INVESTSA September 2012 FPI

R37,50 | September 2012

HEAD TO HEAD

Templeton Emerging Markets Group and 36ONE Asset Management

Responsible Investing how ethical is your investment

profile

CEO of Sanlam Investments: JOHAN van der merwe

RETIRING

RIGHT

Look at the right investments

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Contents

CONTENTS

06 10 18 20

RETIRING RIGHT

22 26

Responsible Investing How ethical is your investment?

HEAD TO HEAD

Expensive now, but perhaps not later

REGULATION MAKEOVER RECEIVES MIXED REVIEWS

S U BS C R I P T I O N S

Focus: Investing for retirement

The real cost of annual fees R37,50 | September 2012

Profile: Johan van der Merwe, Head of Sanlam Investments

Templeton Emerging Markets Group and 36ONE

MONEY MARKET FUNDS

PROFILE

CEO OF SANLAM INVESTMENTS: JOHAN VAN DER MERWE

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Head to Head 36ONE Asset Management and Franklin Templeton Emerging Markets Group

RETIRING

RIGHT

06

Look at the right investments

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3

Letter from the editor

letter from the

editor Retirement isn’t easy. And it’s even harder getting to that stage in life when you should be able to start enjoying more time and new interests, secure in the knowledge that there’s enough money to see you through.

For the vast majority of retirees, there’s not. That’s why making additional and wise investment decisions in retirement are so important.

At times I question our sophisticated financial system. Retirement is a good example. As some articles in this issue show, the cost of retirement products is outrageously high. This does not encourage people to save.

Then I look at Sipho Dlamini, my gardener whom I’ve quoted before and the man I talk to when I want to get a view through the white-noise of the financial market. Sipho is very confident about his retirement. Like many Zulu people working and living in Durban, he has a ‘farm’; part of a smallholding in the country. There he has four children and, at last count, 36 head of cattle. He reckons that’s all he needs. He doesn’t want any more children, putting as much money as he can into providing a decent education for them. When he gets too old to work, his children will take care of him, he tells me. And his cattle make him a relatively wealthy man in the area.

Is the urban system of pensions, retirement annuities and post-retirement investments any better? I wonder. Anyway, we’ve got lots of good advice on the pages that follow on how to make sound investments in retirement. The underlying point is that it’s never too late to improve your financial position in retirement.

Pieter Koekemoer of Coronation Fund Managers, Walter van der Merwe who heads FedGroup Life, and Lee Nakan at Old Mutual, examine different problems and possible solutions for retirement savings and investment.

Maya Fisher-French points out one of the problems; the real cost of annual fees. I also look at the topic and find that property, both listed and physical property, could be one of the best investments in retirement.

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

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

Copyright COSA Communications Pty (Ltd) 2012, All rights reserved.

Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure

Among our regular features is Chris Hart, chief strategist at Investment Solutions, examining the Libor scandal overseas and pointing out some surprising examples of market manipulation in South Africa. Head to Head has Franklin Templeton’s emerging markets icon Mark Mobius and Steven Liptz, co-founder of 36ONE Asset Management, on Where is the value?

The profile is Johan van der Merwe, head of the Sanlam Investments cluster.

It includes some sage investment advice.

accuracy of editorial content, the publishers do not accept responsibility for

While investors are ultimately responsible for providing for their retirement, there’s a lot financial advisers can do to help them, both up to retirement and the days beyond. It’s the least you can do for your clients.

any damages, including pure economic loss and any consequential damages,

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 resulting from the use of any service or product advertised in this publication.

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

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INVESTSA

SHAUN HARRIS

Retiring right Look at the right investments

Many so-called experts and cynics out there will tell you that when you reach retirement it’s too late to start investing. All this should have been done years earlier and if retirees have not made sufficient provisions, they face a bleak change in lifestyle.

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It certainly helps if a person has started investing for retirement early.

But it’s also never too late to invest for retirement, including when you are in retirement. What’s important to realise is that you need to make your money last, at a decent standard of living, throughout retirement. Readers would have seen all the dire warnings about how few people have sufficient savings and investments when they retire.

The point, though, is that you can do something about it.

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“The listed property investor also sees the benefit of exposure to a class that delivers a regular income stream along with the prospect, down the years, of capital growth.”

Being in retirement does not necessarily mean adopting a short-term investment view. For at least two reasons, people who retire in decent health are going to live longer than they probably expected. First is that retirees generally live a healthier lifestyle nowadays.

Many people are more good food and good diet conscious, and have learned the value of moderate exercise. Secondly, advances in medical science mean that all of us will generally live longer.

We should all be celebrating a longer life. But it does pose challenges for retirement. Although, a longer life does mean there’s sufficient time to make the right investment decisions. But it’s not going to be easy.

“One of the stiffest challenges that all pensioners face is being able to build up sufficient capital from which to draw a comfortable monthly income or to purchase a pension that pays an annuity that will see them through to the end of their lifetime,” says Candice Paine, head of retail and Sanlam Investment Management (SIM). She goes on to add that this may have seemed possible in the “go-go years of the early 2000s”, when the local stock market was having a sustained bull run. But the investment environment has changed profoundly since then. It’s a tougher job making the right investment decisions in retirement but still a task that can be accomplished.

Much depends on choosing the right investment vehicles. We assume the retiree has some form of structured income, perhaps a company pension or a living annuity. In addition, the retiree will need some excess capital that can be invested to tide them through, and hopefully enhance, their retirement years. Even for a period as short as five years, that means at least partial exposure to equities. This could be through a simple product like a low equity asset allocation unit trust fund. If the retiree does not need additional income the capital should grow. And if there is a crisis, some of the capital can be accessed, usually within 24 hours.

For retirement investing, exposure to equities, necessary as it is, should be limited.

There are some better options. One is listed property. Mariette Warner, manager of the Absa Property Equity Fund at Absa Asset Management, says total returns from listed property over the first half of the year stood at approximately 21 per cent. “This was significantly up on the second-placed category, the All Bond Index with its 8.3 per cent return and the All Share Index return of 6.1 per cent.” She adds this is not an isolated performance as listed property has consistently achieved solid returns in recent years.

“The listed property investor also sees the benefit of exposure to a class that delivers a regular income stream along with the prospect, down the years, of capital growth.

Those with no immediate need to access quarterly distributions can leave the money within the unit trust to buy more units,” Warner says.

Listed property has proved to be a good investment, particularly well-suited to people in retirement. But what about physical property; the hole in the ground? This might provide even better benefits to retirees. John Roberts, CEO of Just Property Group, says with the world economic crises, global property prices have collapsed, allowing investors with sufficient capital the opportunity to make investments in property substantially below market value. “Property remains a long-term wealth creator and, in finding bargains, that return on investment grows exponentially.”

Retirees can also look at the local market, taking advantage of the lowest home loan rates in South Africa in nearly 40 years. An investment in property can double as a source of income and by providing a holiday home, just what a retired couple needs when they have more time to take off. But a holiday home abroad could be even more attractive.

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“Exchange control regulations allow, subject to foreign investment clearance certificates, a once-off offshore investment totaling R2 million,” Roberts says. Quoting a list of the world’s eight most distressed property markets by UK-based below market value property specialists IPS, he says Ireland tops the list followed by the US (where the sub-prime market crises originated) with the rest in Europe, namely Hungary, Greece, Bulgaria, Cyprus, Spain and Portugal. Depending on the retiree’s geographic taste, it’s hard to imagine they would not find a suitable property in one of these countries, and probably at prices that might never get much cheaper. It combines a regular source of income and a lifestyle choice.

A second property is also an asset that can be left to the family when the retiree dies, hopefully after having enjoyed regular holidays abroad and secure in the knowledge that there is something substantial in the estate.

“A second property is also an asset that can be left to the family when the retiree dies, hopefully after having enjoyed regular holidays abroad and secure in the knowledge that there is something substantial in the estate.”

Current low interest rates in South Africa present a problem for many retirees, whose investments are often based on interest rate products. “Volatility spotlights the relationship between category performance and interest rates. Generally, the prospect of a rate rise is negative for listed property while low rates, with the chance of a further dip, tend to be positive,” says Warner.

The same will be true of the performance of equities. But some equity-based products can get around this. Paine highlights the performance and scenarios around SIM’s absolute return funds, which over a three-year rolling period can beat inflation significantly.

Rapidly rising inflation is probably a bigger threat to retirees than low interest rates. Paine says absolute return funds can “maintain a comfortable monthly income and maintain, if not increase, the value of your capital”.

“Exchange control regulations allow, subject to foreign investment clearance certificates, a once-off offshore investment totaling R2 million.”

What should be different when you retire? For one, the time and money to enjoy the things you could not while working, if you have made the right investments. It’s important for retirees not to see themselves as in a separate, retired class. Many will keep on working, not because they need the extra money but to follow a business interest they perhaps could not before. New hobbies and interests are also important, not necessarily the local bowling club (though there’s nothing wrong with bowling) but interests that could not be explored while working. Retirement should be a time to enjoy all those things you didn’t have the time to enjoy before.

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INVESTSA

Investing for Retirement

Responsible Investing

A BETTER RETIREMENT Pieter Koekemoer | Head of Personal Investments at Coronation Fund Managers

D

espite the ongoing volatility in the wake of the financial crisis, markets remain significantly above their crisis lows reached in early 2009. The resulting asset-price inflation has flowed through to pension fund assets, with many investors experiencing a substantial rise in the nominal value of their retirement savings. We would therefore assume that pension fund investors are in a significantly better position when compared to the depths of the crisis, but sadly this is not the case.

has remained as precarious. Going forward there are, however, various options available to investors that could go some way to rectifying the situation.

Saving more is the most obvious way in which the increased cost of retirement could be met.

But given an environment where food and energy prices are rising and increasingly taking their toll on disposable incomes, it is difficult to envisage investors being willing (or able) to increase retirement fund contributions.

While increased values of retirement savings may make investors feel better prepared for retirement, it is important to consider increases in the ‘cost’ (in terms of the capital required) of retirement, relative to the increases experienced in asset values. And it is in this cost part of the equation where the picture becomes less bright.

Saving for longer is also not popular, especially where it means that retirement has to be postponed by a number of years. However, it is a very effective way of making up any shortfall as more contributions are made, accumulated balances earn investment returns for a longer period and the post-retirement period is shortened. Another option is to start providing for retirement earlier; unfortunately, this option is available only to younger investors.

Falling bond yields, increasing longevity and higher expected inflation have led to life insurers increasing annuity rates; in effect making retirement more expensive. These increases are not confined to guaranteed annuities offered by life insurers, but also indirectly feed through to living annuities.

Sustainable levels of drawdowns from living annuities are falling as pensioners live longer and earn less investment income, particularly in post-retirement strategies where a significant proportion of the assets should be invested in low-risk portfolios. As we have reported before, we do not believe that an initial income drawdown rate above five per cent will be sustainable over the typical 25- to 30-year retirement horizon.

Being in the right fund, according to your ability to take investment risk, is essential. As a rule of thumb, younger investors have a higher risk tolerance as their investment horizon is expected to be long enough to cover entire market cycles. In addition, the expected future contributions from younger investors form a significant part of the eventual retirement lump sum. Hence the volatility of the combined retirement provision (savings accumulated to-date plus expected future contributions) is much lower. Similarly, investors who are closer to retirement generally have a much lower risk tolerance as they do not have sufficient time to wait out market cycles.

It is worrying that, despite markets rising significantly from their crisis lows, the situation

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Human nature is such that most emphasis is placed on most recent experiences, which could have dire consequences for retirement

INVESTSA

savings. In the aftermath of a period such as the recent financial crisis, investors tend to be much more risk averse. This could lead to younger investors not taking on enough investment risk, where the return, commensurate with the risk taken, would be too low to ensure an adequate lump sum at retirement. Conversely, investors closer to retirement may suffer a significant loss of retirement capital due to taking too much investment risk, once again leading to a poor outcome. Getting the balance right between the investment return required and the risk assumed in generating this return, and selecting an appropriate product that fits within this framework, is critical.

“These increases are not confined to guaranteed annuities offered by life insurers, but also indirectly feed through to living annuities.”

The final element involves choosing the right manager. With the best asset managers delivering long-term ‘alpha’ in the low single digits, it is easy to presume that their contribution to better retirement outcomes is negligible and hence that the choice of manager is not that important. On the surface this might seem plausible; however, this is an overly simplistic and inaccurate view. In a scenario where increasing retirement funding contributions or delaying retirement is difficult, if not impossible, the contribution made by your investment manager in delivering outperformance becomes critically important.

INVESTING FOR RETIREMENT

RETIREMENT SAVINGS

Walter van der Merwe | CEO FedGroup Life

At university I was taught that the first principle of retirement savings is to match assets to liabilities and, in doing so, generate sufficient capital at retirement to buy a pension. After all, a retirement fund, if smartly invested, ensures that old age is provided for and quality of life maintained.

However, the reality is that more than half of today’s pensioners have not done enough to ensure this. Recent industry studies indicate that only six per cent of South Africans have accumulated enough savings to retire comfortably. Mirroring global trends, South Africans are living longer and as a result need to work past retirement age or save more in order to maintain their standard of living.

Experts suggest that for retirement to be met with distinction, a net replacement value of 75 per cent needs to be secured. To achieve this, appropriate investment strategy is key. It is also the component that generates most controversy ranging from conservative, balanced, aggressive, member choice to life staging.

These strategies are promoted by providers based on their house views; choosing one that best suits the first principle goal is not easy.

Figure A illustrates the difference between these strategies by considering past performance of the major assets classes based on typical asset allocations and fees. The model depicts the retirement savings growth secured to achieve a retirement lump sum. In all cases, the member started saving at age 25, based on:

- Conservative and member choice produced the worst result.

- Over the period, there is volatility in performance between the strategies, as expected.

The price paid by member choice The low return achieved by a member choice could be attributed to the higher fees incurred by this strategy. Members are set back further, as they are often ill equipped to make informed decisions.

Often reactive to market noise, members ping pong between conservative and aggressive, losing return in the process.

Conservative approach, conservative returns A conservative strategy does not fare much better than member choice. It is incapable of achieving the returns required for a retirement with a high enough net replacement value. By investing in conservative assets, you would struggle to generate returns needed to sustain quality of life throughout retirement.

Better off with life staging?

Life staging, which according to the model presents a mediocre return, is based on the principle of matching asset allocation to age based on life stages. This strategy suggests an aggressive

- Salary at retirement of R120 000 p.a.

- Contribution rate of 14 per cent throughout - Annuity rate of 7.5 per cent - Salary growth rate of four per cent p.a. on top of inflation - Retirement age of 65 Figure A. A retirement model depicting the return secured by various investment strategies.

Interesting results: - Aggressive and balanced surpassed the required retirement lump sum saving.

- Other strategies fell short of the mark.

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strategy for younger members and a conservative one for those moving closer to retirement.

While life staging can allow a member to be better off, the associated fee often results in a member losing out on performance.

The risk of an aggressive strategy The calculated retirement lump sum from an aggressive strategy is the highest. In theory, this strategy rewards an investor with high returns.

However, when it comes to balancing risk, there seems to be little gained for the extra risk.

Balanced ensures retirement with distinction A balanced strategy secures a return just below an aggressive strategy, without the risk. Focused on not placing all your eggs into one basket, this strategy aims to allocate assets across conservative and aggressive classes. In doing so, it reduces risk and produces a stable growth.

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

Investing for Retirement

Responsible Investing

The attraction

to umbrella funds Willem Loots | Head of Umbrella Funds | Liberty Corporate

O

ne of the main reasons why umbrella funds are attractive to employers and employees is that they offer a relatively cost-effective way to access pooled retirement savings and group risk products.

Umbrella funds enable multiple participating employers to share retirement fund governance costs, and access scale from an investment point of view. In this way, members’ retirement investments are contained by their employers in a more cost-effective vehicle compared to a standalone retirement fund.

“Traditionally employers have felt the need to control member savings and protection arrangements more closely.

This reaction is normal and can be found even in the most paternal organisations.�

For small and medium enterprises (SMME), umbrella funds are by far the most popular retirement savings vehicle. They are distinct from individual savings products such as retirement annuities, for example, but they can offer individuals the option to make additional voluntary savings contributions. However businesses with, say, 300-plus employees on their payroll have historically opted not to belong

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to umbrella funds but have typically preferred to implement their own arrangements. These businesses often have not sufficiently accounted for the cost that they incur through their executives and staff being involved in managing those funds.

An increased awareness of this is leading to growing number of employers who find umbrella funds more appropriate. This will ultimately leave only the very large employers who are able to efficiently run their own pension and provident funds, as umbrella funds offer small employers with comparable economies of scale in terms of total product cost.

Similarly, participating employers in umbrella funds also have access to a comparable menu and range of investment portfolio options.

With risk benefits such as group life insurance, disability income protection and funeral benefits, for example, there is no compromise in benefits compared to those that the board of trustees of a large corporate would be able to access.

Traditionally employers have felt the need to control member savings and protection arrangements more closely.

This reaction is normal and can be found even in the most paternal organisations.

However, with umbrella fund arrangements, management can experience a high level of transparency and choice in costs and product options.

INVESTSA

Investing for Retirement

WHY SAVINGS CAN’T Wait Lee Nakan | Executive General Manager at Old Mutual

I

t is common knowledge that South Africans do not save enough for retirement. In fact, the latest Old Mutual Savings and Investment Monitor found that 44 per cent of metro working South Africans have no formal retirement provision at all.

“The research further found that consumers are unsure of their finances, particularly in the current global economic turmoil, which is one of the reasons why they tend to postpone committing to long-term savings such as retirement,” says Lee Nakan, executive general manager at Old Mutual’s Broker Distribution division. “Yet the long-term detrimental effect of not saving at all for retirement cannot be ignored.” While South Africa’s economy has remained relatively stable, the latest change made to the repo rate will have a negative impact on investors’ retirement savings.

“The recent announcement by Reserve Bank Governor Gill Marcus of a repo rate cut of 50 basis points gave some relief to consumers while adding strain for investors,” he says. “It means that they will have to save even more each month to ensure that they can live out their golden years comfortably.”

What’s concerning is that consumers feel so financially constrained that they see no way they can save money for crucial events like retirement. Says Nakan, “The problem is that the longer people delay starting to save, the less time they’ll have to reap the benefits of compound interest.” Compound interest refers to the interest investors earn on interest already earned. The effect is a dramatic accumulation of the money invested and the interest realised. “It is always easier to save less for longer than more for a shorter period of time. In fact, every year that you commit to saving will improve your ability to retire comfortably one day,” he says.

This exponential growth indicates the benefits of starting to save as early on in your working life as possible. “The sooner you start putting money away each month, the sooner your money’s growth will reach a ‘tipping point’ and accelerate its investment growth.” By taking advantage of compound interest, investors will be able to save smaller amounts over a longer period of time. “Remember, reaching your financial goals is achievable even if you’re only able to save fairly modest amounts,” points out Nakan. “It’s important to remember that an increasing life expectancy puts additional pressure on the nature and adequacy of your retirement provision. Including growth assets in your post-retirement investment plan is becoming a must.”

What’s more, it is widely accepted that the world has entered a lower growth environment. This means that returns will typically be lower than the previous bull market. Start early and save more in order to make up for generally lower anticipated returns.

“It is advisable for investors to establish their current financial situation, ascertain which additional financial obligations you may be responsible for in the future and make wise, informed decisions,” concludes Nakan.

Enlisting professionals to help you formulate a realistic achievable financial plan today will bring you real peace of mind and financial security tomorrow.

Industry Associations

Peter Atkinson | Technical Portfolio Manager at the Financial Intermediaries Association of Southern Africa (FIA)

I

t is a well-known fact that a major contributor to the poor level of retirement provision is the extent to which people tend to spend their withdrawal benefits rather than preserving them. Given the high level of mobility typically experienced during a person’s working career – either from choice or as a result of retrenchment – it is not surprising that this has the effect of eroding the eventual retirement capital considerably.

Back in the 1970s, indications from government that compulsory preservation may be introduced resulted in widespread riots and general opposition from workers.

At the time it is possible that part of the reaction may well have been due to a lack of trust in the retirement fund movement as a whole, considering that in those days there were no member trustees and generally little transparency surrounding funds.

However, it was also quite clearly put forward that there is little point in storing up funds for eventual retirement when hard times may threaten your home or even the provision of food for the family in the interim.

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COMPULSORY RETIREMENT FUNDING PRESERVATION – CAN IT WORK? Now there are again moves afoot to institute some form of compulsory preservation.

But will it work this time and is government intervention the right solution?

On the one hand, we might sympathise with the authorities, who are seeking to alleviate the burden of looking after the aged on the State. Tax incentives are meant to promote more saving but are of little effect on lowincome earners, while limitations on the access to capital (at least up to age 55) are perhaps largely ineffectual because they can be circumvented by early withdrawal, even though this may well be accompanied by even more hardship if it proves difficult to find alternative employment.

Tax penalties on withdrawal probably do little to deter someone in financial distress and may indeed simply magnify the problem in many cases by reducing the available cash. And then we have to accept that, if someone falls on hard times and is not able to access retirement savings as a bridge, it could be that the government may have to provide financial support in some form anyway. On the other hand, critics will raise the issue of a nanny state

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in which government seeks to rule the lives of its citizens rather than letting them act as they see best, given the circumstances in which they find themselves. After all, people are ingenuous and will usually come up with a plan to circumvent whatever legislation is put in place for their own good if in a corner.

“Tax incentives are meant to promote more saving but are of little effect on low-income earners.”

A direct move to enforce compulsory preservation is likely to meet with some considerable resistance, while it could also lead to employees putting further pressure on employers to do away with compulsory retirement funds, thereby having the opposite effect to the desired outcome.

A compulsory State scheme with forced preservation would seem to be a relatively simple answer to this, provided it is structured, implemented and managed properly. However, it is possible that this may have the effect of lulling people into complacency on the basis of a belief that the compulsory scheme will provide adequately for retirement, whereas this is hardly likely to be achievable. In addition, should the move end up putting pressure on intermediaries, who no doubt currently play a huge role in promoting the level of retirement saving, this scenario seems even more likely.

Even if it is possible to ensure that people have sufficient savings at retirement, there is the challenge of trying to educate older people who have never had the responsibility of managing their finances before, to arrange their affairs suitably in retirement. Surely this suggests that the answer lies more in building their understanding of finances; again an important function of the intermediary for which little recognition is granted.

RETIREMENT INVESTING

PRESERVATION IMPROVES BUT BETTER MEMBER COMMUNICATION NEEDED Hugh Hacking | Head of Retirement Fund Solutions at Old Mutual Corporate

D

espite a growing realisation that preservation of retirement funds is important, the majority of South Africans still take cash withdrawals when faced with a preservation decision. Furthermore, these preservation decisions are the individuals’ own or based on the advice of family members. This indicates a crucial need for the retirement industry to improve communication around preservation.

This is according to Hugh Hacking, head of retirement fund solutions at Old Mutual Corporate, referring to the findings of the 2012 Old Mutual Retirement Monitor, which asked respondents to reveal their preservation behaviour over the past 15 years. “There appears to be a slight increase in the extent of recognition by fund members of the need to preserve their retirement benefits when changing jobs. For example, when asked about their probable future preservation behaviour, 19 per cent of respondents indicated that they would withdraw some or all of their benefits on changing jobs. This is lower than the 24 per cent that responded similarly in the 2011 survey,” he says.

However, Hacking says it is concerning that, consistent with the survey results of previous Old Mutual retirement monitors, the vast majority of those who said they withdrew cash on exiting a fund, took their entire available benefit. “This has been identified in the retirement reform discussions as a major priority for the government and it

seems likely that some form of compulsory preservation may be implemented.

However, in order for this to work, it’s important to understand people’s reasons for withdrawing their benefits.”

According to Hacking, preservation decisions are dependent on the circumstances under which respondents leave their employment. “Not unexpectedly, the incidence of cash withdrawals is higher among those for whom the loss of a job was not voluntary.

As the pressure of rising costs weighs on South African households, the temptation to access your retirement funds grows.

Unfortunately, in the case of an unforeseen retrenchment, economic realities often see these retirement benefits spent on immediate needs,” Hacking explains.

It is clear from the survey that preservation actions taken by South Africans are still largely dictated by the advice – or lack thereof – that they receive. There is a crucial need to improve the communication and education around the preservation of retirement funds. He says there is a severe lack of engagement between employers, retirement funds and members of the retirement funds when it comes to advice on leaving the fund. “What is striking to note is that neither the companies nor the funds they are leaving are providing people with advice on their preservation options. This highlights an area that requires urgent attention

from the South African retirement industry.

It needs to be made easier and more compelling for fund members to preserve their benefits.”

“in order for this to work, it’s important to understand people’s reasons for withdrawing their benefits.”

According to the survey, only 34 per cent of those who had to make a preservation decision were given any advice by the fund, or their employer. “Furthermore, those respondents who withdrew their savings in cash did so either without advice or based on the advice of family members. Meanwhile, of those respondents who indicated that they had preserved to a greater or lesser extent, approximately 19 per cent said they did so based on the advice of their financial adviser or broker,” concludes Hacking.

MAYA FISHER-FRENCH

The real cost of annual fees

W

hat would the reaction from your clients be if you told them that their retirement annuity had an upfront premium charge of 23 per cent? They would probably shout some very choice words, possibly throw something at you and then phone the press or the Financial Services Board to complain.

What they definitely will not realise is that they would receive exactly the same total return after 20 years by paying that hefty upfront fee than if they paid an annual two per cent fee, and two per cent is below the average annual fee of most retirement annuities.

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Annual fees are incredibly destructive over time; by year 15 a two per cent annual fee would be equal to half of the investor’s annual contribution; by year 18, it will cost the investor 70 per cent of their contribution.

“Annual fees sound negligible when compared to the upfront fees but the compound interest is phenomenal,” says Anton Gildenhuys, head of Sanlam Personal Finance Actuarial.

He uses an example of an investor paying an annual R6 000 premium over 20 years with a nine per cent annual return. The investor paying the hefty upfront fee would pay a total

INVESTSA

by Maya Fisher-French

of R27 619 in fees while the annual fee model would pay R40 396 over the 20-year period.

The fact that this cost has less impact on the final return of the annual fee model is that the initial premium is fully invested and benefits from compound growth in the early years.

For the product provider, these extra costs do not necessarily translate into more profits. As Gildenhuys explains, the product provider had to fund the costs of the acquisition and carry those costs for longer, usually at a cost higher than the annual return. “There are always some upfront expenses and there is a cost to carrying this if payment is made annually.

“Annual fees sound negligible when compared to the upfront fees but the compound interest is phenomenal.”

This cost will come from the investment; postponing charges creates a drag,” says Gildenhuys.

Babies and bathwater The irony is that the hefty upfront fee is the model of traditional retirement annuities, yet these drew negative press as investors in the early years saw negligible returns. Using Gildenhuys’s example of an investor paying an annual R6 000 premium over 20 years with a nine per cent annual return, the upfront model would show negative returns until year five.

It is only in year nine that the annual fees exceed the upfront fee. However, this fee gap starts to widen until the final year where the upfront fee remains R1 381 while the annual fee has reached a whopping R4 827; more than three years’ worth of the upfront fee.

Allocation percentage

77%

Year

Start fund

Table courtesy of Gildenhuys

1

What we need at this stage is a re-education of how percentages and fees work along with far more transparency including fees expressed in Rand rather than only percentages.

The attack on upfront fees was largely due to the opaque nature of the products and the difficulty in fully understanding the fees. It also reduced flexibility as an investor benefits only if they remain in the fund for the full period.

If investors fully understood the nature of fees and that a long-term investment with a higher upfront fee would save them money and they could see it in real Rand costs and not percentages, perhaps they would not storm out your office so quickly.

The industry needs to find a way of balancing upfront and annual fees to create a more optimal investment solution. A better mix of upfront and annual fees would reduce costs for the industry as well as for the investor.

Fee as % of fund

2% Start fund

Premium

Fees

End Fund

Year

6000

-1380.96

5034.757

1

Premium

Fees

End Fund

6000

-120.113

6409.077

2

5034.757

6000

-1380.96

10522.64

2

6409.077

6000

-248.414

13255.12

3

10522.64

6000

-1380.96

16504.44

3

13255.12

6000

-385.464

20567.93

4

16504.44

6000

-1380.96

23024.59

4

20567.93

6000

-531.857

28379.32

5

23024.59

6000

-1380.96

30131.56

5

28379.32

6000

-688.232

36723.28

6

30131.56

6000

-1380.96

37878.16

6

36723.28

6000

-855.267

45636.14

7

37878.16

6000

-1380.96

46321.95

7

45636.14

6000

-1033.69

55156.67

8

46321.95

6000

-1380.96

55525.68

8

55156.67

6000

-1224.28

65326.3

9

55525.68

6000

-1380.96

65557.75

9

65326.3

6000

-1427.86

76189.29

10

65557.75

6000

-1380.96

76492.7

10

76189.29

6000

-1645.33

87792.92

11

76492.7

6000

-1380.96

88411.8

11

87792.92

6000

-1877.62

100187.7

12

88411.8

6000

-1380.96

101403.6

12

100187.7

6000

-2125.75

113427.5

13

101403.6

6000

-1380.96

115564.7

13

113427.5

6000

-2390.79

127570

14

115564.7

6000

-1380.96

131000.3

14

127570

6000

-2673.91

142676.8

15

131000.3

6000

-1380.96

147825.1

15

142676.8

6000

-2976.33

158813.5

16

147825.1

6000

-1380.96

166164.1

16

158813.5

6000

-3299.36

176050.4

17

166164.1

6000

-1380.96

186153.6

17

176050.4

6000

-3644.42

194462.5

18

186153.6

6000

-1380.96

207942.2

18

194462.5

6000

-4013.01

214129.9

19

207942.2

6000

-1380.96

231691.7

19

214129.9

6000

-4406.73

235138.3

20

231691.7

6000

-1380.96

257578.7

20

235138.3

6000

-4827.29

257579

Total fee

-27619.1

-40395.7

INVESTSA

19

profile | CEO of Sanlam Investments

J OHAN van der merwe C E O o f San l am I n v e s tment s

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JvdM “we have a culture of innovation with teams of people proud of what they do and where they work.”

1. What is the biggest challenge currently faced by businesses that want to expand?

We are facing some intense volatility in the market so the timing of investments is more difficult than ever. We have to be acutely aware of valuations and put them in perspective, being careful not to overpay in advance of any significant declines. The global economy remains relatively precarious and we are seeing quite a cautious approach by investors, but are actively looking for opportunities to give our offshore businesses more critical mass.

For example, there remain opportunities in developing markets; with Sanlam committed to expanding its footprint in Africa (we have presence in at least a dozen countries on the continent). At Sanlam Investments we are developing a range of Pan-African funds in different asset classes like equity, debt, property and private equity.

2. You have headed up Sanlam Investments for 10 years, during which time the global economic situation has changed dramatically. How would you describe your experience thus far?

When I came into Sanlam Investments, the place was not realising its potential. It had languishing performance numbers and a need for much greater focus. As I got into fixing the business – bringing in the right people and creating a cluster of specialised divisions – the greatest satisfaction has been watching people grow, and in turn, the business develop. Where we once had one large, complex organisation, today we have a culture of innovation with teams of people proud of what they do and where they work.

A large part of this has been giving senior leaders the space to own their role and be accountable for their division’s success.

3. You also oversee developed markets.

Do you think these regions offer most value as they have seriously underperformed?

We continue to see opportunity in developed markets and have made some strategic acquisitions in several of them, including the US, Asia Pacific and Europe. For example, Centre Asset Management is a Wall Streetbased asset manager with $500-million AUM in which we have 62 per cent ownership.

Beyond this, 8IP, a Sydney and Hong Kongbased asset manager in which we have majority ownership, is another positive development for us as it focuses on growth in the Asian countries. On the private client front, we have identified the UK and Australia as jurisdictions to operate. This is to offer South Africans an holistic global investment offering and to grow as a niche player in these markets.

4. Do you believe the global economic and financial crisis has changed investor’s habits?

Yes. The investment environment has changed profoundly since this global financial crisis. Investors are now living in a world of low returns and even lower yields.

Government regulation has tightened and as this increases we simultaneously have a decrease in interest rates. But we don’t really know how long this will last. These factors all impact investor choices.

5. What is your investment philosophy?

At Sanlam Investments, we have a value philosophy and will continue to do so into the foreseeable future. We believe in long-term growth based on the belief in the inherent value and potential of the assets in which we invest. This philosophy has proven

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to achieve superior results over the long term. With such philosophy there may be periods of short-term underperformance.

6. Do you think all of the regulation in the financial services industry is justified?

It is very clear that self-regulation is not an option. If the industry has to be compelled to see the competitive advantage of good governance and ethical management, then so be it. In terms of how we run our business, the only difference regulation makes is increasing our admin load. We are a profoundly ethical organisation, we have a deep set of values that we abide by and we see transparency as an essential part of being a good corporate citizen.

7. How do you define success?

I have tried to instil an entrepreneurial culture that leverages the passion that Sanlam employees have for the business and their sector. This has meant relying on the skills and talent of those who work around me to deliver results without me being ‘over their shoulder’. In doing so, we have seen some tremendous success, with the growth of our business and the quality of our people.

8. If you had R100 000 to invest, where would you invest it?

I take a long-term view on my own investments. I would invest money now in the renewable/clean energy space as well as the leading edge communications industry. The best opportunities lie in the private equity space and not always readily available to the public at large.

21

Fiona Zerbst

Responsible Investing

How ethical is your investment?

Fiona Zerbst

The global trend towards responsible investment (RI) means local investors need to bring themselves up to speed. How does RI affect the investment industry, and is it good for returns?

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Responsible investment and returns are viewed as polar opposites by some people. But there is no proof that RI buy-in sacrifices long-term returns. In fact, some case studies claim just the opposite. Scepticism may be a knee-jerk reaction to this poorly understood area of investment.

When it comes to investment, we all want good returns and preferably the best possible returns. But do we want them at any cost?

Cynthia Schoeman, managing director of Ethics Monitoring and Management Services, says: “We already moderate our win-at-any-cost scenarios with a measure of ethics. If we were so keen to pursue returns, we wouldn’t draw any lines at all. I often ask my students why they don’t work in the drug trade if money is their only aim. So what’s wrong with taking that ethical stance just a little further and look at investment with environmental, social and governance (ESG) issues uppermost?”

It’s easy to spurn child labour practices; less so to say you don’t want your pension fund to invest in tobacco products. What is clear, though, is legislation and investor codes are driving trustees and their service providers to pay attention to RI as never before. The Amendment of Regulation 28 of the Pensions Funds Act, 1956, states: “A fund has the fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities.”

What does all this mean for the investment industry?

From SRI to RI Socially responsible investment (SRI) was the catch-phrase in about 2004, when it was defined by the African Institute of Corporate Citizenship as “an investment strategy that balances financial and social objectives”.

According to ASISA, the function of RI is to align investor objectives with stakeholders and the broader developmental needs of society. There are four broad practices we can follow:

As SRI matured into RI, different emphases came into play. In 2005, the United Nations invited a group of the world’s largest institutional investors to develop the Principles for Responsible Investment (PRI).

The PRI South Africa Network was launched in May 2009, with the support of the Government Employees Pension Fund (GEPF).

While legislation is one thing, non-mandatory codes encourage rather than force compliance. The Code for Responsible Investing in South Africa (CRISA) was launched in July 2011; largely because the King Code of Governance was lacking in guidelines for institutional shareholders. It works on an apply-or-explain principle, just like King III, and institutional investors need to fully and publicly disclose to stakeholders at least once a year to what extent CRISA is being applied.

“A company that may be a good bet over the next 12 months may be a huge environmental polluter, for example, and will have to pay carbon tax in the future, which could affect returns.”

• Engagement, whereby investors engage with management or other stakeholders to improve sustainability.

• Positive or negative screening – the inclusion or exclusion of stocks or funds that meet value requirements (the JSE’s SRI Index or a faith-based Shari’ah fund would be examples).

• Integration, where ESG factors are taken into account alongside the purely financial across all asset classes.

• Targeted or impact investment – social, environmental or economic goals that benefit society, like infrastructure, SMME development, agriculture and climate change.

All well and good, but the biggest stumbling block is the practical implementation of ESG principles, says Claire Rentzke, head of manager selection and research at RisCura. She says that while fund trustees grasp the RI concept, they have a tendency to focus on minutiae rather than the big picture.

“You don’t need to make a call on individual shares in a portfolio, for the sake of compliance,” she says. “If long-term investment is your goal, look at sustainability. Be aware of how governance and operational issues may affect a company. Analysts should be cognisant of these factors, which means they have done a certain amount of scenario planning and can assess and quantify risk.”

While governance is fairly easy to quantify, the ‘E’ and ‘S’ of ESG are perhaps less so, which is why bottom-line reporting and disclosure are going to be crucial for asset managers to scrutinise. Scenario planning will be vital, too, because of potential red flags.

A company that may be a good bet over the next 12 months may be a huge environmental polluter, for example, and will have to pay carbon tax in the future, which could affect returns. Environmental groups and ethical investment funds warned about the possibility of disaster prior to BP’s Deepwater Horizon oil spill of 2010, but analysts failed to highlight the risks. This resulted in institutional investors threatening to sue, claiming BP inflated its share price by misrepresenting its safety record.

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23

“On paper, South Africa is impressively committed to RI, but in practical terms, some investors need to be led to water to drink.”

RI and returns

has played a large role in driving fund managers to buy into RI. The biggest pension fund in Africa has assets of over R1 trillion under management and has over one million members, with active trustees making sure that development investment is top of mind. They are also quick to reject the idea that this equates to sub-optimal returns.

If the BP story hasn’t served as an object lesson, it should.

“So many organisations say ethics is expensive and not good for returns,” opines Schoeman. “I hear CEOs say it doesn’t pay, or it doesn’t make good business sense to implement RI, but in today’s global village you can’t hide bad business practice for long.”

“People are often reluctant to buy into an idea until they see results,” says Mulder. “But RI doesn’t necessarily spell poor returns; in fact, over time, sustainability can come to matter very much.”

The recent Standard Chartered debacle is a case in point. The UK-based bank allegedly hid 60 000 transactions with the Iranian Government over 10 years, involving at least $250 billion, causing such reputational damage to the business that shares plummeted 24 per cent (its lowest level in 10 months). The New York State Department of Financial Services said that in the bank’s zeal to make hundreds of millions of Dollars at almost any cost, it engaged in wilful and egregious violations of law.

This is an extreme case, but it’s easy to see how reputational damage can translate to heavy losses.

Of course, there is no perfect company or industry to invest in.

Schoeman suggests that conditional investing may be a good compromise, whereby you invest in a company to encourage better governance or labour practices. “Shareholder activism can drive this,” she asserts. “But companies must meet the necessary criteria or lose the investment.”

Windall Bekker, partner at Rezco Investment Group responsible for retirement fund solutions, suggests another approach. “You may find that one trustee will think BEE investment in a coal-fired pit constitutes RI but another trustee wants to see investment in a wind-farm; my RI might not be your RI. To meet different needs, you could perhaps overlay an ESG score with a BEE score from a rating agency and get a median score that meets the needs of all trustees.” The trick is to get trustees on the same page.

On paper, South Africa is impressively committed to RI, but in practical terms, some investors need to be led to water to drink. Nowadays, though, the question is not: can I afford to pursue RI; but rather: can I afford not to?

Sunette Mulder, senior policy adviser at ASISA, says that the GEPF

24

INVESTSA

SHAUN HARRIS

Expensive now, but perhaps not later

by Shaun Harris

There’s never really a right price at which to buy shares. Rather it’s the rating of the share – how cheap or expensive it may look compared to peers in the same sector or industry – combined with fundamental analyses of prospects for the company and the time frame of the investor. The right decision to buy what looks like an expensive share now may turn out to have been a cheap acquisition in five years’ time. Of course, the opposite is also true.

Still a high price for potential growth stocks

26

INVESTSA

“Wal-Mart gives Massmart more buying power. But the value could be if you take a longer, five-year view or its more aggressive push into Africa.”

O

ne method that’s not reliable for choosing price and a share, as investors probably know, is the rear-view mirror. A history of share price performance and financial results should, at best, be used only as a rough guide to the share; certainly not as the reason for buying, or not buying it. Forecasts are only a rough guide as well. As Adrian Saville, chief investment officer of Cannon Asset Managers, says: “Forget forecasts; they are mostly based on noise disguised as news.”

What investors and financial advisers have to do is take a thorough look at the company and try and relate that to the share price.

It’s pretty time consuming, hard work, so the adviser should be putting in lots of the legwork for clients who don’t want to go the DIY route. Yet even the best analyses can be fooled by the stock market, which at times goes crazy. Normally it’s short lived and investors should try and ride it through.

But at times the market and certain shares seem to defy reason. One example we’ll look at is Massmart Holdings, and the possible influence on the share’s rating of its international owner, Wal-Mart Stores.

The right price for a share also relates to not only the share price, but how much the transaction costs the investor. Costs vary greatly and will affect returns over the long term. Cheapest is buying a share directly, with the online trading platforms offered by all the banks as probably the cheapest and easiest way. But then the investor has to know what they are doing. A stockbroker or private client manager can offer what should be expert guidance, but costs will be higher. Now, with competition so keen in the industry, costs will vary from party to party.

The local market, the JSE, is still looking overpriced. Through most of August, the All Share or Top 20 index kept on setting new highs. Every now and again there’s a correction, but then the market continues to set new highs. Yet while many shares could be considered as oversold, buying continues often from foreign investors. Avoid expensive or hyped asset classes, cautions Saville.

“Although what an investor acquires is a key consideration, equally critical is how much is paid for the asset. Overpaying for that asset will result in a poor investment.”

A mystery at present is Massmart Holdings, the retail share that houses a number of high-volume, low-price chain stores. The retail sector looks expensive in general but Massmart’s rating defies gravity. At the time of writing, the second half of August, Massmart was on a price-to-earnings (PE) ratio of 34.5 times. That can be compared to other top retailers like Mr Price (25.4 times), Woolworths (21.9 times) and Truworths (18.5 times).

“Although what an investor acquires is a key consideration, equally critical is how much is paid for the asset.

Overpaying for that asset will result in a poor investment.”

I think that foreign investors’ appetite for Africa drives the share to higher ratings.”

Massmart is well represented in Africa, with its stores in a number of sub-Saharan countries. But what should be considered as an influence on the share’s rating is its huge international parent, Wal-Mart Stores. Investors overseas have always had a love-hate relationship with Wal-Mart but as one of the most valuable shares in the world on market capitalisation, they cannot ignore it. It’s a love affair again as some investment houses overseas are calling Wal-Mart “the new gold” for investors who see the share as a safe haven in the slowing global economy with volatile growth stocks, according to a report by Bloomberg. Yet while the comparison is far from exact, Wal-Mart is trading on a PE multiple of 16.2 times on the New York Stock Exchange, high but still off its peak of 16.8 times in 2008. But Wal-Mart, which bought 51 per cent of Massmart for R16.5 billion a little over a year ago, must be affecting the South African operation. “I think the effect on the South African business is incremental,” says Armitage. “Wal-Mart gives Massmart more buying power. But the value could be if you take a longer, five-year view or its more aggressive push into Africa.”

Making it more surprising that money is still flowing into the share is that broker consensus ratings are screaming to sell.

IG Markets South Africa offers a broker consensus where calls between buy, sell and hold are divided between 100 per cent.

Massmart has by far the largest sell signal of close to 90 per cent. There are no buy recommendations, the other just over 10 per cent on hold. Similar-type retail shares also with big sell signals are Pick n Pay Stores, Shoprite and Truworths, but the sell call here is approximately 50 per cent. Another broker consensus is on Internet platform Moneyweb.

Here Massmart is a straight sell, no buy or hold recommendations.

There are two other factors. While Massmart has been known to sharply cut costs, including staff, Wal-Mart is greatly disliked for retrenching staff to get costs down. Consumers still flock to Wal-Mart stores because they offer low-cost deals, but each of those consumers probably also knows somebody who was retrenched by Wal-Mart. Trade unions in South Africa are well aware of this (some unions opposed the acquisition) and are likely to take action if Wal-Mart imposes its low-cost strategy too aggressively on Massmart. It’s a potential recipe for disaster. So while foreign investors continue to buy the very expensive Massmart, there could be a selloff in the fear of strike action.

It appears that some local investors are selling Massmart, but as soon as they sell, the share is snapped up by foreign buyers.

“It’s a great quality business and always trades on a high multiple,” says Peter Armitage, CEO of Anchor Capital. “But

Yet despite the high rating of the JSE, it’s always a good time to buy shares.

Massmart shows this. The trick for investors and advisers is to find the right share at the right price. A long-term view helps to get high share ratings into perspective.

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27

HEAD TO HEAD

36ONE Asset Management

Co-founder Ste v en

Li p tz

Co-founder | 36ONE Asset Management

1. The JSE continues to reach record highs this year. Do you think local markets are fully valued?

is cognisant of its expenditure issues such as above-inflation wage increases for government employees.

While the markets are at all-time highs, this is not a reflection of the overall picture. Certain sectors and specific stocks within those sectors have been instrumental in this market run. Resources continue to underperform given pressure on commodity prices on the back of concerns of a China slowdown.

Certain sectors, such as food and clothing retailers, have experienced a significant rerating as international investors search for growth and dividend yields in a worsening global landscape. We therefore think certain sectors are displaying a hot-house effect and caution is warranted. However, as we are focused on stock picking, the market’s overall valuation is of less concern to us. We continue to find value in selected businesses.

However, South Africa’s primary issues are not globally influenced but more local.

While Europe is dealing with unprecedented unemployment rates in the region of 20 per cent, we have been dealing with this for years. The primary local focus needs to be an investment in education and improving skills of the employee base.

2. Do you expect this performance to continue?

The performance of the overall market is unpredictable. This does not, however, affect our philosophy of finding and investing in good businesses which should outperform over the medium to long term, regardless of the direction of the overall market.

3. What is the danger of SA entering a Lost Decade such as has been seen in the UK and US over the last 10 years?

SA is not prone to the same elements that caused the economic demise of the UK and US. The South African national credit regulator and the banks have acted very responsibly over the years, avoiding the credit issues seen in the developed world.

Additionally, South African tax collection is in excellent condition and the government

28

4. Where can investors expect to get the best returns?

We believe the best returns come from investing in quality businesses and not overpaying for them. These are businesses with decent revenue growth and the ability to protect their margins by passing on input cost pressures to their clients through price increases. Healthy balance sheets and a commitment to use capital efficiently are also important. This environment will provide these companies with opportunities for acquisitions which will enhance their value provided that management do not overpay.

5. For those with a local bias, where can they seek value locally?

While there are quality companies locally, the other half of the investment decision is always the entry point as overpaying will affect the returns.

The hot-house effect of foreign investment has made the entry point of many quality companies unattractive. Therefore the focus now is searching for quality at attractive entry prices.

Prices of quality businesses may still be attractive for a number of reasons. Some businesses may be overlooked simply due to small size or due to the sector being out of favour with the current flavour of the month theme.

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6. Should investors consider investing offshore; and if so, where?

We believe that investors should consider investing offshore. However, investors should look for good companies at reasonable prices, rather than the location being the driving factor. An example of this is selected global retail companies which are trading at half the forward price earnings multiples of domestic retail businesses.

“We believe the best returns come from investing in quality businesses and not overpaying for them.”

7. Are there any asset classes they should avoid?

Our belief is that an expertly constructed equity portfolio has the greatest ability to provide real returns over the long term. While we focus on stock-picking rather than asset allocation as the predominant driver of our investment returns, we acknowledge that the volatility of returns can be influenced by varying the allocation to different asset classes, like bonds for example. A note of caution on all securities valued predominantly on yield: with so much global uncertainty, the race is on for yield, which drives up the price of these instruments significantly. Any alleviation of this riskaverse environment could cause a flight from yield-only instruments to instruments offering more capital growth, causing a significant deterioration in returns for this asset class.

HEAD TO HEAD

Templeton

Executive Chairman M ark

M o b iu s

PhD | Executive Chairman |Templeton Emerging Markets Group

1. The JSE continues to reach record highs this year. Do you think local markets are fully valued?

invest globally in order to diversify. No market, even South Africa, will be the best year after year.

There are opportunities in all markets, even in those that have gone up. In South Africa, we are still finding attractive investment opportunities.

5. For those with a local bias, where can they seek value locally?

2. Do you expect this performance to continue?

Obviously, we cannot foretell the performance of any market. While we firmly believe that emerging markets such as South Africa should do well in the long term, the worries and uncertainty in Europe will likely continue to create volatility in global markets, which could spill over into emerging markets.

3. What is the danger of SA entering a Lost Decade such as has been seen in the UK and US? We believe that the likelihood of SA entering a Lost Decade is low. South Africa has strong long-term growth potential and stands out among its African peers with a large and liquid equity market. In addition, some of the investment challenges related to liquidity and general transparency are less of a problem in South Africa than in other African markets. Finally, a number of South African companies provide exposure to markets further north that might be difficult to secure locally.

4. Where can investors expect to get the best returns?

Investors cannot be guaranteed returns in any market. The most important factor is to do thorough research and, most often,

South Africa is well known for its wealth of natural resources and, like many African countries, also has a youthful population and rising middle class. As a result, we have found particularly attractive opportunities in South Africa’s mining and retail sectors.

Consumer businesses in South Africa include consumer product and consumer service companies, such as consumer banks and insurance companies, as well as businesses in the telecommunications field.

6. Should investors consider investing offshore; and if so, where?

As people, businesses and economies around the world become more intertwined, it has become essential to have a global perspective when it comes to investing.

Adjusting the core of your investment portfolio to the global marketplace opens a world of investment opportunities.

Diversifying around the globe can help reduce the impact if your home financial markets were to suffer an extended bear market. While global investing includes additional risks, such as currency fluctuations and political uncertainty, diversifying can help offset overall portfolio volatility. In our view, Frontier and ASEAN markets are of particular interest at the moment due to their long-term growth potential. Frontier markets also offer the potential for diversification since we’ve found there is often little correlation between the performance of these markets and the developed markets.

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7. Are there any asset classes they should avoid?

There are opportunities in every asset class.

No one asset class does well all the time, so it can be a good idea to put your eggs in a variety of baskets. If some of your investments are down, others may be up.

“We believe that the likelihood of SA entering a Lost Decade is low. South Africa has strong long-term growth potential and stands out among its African peers with a large and liquid equity market.”

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ASSET MANAGEMENT

Money market funds

REGULATION MAKEOVER RECEIVES MIXED REVIEWS Asset managers are divided in terms of the implications of new regulations on South African money market funds.

I

n anticipation of the implementation of Basel 3, which will commence in 2013, the investment guidelines prescribed for money market funds have been amended by the Registrar of Collective Investment Schemes, effective 1 July 2012.

Tighter controls on the instruments in which money market unit trust funds can invest, which were introduced this month, may have an impact on the possible yields in these funds. Asset managers’ views on how these changes will impact money market funds are a mixed bag.

While some believe the new rules will reduce yields by as much as half a percentage point, others believe yields could improve.

Sean Segar, head of product at Nedgroup Investments’ Cash Solutions,

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increase marginally. Furthermore, the new controls and closer monitoring will regulate the increase in capital risk of money market funds. “In line with trends in Europe and the USA, a further development is that money market funds are now able to invest in single instruments with a term to final maturity of 13 months versus the previous limit of 12 months. The weighted term to maturity of the fund as a whole has also been increased from 90 days to 120 days,” says Segar.

Meanwhile Peter Blohm, ASISA’s senior policy adviser, says it has not assessed the impact the new limit will have on money market fund yields, but believes the effect will be slight.

“With the lowest interest rates in 40 years, investors will look more than ever before to money market funds to compensate for the lower call rates that banks will be offering, as money market funds offer higher rates without compromising access to funds.” says as a result of the new regulation, money market funds are likely to experience higher yields within a more regulated environment. “This amendment to the investment guidelines for money market funds could not have come at a better time for yield investors following the recent surprise interest rate cut. With the lowest interest rates in 40 years, investors will look more than ever before to money market funds to compensate for the lower call rates that banks will be offering, as money market funds offer higher rates without compromising access to funds. It makes sense that money market funds, a large source of funding for banks, adapt to remain compatible with the evolving funding needs of banks.”

According to Segar, the new investment guidelines for money market funds will enable yields on money market funds to

which is clearly keeping a close watch on money market funds. Among the changes facing money market funds is the move to focus on the market capitalisation of issuers as a basis for setting limits as opposed to a minimum credit rating. There is also a further control which stipulates that in order to issue instruments to money market funds, the institution issuing or guaranteeing such instruments must have capital and reserves of at least R100 million,” he continues.

Global rating agency Fitch Ratings says that the new regulations have not had any rating implications for South African money market funds. However, the agency does say the newly implemented regulatory framework may lead some South African money market funds to consider adding unrated corporate exposures to the portfolio.

“Under the previous regulatory framework‚ issuer diversification and eligibility rules were driven by ratings‚ while the new regulatory framework replaces ratings with market capitalisation‚ among other criteria.

In practice‚ many of these funds may be unable to add unrated exposures to their portfolios, given the investment guidelines governing the funds in their investor mandates‚ which typically include ratingsbased limits. Furthermore‚ the majority of high quality issuers considered for inclusion in money market fund portfolios are usually rated‚” it said.

However, Eldria Fraser, the chief investment officer of Prescient Investment Management, says money market funds will be forced to hold shorter-dated instruments as a result of the changes and this could affect yields negatively by up to an estimated half a percentage point. Ameesha Chagan, portfolio manager at Futuregrowth, also says there could be a fall in yields in certain money market portfolios where managers were investing in longer-dated, higheryielding instruments.

Taking other changes to the money market regulation into account, Segar says the type of instrument that may be invested in by money market funds is also better controlled as a result of these regulations, as are the valuation procedures. “Investors in money market funds can take comfort from the fact that their investments are well regulated by the Financial Services Board

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ALTERNATIVE INVESTMENTS

LISTED PROPERTY

WHERE TO FROM HERE? Mariette Warner | Manager of the ABSA Property Equity Fund

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or the first seven months of this year, listed property delivered a total return of 28.3 per cent compared to the All Bond Index of 11.9 per cent, the All Share Index of 7.3 per cent and cash of 3.2 per cent. After this, one might ask: where to from here?

Should there be a major correction or has something fundamentally changed?

The only change has been lower expectations for GDP growth, which has negative implications for rental markets. The sectors that are vulnerable are the B and C grade office markets, retail properties that are located in nodes where there is competitive pressure and industrial properties that serve the manufacturing industry. The best performers will be dominant retail centres that are correctly positioned within their catchment areas, industrial properties that serve the distribution and logistics industries and A-grade offices, particularly those classified as premium grade such as new, energy-efficient buildings in the best locations. More than half of listed property’s strong performance came during June and July when 10-year bond yields fell from 7.74 to 6.75 per cent. Therefore, it is more of the same theme; strong price performance on the back of falling bond yields spurred by July’s 50 basis points cut in the repo rate.

Any retreat, or further significant increases, in prices for the balance of this year will depend on movements in the bond market.

In the current global environment this is difficult to forecast. The global quest for yield remains paramount, but the debt situation in Europe poses a threat to SA bond yields.

At times like this investors need to remind themselves about the primary reason for investment in listed property. It is a long-term value play based on growing income streams over time, through interest rate cycles.

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On average, income growth from listed property is expected to be between five and six per cent for the next 12 months, similar to inflation. Listed property therefore still provides inflation protection for income.

Year to date, there has been wide divergence in total listed property returns, from 45 to 8 per cent (excluding the extreme of -37 per cent which does not have the risk profile of a property company, but is more like that of a hotel business). The major reason for divergence is the difference in predictability of future income growth. In the current lowreturn investment environment with uncertain global economic growth prospects, defensive investments, where returns are relatively easy to predict, are in high demand.

With some property stocks, yields have been driven down because of certainty of income growth and a high degree of faith in management’s ability to deliver. Those stocks with lagging total returns, year to date, have varying degrees of uncertainty in terms of

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future income growth prospects or in the past management has delivered disappointing results relative to stated prospects.

Because of the defensive nature of listed property, it is highly likely that the sector will stay at or close to current levels. What is expected to happen next is that the laggards will play catch up to varying degrees as results are published during the latter part of the year. When prospects for income growth become more certain, investors will be prepared to pay higher prices.

The low-return environment is expected to continue for some time. Under this scenario, making valuation decisions based on historical relative pricing trends will inevitably lead to incorrect asset allocation decisions.

Although listed property may look expensive, defensive asset classes have rerated and these ratings will only change when high growth assets again have the potential to deliver superior returns.

Economic Commentary

Optimism Bias Sheshi Kaniki | Senior Economist at Momentum

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n June 2011, the International Monetary Fund (IMF) projected that world GDP would increase by 4.5 per cent in 2012.

The IMF’s latest forecast released in July 2012 is far less optimistic, projecting growth of only 3.5 per cent. Downward revisions to economic growth have been a major activity for forecasters since the onset of the global financial and economic crisis in 2008. It captures what some commentators have referred to as ‘optimism bias’. The expectation that the world economy will register a strong recovery has so far eluded us, and is unlikely to materialise in the short term.

We appear no closer to a solution to the troubles in the Eurozone and the weak growth in the United States four years into the crisis. In fact, after expending a significant amount of policy stimulus, fewer options are available to policymakers in developed countries. The current proposals being considered by Eurozone leaders (a fiscal union and a banking union) require a high level of political will, which does not currently exist. Moreover, it is becoming clearer that the structural challenges of large budget deficits and high levels of household debt in developed countries will be addressed only by embracing a long-term view with significant levels of pain along the way.

China has registered strong economic growth through most of the crisis period. Up until fairly recently, the Chinese economy has been viewed by many as the saving grace for the world. This hinges on the premise that China will keep buying raw materials from fellow developing countries, and capital and manufactured goods from developed countries. In other words, Chinese demand would be robust to the deteriorating global conditions. However, the Chinese economy has also weakened during the course of 2012. GDP growth in the second quarter of 2012 was 7.6 per cent, the slowest rate of economic expansion in three years. Demand for raw materials is driven in part by the appetite for

Chinese goods in developed countries and as the crisis has intensified this appetite has waned. China does have room for fiscal and monetary policy stimulus, which officials have already begun to utilise.

The domestic economy is moving in tandem with global developments. Exports have slowed, commodity prices have softened, unemployment remains high, and GDP growth has moderated. The Bureau for Economic Research (BER) forecasts that the local economy will expand by 2.5 per cent in 2012, significantly lower than the 3.1 per cent growth registered in 2012.

On 19 July, the Monetary Policy Committee (MPC) of the South African Reserve Bank decided to cut the repo rate by 50 basis points to five per cent. The prime lending rate of commercial banks is now 8.5 per cent, its lowest level since 1974.

Deteriorating global conditions, falling inflation, and consumer confidence that is at its lowest level since the start of the global financial crisis in 2008, prompted the rate cut.

“Downward revisions to economic growth have been a major activity for forecasters since the onset of the global financial and economic crisis in 2008.”

will place upward pressure on domestic food prices. In addition, the price of Brent crude oil has recently increased to over $100/barrel after falling to about $90/ barrel at the end of June. Notably, the risk of higher inflation is entirely supply driven.

Inflation is expected to ease further over the medium term given the weak global and domestic demand conditions.

The focus on Africa as the next global growth frontier has continued in 2012.

According to McKinsey & Company, growth in private consumption on the African continent since 2000 has exceeded that of Brazil and India. The IMF forecasts that sub-Saharan Africa will grow by 5.4 per cent and 5.3 per cent in 2012 and 2013 respectively. The region is set to maintain its position as one of the fastestgrowing regions in the world. Even after adjusting for optimism bias, sub-Saharan Africa’s growing middle class presents an enormous opportunity. South Africa needs a sharp strategy to contribute to and benefit from the prospects presented by Africa.

Complacency should be avoided as other African countries such as Nigeria, Ghana and Kenya improve their competitiveness, relative to South Africa.

According to Statistics South Africa, inflation dropped further in June. Inflation measured by the Consumer Price Index (CPI) dropped to 5.5 per cent from 5.7 per cent in May, and is now at its lowest level since August 2011. The moderation in inflation was driven by lower petrol and food prices and provides some relief to consumers. However, there are indications that inflation could move upwards in the short term. Unfavourable weather conditions in Russia and the United States have adversely affected the production of wheat and maize. The lower supply of these foodstuffs on international markets

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Regulatory Developments

Making responsible investing

a reality Tracey Want | Investment Solutions

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ith the introduction of the Code for Responsible Investing in South Africa (CRISA), South Africa became the second country after the United Kingdom to formally encourage institutional investors to integrate environmental, social and governance (ESG) issues into the investment process.

CRISA endeavours to assist the investor community to give effect to the King Report on Corporate Governance in South Africa (King III) in line with the United Nations-backed Principles for Responsible Investment (PRI).

The intention of the voluntary guidelines is to encourage asset owners to consider long-term sustainability issues when making investment decisions. It also extends to how asset owners should exercise their ownership rights to promote good governance.

Getting this right is important as evidence suggests that responsible investment and responsible ownership promotes sustainable practices at companies; creating platforms that can deliver sustainable returns. As such, it is critical that investment managers themselves have a view as to how environmental, social and governance (ESG) issues can be effectively incorporated into their existing alphagenerating process.

“The relative success with which investment managers integrate and balance the legislative and ethical demands of responsible investing with their performance objectives is key to performance in this rapidly changing industry,” says Tracy Want, Investment Solutions. To get this right, Investment Solutions has established a responsible investing committee to interrogate ESG issues and develop a philosophy and methodology to score these.

Want says this process needs to start with a survey of asset managers both locally and globally. “Once the data is run and trends identified, we’ll be in a better position to develop a practice to accurately value, rate and guide ESG issues”, says Want. “And

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although voluntary, let no-one think that CRISA isn’t set to become a permanent feature of South African investment practice.”

To date, it has been widely accepted by different industry bodies. The Institute of Directors in Southern Africa, the Principal Officers Association, the Association for Savings and Investment South Africa (ASISA), the Financial Services Board (FSB) and the Johannesburg Stock Exchange have all made public declarations of acceptance of the code.

Furthermore, Want adds, “Initial findings by Investment Solutions confirm that institutional investors have already adopted principles contained in CRISA to different degrees.”

As such, the most engaged asset managers have dedicated resources to actively research and promote responsible investing principles into their investment process. These managers typically engage the management of the companies in which they invest on matters relating to ESG. The shares they hold on behalf of their clients are generally actively voted, with voting records made publicly available.

In the middle of the spectrum are managers that claim sustainability issues are part of a long-term investment strategy and are incorporated into their investment process.

“These generally, however, struggle to articulate exactly how they apply the code, even though it is evident some of the correct practices are in place,” observes Want. These managers typically do not employ an ESG analyst but generally actively vote their shares and carefully consider all decisions put to them. They may also engage companies privately on issues they believe important to an ESG cause.

At the other end of the spectrum are managers who do not openly accept CRISA principles. These managers generally hold that their primary role is to create long-term value for clients and that focusing resources

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on non direct-investment-related issues detracts from performance.

“Only once Investment Solutions knows what the profile of a responsible fund manager looks like, will we be in a position to share this information and openly encourage responsible behaviour,” adds Want. For example, two companies could both present very high responsible investment profiles even though they had completely different portfolios. “Comparing and rating contradictory strategies needs an in-depth assessment of the managers process, after which one would need to work out how to measure, and then report findings, in a lucid and easily comparable format.

“So while the action of adopting the CRISA code is relatively simple, making the principles a reality as well as being able to provide proof that the principles exist in a portfolio is a much more complex process, particularly where a client makes use of more than one underlying investment manager,” concludes Want.

CHRIS HART

LIBOR AND MARKET SIGNALS Chris Hart | Chief Strategist at Investment Solutions

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ne feature of a market where trade is conducted in an open and transparent manner is that price discovery is quite efficient.

Price signals are an important component of financial markets and economic fundamentals. They help to channel resources and allocate capital and if they are distorted, so is capital allocation.

The big question is how many markets are open and transparent? How many markets are efficient price-setting mechanisms where price discovery is good? The Libor scandal suggests very few are not tainted in some way.

The manipulation of Libor rates has been unequivocally condemned and rightly so. The backlash could have further ramifications, as it appears the regulatory authorities – including the UK and US central banks – have known about the problem for several years.

The manipulation of Libor could be a nexus of collusion between the participants and the regulators. Libor is a cornerstone of the financial market system as it is used as a reference rate for countless contracts. This includes swap-market and other interest-rate contracts such as mortgages. Hundreds of trillions of notional value is involved. Just one basis point can involve damages of billions.

However, the indignation over Libor manipulation needs a wider scope. Central banks are a case in point where market intervention and manipulation have become almost part of their core business. They are continually manipulating currency markets, interest rates, money markets, bond markets and, in some instances, equity and commodity markets. This is done covertly and overtly.

Consequently, it should come as no surprise when the large, too-big-to-fail investment banks are also caught manipulating markets. When the authorities are continually manipulating markets, there would be very little ethical resistance to other players engaging in similar activities. However, once exposed, market-manipulation activities always appear distasteful and wrong because they are.

Market manipulation does not just stop at central banks. Governments manipulate markets, with politicians very quick to blame speculators if markets move against suboptimal policy. When the US releases oil from its strategic reserves to lower the price of oil, that is market manipulation. Taxes and regulatory inefficiencies also distort markets. Protectionism, a political favourite, always ends in tears, but is another form of market manipulation.

It is clear that the London and New York global financial centres are compromised due to the activities of market participants, compliant regulatory authorities and busy-body central banks. What of Johannesburg, a lowly socalled emerging-market financial centre?

The Johannesburg equivalent of Libor is Jibar, which is similar in principle but technically different. There are fewer participants in the local market, which means it is more vulnerable to manipulation.

However, it appears Jibar is a good measure and has been relatively free of manipulation.

Regulators in SA have a more arms-length relationship than the more incestuous one

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that appears to be the case in London and New York. The SA Reserve Bank has proved a cautious player in the local financial markets, having learned lessons in 1998 and 2001.

One consequence is that SA financial markets have been trading quite efficiently regarding valuation differentials between asset classes, and volatility is quite low. This implies price signals in the local financial markets are relatively accurate. However, inefficiencies do plague local markets, including exchange controls and Stateowned enterprise prices that are not fully transparently or efficiently set, with electricity and telecommunications being just two examples.

Inefficient pricing creates distortions in markets and results in inefficient capital allocation. Market manipulation contributes greatly to this. Hopefully, the Libor scandal will help to generate a fresh awareness that market manipulation is an undesirable activity no matter whom or what is originating it.

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Practice Management

TO EVERYTHING

THERE IS A SEASOn Paul Kruger | Head: Communications at Moonstone Information Refinery (Pty) Ltd

A rather cynical broker recently said Pete Seeger should rewrite his pop classic and call it, “Churn! Churn! Churn!”

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ll attempts at regulating replacements were dismal at best. So-called replacement reporting failed the test every time for one simple reason: it was sanctioned in the board rooms of the product houses. As shareholders became the new black, their hunger had to be fed by producing new business. Never mind the quality; feel the width.

It got so bad that blatant bribery of advisers to switch their entire book to a new product provider was apparently condoned, with a cut-off date by which it had to cease; despite very clear stipulations regarding the correct procedure.

It’s no wonder that the authorities decided that the industry was unable to regulate itself.

The introduction of the FAIS Act in September 2004 was part of a process of increasingly turning the screw as the FSB became more au fait with what was really happening in the industry. The introduction of the FSB Enforcement Committee in 2010 brought in a new element. Prior to this, the FSB had to follow normal legal procedure against transgressors. As the wheels of justice slowed over time, this became an almost impossible option. Justice was seen as elusive, and the FSB as a toothless bulldog.

The Enforcement Committee has several options at its disposal in meting out justice: it can impose a penalty, issue a cost or compensation order, or come to a settlement with the person charged with contravening the Act. Since November 2010, the

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Committee reviewed 263 cases, resulting in 38 settlements, where those charged had admitted guilt and paid a fine.

the replacement of perfectly suitable policies with new ones, purely to satisfy shareholders, without any concern for the clients’ interests.

The settlement agreements published on the FSB website do not sound like rough justice being meted out. In fact, it can be confused with the minutes of an ‘Amiables Anonymous’ meeting. The guilty party would bow and scrape, and the mighty committee would graciously bestow a relatively minor penalty on the recalcitrant offender.

A recent determination concerned a brokerage that replaced 19 policies. In the determination, the following contraventions were listed: “…the respondent failed to disclose the following to its clients: •

“It cannot be business as usual when offenders get away with non-compliance. There must be serious consequences.”

•

•

ctual and potential financial A implications, costs and consequences of the replacement policy.

The fees and charges in respect of the replacement policy compared to the terminated short-term policy.

Exclusions of liability, excesses, restrictions of benefits and special terms and conditions which are applicable to the replacement policy compared to the replaced policy.

At the FSB’s annual FAIS Conference at the end of July, the head of the Enforcement Department hinted at a no-more-mister-niceguy approach. “It cannot be business as usual when offenders get away with non-compliance.

There must be serious consequences. We want to ensure that we not only remove the economic benefit derived from noncompliance, but that we also institute a further gravity penalty. This will take into account the severity of the non-compliance and will act as a further deterrent to offenders,” said Thulare.

In addition to the above, the respondent also contravened the conflict of interest conditions of the General Code of Conduct. A fine of R50 000 was agreed upon. We have to wonder what the gravity penalty, referred to above, would have been. Will the gravity be determined by the transgression, or the impact on the transgressor? A fine of R50 000 could be severe for a single broker, but not a deterrent for a big product house.

Will this apply to the serial churners? No, I am not talking about advisers in general. I am referring to product houses that reward

The time has come for the grim reaper to shift the focus from the doer of the deed to the sower of the seed.

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SUNEL VELDTMAN

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

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had to visit the dentist recently. Imagine my surprise when the dentist told me that my diligent brushing was the cause of my dental woes. Apparently one should not brush hard and thoroughly but rather lightly and carefully. I learnt that older people seldom suffer from tooth decay but often suffer from problems caused by heavy handed brushing. My dentist also told me to choose a soft, flat brush over a fancy brush with angles and bristles or electric brushes.

You are probably curious about how this relates to investments and financial planning. Well, for decades I was subjected to countless toothpaste and toothbrush ads, which formed my ideas about dental care. I don’t think my first dentist showed me how to properly brush my teeth.

This experience made me reflect on our industry.

How do our clients form their views on money?

Parents have an important role, but often there is an absence of meaningful instruction. Where did the roots of your money perceptions come from? I contend that many people with strong opinions regarding money have never had formal monetary training, may never have picked up a complete guide on money, or have never even researched issues related to money.

Most clients approach their financial adviser with incidental views, formed almost entirely by the media or their friends’ take on the media.

This includes financial product ads and public relation efforts.

investment marketer. I learnt all the tricks of the trade. You can always shift your marketing approach to sell a product. When you have poor five-year returns, you advertise patience.

When your five-year returns are on top, you advertise your position in the ranking tables.

When our clients arrive in our offices, our rational voice is comparable to that of an ant shouting at the foot of an elephant. I recently asked one of my top clients what he expected of me. Much to my surprise he still wanted me to forecast the future. Despite my best efforts to influence my client’s thinking, I realised that my voice was simply drowned out by the magnitude of the media and financial product giants’ proclamations.

This raises questions. Who is responsible for teaching the truth about money to our communities? Should it be a subject taught in schools? Why do we have sex education but

hardly any money education? Teaching kids how to relate to money appropriately would go a long way when it comes to solving money problems. In conjunction, the industry should take an active role in producing unbiased education. Industry bodies should have a louder, more rational voice in the media. It would help good financial advisers a great deal to start relationships with correctly educated clients.

Most of all, financial planners and advisers have a unique role and responsibility. Much like the interaction with my first dentist, your first experience with a financial adviser is incredibly important. Financial advisers have the opportunity to teach youngsters about money, rather than sell them their first inappropriate product. Good, responsible advice will prevent so many people on reaching retirement, discovering that their best opportunity took place decades ago, when they met their first financial adviser.

“Financial planners and advisers have a unique role and responsibility. Much like the interaction with my first dentist, your first experience with a financial adviser is incredibly important.”

We know that the media sells bad news. The media realises that people remember bad news more than good news. In contrast, people with long-term goals need to believe the good news; the markets rise more than they fall. We also know that the media sells short-termism because they can’t say the same thing every day. The preoccupation with ‘experts’ forecasting the future is much more entertaining than the monotonous advice that comes from financial planners.

Information provided by financial product ads and public relations information is largely biased. One of my first jobs was as an

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EVENTS

Treasury on future of social security: private retirement funds will remain significant role players

Industry and labour form part of engagement process for government’s proposed reforms.

David Gluckman | Head of Sanlam’s employee benefits future positioning and research

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rivate retirement funds will continue to play an important role in South Africa once widespread social security reform has been completed and implemented.

This is the view of David McCarthy, retirement policy specialist at National Treasury, who was speaking at the annual Sanlam Benchmark Symposium.

“The social security reform process currently underway is significant and it is important that we get it right. We are working on getting the best set of proposals for the whole country,” he says, acknowledging that efforts to create a national social security fund (NSSF) were causing a large amount of uncertainty in the retirement industry. “The global financial crisis has resulted in a fundamental rethink in the approach to regulation which needs to be more intrusive.

Regulation needs to be tougher and stronger in the retirement industry.” McCarthy adds that draft retirement reform proposals announced in the 2012/13 Budget in February were still under consultation with various stakeholders including financial institutions, business and unions.

He says there was a very strong emphasis on protecting vested rights so that people currently nearing retirement would not be adversely affected by any new measures introduced in 2013 and beyond.

David Gluckman, head of Sanlam’s employee benefits future positioning and research, says that high levels of uncertainty existed about

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Kobus Hankeom | Head of strategy, governance and compliance at Simeka Consultants & Actuaries

the introduction of the NSSF, dissuading new retirement industry players from entering the market. He identified other major challenges facing the retirement industry as ongoing consolidation, margin attrition, governance, the cost of regulation and increasing the preservation of benefits.

Meanwhile, McCarthy notes that the NSSF proposals would have risk benefits as an essential element “whatever design we settle on”.

South Africa is expensive in comparison with international benchmarks. “We (National Treasury) want to know why we are so high on the expenses scale when we have such developed markets and what it is about the SA market that makes costs so high. This is a crucial issue for the long-term success of our country.

“While retirement funds currently managed around R2.4 trillion of retirement savings – more than half of all household savings in SA – the country still has inadequate levels of retirement savings and low levels of annuitisation, and considerable consultation will take place in the annuity reform process,” says McCarthy.

Annuities would also be examined as part of retirement reform as there is a need for better rating structures in conventional annuities and a relook at living annuities which could run out during people’s lifetimes due to drawnrates being too high. “The striking thing is that protection is withdrawn when people retire,” adds McCarthy, referring to retirees having to

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make their own decisions once they received lump sums and started drawing down annuities.

Also speaking at the symposium, Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants & Actuaries, said employers needed to play a far bigger role in retirement funding and planning than at present. “Employers need to ask themselves how efficient their funds are at giving people a dignified retirement. Retirement funds are the most tax-effective savings vehicles available, but they have to be as efficient as possible.”

In a panel discussion regarding retirement reform proposals, Isaac Ramputa, assistant general secretary of SASBO, said while there were many good elements in the proposals, there could be a challenge in terms of implementing changes to tighten preservation, indicating that unions were unlikely to support preservation as the only capital available to members on leaving a job or after UIF payments had stopped. “We agree with the National Treasury that all formal sector workers should contribute towards their retirement funding, but it all depends on the contribution level,” he adds. However, he and most members of unions disagreed with the National Treasury on another matter; prescribed assets. While Ramputa said industry needed to change its attitude towards prescribed assets or be legislated to do so, McCarthy said the National Treasury was surprised by the call for prescribed assets to be enforced as the need for this was at a 40-year low with industry already big holders of government assets.

South African fund manager takes top international award for the third year running

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or the third consecutive year, Sanlam Investment Management (SIM) Global’s, Kokkie Kooyman, has been named fund manager of the year (category: financials). Adding to this he also received the Best Specialist Fund award for the Sanlam Global Financial Fund. This was announced at the prestigious UK-based publication Investment Week’s fund manager of the year awards ceremony held at London’s Royal Albert Hall in July.

Speaking after the announcement of the award, Kooyman, global fund manager at SIM Global, said that he was delighted and humbled by this recognition. “We are thrilled to have been acknowledged by Investment Week for a third year, for this top international honour, especially taking into consideration the extremely difficult market conditions of the past five years.

Kokkie Kooyman Sanlam Investment Management (SIM) Global Our fund’s performance has been delivered by a talented and dedicated team and therefore recognition for this commitment is a significant achievement for the whole team.”

The Investment Week fund manager of the year awards aim to highlight funds which have consistently outperformed over a three year period and those which the judges believe are likely to continue this performance in the future. Kooyman was the only South African finalist in the category at the awards. He has managed the Global Financial Fund for 12 years and during that period it has achieved a compound annual return of 14 per cent in US dollar terms for investors, compared to the benchmark of one per cent.

investing. Our philosophy has been honed and adapted by 25 years of experience, a system that consistently identifies the best investment opportunities and results in continuous outperformance over the long term,” explains Kooyman.

“We do our own research, our portfolios are concentrated and we are unconstrained.

These factors become especially important when specific markets or sectors are expensive. In addition, we deliberately focus on finding undervalued companies. These tend to be undiscovered companies (generally small market cap) or turnaround situations with good growth prospects, forecasting high return on capital and a low price to net asset value ratio,” concludes Kooyman.

“SIM Global’s success is based on a solid understanding of the fundamentals of value

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morningstar

TRANSLATING FUND MANAGER SPEAK David O'Leary | CFA, MBA, Morningstar

Fund companies are well versed in the art of spin. We translate some of the common euphemisms.

One of the most difficult aspects of my job is cutting through the rhetoric offered up by charming portfolio managers or professional public relations experts. A fund company is bound to find itself in undesirable circumstances from time to time; its star portfolio manager jumps ship, it loses a huge client or fraud is uncovered at its largest stock holdings. And they are often well prepared.

Response: “I’m really excited about the names in the portfolio right now.”

Translation: I bought in way too early and most of the stocks I own have been hammered.

I often hear this comment from value managers. Value managers aim to buy stocks that are trading below what they perceive to be their fair value. Then it’s just a waiting game for the rest of the market to recognise the stock’s true value.

The trouble is there’s rarely a definitive moment when the manager is proven wrong.

They can continually claim the market is being irrational. Finding that trade-off between having confidence in a stock pick and stubbornly refusing to admit you’re wrong can be very difficult. Either way, when you hear a fund manager talking about how excited they are by the names in their portfolio, you can be pretty sure that means the fund hasn’t performed very well recently.

Response: “Our fee structure helps align my interests with the unit holders.”

Translation: Our performance fees allow us to charge you even more money.

Ostensibly the purpose of performance fees is to align the fund manager’s interests with

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the investors’ interests. And it’s advertised as a benefit to the investor. But many of these fees are structured so that they favour the fund company. The common hedge fund structure, ‘the 2 and 20’ sees the fund company earn a two per cent TER no matter what and then 20 per cent of any outperformance the manager produces. The asymmetrical nature of this structure can encourage the fund manager to take on more risk. After all, if their aggressive bets don’t work out and the fund performs poorly they still earn a healthy fee.

Performance fees are unnecessary. The portfolio manager has a fiduciary duty to manage money responsibly no matter what.

And if they have any faith in their own ability, they will likely be a big investor in the fund.

So what more incentive could they need to do well? And if they aren’t invested in the fund, you have to wonder why.

Response: “We’re conscious of tracking error and actively manage that risk for our clients.”

Translation: We’re hugging the benchmark for dear life!

There’s an often quoted statistic that 80 per cent of actively managed funds fail to beat their benchmarks. But many of those so-called actively managed funds aren’t very actively managed at all. Truly active managers scour the eligible investment universe to find the most attractive securities, regardless of the benchmark. At the other end of the spectrum, completely passive funds use various techniques to efficiently copy an index. And there is a wide range of strategies that lies somewhere in between.

Many so-called actively managed funds look pretty passive. They take only small, measured deviations from the benchmark but by claiming to be actively managed, they can charge higher fees without the risk of dramatically underperforming compared to

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the benchmark. This tactic is more popular among very large firms that have a lot more to lose than they have to gain.

Response: “I’m stepping away from the business for personal reasons.”

Translation: I’ll be working for a competitor as soon as my restraint-of-trade period ends.

Personnel turnover is one of the biggest problems mutual fund investors face. If your fund’s manager leaves the firm, you’re faced with a tough decision. Many investors will opt to redeem their fund to either follow the manager or buy their next favourite fund instead. For that reason fund companies do their best to either suppress the news or spin it. One common tactic is to claim the departure is due to personal reasons. At times they may even specify that the manager is taking time off to spend it with his family.

This approach avoids the often honest but unsavoury rationale: the manager is leaving to a competitor for more money.

etfSA.co.za

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

W

ith good recovery in many South African investment markets, a number of index tracking products are providing superior returns. The table below shows the increase in the main FTSE/JSE indices over the past year or more.

With above-inflation returns by the main market indices for both bonds and equities, many of the index tracking products, ETPs and unit trusts included in this survey are

yielding good results for investors.

As pointed out in our recent news story “How Many Actively-Managed Unit Trusts Can Outperform the Index?” (12 July 2012), on average, more than 80 per cent of active unit trust managers have failed to beat the index performance over the past one to seven years. In these difficult investment times, index tracking products, particularly low cost exchange traded products are coming into their own.

Alternative investments are also coming under increasing attention

in the quest to find alpha performance. Exchange traded products give exposure to many of these alternative asset classes. The summary of the Performance Survey illustrates the recent outstanding performance of commodity-based ETNs (wheat, corn) as well as property index securities, for investment periods of less than one year.

Total Return Main JSE Indices To end July 2012 1 year (p.a.)

2 year (p.a.)

FTSE/JSE All Share

15.72%

16.18%

FTSE/JSE Top 40

13.92%

15.08%

FTSE/JSE Industrial Index

29.45%

25.62%

The All Bond Index

16.71%

12.93%

MSCI World Equity Index (Rand)

18.25%

8.50%

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

Type

5 Years (per annum)

Fund Name

Type

3 Years (per annum)

NewGold

ETF

22.35%

Proptrax SAPY

ETF

25.62%

Prudential Property Enhanced

Unit Trust

16.69%

Satrix INDI 25

ETF

25.02%

Satrix INDI 25

ETF

14.97%

Prudential Property Enhanced Index Fund

Unit Trust

24.82%

2 Years (per annum)

1 Year

Satrix INDI 25

ETF

25.91%

Standard Bank Corn-Linker

ETN

47.78%

NewGold

ETF

24.17%

Standard Bank Wheat-Linker

ETN

36.24%

Proptrax SAPY

ETF

23.03%

Proptrax TEN

ETF

34.72%

DBX Tracker MSCI USA

ETF

19.73%

Proptrax SAPY

ETF

33.04%

Prudential Property Enhanced Index Fund

Unit Trust

32.62%

6 Months

3 Months

Standard Bank Corn-Linker

ETN

46.51%

Standard Bank Corn-Linker

ETN

49.73%

Standard Bank Wheat-Linker

ETN

30.00%

Standard Bank Wheat-Linker

ETN

43.45%

Proptrax SAPY

ETF

22.54%

Source: Profile Media FundsData (31/07/2012)

* Includes reinvestment of dividends.

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

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

41

INDUSTRY INDUSTRY NEWS NEWS

Appointments

Evan Walker joined 36ONE Asset Management as a member of the investment team and co-manager of the 36ONE MET Equity Fund. He was previously fund manager of the multi award-winning Momentum Small/Mid-Cap Fund. Prior to this, he was head of industrial research and retail analyst with Credit Suisse Standard Securities for seven years.

Walker holds a BCompt Honours as well as an MBA.

Nedgroup Investments has appointed Vuyolwethu Nogantshi as head of institutional and consulting. He has over 10 years of experience in the financial services industry and previously worked for Alexander Forbes Asset Consulting as an investment consultant and later was appointed as head of performance surveys. Nogantshi is an actuary and holds a BEconSc. from the University of the Witwatersrand in actuarial science and mathematical statistics.

Absa Capital brings home some awards Absa Capital was recently recognised as the Best Debt House in South Africa in the annual Euromoney Awards for Excellence 2012. This is in addition to its electronic FX trading platform PACE FX being awarded the best e-FX platform for corporates at the FX Week e-FX Awards in New York.

The Euromoney award recognises the winner’s ability to help clients access financing in multiple debt capital markets while taking into account the client’s unique needs in different economic environments.

“We are delighted with this achievement and believe that this award demonstrates Absa Capital’s commitment to providing clients with access to the full range of Absa and Barclays resources and financing solutions,” says Stephen van Coller, chief executive at Absa Capital.

“The Euromoney award recognises the winner’s ability to help clients.”

PACE FX is based on the multi award-winning BARX FX trading platform from Barclays. The award was established this year to reward the platform that best understands the unique needs of corporate clients, and answers those needs with innovation.

“In a competitive and ever-changing FX marketplace, it is essential for banks to innovate in their electronic foreign exchange offering, to ensure they meet their clients unique and evolving needs,” says Van Coller.

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The Financial Planning Institute of Southern Africa (FPI) has appointed Almo Lubowski, CFP, as head of technical and advocacy services. Lubowski has been serving the FPI as the technical services manager for the past two years and has been successful in establishing a very effective technical services department. In his new role, Lubowski will be responsible for developing policy positions on issues affecting the financial planning profession and advocating for these positions with policymakers, regulators and industry bodies.

SA entrepreneurs to benefit from FNB Private Clients partnership with AngelHub FNB Private Clients has announced a strategic partnership with AngelHub, in order to support South African entrepreneurship and innovation.

AngelHub is an investment group that pools funding, expertise and networks from a diverse range of angel investors, for investments into high-growth South African ventures, with the aim of accelerating growth and creating value by aggregating knowledge and resources.

“FNB is built on a legacy of entrepreneurial vigour and we pride ourselves as being the bank of choice for entrepreneurs. FNB Private Clients recognises the importance of entrepreneurs in developing our country’s wealth and also understands that the majority of wealthy individuals in South Africa are business owners,” says Basani Maluleke, head of FNB Private Clients.

“Encouraging South African entrepreneurship and innovation should have the dual benefit of generating both economic value and job creation,” says Brett Commaille, from AngelHub. “Through our partnership with FNB Private Clients, we hope to reach a larger audience of potential angel investors who will invest in high growth business ventures that suit their individual investment requirements.”

Prescient’s Irish deal and new licence in China shows opportunities for continued growth

growth opportunities in Europe generally and in Ireland in particular. With this deal we have acquired a company based on a smart group of talented and hardworking people. With their help we will be able to achieve our ambitious plans.”

Prescient Group has announced the acquisition of AIB Asset Management Holdings and its subsidiaries in Dublin. In addition to this, China Securities Regulatory Commission (CSRC) has granted Prescient Investment Management a licence to buy Chinese stocks and bonds, opening the way for the group to apply its philosophy to a market well suited to the quantitative investment style.

The Irish acquisition involved the sale by Allied Irish Banks (AIB) of AIB Asset Management Holdings, including AIB Investment Managers, to Prescient for an undisclosed sum. The companies have been renamed and are now part of the Prescient brand. Following the transaction, the Group currently has assets under management in excess of R150 billion.

Herman Steyn, executive chairman, says the transaction represents a significant milestone in the development of the business. “We believe there are

Nedgroup Investments money market fund obtains Fitch rating Following a rigorous process, Fitch Ratings has assigned a AA+(zaf) National Fund Credit Rating and a ‘V1(zaf)’ National Fund Volatility Rating to the Nedgroup Investments Money Market fund.

Prescient’s licence to purchase Chinese stocks and bonds was granted under the Qualified Foreign Institutional Investor (QFII) scheme. China has stepped up efforts to expand the QFII programme, which it launched in 2003 to allow foreign investors to buy Chinese securities as part of a broader reform of the country’s financial markets.

Liang Du of Prescient Investment Management says the Chinese capital market has historically been closed to foreign investors, but the investment quotas allow asset managers to invest in Chinese shares on the Shanghai and Shenzhen stock exchanges. “Without the quota, investors would have access to roughly 150 Chinese companies that are dual listed or listed in Hong Kong. With the quota, investors are able to buy almost 2 000 shares in mainland China, accessing companies that would otherwise not be investable.”

Du explained that the QFII programme has been successful with companies that have been given quotas generally investing for the long term rather than speculating. China has tended to adopt a slow but steady approach to liberalising markets.

Ian Ferguson, head of Cash Solutions at Nedgroup Investments, confirms that the rating will not result in any change to the way the fund will be managed.

“We are delighted that Fitch Ratings has recognised the high credit quality of the issuers to the fund, as well as the fund’s low exposure to interest-rate risk and spread risk in the rating, supported by the fund’s short maturity profile.”

According to Ferguson, recent research undertaken by Nedgroup Investments indicates an overwhelming preference among corporate treasurers for money market funds to be rated.

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“Eighty per cent of corporate treasurers that responded to our survey stated that they preferred money market funds rated by an international rating agency.

Investors gain an additional layer of comfort from such a rating, knowing that an independent, international rating agency has conducted a thorough review of the fund, the fund manager and the investment process,” he says.

“We are delighted that Fitch Ratings has recognised the high credit quality of the issuers to the fund, as well as the fund’s low exposure to interest-rate risk and spread risk in the rating.”

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PRODUCTS

NewGold exchange traded fund The NewGold ETF (JSE code GLD), issued

by Absa Capital, is the most successful South African ETF measured by size.

This is according to Mike Brown, managing director of etfSA.co.za, who says the EFT which first listed on the JSE in November 2004, now has 136 million shares in issue, with a market capitalisation of over R17 billion. The next biggest ETF is the Satrix 40 with a market cap of R7.1 billion.

“The NewGold ETF continuously tracks the price of gold bullion on international markets, by holding physical gold bullion equivalent to the value of securities in issue. NewGold currently holds in depository storage in London, some 1 318 941 fine troy ounces of gold bullion. As the value of this gold hoard rises and falls, so does the value of the NewGold GLD securities, thus providing investors with a participatory interest in a gold bullion portfolio,” says Brown.

The NewGold securities are listed and trade in Rand on the JSE, adds Brown. “Given the foreign exchange control restrictions which prevent transactions in physical gold

36ONE renames Target Return Fund The 36ONE Target Return Fund was renamed on 1 July and has moved to the general equity category. The new name is the 36ONE Met Equity Fund. This fund will hold at least 80 per cent in equities at all times. This compares to the more flexible mandate of the 36ONE Flexible Opportunity Fund, which has holdings across equities, offshore traded corporate bonds and cash.

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bullion in South Africa (except for registered jewellers and industrial users of gold), NewGold provides an opportunity for local investors to gain direct exposure to the gold bullion price.”

Since its listing in late-2004, NewGold has provided outstanding performance. To 29 February 2012, the NewGold ETF has provided an annual return of 24.14 per cent, since inception, or a cumulative return of 387.8 per cent.

“The NewGold ETF continuously tracks the price of gold bullion on international markets, by holding physical gold bullion equivalent to the value of securities in issue.”

SINGAPORE, AFRICA, europe, malawi, brazil, china, italy

Singapore urges India to implement economic reforms Singapore’s Prime Minister, Lee Hsien Loong, is pushing India to implement economic reforms to attract foreign investors as the country’s business environment is complicated due to political instability.

He says the country needs a predictable environment in which foreign investors can invest their money as they have long expressed growing concern about India’s paralysed reform process, policy changes and unpredictable taxation moves.

African economies predicted to show growth but are warned of tough times ahead African Development Bank forecasts economic growth to continue reaching 4.5 per cent in 2012 and 4.8 per cent next year, with sub-Saharan Africa to grow at an even faster pace. However, the bank’s chief economist, Mthuli Ncube, says the continent faces increasing threats from continued political instability, youth unemployment and the global recession dragging down oil and commodity prices. He adds that as Africa’s population continues to grow, job creation will lag far behind and will put even more pressure on African countries.

EU unemployment reaches record high Unemployment in countries using the Euro was a record 11.2 per cent in June. This is according to European Union (EU) data agency Eurostat which said 123 000 people lost their jobs going into the European summer, bringing the total to nearly 18 million, up from two million a year earlier..

Japanese public pension fund under pressure as baby boomers claim Japan’s public pension fund, the world’s largest, is selling domestic government

bonds as the number of people eligible for retirement payments increases. According to Takahiro Mitani, president of the Government Pension Investment Fund (GPIF), Japan’s population is ageing. Baby boomers born in the wake of the Second World War are beginning to reach 65 and are eligible for pensions, putting GPIF under pressure to sell Japanese Government Bonds (JGB) to cover the increase in pay-outs.

Banks profit cut severely due to debt crisis Deutsche Bank’s bottom-line profit in the second quarter has been cut by nearly half due to the Eurozone debt crisis. Co-chief executives Juergen Fitschen and Anshu Jain said in a statement that the banks net profit fell to 661 million Euro ($811 million) in the April to June period from 1.2 billion Euro a year earlier, while revenues declined 6.0 per cent to 8.0 billion Euro. They said the fall in profits is fuelling concern whether Deutsche Bank can meet the EU’s more stringent capital requirements without issuing new shares to raise additional funds.

IMF approves Malawi’s $156 million loan In an effort to lower Malawi’s runaway inflation and achieve fiscal sustainability, the International Monetary Fund (IMF) approved a $156 million loan through its Extended Credit Facility (ECF) programme.

Naoyuki Shinohara, deputy managing director at the IMF, said in a statement that the ECF programme includes measures to enhance domestic revenue mobilisation and public financial management reforms to strengthen the budget process and avoid the accumulation of arrears.

World Bank lowers forecast for SA’s economic growth A decrease in consumer and business confidence in South Africa prompted the

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World Bank to lower its forecasts for the country’s economic growth in 2012 from 3.1 per cent to 2.5 per cent. Asad Alam, World Bank Country Director for South Africa, said that due to its high integration with the global economy the country is susceptible to the ongoing slowdown in the Eurozone countries and China, the two principal export destinations for its goods and services.

Brazil cuts taxes and maintains social programmes Brazil will not adopt EU-style austerity measures to tackle its economic challenges, according to President Dilma Rousseff. Alternatively, the world’s sixth-largest economy will cut taxes and maintain social programmes. “Brazil is following a different path,” Rousseff said, and would not restrict any labour rights, will boost stimulus measures and will prevent the national currency from appreciating against the Dollar to avoid harming the fragile industrial sector.

Economic growth is China’s top priority According to Premier Wen Jiabao, China’s economic rebound is not stable and faced hardship. Jiabao said that stabilising economic growth was the government’s top priority as the economy expanded during the second quarter at its slowest pace (7.8 per cent) in more than three years as a result of the Eurozone crisis.

Italian banks downgraded due to increased risk Moody’s Investors Service lowered ten Italian banks and three Italian financial institution’s long-term ratings. According to the ratings agency, this indicates an increased risk that the government might be unable to provide financial support to its banks that are in dire straits. Furthermore, Moody’s said that exposure to the domestic economy and high direct exposure to sovereign debt resulted in stand-alone credit assessments being no higher than the sovereign rating.

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BAROMETER

HOT SIDEWAYS

South African commercial property best in world Over the past decade, commercial property in Johannesburg and Cape Town has experienced greater capital appreciation than international markets such as New York, London and Munich. Cape Town and Johannesburg property values have increased by 9.7 per cent and 7.5 per cent respectively over the past decade, compared to New York, London and Munich, who have experienced 3.6 per cent, 2.2 per cent and -0.1 per cent respectively.

“Commercial property in Johannesburg and Cape Town has experienced greater capital appreciation than international markets.”

Draghi rallies markets Stock markets surged across the world in response to a statement made by European Central Bank (ECB) President Mario Draghi, after he announced the bank’s unwavering commitment to protecting the Eurozone. The European and Asian stock market, metals, oil and the JSE, along with many other markets, all responded strongly to the announcement.

Truworths successfully navigates stormy retail market conditions Truworths has forecasted a 17 per cent year-on-year increase in headline earnings combined with a substantial improvement in the group’s sales.

These positive results have occurred despite the current turbulent retail environment that is experiencing constrained growth in sales and earnings.

NOT

Platinum market in freefall The platinum industry is struggling due to a combination of poor market conditions. Market leader Anglo American Platinum has felt the brunt of the damage and has experienced a 78 per cent decrease in headline earnings a share and substantial declines in sales, which has been further amplified by the resignation of its CEO. The poor performance can be attributed to a declining demand for platinum, weaker prices, rising operational costs and issues ranging from increasing power costs to labour and safety stoppages.

Unit trusts boom but money markets offset Figures published by the Association for Savings and Investment SA (ASISA) showed that unit trusts produced higher income yields in the second quarter with the local collective investment schemes industry growing by R242 billion, one of the highest increases recorded.

However, money market funds realised net outflows of R8.8 billion.

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South Africa’s economy less free According to the Free Market Foundation, the South African Government’s recent introduction of regulations is making the economy stagnate and less free. At a recent conference, director Leon Louw stated that the introduction of the National Credit Act, Consumer Protection Act and exchange controls had taken the country off the path of becoming a freemarket economy.

IMF cuts growth forecasts The IMF has cut its global growth forecast amidst the continued economic crisis occurring in Europe. The IMF believes the Euro crisis has had a significant detrimental effect on the rest of the world and reduced its global economic growth forecast from 3.9 to 3.5 per cent. This however, is better than SA’s forecast which was slashed from 3.1 to 2.6 per cent.

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AND NOW FOR SOMETHING COMPLETELY DIFFERENT

The reel deal on vintage

movie poster investing Many cinematic fans will be thrilled to know that their interest in films is not only a form of entertainment, but can actually present a lucrative investment opportunity, too.

Collecting original movie posters has been going on for many years and their sale has the potential to yield large sums of money.

However, as with most movies, there is a twist in the tale. The value of a movie poster is determined by many factors, the most important of which is its rarity.

In addition, the creativity and artistic expression found in movie posters paired with the condition in which the poster is in also needs to be considered when on the hunt for an artwork of value. Interestingly, collectors prefer illustrated posters as opposed to photo posters which are less expensive to produce compared to the costs of hiring a graphic artist to design an image.

Unlike comic books and other collectibles, official movie posters cannot be purchased directly from the studio or studio printers.

Generally, to promote a movie, studios hire advertising agencies to develop the promotional materials and this includes posters. Approved designs are sent to commercial printers and then distributed to theatres. Sometimes the studios or printers will sell movie posters wholesale to poster dealers, who then sell to collectors.

This makes original movie posters all the more appealing, while usually, the older the poster, the rarer it is.

To illustrate just how valuable and appealing they are to collectors, here are the top three most expensive posters ever sold:

©Universal Studios

©Universal Studios

©Heinz Schulz-Neudamm

An original movie poster is the first commissioned artwork that is then authorised and printed by film studios to promote their movies in theatre lobbies, shopping malls and

other advertising venues. An original movie poster has a direct connection to the movie in that there is collaboration with the studio, the director and the artist, and this gives it the potential to appreciate in value. Posters that are made for sale to the public in stores are not considered originals.

The Mummy – $435 500

Metropolis – $690 000

The Black Cat – $334 600

The poster of Universal Studios’ classic 1932 horror film, The Mummy, directed

by Karl Freund, takes second place as the most valuable poster when it was sold for $435 000 in 1997, the highest price paid for a movie poster at that time. Critics argue that it is due to the movie’s lead actor, Boris Karloff’s uncanny acting skills that made the movie such a hit and thus made the original poster such a desired collectable.

The classic 1927 science-fiction film, directed by Fritz Lang about a dystopian future in the year 2000, was adapted from the novel of the same name by his wife Thea von Harbou. The film remains an iconic example of early German film making, which has influenced generations of film makers. Lang commissioned German artist Heinz Schulz-Neudamm to paint the poster. The artwork depicts a wicked artificial woman, The Robot, who is used by a crazed scientist to infiltrate and seduce a mutinous race of underground workers in a totalitarian city. The original poster has been seized in a liquidation case and is estimate to fetch over $1 million when it goes on auction.

Another classic movie starring Boris Karloff comes in at third place. This time it is for the horror movie, The Black Cat. This 1934 classic horror film, directed by Edgar G Ulmer and distributed by Universal Studios, was the first time Karloff collaborated with actress Bela Lugosi, a partnership that many argue was their best ever. The poster of this film, which was auctioned by Heritage Auctions in 2009 for a healthy $334 600, is believed to be the only Style B (studios issue different styles for the same movie) example ever to surface.

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47

they said

They said “Recessions are expensive. In the four years to 2011, the global economic problems have cost South Africa R500 billion in national income foregone and every working age adult R20 000 in personal income. We should consider the $2 billion as a down payment towards resolving the global problems.”

Goolam Ballim, Standard Bank’s chief economist, believes that South Africa’s contribution to the IMF is a sign of leadership.

South Africa and the rest of the Brics members agreed to enhance their contributions to the IMF with the aims of rescuing the Eurozone.

“Very significant household financial risks still exist. The lowering of debt to disposable income ratio and raising of the savings rate are key requirements to strengthen household financials.” Arrie Rautenbach, Absa retail markets head, comments on the significance of the recent rate cuts.

“Africa is really growing at a fast pace and we urge Indian business to invest in the continent.

Six of the fastest-growing economies in the world are in Africa.” Virenda Gupta, the Indian High Commissioner, spoke about tightening the investor relations between in his own country and the continent of Africa.

48

“SA is one of the most unequal countries in the world. According to the World Bank report, the top 10 per cent of the population accounted for 58 per cent of SA’s income, whilst the bottom 10 per cent accounted for just 0.5 per cent of income.” DA finance spokesperson, Tim Harris, commented on the results of the recently released World Bank inequality report.

“You had the Great Depression in the United States, this is exactly what we’re going through in Greece. It’s our version of the Great Depression.” Greek Prime Minister Antonis Samaras spoke to Bill Clinton regarding Greece’s dire economic conditions prior to a conference consisting of major international leaders.

“The South African economy is not different to other countries. There is not much more than interest rate relief the Reserve Bank can use in its arsenal to weather the storm.” Colen Garrow, chief economist at Johannesburg-based Meganomics, who predicted July’s rate cut.

“With so much risk to go around, markets have been making sharper and sharper distinctions between ‘safe haven’ and ‘risky’ assets.”

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Michael Gavin, head of global macro and emerging market strategy at Barclays Capital, commented on the implications of the troubles occurring in Europe.

“Despite these declines, confidence in these segments (life insurance, retail and investment banking) of the financial services sector remained higher than that of asset management.” Ernst & Young, commented on declining confidence in the financial sector that was noted in its recently released Ernst & Young financial sector confidence index for South Africa.

“It’s clearly a bloodbath, as you can see.”

Anglo American Platinum acting CEO, Bongani Nqwababa, spoke at the company’s interim results presentation and remarked on the tough position the company and the market was currently in.

“The key to higher growth and more jobs in SA ultimately lies in raising fixed investment in both the private and public sectors.”

Business Unity South Africa (BUSA), on its reduced forecast of South Africa’s growth rate, which it downgraded to 2.5 per cent from 2.7 per cent.

you said

You said @LindsayBiz: “Rand hits R8.50 as investors flee risky assets. Spain and Greece on their knees, Italy wobbling. Weather’s lovely in Europe though.”

Lindsay Williams – Football & Fish, Broadcasting & Beer, Wine & Whining, Writing & Wronging Cape Town @Warren_Dick: “Really? Is this how pathetic they have become???@ TheEconomist:#LIBOR is badly broken. But for now, a flawed number is better than none.”

Warren Dick – An apprentice in the study of this organised chaos we call financial markets. I write for Business Day Investors Monthly and Africa Investor.

Johannesburg @iSayTrade: “I get the feeling equity market sentiment not very negative taking the Spain & Italian turmoil into account. Hope it does not get worse.”

Gerhard Lampen – Passionate about economics, investments, trading and technical analysis. Member of JSE since 1991. Created and managing Sanlam iTrade. Loves music and wine.

Johannesburg, South Africa

@MotivateToday: “9 million South Africans are #debt stressed - more than 3 months in arrears according to the Credit Ombud.

Debt is a national pandemic.”

Nigel Willmot – Master Financial Wellness Coach | Forest FC and Orlando Pirates supporter | 80s music buff | Ale connoisseur | Don’t like my Tweets? Tough JHB, West Rand, South Africa @keithmclachlan: “If you were momentum small cap traders, you’d probably be buying Ellies, Calgro M3, EOH and Pinnacle Tech.

Just saying.”

Keith McLachlan – Small and mid cap analyst. Writer. Painter. Talker. Philosopher.

Warrior poet.

South Africa @WallStreetThug: “The market cap of the Italian financial sector is now the same as the market cap of Colgate-Palmolive ($47bn).”

Wall Street Thug – Financial Lyricist

at Reuters TV. Tweeting on economics, markets, policy, rates, FX. Now in London, previously based in New York, Madrid, Rio, Sao Paulo.

London @fuTuRe_sHoCk: “Unless bond prices can continue to rise as new debt is issued the era of rigged bond prices might be drawing to an end.”

Spence Cooper – Documenting the collapse of global, fractional reserve banking. Our food supply is the last defense against total tyranny.

USA @chrismoerdyk: “CEOs find marketers untrustworthy, unimpressive and disconnected http://zite.to/PPNrVK.” Chris Moerdyk – Marketing analyst, chairman of www.bizcommunity.com. Fellow of the Institute of Marketing Management.

CMO Council. Former head of strategic planning at BMW. Cape Town

@ReutersJamie: “20 countries have 2y govt bonds yields <1%, says deutsche. 6 are negative, all in Europe. Whatever happened to zero percent mattresses?”

Jamie McGeever – Editor, presenter

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49

FINDING PEACE AT THE 12 APOSTLES HOTEL AND SPA Isolated from the buzz of the mainstream world, the Apostles Hotel and Spa rests above the Atlantic Ocean on a plateau of wild fynbos, guarded by the Twelve Apostles Mountain.

This is not your typical Cape Town getaway. You are close enough to the iconic Camps Bay beach, but far enough not to be disturbed. Once you have stepped out of a spa treatment from a crystalline cave offering revitalising spa, massage and energy treatments, fresh and salt water hydro therapy pools are to be discovered, along with fresh fruits, juices and healthy snacks. It was rated as the number one hotel spa in Africa and the Middle East at the Travel and Leisure World’s Best Awards 2012.

The widespread layout provides guests with a variety of room options with differing views

but all are elegantly designed with fabrics that are light and airy. Some rooms open onto a balcony overlooking Table Mountain National Park or the majestic Twelve Apostles; while others peer off towards the ocean. The choice of classic, luxury and superior rooms may suit some, while the onebedroom family suites, garden or the Presidential suite will find favour with others.

The Azure Restaurant boasts a feast of flavours from the breakfast menu or buffet, including champagne and oysters, right through to lunch and dinner. My dinner menu presented two separate tastes for starters and main: the traditional home-style menu, created by hotel founder Bea Tollman, offers rich, fresh choices and leans towards traditional tastes, such as sirloin, schnitzels, seafood platters, pot-roasted

sole, pasta primavera or Cape Malay Curry.

Executive Chef Henrico Grobbelaar delivers on the fine dining menu and prepared my fried squid with ink-rice balls starter. It was followed by the springbok fillet with an assortment of complementary flavours, which included orange tapioca and a sultana caper paste. Norwegian salmon, steak tartare, duck bresaola, squid, pork belly … there is more and you will be spoilt for choice. I suggest spending a few evenings sampling them all. There is also Café Grill, surrounded by a heated ocean-facing pool, and a mountain-facing rock pool Jacuzzi, which is open 24 hours and serves light meals.

If you’re not enjoying sunset cocktails at the Leopard Bar, or listening to soothing live music by the fireplace, Tea by the Sea

in the Conservatory offers a different experience. Delicious homemade delicacies are a must but a private intimate dinner here will bring life to any romance.

There are a host of things to do. Nature walks with picnic hampers can be arranged; meditate or relax on one of the hammocks or tanning deck; watch a classic or contemporary film at the 16-seater cinema; or take helicopter flip to the V&A Waterfront. Due to the hotel’s location, star-gazing evenings with an astronomer allow you to take a closer look at the night sky through telescopes.

The hotel prioritises guest wellness and offers a variety of complimentary activities, which includes cycling to Chapman’s Peak, hiking trails, jogging and yoga classes. A gym facility is also available.

The Twelve Apostles Hotel and Spa, Victoria Road, Camps Bay, Cape Town, South Africa, Tel: +27 (0)21 437 9000 E-mail: bookta@12apostles.co.za

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