted for their trustees – and even fewer could name a trustee – a staggering 80 per cent of those surveyed were confident that these trustees would make sound financial choices on their behalf. When left to their own devices, fund members seem to make decisions that destroy value. Major mistakes include contributing too little to their retirement fund, starting their contributions too late, and withdrawing their accumulated capital when changing jobs. Trustees also exhibit behavioural failings.
make choices when they join a formal retirement fund,” says Van Zyl. “They fill out loads of forms and are then left alone in the hope that ‘one day’ they will enjoy a great retirement.” It is as if many retirement fund members go from limited assistance on ‘day one’ of their journey to retirement to ‘day one’ in retirement without any financial guidance along the way. The current practice of suggesting a meeting between the fund member and a financial adviser a few months before retirement is nonsensical. “The typical trustee or employer response to a member’s cry for help is to refer them to a financial adviser,” says Van Zyl. “This abdication of responsibility is one of the biggest stumbling blocks to making meaningful improvements in the retirement funding landscape.” At the 2013 Benchmark Symposium, it was suggested that the employer, through its human resources department, should facilitate and even fund financial advice workshops and one-on-one sessions with financial advisers for fund members.
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The latest survey suggests that trustees expect only 13.4 per cent of their fund members to retire comfortably. But while 76 per cent indicated that they were worried about how fund members would utilise their benefits upon retirement, only 24 per cent wanted further dealings with members post-retirement. How can poor member behaviour be addressed? An important first step would be for employers and trustees to create more checkpoints along the road to retirement and to communicate more effectively with fund members at each such opportunity. “Our research has shown that fund members are only asked to
T
w Danie Van Zyl, Head of Guaranteed Investments at Sanlam Structured Solutions
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*I 28
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are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage investsa 29 in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the manager. Commissions and incentives may be paid and, if so, would be included in the overall costs. Forward pricing is used. Based on a lump sum investment calculated on a NAV to NAV basis with income reinvested. Member of ASISA.
Marrying st cks I
nvesting in stocks for the long term is a given. But long term is a concept open to interpretation. Long term, in these promiscuous times, can even mean a fiveyear fling.
So what does it mean when punters talk about being “married to a stock”? Officially, the definition would state that an investor that marries a stock will hold the share through thick and thin, in sickness and in health … for better or (gulp!) worse. Straight off, investment professionals will advise strongly against marrying a stock. And they are quite right to do so. Frankly, the argument for a long-term relationship with one or a handful of stocks is quite easily shot down. Firstly, there are very few stocks that can consistently deliver sterling returns year after year for a few decades. Let me re-emphasise: very few, perhaps less than a dozen on the JSE. There are always periods where sentiment runs too hot, and pushes valuations to dangerously exuberant and unsustainable 30
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levels. Even the most dedicated investor will know the comedown to more realistic levels can be brutal, which pretty much mitigates the old have-and-hold option.
benefits from the company’s ‘newer’ guises in form of Richemont, Remgro and Reinet Investments (not to mention British American Tobacco, the biggest listing on the JSE).
What’s more, companies are not infallible and every so often a strategic ploy goes awry or economics dictate that demand for products or services (not matter how essential these are to clients) softens. In addition, the needs of individual investors can change several times over the long term, which makes a more flexible investment policy a much more suitable option than an uncompromising lock-in.
The Rembrandt example could conceivably be dismissed as a freakish turn in value creation; something unlikely to be repeated on the JSE. But in recent years there have been other examples of enormous long-term value creation by backing visionary individuals in their endeavours.
But then there are the fortunate few who agreed to fund the late, great Anton Rupert in the late forties that will spout the virtues of marrying into good stock. These shareholders have turned relatively small sums into many millions (perhaps even billions) as the Rupert family-controlled Rembrandt prospered and evolved. Even today original Rembrandt shareholders are enjoying considerable
The late eighties saw the emergence of two inspired (and acquisition driven): Joffe’s Bidvest and the late Bill Lynch’s Imperial Holdings. Both have amply rewarded original backers. Smaller companies like fast food franchisor Spur Corporation and plastics packaging specialist Bowler Metcalf – that also hark back to the late eighties – have produced strong profit performances and paid out sumptuous dividends on a most consistent basis. More recently we have the astounding examples of
Marc Hasenfuss
Frankly, the argument for a long-term relationship with one or a handful of stocks is quite easily shot down.
an investment banking presence with PSG Investment Bank. Currently PSG is labouring under the impression that perhaps a too large chunk of its value resides in Capitec Bank, which in turn has seen sentiment shaken (perhaps unfairly) by bad debt issues that have dogged rival African Bank. Perhaps the best way to weigh up making a long-term vow to a single stock is to use common sense. If an investor is going to back a stock – or a few stocks – through thick and thin, make sure these long term lock-ins are part of a larger (and more flexible) portfolio. Obviously the stock(s) selected should offer some indemnity against trading cycles, which in some industries, like mining and construction, can be vicious. Companies that accrue profits in lumps rather than consistently should probably be avoided. Inconsistent operating performances (especially if there is a prolonged cyclical downturn) would increase the chance of an investor breaking up a marriage because there is unavoidable temptation for investors to look elsewhere for sexier returns.
investment companies like PSG and HCI as well pharmaceutical group Aspen and asset manager Coronation Fund Managers. It is worthwhile examining PSG in some detail. The company was founded in 1995 by former stockbroker Jannie Mouton through a 30c/share reverse takeover of PAG. (As an aside, when I broke the news of this deal in Business Report almost 18 years ago, a very well-known stockbroker in Cape Town advised me to snaffle as many PAG shares as I could and put them in a bottom drawer. I didn’t, and regret it every time I see the happy throngs at the PSG annual general meeting.) At the end of 2012, PSG showed a compounded annual growth rate (CAGR) – a measure that incorporates share price appreciation as well as dividends/distributions – was over 55 per cent. Put differently, an investor who bought R100 000 PSG shares in late 1995 would be worth a gobsmacking R136 million. But such a rewarding ‘marriage’ is not as easy as it looks. The
R136 million dowry required an investor to reinvest all the dividends received in PSG, as well as hold onto the Capitec shares that were unbundled to shareholders in 2003 (and reinvest the dividends received from Capitec). Naturally, the counter argument is that – like a strong marriage – the relationship must stay true to its original vows to stay together for “better or worse … in times of sickness and in health”. PSG again serves as a good example.
If anything, the key ingredient for a successful long-term marriage is diversification. As such, stocks that might be worthy of a long-term commitment might be the old-style investment trust companies that hold several underlying interests. The old Rembrandt Group and Hosken Consolidated Investments (HCI) have built successful long-term investment strategies around a core investment. Rembrandt had its tobacco interests churning huge cash flows which allowed diversification into other promising ventures like cellular services, luxury brands, private hospitals, financial services, media and technology. HCI has a central investment in casino giant Tsogo Sun that provides a strong cash flow underpin to deal-making endeavours that include media expansion (via e.tv and, more recently, Australian radio assets), transport, property, liquor, mining and other gaming formats.
Besides the permutations required for a PSG shareholder to reap the R136 million reward, there are also the ebbs and flows in market sentiment to consider. Some PSG shareholders might have considered it prudent to lighten up or sell off shares when the price was a hot 600c – which meant the share to original investors was a 20-bagger.
The calibre of management is also a key consideration, especially when it comes to a company driven by a family owner or a charismatic individual. Establish whether succession planning will secure the services of inspired individuals or at least executives that won’t ditch the principles that made the company successful in the first place. Then you have to ask whether it’s possible to replace a brilliant entrepreneurial mind like Brian Joffe, Koos Bekker (Naspers), Stephen Saad (Aspen) or Jannie Mouton.
Shareholders would also have needed to endure through the odd challenging period; like the small banking crisis in 2000/2001, when PSG capitulated in its effort to build
Most importantly a company’s executives should be honest, transparent and able to take tough decisions at all times. That, after all, is the basis of all strong long-term relationships. investsa
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the roundtable convergence of great minds
In July, the Momentum Collective Investments roundtable discussion was held in Krugersdorp and Bloemfontein, where the debate for fixed interest investments continued. Inflation-linked bonds (ILB) as an asset class are now around 13 years old in South Africa and have delivered significant returns of over 13 per cent per annum for that period. This time frame has been characterised by sharply rising and falling inflation and interest rates.
Key speakers at the event Richard Klotnick BCom (Hons), CFA Portfolio manager
Richard Klotnick BCom (Hons), CFA Portfolio manager
Richard joined the fixed interest team at Momentum Asset Management in 2009 a as a fund manager. He commenced his career at Global Credit Ratings in 2004 as a credit ratings analyst, rating companies across various sectors. He then moved to Nedbank Capital in 2006, working in credit research and ratings advisory in the debt capital market.
Conrad Wood Head of fixed income at Momentum Asset Management BCom (Economics), CFA
Conrad Wood Head of fixed income at Momentum Asset Management 32
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Conrad joined Momentum Asset Management in 1994 after completing his degree. He started as a bond dealer and progressed into fixed income fund management, specialising in money market and income funds. He has managed the Momentum Money Market Fund, the Momentum Maximum Income Fund and the Momentum Diversified Yield Fund since their inception. These funds have performed well under his management. He was appointed as head of fixed income at Momentum Asset Management in late 2007 and has been reappointed as the head of the merged asset manager’s fixed income team. His team currently supervises close to R70 billion in fixed income assets.
However, the ILB reality is a complex one. Over entire cycles, the underlying inflation trend should drive performance, but one needs to be mindful of the leads and lags during the cycle where real yields adjust in response to monetary policy actions/expectations. These changes in real yields cause capital volatility and tend to dominate returns while they are occurring. This is possibly why ILBs have performed so well in general over the last two years with rising inflation and plummeting real yields: a perfect storm for ILBs. Richard Klotnick, fund manager at Momentum Asset Management, explains that fixed interest investments achieve consistent, sustainable returns throughout market cycles thanks to active management and active asset allocation, which allows the manager to add risk to different investment categories to achieve consistent returns and maximise risk-adjusted performance.
Momentum Collective Investments
When inflation spikes, inflation-linked portfolios are protected because there is more spread through diversification, thereby delivering consistent performance in all market conditions. At present global markets are much more focused on a tightening of monetary policy by the US Federal Reserve (FED). The initial reaction to the rising real yields in the US has been a dramatic rise in loca l ILB yields, which has caused pronounced underperformance through capital depreciation, despite rising inflation locally. According to Klotnick, a further rise in real yields should be fairly contained as the US economy does not appear in need of significant policy tightening and South Africa’s local authorities still seem comfortable in not responding to a rising domestic inflation threat by hiking rates. This should keep local real rates relatively contained, resulting in inflation dominating the contribution to performance rather than capital volatility.
Momentum Diversified Yield Fund – flexible income fund The Momentum Diversified Yield Fund comprises of a diversified use of fixed income asset classes and active asset allocation. The fund’s valuation is based over a medium-term horizon, which suits the Momentum philosophy and is measured throughout market cycles. Its credit exposure is overweight relative to the benchmark and favours quality issuers with good balance sheets. It is bullish on corporate exposure, neutral to banks, bearish on microlenders and municipalities and uncertain on user pay models for parastatals. The Momentum Diversified Yield Fund is an actively managed flexible fixed interest fund. It has the ability to invest in income-enhancing instruments across the fixed interest universe as well as listed property and preference shares. Flexibility to invest offshore provides further yield opportunities. The mandate allows for positions to be taken across the yield curve in order to maximise returns with full flexibility on duration.
Momentum Inflation Linked Bond Fund Similarly, the Momentum Inflation Linked Bond Fund is actively managed with asset
Fixed income allocation between ILBs, nominal bonds, and money markets and performance is also to be measured through market cycles. Its valuation is based over a medium-term horizon. The benchmark is measured at 60 per cent ILBI; 30 per cent ALBI; and 10 per cent Stefi. However, given the name and nature of the fund, ILBs will always comprise a substantial portion of the fund. The Momentum Inflation Linked Bond Fund is a gilt portfolio which seeks to provide investors with an inflation-beating total return. In order to achieve this objective, the investments include a mix of inflation-linked bonds, corporate bonds, government and other bonds, other interestbearing securities, non-equity securities, money market instruments and assets in liquid form. The Momentum Inflation Linked Bond Fund aims to provide investors with consistent growth in income and capital in real terms through exposure to fixed-interest securities, predominately those that offer inflation protection. Tolerance for volatility in the short term is recommended given interest rate risk on high duration inflation linkers. The fund is consequently best utilised as a long-term building block for investment portfolios given its core inflation-linked bond holdings and focus on providing real returns over time.
Comments from delegates My experience of the investment seminar was pleasing. It makes sense to present to smaller groups so that there can be better engagement and more interaction. The duration of the seminar is appropriate and doesn’t influence production time too much. The content was very professional, market-related and currently fitting. Definitely the way to go forward in the future!
I liked the conversational style of the presentation. Conrad Wood is very knowledgeable and I appreciated his honest answers. Most of my concerns were addressed and I learned a thing or two. (Also great lunch!!) Carel Botma, B Comm (Accounting) CFP®, Bloemfontein, Finansiële Beplanner/Financial Planner For sure the ‘’Round table ‘was very informative and we Financial Advisors do need to hear what experts in their field have to say about the markets, predictions and general questions and answers. Samuelson, the writer of many Economic student handbooks, says in his introduction; ‘’The more you know of something the more you realize how little you know‘.’ There are so many funds. Can we discuss for e.g. the Core funds at one session; are funds that are on the Core portfolio strictly scrutinized by Wealth? I want to know and feel content that Core funds are ‘’safe’’. Time well spent With thanks Max Tessendorf, Senior Financial Planner, Momentum Financial Planning
Carel Olivier, Momentum Financial Planning
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Morningstar
2013 Mid-year Unit Trust Performance Review Q2 2013 ASISA Category Performance (source: Morningstar Direct) ASISA Category
Q2 2013
Year to Date
Regional IB Short Term
9.2
15.3
Global EQ General
8.9
27.0
Global MA High Equity
8.8
24.6
Global MA Medium Equity
8.6
20.7
Global MA Flexible
7.8
22.7
Global MA Low Equity
7.8
18.9
eturns on offshore assets were buoyed as the Rand continued its free fall in the second quarter of 2013. The Rand was off another nine per cent after falling roughly eight per cent in the first three months of the year. Strong returns from indices in developed markets such as the Nikkei 225, the S&P 500 and the NASDAQ also helped drive robust returns in unit trusts invested in foreign equities.
Global IB Short Term
7.1
14.5
Worldwide EQ Unclassified
6.9
6.9
Global EQ Unclassified
6.4
6.4
Worldwide EQ General
5.1
5.1
South African EQ Industrial
5.1
12.2
Global IB Variable Term
4.9
11.6
Worldwide MA Flexible
4.9
15.3
Meanwhile resource stocks continued to be hit hard in the second quarter and unit trusts in the South African Equity Resources category suffered a 14 per cent loss over the period. Contributing to the downward pressure was a decline in the price for crude oil and gold. Early in the quarter, gold plummeted 13 per cent in two sessions making it the worst drop in 33 years for the yellow metal.
Regional EQ General
4.3
15.5
Global RE General
3.8
17.2
South African EQ Unclassified
1.6
1.6
South African IB Short Term
1.3
2.6
South African IB Money Market
1.3
2.5
South African MA Medium Equity
0.9
5.1
South African MA Low Equity
0.9
4.6
Over the entire second quarter, gold dropped roughly 25 per cent placing it firmly in bear market territory. The price for crude oil slid a more modest six per cent on the quarter. Meanwhile continued labour unrest in the mining sector also played a big part in the woes of local resource stocks.
South African MA High Equity
0.7
5.3
South African MA Flexible
-0.1
4.4
South African EQ Mid/Small Cap
-0.3
6.0
South African RE General
-0.5
7.3
South African resources funds plummet while offshore equity and balanced funds lead the pack.
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The top 10 performing categories this quarter all belonged to foreign unit trust categories. Foreign unit trusts were the direct beneficiary of the depreciating Rand which benefits South African investors buying offshore assets. Domestically domiciled unit trusts must sell Rand in order to trade foreign assets. When foreign assets are eventually sold, investors then buy back the currency at lower prices and profit from the trade. The best performer among the 29 ASISA categories that Morningstar tracks was the Regional Interest-bearing Short-term category which saw gains of 9.2 per cent in the second quarter. Unit trusts in this category invest in fixed income securities trading overseas. This was followed by 8.9 and 8.8 per cent returns for the Global Equity General and Global Multi-Asset High Equity categories respectively. The best performing category investing in domestic assets was the South 34
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South African EQ General
-1.1
1.9
South African EQ Large Cap
-1.1
0.9
South African IB Variable Term
-2.1
-1.0
South African EQ Financial
-3.7
1.9
South African EQ Resources
-14.1
-16.1
African Equity Industrial category returning 5.1 per cent for the quarter. The worst performing categories largely belonged to unit trusts investing in domestic equities. The Financials, Large Cap, and General Equity categories all suffered losses ranging from 3.7 to 1.1 per cent. These returns were roughly in line with the FTSE/JSE All Share’s 0.2 per cent loss during the second quarter. The South Africa Multi-Asset High Equity category saw a muted, but positive, return during the quarter. Meanwhile fixed income funds fared poorly with the South African Interest-bearing Variable Term category losing 2.1% per cent for the quarter.
David O’Leary, CFA, MBA | Director of Fund Research, South Africa | Morningstar South Africa
Old M of futu under 15h00 to the * Bas
HOW TED BERRIMAN TOOK THE LONG VIEW
“When my colleague, Leon and I left our company in 2003, we headed in separate directions. I invested my pension of R500 000 in the Old Mutual Balanced Fund, and continued to contribute 15% of my salary after that. Leon took a long holiday, bought fancy cars and enjoyed life. Today, Iʼm smiling because my investment is now worth *R4 318 565 (15.7% return p.a.). Leon, despite enjoying life, is going to have to work into his retirement.”
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 your Broker, call 0860 INVEST (468378) or visit www.omut.co.za
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 fundʼs 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. Footnote: Premiums grew at 6% per annum. * Based on average customer experience but actual investment returns
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10010024JB/E
I INVESTED IN WAITING
Steven Nathan CEO of 10X Investments
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Profile
You have over 10 years’ experience in equity research and corporate finance as a managing director for Deutsche Bank in Johannesburg and London. How did this experience motivate you to start 10X Investments? I had a strong sense of how retirement savings should be looked after and, in my role, I saw the poor job the industry was doing. Closer to home, my mother was a victim of the industry’s complex, expensive and opaque products. My choice was simple: remain in an industry that prioritises its own interests, or leave and design an alternative model that prioritises the interest of investors. I chose the latter and started a company designed around the best interests of the investor. This philosophy underlies our mission statement and is part of our DNA, evident in everything we do. What do you believe are the key challenges facing the South African retirement fund industry? The key challenge is to offer clients valuefor-money services as the industry is failing miserably to do so. This is simple in theory but challenging in practice due to the many vested interests and the industry legacy of expensive but cumbersome products and systems. In your opinion, what needs to change in the retirement fund industry? The industry views the intermediary as its client, not the investor; the focus is therefore on incentivising and assisting the intermediary to gather assets rather than meeting the investors’ need. This has to change. The industry will have to offer solutions that serve the needs of investors rather than intermediaries. Where do you see the retirement fund industry going? The industry continues to do very well for itself, despite its poor treatment of clients. This economic anomaly feeds on informational asymmetry, but it cannot persist. The industry is under pressure from government to reform and to offer simple, low-cost solutions. Consumer awareness is improving as media coverage is increasing, and the horror stories of poor savings outcomes are spread by family and friends. The industry can either reform itself voluntarily or be forced to reform by government and consumers. What is 10X Investments’ philosophy? 10X’s core purpose is to help people have more money at retirement. Everything we do is focused on improving the savings outcome.
We do this by providing one optimal solution. There are no complex choices, complex investment products or high and hidden fees. The 10X solution has three components: 1. Age appropriate portfolios: All fund members are invested in an optimal portfolio based upon their age and expected retirement date. 2. Index funds: 10X uses index funds as these generate superior long-term investment returns relative to most active funds. 3. Low fees: 10X charges low fees (typically half the industry average or less) to give our clients more of the investment return. Each one per cent fee saved increases their final pension by approximately 30 per cent. We are fully transparent and the 10X funds are controlled by professional independent trustees; we are not player and referee of our clients’ savings. In essence, 10X administers and manages retirement funds at half the industry fee with similar or better returns. 10X funds have outperformed the average large pension fund manager (before fees) over the one, three and five years ended December 2012. How do you wind down from the pressures of your position? I spend time with my wife and three children, who are 4, 6 and 8 years old. My two boys are active soccer players and my oldest plays provincial chess, which absorbs much of my weekend. My four-year-old daughter loves the beach and the urban park in Green Point. I also exercise regularly, which includes biking with my children and the odd boxing lesson with my middle son. I enjoy reading, especially non-fiction stories about inspiring people. How do you define success? Being able to live out my passion, my beliefs and my values. This is my inner scorecard and it brings me true happiness and satisfaction. Hopefully this passion will also contribute positively to society and bring about win-win partnerships with our clients and the broader community. Finally, if you had a R100 000 where would you put it? Assuming a 10-year plus horizon, I would invest in a low-cost index funds with R25 000 each in SA equities and SA property and R50 000 in international equities. I would not trade this portfolio, other than to rebalance occasionally. I think I would be very pleased with the outcome. investsa
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news Sungard’s Investran to boost Maitland’s operational efficiency Maitland, the largest third party administrator in South Africa, has selected SunGard’s Investran to help automate its investment accounting process and investor reporting operations. Investran’s single platform will help Maitland facilitate internal collaboration, support investor relations and automate accounting to streamline the investment and investor accounting process and provide enhanced reporting to its investors.
Bruce McGlogan, head of private equity and real estate, fund services at Maitland says that its services extend across all fund types, strategies and investment styles. It operates at the highest technological and governance levels and Investran offers a comprehensive support model backed up by skilled resources that will enable them to deliver on their service commitments. “We found that its broad functionality and the fact that it is a highly configurable product allows ease of customisation for our clients both
Prescient has announced the appointment of Melanie Allen as its new CEO for EMH Prescient, the investment manager’s Namibian arm of the business. Allen has a wealth of experience having previously been a director at Charter Asset Management, she has had various positions at Old Mutual Namibia, Namibia Asset Managers and Pointbreak Wealth Managers. She holds a BCom accounting obtained from the University of South Africa (UNISA) and completed five years of articles at KPMG in 1998.
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locally and globally and helps us achieve greater business agility as we look to grow into new markets,” says McGlogan. “SunGard’s Investran will help Maitland analyse, manage and disseminate large amounts of qualitative and quantitative data. As an integrated front-to-back solution suite, Investran will facilitate internal collaboration, support investor relations and automate accounting, thereby helping improve overall business efficiency and mitigate operational risk,” concludes McGlogan.
New online portal for JSE market data The Johannesburg Stock Exchange (JSE) has rolled out a web-based portal, Nova, through which JSE market data clients can report their monthly usage of JSE data direct to the exchange. This system allows market data clients to log on to Nova to view JSE data products that their company subscribes to as well as historical usage figures. This assists with risk management of monthly reporting for clients while reducing administration and complexity. Ana Forssman, director of Market Data at the JSE, says that feedback from clients was that the new system is easy to navigate, provides them with better control of their monthly terminal and user reporting and has freed up some staff capacity. An added benefit is that the intuitive interface and historical usage information will be useful when data managers switch roles or leave a firm.
Giyani Gold listed on the JSE’s AltX Giyani Gold, an exploration mining company based in Canada, is now listed on the Johannesburg Stock Exchange’s (JSE) AltX board. Charles Allen, president of Giyani Gold, says that this listing will provide the company with an additional platform to raise capital for growth in addition to raising the company’s profile and investor base in the region. “This listing will facilitate further BEE involvement in the company and we’re very pleased that Southern African investors will benefit from the development of the region’s national resources.” Zeona Jacobs, director of issuer and investor relations at the JSE, said that they were very pleased to welcome Giyani Gold on to the JSE. “Johannesburg started as a mining town
and owing to the number of resource assets in South and Southern Africa, investors in this market understand investing in mining. Despite challenging global conditions, the message that the JSE shares with companies with African assets is that there is capital in South Africa.” Allen also stated that Giyani Gold is focused on building its portfolio of under-explored proven gold assets. “The company’s exploration activities are currently focused in the Giyani region in Limpopo, South Africa and in Ontario, Canada. The company will separately list its Canadian exploration assets in Toronto in the next few weeks. “Giyani Gold will also be listing on the Namibian Stock Exchange (NSX) in the near term,” concludes Allen.
“The application was designed and developed by the JSE’s internal IT team using Agile methodology, piloted by this project. The first phase of the project is related to data from all markets with the exception of indices, while the next two phases will extend this facility to indices reporting as well. Future releases of Nova will allow clients to upload data files for automatic processing which will streamline what was previously a manual process,” says Forssman. “International demand for JSE data continues to grow, with 45 per cent of data sales for 2012 having come from outside of South Africa. Traditional markets of Europe and the UK continue to be important but during 2012 we saw a spike in demand from North America – primarily from algorithmic players,” concludes Forssman.
Henry Munzara has been appointed manager of the STANLIB Shari’ah Equity Fund. Munzara will manage stock selection and asset allocation. His position as STANLIB’s head of research complements the management of the Shari’ah Fund and is in line with the asset manager’s focused agenda of having thematic funds housed within research. He has 16 years’ asset management experience in equity research and managing multiasset class funds. Prior to his appointment in September last year, he co-managed the STANLIB Absolute Return Funds.
Old Mutual Wealth has announced the appointment of Dave Mohr as chief investment strategist. Mohr was previously employed by Citadel as chief investment strategist and as chief economist at Old Mutual for 11 years. He established an investment research and asset management capability at Citadel and designed investment and advisory solutions. His responsibilities at Old Mutual Wealth will include providing input to the management of the Wealth Investment Strategies, and presenting these strategies to clients, planners and trustees. In doing so, Mohr will be supporting the group’s business development activities and will also be a key spokesperson for Old Mutual Wealth on investment issues. investsa
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Practice management
Retirement reform
Legacy management
O
nce upon a time, as all good fairy tales start, a secure pension was aligned with lifetime employment. Dutiful sons, not too many daughters in those days, went out to secure a job for life at a large institution. A handful went out and became entrepreneurs, starting their own business, much to their dads’ discomfort; unless, of course, they were a qualified medical doctor or dentist. Hand in hand with the new job was a canteen with really good lunches, a medical aid guaranteed for life by your employer, and a defined benefit pension fund. For those who don’t know, this defined benefit fund offered an annual pension of something like two to three per cent of your final annual salary for every year of service. So, if you worked for 40 years, for the same employer, you could retire with a guaranteed pension of between 80 and 120 per cent of your final salary. Importantly, the investment, expense and mortality risk all rested on the secure shoulders of your employer.
His smart financial director would drive down costs, severely question poor investment performance and challenge mortality assumptions. The pension fund was another business expense to be managed. Unfortunately, one of the ways of reducing costs was to offer very little or indeed no termination values when a disloyal employee had the gall to find another job. Savings here would be applied to lower the cost of running the fund for the benefit of retirees and the employer. In the late eighties, promoted by poor investment returns, smart advisers and politically charged unions, relieved employers were let off the hook as they converted their funds with alacrity to defined contribution provident funds. The benefits were clear; pass the investment risk on to the employee and set the expenses on a cost-to-company basis. By paying out a lump sum on retirement, the residual moral or legal obligation to the retiree and their dependants was wiped out. They could even use the opportunity to negotiate out of the lifetime medical aid commitment. In the process, less ethical employers were able to pocket the savings achieved as surplus when the members moved to defined contribution. 40
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The defined contribution/cost-to-company world also opened up a cornucopia of investment choice, preservation and annuity options as financial institutions waged war for the assets previously tied up in a relatively small number of employers’ hands. During the nineties, the government again stepped in, secured entrenched rights for employees and insisted that ex-employees be compensated with their equitable share of surpluses of the past. Why this recap? Well in the latest of a series of papers published by National Treasury entitled ‘Charges in South African retirement funds’, we can perceive this legacy embedded in the industry. These historic developments surely continue to have their role to play in driving up costs. In the Treasury paper, the various types of funds are set out. Depending on how we chop up the industry’s record keeping, there are potentially 11 different principal retirement funding methodologies created by, what will shortly become, our legacy retirement funding regimes. In addition to the life annuity/pensions books maintained for some of these old funds, there are according to the FSB (as reported in the National Treasury’s paper) the following: • Members split between defined benefit pension and provident preservation funds: 3,705. • Members divided between defined contribution pension and provident preservation funds: 213,929. • Members split between defined benefit pension and provident funds: 2,135,821.
funding. Similarly, computer and other systems need to be preserved to enable processing of transactions on these various benefit platforms. To test the challenge, we can ask: who can remember how to process a retirement from a defined benefit provident fund? A further driver of costs is that the preservation of entrenched rights for a smaller and smaller group in one or more of the 11 ‘pockets’ becomes progressively more expensive. The existence of these various pockets of retirement benefits also results in potentially multiple records being maintained for one retiree, at a cost. The feedback then, to National Treasury and other decision-makers, is to consider carefully the long-term implications of the preservation of existing rights against the benefit of a streamlined single channel for retirement funding. It is also worth noting this historic complexity when comparing the South African industry’s costs against other countries where this complexity simply does not exist.
• Members split between defined contribution pension and provident funds: 6,096,660. And finally: • Members of retirement annuity funds: 3,818,438. The life and pensions industry is sometimes called the long-term industry to distinguish it from the short-term industry, but it also denotes the long tenure engagement with its clients. For financial institutions, this long-term engagement includes the cost of maintaining trained human resources who can understand and manage the various rules involved in successive iterations of the various forms of retirement
Gavin Came, Consultant at Sasfin Financial Advisory Services, and Chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern Africa (FIA)
Products
New private equity fund from Old Mutual Investment Group
Old Mutual Investment Group launched a new private equity fund that targets high net worth individuals and institutions. The fund gives investors access to a selection of South Africa’s leading private equity managers Jacci Myburgh, head of Old Mutual Private Equity, says that the Old Mutual Multi-Manager Private Equity Fund 3 is its third multimanager fund and is aimed at both individual and institutional investors. “The fund invests in five underlying private equity managers, which include Actis, Ethos and Capitalworks, as well as two of Old Mutual’s direct funds. Managers are selected based on their proven track records, unique investment strategies and depth of experience. Investors gain exposure to over 40 companies across a wide variety of industries, geographies, investment vintages and manager styles, making it a uniquely diversified investment solution for investors wanting to take advantage of the benefits of private equity.” Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA) says that this latest fund launch by Old Mutual Private Equity is confirmation that the South African private equity industry is adaptive and alert to investors’ needs. “It shows, too, that appetite for the asset class is healthy and that private equity fund managers continue to find opportunities for growth and returns through careful deal selection and rigorous management of assets.” Van der Merwe notes, “Investing in private equity was traditionally the domain of institutions but by pooling investors’ capital within an innovative fund-of-funds structure, investors in Old Mutual Multi-Manager Private Equity Fund 3 can access the diverse portfolio for as little as R100 000. While private equity is a long-term investment, typically 10 years, this fund is underwritten by Old Mutual, which offers clients the option to access their investment early.” However, Myburgh does caution that there is an exit fee and strongly advises investors to consider this asset class as a long-term hold. “Private equity involves investing capital into companies that are not listed on a public stock exchange. The objective is almost exclusively to enhance the value of the business. The reason we believe private equity firms are successful in building better quality businesses is because of an alignment of interest between investors, private equity managers and management. As shareholders, we are also on the management boards, and are actively involved in the running of these businesses,” concludes Myburgh.
Sanlam Lifestage launched for life-cycle investing
Sanlam Employee Benefits has recently added Sanlam Lifestage as a new product option to its retirement platform. Marcus Rautenbach, head of investment consulting at Simeka Consultants and Actuaries, says the new product lives up to the fundamental premise of life-cycle investing – the need to manage appropriate risk at the appropriate time. “There are two major potential pitfalls to retirement investing. Firstly if you invest too cautiously and early, you end up with less then you need at retirement. And secondly, market volatility in the years just before retirement can chew up a large chunk of your savings. The distinguishing feature of the life-cycle investment strategy is that its overall asset allocation automatically adjusts to become more conservative as the investor approaches retirement age,” says Rautenbach. Rautenbach also states that Sanlam’s product addresses both risks well and its stand-out feature is the choice it gives to those close to retirement. “Six years before an individual stops work permanently, we consult them to assess which one of three categories they fall into: do they have additional income streams for retirement so they can afford to stay in a slightly riskier portfolio; do they require guaranteed returns; or are they highly conscious of the need for their retirement savings to keep pace with inflation. A different portfolio is tailored to each of these types of investor to ensure their retirement needs are met.” The three options will help simplify the process of moving into a living annuity once the person retires. And to minimise marketrelated risk, transfers into one of the three options happens gradually over a 50-month period. “Adopting strong default strategies are the ideal way in which retirement funds can pursue the national objective of making retirement savings more accessible and cost-effective. Retirement funds can invest in Sanlam Lifestage through the Sanlam Umbrella Fund or through free-standing funds that are clients of Sanlam Employee Benefits,” concludes Rautenbach.
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Regulatory Development
bang A bigger
for your buck with REITs
S
outh Africa is the latest country to introduce real estate investment trust (REIT) legislation regarding the ownership of property. This is expected to help grow the property market as international investors are likely to be more willing to invest as they have a better understanding of the sector.
Until recently, property investors in South Africa could invest in property through more rigid property unit trusts (PUT) and property loan stocks (PLS). The introduction of simpler REIT legislation is expected to align and harmonise property investments with global norms. The greatest criticisms of PUTs and PLSs are their inconsistent tax treatment and complex oversight layers which often add costs and erode investor returns. PUTs were introduced in the 1960s and enable the investor to hold shares in immovable property directly. They are governed by the Collective Investment Schemes (CIS) Act, with an FSB-mandated registrar, and are managed by a management company in a trust that issues units to the public. PUTs are permitted to borrow up to a maximum of 30 per cent of the value of the property portfolio, and are not liable for capital gains tax (CGT) when properties are sold. Property loan stocks are property companies, governed by the Companies Act, that own different types of immovable properties. Investors participate by investing in a hybrid debt equity instrument. Each PLS share is issued with a linked debenture which allows the company to treat dividends as interest, which is tax deductible. All issues governing debt financing are limited by the memorandum and articles of association, and the Companies Act. Neither PUTs nor PLSs have minimum distribution requirements, but distributions by a PUT are prescribed under its trust deed 42
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as required by the CIS Act. Since a PUT is essentially a trust, it is taxed like one. This means for all its distributions the conduit principle applies, and that income is tax exempt and only taxed in the hands of the unit holders. Any undistributed income is subject to a 40 per cent tax rate. The PUT entity is not subject to CGT, but the PUT unit holder is liable for it. This means that any capital appreciation is taxed in terms of the CGT provisions in the Income Tax Act. PLS companies are subject to income tax at a rate of 28 per cent of their taxable income, and CGT at an effective rate of 18.6 per cent for all capital realisations. PLS shareholders are also subjected to CGT on their realised capital appreciation. On dividends declared, both PUTs and PLSs are liable for withholding tax at a rate of 15 per cent. With the PUT and PLS tax regimes being so inconsistent, the South African Treasury, lobbied by the property industry, adopted the REIT structure, bringing our legislation into line with international norms. With REITs, the tax regimes are harmonised, resulting in the South African property sector being more internationally competitive.
The REIT treats the distribution as a tax deductible expense. Capital gains tax (CGT) and securities transfer tax (STT) will fall away for any capital gains on property sold by the REIT, or on the buying or selling of shares by investors. In addition, South African investors will receive gross distributions from a SA REIT without the 15 per cent dividends tax being levied against the distribution. Foreign shareholders of SA REITs will be levied a dividend withholding tax after 1 January 2014 – the current rate is 15 per cent, or the applicable double tax agreement rate could apply. The REIT tax regime applies to JSE-listed PUTs and PLS companies. These entities can apply to the JSE to convert into REITs. PUTs are already regarded as REITs, while PLS shareholders will have to change their company’s constitution through a resolution at a general meeting. There is no prescribed management model, or prescribed property sector investment requirements, and REITs may invest across various sectors including retail, office, residential, industrial and healthcare properties. They are governed by the JSE Securities Exchange.
REITs are entities that invest in a diversified pool of professionally managed real estate assets. Similar to PUTs and PLSs, investors don’t need a large capital outlay for an investment that is relatively passive, consisting of a pool of real estate assets which offer a steady rental stream and exposure to capital growth. However, with an REIT, investors get a bigger bang for their buck because of the additional taxation benefits. Income earned by the REIT is seen to vest with the investor and, if distributed during the year that it was earned, is taxable in the hands of the investor and not the REIT entity. Investors are taxed on the proceeds at their effective tax rate.
Naledi Mongoato, Investment Analyst at Novare Equity Partners
The world
EUROPE, PORTUGAL, TUNISIA, GERMANY, RUSSIA, SOUTH AFRICA, CROATIA
EU ESTABLISHES NEW BANK RULES TO PREVENT BAILOUTS The European Union (EU) has reached an agreement on determining who will pay for bank bailouts in the future without the taxpayer bearing the consequences. The deal is an important step forward in restoring financial and economic stability to the recession-hit continent. The main element of the deal includes a set of rules which will determine the order in which investors and creditors will have to take losses when a bank is restructured or shut down. BUSINESS CONFIDENCE IN THE UK AT SIX-YEAR HIGH According to the British Chambers of Commerce (BCC), export sales have boosted the UK’s economic prospects. The BDO Output Index quarterly survey shows an increase in the UK’s economy, with business confidence being at its highest level since 2007. “The UK upturn is slowly strengthening,” said David Kern, the BCC’s chief economist. CREDIT DERIVATIVES SECTOR MARKETS SUPPRESSED BY WORLD’S LARGEST BANKS The Credit Derivatives Industry (CDI) has been hit hard by 13 of the world’s biggest investment banks, according to the European Union. Data provided by the Markit Group Ltd has revealed complaints by the CDI stating that it would like to see more transparency among the banks. “The commission states that the banks acted collectively to shut out exchanges from the market,” the EU’s executive arm said. STOCK MARKETS TUMBLE DUE TO ONGOING POLITICAL UNREST IN PORTUGAL The Portuguese Government, which is said to be on the brink of collapse due to ongoing
political unrest, caused the FTSE (London Stock Exchange) to fall 74 points in the first half of the year. EU stock markets have taken a dramatic fall following political volatility in the nation, which has sent the currency downhill, threatening a new phase in the Eurozone crisis. FRANCE’S HOLLANDE PRAISES TUNISIA AS MODEL FOR REGION France has pledged $640 000 000 to Tunisia, after French President Francois Hollande called the nation “a model in the region”. According to Hollande, the country’s religion and democracy have proven to be compatible and has resulted in political stability in the region. SOUTH AFRICA RANKED THIRD-HIGHEST AMONG GLOBAL PROPERTY GROWTH South Africa’s residential property sector has seen a favourable year in housing prices, according to finance publication, The Economist. The survey conducted by the publication revealed that the nation ranks third, only behind Hong Kong and Brazil, in the world’s property prices. Hong Kong’s growth listed as 24.5 per cent, Brazil’s at 12.8 per cent and South Africa’s at 11.1 per cent. GERMAN EXPORTS SEE SHARPEST FALL SINCE 2009 As global economic growth slowed down, so did Germany’s exports, falling to 9.6 per cent, which is the nation’s sharpest fall since 2009. Overall exports, according to the Federal Statistics Office, were 2.4 per cent lower than before. Carsten Brzeski, senior economist at Germany’s largest bank, ING, says that the figures indicate that Germany is struggling to find its feet during the volatile economy. NEW FINANCE MINISTER FACING UPHILL BATTLE WITH EGYPTIAN ECONOMY Ahmed Galal, managing director of the Cairo-based Economic Research Forum since
2007, and for 18 years a researcher at the World Bank, has accepted the post of finance minister in Egypt. With the nation’s budget deficit widening, Galal will now try to convince his economic counterparts to accept economic austerity, stating that the nation is almost at its bankruptcy point. TIMING VITAL FOR AFRICAN SUCCESS According to Portuguese-based Espirito Santo Investment bank, success can be easily achieved by JSE-listed companies in Africa. According to a report conducted by the Avior research centre, investors should set their sights on private equity investments within Africa and beware of the “pitfalls of chasing the African growth story without a proper understanding or the appropriate resources”. IS CROATIA READY FOR EU MEMBERSHIP? Croatia has been granted European Union (EU) membership, despite questions being raised regarding the recession-hit nation’s readiness to become a member. Already under immense economic pressure, the general argument has been that the union’s lesser nations have played a significant role in the rest of their EU counterparts lagging recession recovery. The European Union will grant Croatia $15 billion as part of the agreement, which also includes access to foreign direct investment opportunities. PENSION FUNDS AT RISK IN $43 BILLION BID TO JOLT ECONOMY Russian President Vladimir Putin has announced a risky but ambitious economic plan going forward for the nation. Putin’s decision is to dip into the country’s pension funds for loans of up to $43.5 billion, said to be used for infrastructure projects and other investments, leaving some of Russia’s top financial experts concerned about a burst of inflation. investsa
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They said
They said “The arguments in favour of listed property include diversification with strong, predictable returns when equities are weak; good yields compared to cash; benefits afforded in a low interest rate environment and being a good inflation hedge. However, there are many arguments against listed property,” Grant Alexander, Director of Private Client Holdings, warns that REITs might not offer investors as much as hoped and advises that SA investors must be aware of several pitfalls that real estate as an asset class holds. “Local investors are buying into passive investing, according to my experience. Trustees are definitely seeing what’s out there in terms of the papers from Treasury. In a low yield environment, a few per cent savings in costs makes a big difference to a member and they are therefore displaying a growing interest in passive management.” Head of institutional business at Nedgroup Investments, Vuyo Nogantshi, commenting on the fact that it is clear that passive investing is gaining popularity as a way for the industry to reduce costs. “Endowments’ interest in Africa began after the 2008–2009 financial crisis,” said founding partner at investment firm Kuramo Capital Management, Wale Adeosun. Adeosun estimates that 10 to 15 per cent of these institutions are already investing in Africa, while up to 30 per cent may be seriously looking for deals there. “There is no correlation between a country’s GDP growth and the performance of that
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country’s equity investments. Investors seem to be buying into the African growth story instead of actually understanding the price to value relationship of a company, which is crucial in understanding whether a business is overvalued or not.” Analyst at RE:CM, Amédi de Klerk, discussing how investors need to be aware of the hype around Africa, as the predicted economic growth may not necessarily lead to investment returns for investors. “Where there is lots of money, there shall always be temptations, and leaders and workers should always be careful not to burn their fingers. This is the reason many of them are run by trustees. This is done so that the union is saved or immune from the negative or unintended consequences of an investment company.” Cosatu president, Sdumo Dlamini, commenting on the fact that union investment companies are emerging as pressure points in internal political battles. “The performance of private equity in the three-, five- and 10-year horizon has outperformed listed equity. So it is an attractive option for portfolio managers like institutional investors who are looking for long-term investments.” Chief executive of the South African Venture Capital and Private Equity, Erika van der Merwe, commenting on the huge foreign appetite for exposure to Africa. “Africa must seek greater benefits from the BRICS forum, and yet we must not sell our soul in order to seek investment.” Public Enterprises Minister Malusi Gigaba advising that
when seeking investors, companies should look beyond the traditional – Anglophile and Francophile investors – and consider forging links with other African countries. “In expansionary periods, where everything feels good and right, those who want to beat others expose themselves to higher risk investment.” Head of portfolio management (products) at Investment Solutions, Kabelo Rikhotso, discussing how during recessionary periods, investors flee to quality and are prepared to overpay for shares they deem recession proof. “Trade and investment has featured prominently on our agenda because we believe that this will assist in dealing with the effects of slow economic growth and growing unemployment in both our countries.” International Relations Minister Maite Nkoana-Mashabane commenting on the United States being a major economic partner for South Africa and that the region continues to feature high on the list of trade and investment partners. “South Africa’s listed companies have one (of) the highest median cash flow return on operating assets (or CFROI) in the world, making South African managers some of the best stewards of investors’ capital,” according to a detailed assessment by Credit Suisse titled, South Africa’s Capital Excellence, adding that the best South African companies and their managers outshine their peers anywhere in the world when it comes to returns on capital invested over the past 10 years.
You said
u o Y aid s ts e e w st t st e b e la h t e h f t e o over m o f s y you o n tio ned b eeks. c e l A se mentio four w as @timharris: “25 senior officials left Treasury in the past year. 1/10 senior positions are vacant. Is there a problem here?” Tim Harris – South African MP. Finance Spokesperson for the DA. Cape Town @ceesbruggemans: “In current global adjustment our SA solvency/creditworthiness are NOT at issue. It is our labour/politics/ supply/growth failing.” Cees Bruggemans – Consulting Economist/Raadgewende Ekonoom. Johannesburg, South Africa. @SmallTalkDaily: “Seems like the only discount product you can buy at Pick n Pay these days is its share price; hits another year low!” Anthony Clark – Networked and opinionated small-to-mid cap analyst covering a vast swathe of JSE listed and OTC stocks with focus on industrial, food and agriculture stocks. Cape Town. @angelo2711: “You’re never too old to become an entrepreneur.” Angelo Coppola – CCTV Africa business news correspondent, financial blogger and runner. I mean and support everything I tweet and RT. Johannesburg. @ReutersJamie: “The lowdown on China’s slowdown- GDP has eased in 9 of last 10
quarters, 2013 on track to be slowest growth in almost quarter of a century.” Jamie McGeever – Editor and presenter at Reuters TV, tweeting on markets and economics. Mostly. Formerly in New York, Madrid, Rio, Sao Paulo. London. @MichaelJordaan: “The stockmarket is a huge distraction to the business of investing.” Michael Jordaan – Banker, economist and wine enthusiast. Joburg, South Africa
from major investors for inspiration, motivation and insight. @TraderFrans: “At last - do we see the long awaited relief rally in commodity stocks? Out of the lot, I think. Anglo-American has the most potential” Frans de Klerk – Koop en verkoop vlakke van aandele/markte op jou vingerpunte. Buy and sell levels of shares/market at your fingertips. Johannesburg, Suid Afrika.
@johnfcarter: “Scale out of these winners. Bulls make money. Bears make money. Pigs get slaughtered.” John F. Carter – INC 500 Entrepreneur and Trader, author Mastering the Trade. Speak true. Breathe deep. It’s all a dream within a dream. Austin, Texas. @keithmclachlan: “These are such volatile markets recently that the only thing I know with certainty is that our market will be flat over the coming weekend.” Keith McLachlan – Small and mid cap analyst. Writer. Painter. Talker. Philosopher. Warrior poet. South Africa. @Investor_Quotes: “‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’ Warren Buffett” Investment Quotes – Quotable quotations
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And now for something completely different
Rocking to guitar investing
a solo investment worth its pick
D
espite the fact that many rock fans around the world may own a guitar early in their lives, owning a vintage guitar still remains a fantasy for many. According to the experts, the market for vintage and collectable guitars remains lucrative and collectors could see their guitar investments yielding rewarding returns.
The following guitars are examples of how excellent these investments are:
However, investing in vintage or collectable guitars is not simply a ‘rock and a roll’ – many factors come into play in selecting a viable investment. Educating yourself on the various brands and models of guitars, as well as learning to appreciate its respective merits and historical significance is good way to start. In addition, keep collectors’ preferences in mind when selecting a particular brand of guitar to invest in. Investing in guitars that collectors hold in high regard is a sure way to allow for a return on value. Many guitars are judged by the company or craftsperson who made them and this needs to be taken into consideration.
www.carcabin.com
Jimi Hendrix’s 1968 Fender Stratocaster – $2 million Largely considered to be one of the greatest guitarists of all time and one of the most important musicians in rock history, James Marshall Hendrix, or Jimi Hendrix, was an American musician and songwriter who gained fame around the world. Hendrix purchased the white Strat in 1968 and played it at numerous concerts. It’s the same guitar on which Hendrix played The Star Spangled Banner, the recording of which was inducted into the Grammy Hall of Fame in 2009 as one of the headline acts at the iconic Woodstock Festival in 1969. The Strat is rumoured to have sold for $2 million to Paul Allen of Microsoft in 1998, complete with cigarette burns on the headstock, and trademark Hendrix reverse stringing.
Particular attention should be paid to craftsmanship as well as the types of wood used. Inspecting a guitar for cracks, replacement parts and evaluating its playability is crucial too; while a re-glued neck, refinish or new tuners can drive a guitar’s value down. However, original older Fender Stratocasters and Gibson Les Pauls with that road-worn look and feel are worthy, but the neck should be good and playable. It is advisable to obtain an evaluation from an authorised expert when investing in guitars, especially because many forgeries or counterfeit guitars do exist. Comparing the components of the guitar to manufacturer’s specifications for any discrepancies would help in identifying a forged guitar. A pivotal element influencing a collectable or vintage guitar’s value is its owner history and whether it has been signed by a famous musician. Owning a guitar that was once played by a respectable guitarist will increase a collector’s desire to own it and they are more likely to fork out huge sums of money to obtain it. 46
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Fender Stratocaster auctioned off for tsunami victims – $2.7 million To help raise money for the victims of the tragic 2004 tsunami which struck several nations along the Indian Ocean, a Fender Stratocaster was auctioned. It may not have the same musical history of the other valuable guitars which were played by famous guitarists, but it bears the signatures of some of the best musicians in the world. Among the artists who autographed the guitar were Paul McCartney, Mick Jagger, Keith Richards, Eric Clapton, Brian May, Jimmy Page, David Gilmour, Jeff Beck, Pete Townsend, Mark Knopfler, Ray Davis, Liam Gallagher, Ronnie Wood, Angus Young, Malcolm Young, Tony Iommi, Sting, Ritchie Blackmore, Bryan Adams and members of the Def Leppard band.
om911.com
www.flavorsofthought.com
Bob Marley’s custom-made Washburn 22, Hawk series– $1.2 million Nesta Robert Marley, or Bob Marley, was a singer and songwriter who hailed from Jamaica. He is known for popularising reggae music together with his band, Bob Marley and the Wailers. Marley is said to once have given the Washburn, which was custom made for himself, to a technician named Gary Carlsen on 21 November 1971 after a gig in Vancouver. It is estimated to be around $1.2 million.
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“MY DAUGHTER BECAME A PROFESSIONAL
MUSICIAN AT
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“My daughter has always been passionate about music. I remember her using the furniture in our house as her drums until we bought her a real set. She dreams of becoming a professional musician when she grows up. That’s why I started saving for her education early. Old Mutual took her to the Johannesburg Philharmonic Orchestra, where she got to play with them and experience her dream, 15 years before it comes true.” Saving for your child’s education starts with a plan. Call 0860 60 60 60 or contact your Old Mutual Financial Adviser or your Broker to get an education plan. Let us join you through every stage in your life journey, from today. Magauta Mokoena – Old Mutual Customer
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