INVESTSA March 2011

Contents

CONTENTS

06 20 22 24 28 32 37

Emotion is the death knell for sound investment decisions Miles Donohoe

SUBSCRIPTIONS

PrOFILE Patrick Mamathuba – CIO: Alternative Investments, STANLIB Stained Steel Management needs to clean it up HEAD TO HEAD Mazars / acsis Whose responsibility is it to ensure a secure retirement?

Maya Fisher-French Are we heading for a bonus bubble?

Checks are in place but some bonus payments look excessive Raging Bulls Winners announced

12 months for only R450

06 Alternatively send this completed form together with proof of payment to: COSA Communications (Pty) Ltd Subscription Department PO Box 60320, Table View, 7439 or fax to 021 555 3569.

22

For any queries, contact Bonnie on 0861 555 267 or e-mail subscriptions@comms.co.za.

VAT and postage included addresses only

|

standard postage FREE to RSA

company: VAT no: title: initial: surname:

32

postal address: code: tel: fax: e-mail: signature:

gift subscription

March 2011

yes

no

3

Letter from the editor

letter from the

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

editor

Features writers: Maya Fisher French Miles Donohoe Publisher - Andy Mark Managing editor - Nicky Mark Design - Gareth Grey | Dries vd Westhuizen | Robyn Schaffner Editorial head offices: Ground floor | Manhattan Towers Esplanade Road Century City 7441 phone: 0861 555 267 or fax to 021 555 3569 www.comms.co.za Magazine subscriptions Bonnie den Otter | bonnie@comms.co.za Advertising & sales Lisa McCallum | lisa@comms.co.za Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Miles Donohoe | miles@comms.co.za

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

U

nit trusts were launched about 46 years ago in South Africa to provide access for ordinary people to the stock exchange.

Until the first fund was launched in June 1965, the stock exchange was very much the preserve of the wealthy and something of a mystery to men and women in the street.

The growth of the unit trust industry has been phenomenal, and that’s despite the 1969 stock market crash that nearly wiped out what was then a fledgling industry. It came back, grew and, while unit trust funds also attract a lot of institutional money, the industry is still the preferred investment vehicle for retail investors.

Copyright COSA Communications Pty (Ltd) 2011, All rights reserved.

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

Unit trusts are our focus in this issue and Miles Donohoe reflects on an industry that is attracting record inflows and with assets of close to one trillion rand with nearly 1 000 different funds available.

He discusses, with a number of fund managers, a problem that investment advisers will be only too aware of – what do you do when clients start letting emotions cloud investment decisions?

the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication.

Readers of this publication indemnify and hold harmless the publishers of

Maya Fisher-French looks at an issue that asks, amongst other pertinent questions, who should be giving advice to people on what to do with their retirement fund money? One conclusion is that advice from advisers is sadly lacking here.

a useful tool for advisers. I take a look at what has become the increasingly contentious issue of big bonuses paid in financial services, and whether anybody apart from the recipient benefits from these generous piles of cash that are ultimately funded by shareholders.

I also prod around what has become the most unloved share for unit trust fund managers – ArcelorMittal South Africa.

It’s a core industry with good assets but somehow management just seems to get it wrong, again, again and again.

Next issue will be after the budget presentation. It will no doubt leave us with plenty of issues to contemplate. What could present a new area for advisers is if the budget does in fact go through with hinted-at tax breaks for smaller businesses that create employment.

That would include the situation of a lot of clients.

There are several other themes: lower fees and costs, exchange traded funds as a lower-cost alternative for investors, emerging markets, with a focus on Africa and South Africa as a wannabe BRIC. And also a topic that’s never far off the screen for advisers, new legislation.

This year so far is proving fascinating in the investment arena. The local equities market is getting very hot. When things get hot in my corner of the world, we say, “cool bananas”. It helps.

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.

4

Andrew Bradley of Acsis and Marius Fenwick of Mazars go Head to Head on risk profiling, debating whether it’s

March 2011

Until next time.

OMIG133997/E

Once again,

you’re the winner.

Because when we win, you win. True performance cannot be measured by short term success, but rather by long term results. It’s performance that comes from our unbeatable expertise in research, our continuous commitment to South African investors, and maybe a few awards along the way.

To experience the long term rewards of investing with us, contact your Old Mutual financial adviser, or your broker, visit www.omut.co.za or call 0860 INVEST.

do great things To invest, contact your Old Mutual financial adviser or broker.

0860 INVEST (468 378) I www.omut.co.za

Award for Top Performance in its sector for the Old Mutual Mining & Resources Fund A has been calculated on a straight performance basis for the 3-year period ending 31 December 2010. Calculated on a NAV-NAV basis, with income distributions reinvested at the ex-dividend date. Calculated by ProfileData. Full details of these awards are available from the Management Company. Unit trusts are generally medium to long term investments. Past performance is no indication of future growth. Shorter term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available from the Management Company. You may sell your investment at the ruling price of the day (calculated at 15h00 on a forward pricing basis and 17h00 at month-end for Old Mutual RAFI® 40 Tracker Fund and Old Mutual Top 40 Fund). Specialist equity funds may hold a greater risk as exposure limits to a single security may be higher. Certain funds may be capped to be managed in accordance with their mandates. Different classes of units apply to these portfolios and are subject to different fees and charges. Old Mutual Unit Trusts is a member of the Association for Savings and Investment SA. Old Mutual Investment Group (SA) (Pty) Limited is a licensed financial services provider.

Miles Donohoe

Emotion is the death knell for sound investment decisions Unit trusts just shy of trillion mark in SA but investors remain cautious

U

nit trusts are still the preferred method of investing for most South Africans, so much so that in 2010, a record net inflow of R109 billion was directed into the local collective investment schemes industry taking assets under management to just shy of R1 trillion (R927 billion) at the end of last year from R750 billion at the end of 2009.

6

However, statistics from the Association for Savings and Investment South Africa (ASISA) showed that while investors may be pouring back into the market, they are still proving to be exceptionally cautious. Fifty-five per cent of net inflows in 2010 were directed into the domestic fixed interest sector; domestic asset allocation attracted 34.2 per cent of net flows during the period while domestic equity received just 4.4 per cent of the net inflows last year.

“This means that in 2010 investors continued the trend of sacrificing long-term capital growth for the perceived safety of fixed interest funds. Yes, equity investments carry a higher risk and are more volatile, but over the longer-term equities have consistently outperformed fixed interest and inflation. Only time in the market will enable investors to benefit from the growth potential of equities, not timing the market,” said Leon Campher, CEO of ASISA. This fear over timing the market is the downfall of most investors, with history showing people always tend to follow the herd mentality of exiting the market after a correction and rushing back in once a rally has taken place.

“The emotional bias to take action after results have been poor is incredibly strong,” said Pieter Koekemoer, Head: Personal Investments at Coronation Fund Managers.

“Investors are much more likely to divest from a risky asset class such as equities after the market is down, or to replace a fund manager after a poor performance year than to move money after a period of spectacular performance.” However, as many financial advisers can testify, particularly following the events of the last few years, it is extremely difficult to persuade clients not to exit their equity investments in a time of market turbulence.

Koekemoer said that there are pre-emptive tools at an adviser’s disposal, including making sure that they are investing according to a rigorous framework that has been established and put in place in a period of calm, well before any market correction takes place. “This could include hard-coded strategic asset allocation limits to specific asset classes, and a clearly defined risk budget consistent with your risk profile. A simple way to implement this is to invest in a multi-asset fund with pre-defined exposure limits.”

However, as thorough and foolproof as a financial plan might be, the nature of human beings is to panic, especially when it comes to their hard-earned income.

Koekemoer added that the sheer choice of unit trusts available in the market – there

were 940 active unit trusts in South Africa at the end of December 2010 – plays a major role in forcing investors to time the market.

“The big risks represented by so much choice are that investors may be so confused that they take no action, or that they may be tempted to switch for emotional reasons at the wrong time.”

The fact that investors and their advisers have almost 1 000 unit trusts to choose from is fairly daunting; however, the reality is that most of the industry’s assets are concentrated in a much smaller pool. Of the top 180 unit trust funds, which represents around a fifth of all funds, these contain more than 60 per cent of the industry’s assets.

“A top performing fund over 12 months is often the worst performer over the next 12 months, so it is not wise to simply pick the current number one fund...”

Linda Eedes, analyst at RE:CM, said increased competition amongst asset managers should have the additional benefit of raising industry standards. “However, too much information without the benefit of knowledge is confusing for investors and can cause them to invest impulsively and possibly unwisely. Both asset managers and financial advisers play a role here – the asset manager to ensure investors fully understand their products and have appropriate expectations, and the adviser to fully understand their client’s return objectives and risk profile and advise them accordingly.”

Warren Ingram, director at Galileo Capital, argued that South African investors are in fact benefiting from a larger South African unit trust industry. “More competition means that we are seeing funds reduce their costs which directly benefits investors. In addition, fund managers will not be able to rely on past success to get them through the bad times.”

This reliance on past performance is often a problem for investors as they seek to ride the crest of a wave that has already broken.

“A top performing fund over 12 months is often the worst performer over the next 12 months, so it is not wise to simply pick the current number one fund, you might actually be better off investing in the current worst performer,” said Ingram.

March 2011

Clearly it is impossible for any top performing fund to remain a top performer all the time – though some funds do appear to manage this better than others. For example, Allan Gray was named the 2010 Domestic Management Company of the Year for the third consecutive year at the recent Raging Bull Awards but there have been questions over whether its performance is now lagging competitors after it sought to reduce equity exposure in 2010.

Ingram added that a good yardstick for investors is to expect their fund to be in the top 25 per cent of all funds in its category all the time. “If you invest in an actively managed fund where the manager is trying to beat the market, there will be times when the fund underperforms. This does not mean your fund is now a poor investment, you just need to be patient to enable the fund to reward you over time.”

However, he does caution that there is a danger that the increased array of choice open to investors could result in a change of investor behaviour.

“Top performing funds may attract money simply because they are the current top performers. This is typical behaviour in other markets and is not good investment practice because investors don’t remain in a fund for long enough as no fund will be a top performer all the time.”

Eedes said financial advisers should identify asset managers who have a proven track record of using the flexibility to generate superior long-term real returns. “Rather than attempting to time markets themselves, investors should be encouraged to invest in balanced funds which allow asset managers the flexibility to invest in the most compelling investment opportunities, wherever they find them.”

Once again the issue of timing the market comes to the fore as investors typically move from one top performer when it starts underperforming to another, which means they often lose money when they choose to switch.

If a client has a properly diversified portfolio, with exposure to a range of asset classes, the desire to suddenly switch should be somewhat mitigated. However, with such an array of choice available, for many clients, the grass may always be greener.

An adviser cannot prevent clients from exiting the market or switching funds at the wrong time; but if a client is clear on what the financial goals are from the outset and has structured his portfolio accordingly, it is less likely that a bout of turbulence will sway them off course.

7

UNIT TRUSTS - SIM

Maximise your investments and get to grips with your risk tolerance to ‘myopic risk aversion’ which describes assessing potential risk over too short a period.

This is because equities are unarguably volatile in the short term. However, when the same investor sees a 30-year chart, they perceive a better end result with less volatility, believing that the chances of losing money are slim.

Investors also fall victim to the Prospect Theory where they would rather avoid losses than persevere where there’s a good chance that they will make money.

The first step in avoiding these common behavioural pitfalls is to understand that your risk profile actually translates into an empirically tested asset allocation approach that should temper volatility, while allowing you to enjoy performance upside within a welldefined range.

Candice Paine | Head of SIM Retail

V

ery few people are able to assess their risk tolerance and apply it consistently when making investment decisions – particularly when markets swing. For example, soon after the market bottomed following the global financial crisis, investors flocked to low equity prudential funds, given their perceived lower risk, only to reduce this exposure once the JSE All Share Index had already turned around, thereby losing out on the upswing.

Secondly, it is important to understand that there are certain returns that are reasonable to expect from different asset classes. Our analysis, based on about 100 years of financial data and other inputs, shows that over a minimum of 10 years, it is realistic to expect a seven per cent long-term real return from local equity (higher risk), three per cent from local bonds (lower risk) and two per cent from cash (lowest perceived risk), while global equities and bonds should deliver about six and two per cent respectively.

So why do investors continue to fall into the trap of buying when markets are expensive and selling when they’re cheap? Two phenomena that can derail a well thought through investment plan and result in investors selling at the wrong time are known as framing and the Prospect Theory.

Framing is how your appetite for risk is affected by the time period of an asset’s performance. If you look at returns over a one-year horizon, you may fall prey

8

March 2011

The most effective way to harness these returns – and avoid falling prey to a short-term focus – is to invest in a multiasset class portfolio that is in line with your risk profile. For instance, our SIM Managed Solutions range of fund of funds was developed with five risk profiles in mind: conservative, cautious, moderate, moderately aggressive and aggressive.

These funds have expected real returns over the long-term ranging from three per cent in the Conservative Fund, which is primarily invested in low risk assets like cash and bonds, to six per cent from the equity-dominated Aggressive Fund.

From a longer-term perspective, namely 10 years into the future, your capital could be worth about 33% (a third) more if you invested R1 000 in the Aggressive Fund today compared with the same amount put into the Conservative Fund based on long run expected returns to the various asset classes available to invest in. This doesn’t mean you automatically invest in an aggressive fund as the volatility of that fund over shorter periods may not suit your risk profile. This shows how important it is to choose a risk profile that meets your needs. Also, the differential is likely to widen even further if you chop and change between funds.

UNIT TRUSTS - Jeanette Marais

To have and to hold Unit trusts make poor speculative investments the end of 2009 the average US investor earned 3.2 per cent in US equity mutual funds. In comparison, the US market returned 8.2 per cent. According to Marais, the picture is much the same in South Africa.

“The gap between funds’ returns and the returns achieved by the average investor shows that while a minority of investors enhance their returns by timing their investments, investors on average make poor decisions about when to buy and sell and should therefore probably avoid switching.”

Jeanette Marais | Director of Distribution and Client Services at Allan Gray

T

he average fund manager sees outflows of over a fifth of its assets every year, according to recent figures from ASISA, the Association for Savings and Investment SA.

She added that unit trusts make poor speculative investments. Switching between funds incurs trading costs within the funds, which are borne by investors. And as switching involves selling units in one fund in order to buy units in another, Capital Gains Tax (CGT) may be triggered. In addition, the fund you switch into may charge initial fees.

Because markets can be volatile over the short term, investors are perpetually encouraged to invest for the long term. This entails being clear about their investment objectives at the outset. “Investors need to carefully research their options before

While some of the outflows come from investors cashing in their unit trusts, there is also a high incidence of switching, says Jeanette Marais, director of distribution and client services at Allan Gray.

“Some investors improve their returns by switching out of one fund into another; but often switching destroys value,” said Marais.

“Selling unit trusts that have temporarily dipped below their average performance in order to buy funds that are briefly punching above their weight can be part of a destructive sell-low, buy-high cycle.”

Research on investor returns by US firm Dalbar Inc. shows that over the 20 years to

10

March 2011

investing so they don’t feel compelled to switch before they get the maximum benefit from their fund manager’s strategy.”

At Allan Gray, this typically entails investing for at least four years. This is because the company tends to adopt a four-year investment horizon when investing in a share.

It aims to buy shares that produce superior, long-term returns at lower-than-average risk of loss. To achieve this, it invests in stocks that are out of favour and, as a result, are trading at prices significantly below the investment team’s assessment of the share’s intrinsic value. The four-year investment horizon typically allows enough time for an undervalued asset to return to fair value as the market recognises its earlier, irrational pessimism.

Marais noted that well-managed unit trusts are good at spreading risk and making steady profits in the medium to long term.

But if you doubt your choice of fund and are considering switching, remember that for the majority of investors, the old cliché is true: time in the market produces better results than timing the market.

March 2011

11

UNIT TRUSTS - Grindrod Asset Management

How niche funds AVOID the nettles along the investment path invest in a variety of cash, bond and property instruments to achieve the highest possible level of income for an acceptable level of capital volatility. Unfortunately, the income produced by these asset classes is taxable.

High net worth individuals or family trusts may very well find themselves paying 40 per cent of their investment income to the tax man.

This is where a specialist fund, focused on the provision of dividend income, can play a role.

Preference shares are hybrid instruments that pay a specific yield, similar to cash and bond instruments, but the income is paid in the form of dividends and is thus tax exempt. Advisers are therefore able to use preference share funds to achieve a better after-tax income for those investors with high marginal tax rates.

The use of preference share funds can play a valuable role in tax planning and portfolio management.

Gareth Stobie | Manager: Investment Products at Grindrod Asset Management

A

s no two investors are the same, their needs will differ and the challenges facing their investment goals will differ. Niche funds certainly serve a purpose when it comes to addressing specific challenges within a client’s portfolio. For instance, Grindrod Asset Management manages funds in two asset classes that would typically be considered ‘niche’ or ‘alternative’ – namely preference shares and global listed property.

Global property for diversification and yield in developed markets Given the strength of the South African Rand over the past 12 months, investors have looked to increase their allocation to offshore investments. Having decided to invest offshore, investors are then faced with the

The two funds, whilst vastly different, solve particular problems an adviser (or investor) may face. The two funds serve as examples for the wider use of niche funds.

Preference shares for income investors requiring tax efficiency Clients who require regular income often look to fixed income and money market funds to achieve their goal. These funds traditionally

12

March 2011

daunting prospect of selecting from a number of markets and asset classes within those markets.

Extremely low interest rates across the developed world add further complexities to investing offshore.

The low yields currently available from money market and bond funds are not appealing to most investors. Global listed property, on the other hand, not only provides a yield in excess of four per cent (higher than the 0.25 per cent yield on money market investments and the 2.5 per cent yield provided by a bond portfolio), but also provides long-term capital appreciation. Global listed property also has a history of being uncorrelated to equity markets, which means that a combination of both asset classes in a portfolio reduces the overall volatility of the portfolio, whilst providing the same level of expected returns.

Thus there is certainly a very strong case for augmenting your clients’ portfolios with a selection of specialised funds which are able to address specific needs or overcome a particular investment constraint, all the while enhancing the performance of their individual portfolios.

UNIT TRUSTS - RE•CM

Conquering

our biggest investment problem: ourselves “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Benjamin Graham Linda Eedes | Analyst: RE•CM

As much as we would like to believe that investors act rationally during the decision-making process, the reality is that emotions have a huge impact on the way individuals invest – mostly to their detriment.

Three important elements of human nature affect us most: 1) We have short memories. We tend to assume that winners of today will continue to perform well and shun assets which have performed poorly. However, an analysis of past and future returns shows that over a two- or threeyear period, yesterday’s laggards are more likely to become tomorrow’s leaders, and vice versa. No matter how often we see this pattern repeat, professionals and amateurs alike continue to overweight recent history, both good and bad, in estimating the future. This tendency leads us most commonly to ‘buying high and selling low’. 2) We don’t like risk and hate losing money. Studies have revealed that the brain reacts to losing money the same way it reacts to pain. We are hardwired to avoid pain and this extends to losing money, translating into selling impulsively when assets have underperformed – usually at precisely the wrong time. 3) We live in fear. Fear is a basic survival mechanism – an emotional response to perceived danger, often resulting in investment action at the expense of objectivity and logic. Fear often leads us to find safety in numbers. We find it easier to follow the herd and buy a popular stock: if it goes down, it is easier to rationalise having bought it given the fact that everyone else owns it too. However, it is impossible to generate superior returns if you are doing the same thing as everyone else.

Poor decision-making is especially the case when it comes to market-

timing. The fact is there is no research that points to a time-and-tested way to accurately and consistently time short-term market movements.

As investors, the best way to preserve and grow capital is to invest with a longer term value orientation. As Christopher Browne once said, “It’s time in the market, not market-timing that counts.” Long term at least, the market is going up.

At RE•CM, we believe the best way to avoid these emotional pitfalls and earn superior long-term real returns is to rely on the discipline of a valuation-based process. The process is disarmingly simple: namely, estimate the fundamental value of a financial security and compare that value with the price the market is offering. If the price is lower than the value by a sufficient margin of safety, 30 per cent or more, the value investor buys the security. When the market price reaches the fundamental value, the investor sells the security. Time and again, through the track records of the world’s most famous value investors, this philosophy has proven to be a consistent way or preserving and growing capital, while avoiding the temptation to compete against short-term movements which result in added volatility and risk. The key thing to remember is that value investing demands patience. You have to wait for the market to offer you a bargain. Patience is also necessary after securities are bought. Even if you are correct about the intrinsic value, it generally takes time for the rest of the market to come around. After all, you generally bought it while it was out of favour. A value investor, despite emotions which may suggest otherwise, needs to sit still. The lesson is clear, in life and in investing: ‘Control your emotions or they will control you’.

UNIT TRUSTS - ANALYTICS GROUP

The importance

of the third dimension Dr Lance Vogel | Chief Investment Officer of the Analytics Group

It is always interesting to note the significant number of market participants who treat the selection of investment vehicles as a two-dimensional problem. The only dimensions that seem to be considered are return and risk.

Without the third dimension, that of an appropriate investment time horizon, the levels of uncertainty in linking expected return with expected risk are high and as a result many of these participants will have an unrealistic expectation of the time frame over which risk and return will be closely linked.

The fundamental guideline that is used by Analytics to manage investor assets is a rigorous initial portfolio construction methodology that subsequently works in tandem with fundamental and technical inputs to deliver the expected returns, with no more than the expected risk, within the appropriate time horizon for the chosen portfolio.

The portfolio construction process is thus a three-dimensional exercise in which expected return and expected risk are connected via the appropriate investment time horizon. Our portfolio construction guidelines are aimed at the design of risk profiled, balanced funds so that we can offer investors a suite of unit trust products, of differing risk profiles, that make use of a number of available asset classes to deliver risk adjusted returns that are

consistent with the specified risk profile, no matter what market conditions may prevail.

Any suite of low, medium and high risk balanced funds should always display their unique risk characteristics relative to each other no matter what is happening in the underlying markets, thus ensuring that these risk profiled funds behave true to design and do not ‘warp’ relative to each other as market cycles ebb and flow.

We believe that the additional focus on the appropriate investment time horizon for candidate unit trust funds will provide financial advisers with vital additional input into the planning process.

ECONOMICS

Merina Willemse | Economist at the Efficient Group (Pty) Ltd

T

he start of 2011 has flown past and I wonder if this year will be so much different than the previous? Last year was a year of confirmations: confirmation that the United States will do whatever it takes to keep their economy afloat; and confirmation that the European Union will indeed bail out any faltering member country, despite the fact that it is against the original founding constitution. So what could be new in 2011?

Economic growth in developed countries like the United States is expected to improve on 2010’s growth – albeit because of artificial stimulation.

The European Union will probably withstand economic and political turmoil and continue to do much of the same. China will keep on growing at a faster pace than it can sustain. The only difference between this year and 2010 is that an old familiar friend might come to visit once more ... dear old inflation.

China already has the world in a vice grip. It seems that whatever happens with their economy determines what happens in global markets.

This was particularly evident when China started delving around to find yet another way to cope with the country’s rising inflation level, currently at five per cent. Mid-January saw China announcing the seventh increase in the reserve requirement of local banks. Markets are expecting China to increase its interest rates again soon.

Inflation is also sticking its nose out globally. Early in 2011, the United Nations Food and Agriculture Organisation (FAO) raised the alarm that food

18

A new start or a continuation of the old prices could skyrocket this year. The global food price index for December surpassed its previous peak in June 2008. In South Africa, we have mostly been protected by the gradual food price increases. This is because South Africa, as a net food importer, was shielded by our stronger currency last year. These ‘strong Rand’ days might be numbered as a slightly weaker Rand is expected for most of 2011. We’ve already seen that when better economic data gets released out of the developed world, short term spurts of hot money flows out of SA and this is the most prominent cause of the Rand’s depreciation. The truth of the matter is that despite all the intended

“The only difference between this year and 2010 is that an old familiar friend might come to visit once more ... dear old inflation.” interference (for example, the purchase of R53 billion worth of foreign exchange reserves by the South African Reserve Bank), we don’t really have a lot of control over the Rand as it is often influenced by what happens internationally.

Another real risk to global inflation levels this year is escalating commodity prices. The price of oil has been increasing steadily ever since the start of the political crisis in Egypt. Oil has already surpassed $100 per barrel in early February and we expect the climb to continue throughout 2011.

All of these risk factors mean that lower interest

March 2011

rates might soon be a thing of the past. Interest rates might increase as soon as the middle of this year. The magnitude of the probable hike(s) will depend on the severity of these inflation risks on the Consumer Price Index basket.

While the rising trend in interest rates becomes a global phenomenon, governments might soon realise that they would have to start protecting their currencies against capital outflows. Counter practices could include foreign capital flow restrictions or the prohibition of lending or investing of pension funds abroad.

While the cost of capital has been relatively cheap in most countries for the past few decades, capital could become scarce as interest rates start increasing, constraining investment and, in turn, global growth. This may be the biggest difference between now and yesteryear ... the age of financial protectionism has dawned.

PROFILE |

CIO: Alternative Investments | STANLIB

Patr i c k M amathuba C I O : A lternative I nvestments | S T A N L I B Patrick Mamathuba began his career in the SA Reserve Bank’s economics department before moving into various roles within the asset management industry, including CIO: Alternative Investments at STANLIB at the beginning of last year. INVESTSA caught up with him to find out how alternative investments fit in to STANLIB’s investment strategy.

20

“My first job following university was with the South African Reserve Bank economics department. I spent two years in that department before transferring to the money and capital markets department.”

You have been in the role of CIO: Alternative Investments for a year now.

How has the first 12 months been?

We spent time in the past year establishing the new alternative investments unit at STANLIB. Some of the areas our unit will focus on, such as passive and quantitative investing, have been there all along, so it has been a case of putting appropriate focus on them. We successfully launched two exchange traded funds, tracking the FTSE/JSE ALSI Top 40 and SWIX Top 40 indices. We are looking to add hedge funds and private equity capabilities in the near future.

How did you get into this industry and what advice would you have for someone entering it now?

My first job following university was with the South African Reserve Bank economics department. I spent two years in that department before transferring to the money and capital markets department which were then involved with making market in government bonds. I started on the derivatives desk and have not looked back since. One needs to have passion for the markets as it is hard work and can be stressful at times.

How important are alternative investments to STANLIB’s investment philosophy?

STANLIB aims to provide a broad range of investment solutions to investors. We want to do this without compromising the quality of the outcomes we deliver. Establishment of the alternative investments unit allows for the appropriate level of focus and expertise to be brought to bear.

Do you expect changes brought in by Regulation 28 to increase the interest in alternative investments?

The latest draft of regulation 28 allows inclusion of more asset classes in retirement portfolio and will lead to expansion of the alternative investing

space. Allocation to hedge funds and other unlisted asset classes have been expanded.

These areas provide for a wider choice of assets to advisers when crafting solutions for their clients and should be taken advantage of.

caution and resolve in keeping to one’s longterm goals than focusing on the short term.

Is it important for investors to have some exposure to alternative investments? Why?

In addition to spending time with my family, I play a bit of golf and go hiking when time allows.

Alternative assets offer the investor more tools to achieve their investment goals. The alternatives space is varied and has a lot to offer to an investor. Investor approaches can range from seeking lower costs, where ETFs are ideal, to seeking strategies with low correlation to equity markets where hedge funds should be considered. Alternative assets can be applied either to improve probability of increased returns or reduce risk. In some cases, both risk and return parameters can be improved by adding alternative classes.

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

How do you define success?

Finding joy in most of what you do.

How important do you think the role of a financial adviser is for consumers?

Advisers are indispensible to the investing public. Where investor knowledge level is low, it is important to be able to access advice and financial advisers play a critical role in both ensuring sufficient levels of saving is achieved and that investments are in line with the investor’s risk appetite and goals.

Do you think financial advisers should be recommending to clients to have alternative investment exposure in their portfolios?

On the basis that the risk return parameters can be improved, we firmly believe that there is a place for this asset type in most investors’ portfolios and advisers should recommend them where appropriate.

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

Post the financial crisis, markets have seen higher levels of volatility, which calls for extra

March 2011

21

Shaun Harris

Stained Steel

Management needs to clean it up

22

March 2011

S

teel product is part of a nation’s backbone. You only have to think of the younger Bruce Springsteen for the romantic American view of steel mills. Any industrialised country would count steel production as a core industry.

In South Africa, ArcelorMittal South Africa is the giant, as it is on the rest of the African continent.

Part of the huge, international Mittal Group, it dominates the local steel industry and is also a major exporter of steel. It’s an important part of the economy with three major steel mills that, in total, employ more than 10 000 people.

Yet the ArcelorMittal SA share, listed on the JSE, is possibly the most unloved security on the stock exchange. Generally investors don’t like the company. But it’s a great business with valuable assets. So why this dichotomy between what in theory could be a rewarding investment case and the perception of the company, and the share?

It seems that ArcelorMittal SA management must accept the blame. It invites controversy by making some strange decisions. It also does not seem to have the ability to follow through. Steel is a tough, cyclical industry, as can clearly be seen in the financial results from ArcelorMittal SA. But it seems to run the mills pretty well. It’s the extraneous decisions taken by management that often result in controversy and are starting to cause reputational damage to the steel group.

There are the earlier allegations, along with other steel companies, of price fixing and market division. Most are still under investigation by the competition authorities and ArcelorMittal SA has appealed against one ruling by the Competition Tribunal. The final outcome might still take some time but it’s not doing ArcelorMittal’s image any good.

Financially, one penalty could be 10 per cent of its turnover in its 2008 financial year.

But damaging as these are, they are history.

More recent board actions and decisions are enmeshing ArcelorMittal SA in fresh controversy.

The heart of the problem goes back to April 2009 when ArcelorMittal SA did not convert its so-called ‘old order’ mining rights for 21.4 per cent of the important Sishen Iron Ore Mine.

Iron ore is the major raw material used to make steel. Why ArcelorMittal did not convert these rights has not, many industry players say, ever been adequately explained.

One result, however, was the start of a row with Kumba Iron Ore; like ArcelorMittal SA also listed on the JSE. Under an old agreement, ArcelorMittal received favourable pricing for iron ore from Kumba. When it did not convert its rights, Kumba began to charge industry prices to ArcelorMittal. The steel maker squealed indignantly, the row erupted, there was

arbitration on prices, but the issue continues.

But then ArcelorMittal SA made an acquisition bid for a relatively unknown company, Imperial Crown Trading (ICT), which had ‘inherited’ the 21.4 per cent of the Sishen mine. Just how this came about is also unclear and seems it might enter the murky side of politics. ArcelorMittal, at the same time as the proposed bid for ICT, also announced an empowerment plan. The BEE deal included President Jacob Zuma’s son, Dudazane Zuma, and the notorious Gupta family. Some speculation has been that they influenced the gaining by ICT of the Sishen mine rights.

“The cautionary statements don’t say much, but say a hell of a lot,” said Adrian Saville, chief investment officer at Cannon Asset Managers. He holds ArcelorMittal SA in his Cannon Equity Fund. “What the cautionaries should be saying is this was a bad proposal. They should come back with clearly thought-out proposals. Minority shareholders are not happy. But then there’s the big parent in the background.”

From here on, the saga gets worse and reflects increasingly badly on ArcelorMittal SA. It was obviously after the Sishen mining rights in trying to buy ICT. Just why it decided to link the proposed BEE deal with the acquisition is unclear. There have been suggestions it was an unofficial payment for someone. Kumba is contesting the deal in the courts and has made serious allegations, including fraud and forged signatures, against ICT. This is still being played out but Kumba seems very serious in its intentions.

A big part of the problem is the murkiness around both deals. ArcelorMittal SA announced the deals through several Sens announcements and cautionary statements, but no clear structure for the deals or just what the steel maker is trying to do is apparent.

The statements are filled with proposals and “conditions precedent remain outstanding”.

ArcelorMittal SA constantly has cautionary announcements out. Latest information, released in February with full-year financial results, was more of the same.

Regarding the BEE transaction, the group refers to the last cautionary and repeats “satisfaction of conditions precedent remains outstanding”. It

March 2011

does not say what these conditions are. On the ICT deal, it says conditions precedent “remains outstanding”. For a group that puts out so many statements, it says very little.

“The cautionary statements don’t say much, but say a hell of a lot,” said Adrian Saville, chief investment officer at Cannon Asset Managers.

He holds ArcelorMittal SA in his Cannon Equity Fund. “What the cautionaries should be saying is this was a bad proposal. They should come back with clearly thought-out proposals.

Minority shareholders are not happy. But then there’s the big parent in the background.”

Saville has been holding ArcelorMittal SA in his fund for six years and it remains in the top ten holdings.

“Recent events are troubling but we look past the immediate events. We’re long-term investors. ArcelorMittal SA is a great asset.

But it can’t mask the fact that there have been management problems. I think this business needs to go back to the drawing board, hard as it is for management to do this.”

He plans to continue holding ArcelorMittal SA and describes it as part of the “far left tail of the portfolio”, along with other less obvious shares like Telkom and SA Corporate Real Estate Fund.

Quite a few unit trust funds were holding ArcelorMittal SA a few years ago. It’s a large group with a big market capitalisation, though that has shrunk as the share price trades at a low for the last year, reflecting a decline of about 17 per cent in the share price.

But few funds hold it in significant portions now. Apart from management and reputational problems, the steel maker can be a difficult investment. There’s little clarity on upcoming earnings, something fund managers want some vision on. ArcelorMittal SA’s quarterly earning’s profile since 2009 has swung between large losses to super profits.

John Biccard at Investec Asset Management had ArcelorMittal SA in the top ten holdings of his Investec Value Fund at the middle of 2010, but has since reduced the holding. “It’s now at two per cent of the portfolio so it’s out of the top ten,” he said.

This is because of the headwinds around ArcelorMittal SA, chiefly what might happen with Kumba’s court actions. “Demand in the local steel market is also weak, which negatively affects the steel price. But there’s value in ArcelorMittal, and while two per cent in the portfolio might look risky, I think the bad news is already in the price.”

What does need to change is the less tangible quality of management. Increased disclosure on unclear deals would also help. If ArcelorMittal SA management does not act positively soon, the reputational damage will continue.

23

HEAD TO HEAD | Mazars

Mazars M arius

F enw i c k

COO at Mazars

Is risk profiling an appropriate method with which to determine someone’s investment strategy?

Risk profiling should be one of the cornerstones of determining an investment strategy. However, additional information pertaining to cash flow requirements, the investors ‘psychological’ investment profile (how he would react under different market conditions) and tax should all be considered when structuring an investment strategy.

What are the main dangers of risk profiling?

Investors are willing to accept much more risk/volatility in bull markets. This changes drastically and rapidly when a market changes bearish. The most aggressive investors become the most conservative when the market changes from bull to bear. Risk profiling does not cater for the psychological impact that an aggressive declining market has on investors. The answers to a risk profile questionnaire will be answered according to the prevailing market conditions at the

24

time the profiling is conducted. We find that during a prolonged bull run, when clients should become more careful, they are aggressive; and during a prolonged bear run, when they can start taking more risk, they are hyper-conservative. Investors risk profiles change with the markets and a static questionnaire cannot cater for this irrational and emotional behaviour.

And the benefits of determining a risk profile through this method?

It provides a base to start from.

Profiling must start somewhere and a comprehensive risk profiling questionnaire may force the investor to start thinking about issues and eventualities that may occur sometime in the future. This in turn will make them think of how they might react, even though they are likely to react differently when a market cracks.

This then causes them to review previous questions that may change the profile to be more in line with their psychological behaviour patterns in changing markets.

How else can someone achieve an understanding of their client’s needs?

March 2011

It is more important to understand how your client is going to react when the market conditions change since their objectives and risk adversity will change in varying degrees when this happens.

The most important factor is to keep the client informed of things expected to happen, and factors that are likely to impact (positively or negatively) on their investment portfolios when this does happen. Information takes a lot of the stress away from clients even in bear markets when severe losses are experienced on the stock exchange. Client education and interaction with clients keeping them informed about expected portfolio reactions and movements is more important than getting the initial risk profiling spot-on.

What are the main consequences of not determining a risk profile accurately?

It is very likely that the short-term risk profile is not going to be accurate. It is important that clients realise this and that short-term performance and volatility will more than likely be way out compared

HEAD TO HEAD | acsis

acsis

A ndrew

Brad l e y

CEO of acsis

Is risk profiling an appropriate method with which to determine someone’s investment strategy?

Definitely not. Risk profiling is based on dubious criteria and has resulted in some disastrous financial consequences for those who have invested their money based purely on their apparent risk appetites.

One of the greatest indictments against risk profiling is that the returns produced by risk-profiled portfolios have no relevance to what clients actually require to meet their ongoing lifestyle requirements.

So while ignorant comfort is bliss, the rude awakening will eventually happen.

And when it does, it forces clients to make significant changes to their lifestyles, often at times they do not wish to do so. It is therefore vital for financial planners to take heed of this and ensure that their clients’ long-term lifestyle goals, and not risk appetites, drive their investment decisions.

What are the main dangers of risk profiling?

The questionnaires used to determine clients’ risk profiles vary from being

very simplistic to quite intricate and sophisticated. However, right across the spectrum, all of these questionnaires are fundamentally flawed. The most obvious shortcoming is the type of questions contained in a typical questionnaire. The following question is a classic example: If you bought a new car, would you (a) insure it fully, (b) insure it with a small excess, (c) insure it with a large excess, or (d) not insure it at all?

While this type of question is meant to assess a client’s investment risk tolerance, the reality is that it provides very little insight into a client’s appetite for risk.

How a client decides to insure a car is probably more indicative of cash flow issues and his/her astuteness and level of sophistication. In this way, classifying someone as a conservative investor simply because he/she would fully insure a car does not make sense. It has nothing to do with your appetite for investment risk.

In fact, choosing to insure a car is just sensible.

It is abundantly clear that risk questionnaires do not establish anything

March 2011

meaningful about clients’ investment risk appetites and requirements. But despite this, many financial planners continue to use the results from these questionnaires to categorise their clients and then invest their money into matching risk-profiled investment portfolios. The sad reality is that this has no relevance to the investor’s needs. Worse still, risk-profiled portfolios do not provide investors with a clear idea of what level of returns they can expect.

This does not leave clients any the wiser or better off for having completed the risk profile questionnaire.

What are the benefits of determining a risk profile through this method?

The lifestyle financial planning approach does not determine a risk profile, but determines the required return the client needs to get to their objectives. The philosophy then explores further how to get there in the best possible manner. This ensures that clients achieve their objectives with the greatest certainty possible with a meaningful understanding of their requirements and within a logical sound decision-making framework.

25

Mazars

acsis

to the initial long-term objectives and risk profile. This brings us to one of the biggest problems in managing investment portfolios – clients changing objectives and, more importantly, withdrawing prematurely from investments when performance disappoints over shorter periods than what the initial investment was intended for. Once investments are cashed in, the losses are locked in and the long-term strategy has failed. Not necessarily because of inaccurate risk profiling, but rather because of the irrational behaviour of investors in bear/volatile markets. Once again we need to understand how our clients are going to react under these circumstances and coach/educate them accordingly to prevent such behaviour and ultimately prevent unnecessary losses.

How else can someone achieve an understanding of their client’s needs?

What should drive an investment strategy if not the appetite for risk?

What are the main consequences of not determining a risk profile accurately?

The client’s objectives and the time horizon of the investment.

If the client expects a 20 per cent return p.a. over a two-year period, he is forced to accept a high level of risk and volatility.

If he cannot accept the risk then he must reduce his growth expectation accordingly. If the objective is to beat inflation by five per cent over a 10-year period, the objective is achievable and although volatility will be high over the initial five-year period, this will reduce and the probability of achieving the objective is high. The risk of not achieving the goal over the full term is low; however, volatility will be high initially.

If the client is committed to keep the mandate unaltered with the potential short-term volatility, the strategy can be implemented. If not, the client must change his objectives.

There is no accurate risk profile. The fallacy that there is one is the most dangerous assumption that leads ultimately to the financial ruin of clients who rely on this. An individual’s psychological profile, perceptions and feelings change by the day, by changing seasons and changes in the general mood of our community. No investment strategy should be based on this.

Is risk profiling important for younger investors who are often expected to take on more risk?

Is risk profiling important for younger investors who are often expected to take on more risk?

Absolutely, especially if the investment is for a shorter period; it is not advisable to take on too much equity risk when saving to accumulate funds for a deposit for a house or car.

The same principle applies: the investment strategy must be based on the objective of the investment and the term of the particular investment. This may mean that a young investor will have two investments. One with low exposure to equities for the purchase of property/car; and the second with full equity and offshore exposure for provision for retirement.

Risk profiling is not appropriate for anyone in any age category.

Younger people have the benefit and luxury of time on their side which actually dramatically reduces their investment risk. Their key risk is actually not being fully invested to ensure that they stay ahead of inflation and satisfy their long-term objectives and needs.

26

The only way to effectively understand a client’s needs is to ask them what they need from their money. If you can get an answer to this you are on the right path. Most people do not know what their needs are, now and even more so in future. There are some obvious simple hard facts and then there are some more meaningful and philosophical issues to be dealt with.

That is where financial life planning comes into it. Being able to hold these conversations is what enables financial planners to understand clients’ needs and to plan and invest for them. No risk profiler does this!

What should drive an investment strategy if not the appetite for risk?

The required return needed for a client to achieve their needs together with a meaningful and thorough understanding of the risks associated with getting there.

March 2011

etfSA.co.za

INDEX TRACKING ETF UNIT TRUST PERFORMANCE SURVEY Mike Brown | Managing Director, etfSA.co.za Best Performing Index Tracker Funds – January 2011 (Total Return %)* Fund Name

Type

5 Years (per annum)

Satrix INDI 25

ETF

15,22

Prudential Property Enhanced

Unit Trust

15,18

3 Years (per annum) Satrix DIVI Plus

ETF

18,43

Prudential Property Enhanced

Unit Trust

14,89

Proptrax

ETF

14,29 1 Year

Satrix INDI 25

ETF

26,20

Satrix DIVI Plus

ETF

25,76

NewFunds eRAFI INDI 25

ETF

24,90 3 Months

DBX Tracker MSCI Japan

ETF

13,97

DBX Tracker MSCI USA

ETF

12,74

DBX Tracker MSCI World

ETF

11,30 1 Month

DBX Tracker EURO Stoxx 50

ETF

22,74

DBX Tracker FTSE 100 UK

ETF

14,93

DBX Tracker MSCI World

ETF

13,01

Source: Profile Media FundsData (01/02/2011) * Includes reinvestment of dividends.

The latest Performance Survey shows a dramatic recovery in the DBX (Deutsche Bank) ETF Funds, which track the major global markets, for the first month of 2011. These products reflect some improvement in offshore equity markets to date in 2011, but they mainly owe their stand-out performance to the weakening of the Rand against major currencies.

One-year returns The Satrix INDI 25 ETF was the best performing fund over 12 months, with a 26,2 per cent total return over the period.

It was closely followed by the NewFunds eRAFI Industrial 25 ETF fund, indicating that industrial share indices, which have no exposure to the volatile financial or resources sectors, are not only low risk, but have also provided superior returns in recent market conditions. The Satrix DIVI Plus ETF, which contains a portfolio of largely industrial and retail sector shares, was also a stand-out performer (25,8 per cent) over the past year.

Three to five-year returns The Satrix INDI 25 ETF maintained its pre-eminent position as the best performing ETF or index tracker unit trust fund over the past five years, with a total return of 15,2 per cent per annum over this period. It is also one of the better performers over the three-year period.

The Prudential Enhanced Property Tracker Unit Trust follows the Satrix Indi closely

over the five-year period and has a higher performance over the three-year period (14,9 per cent p.a.). The Proptrax ETF fund (14,3 per cent p.a.), which holds the entire SAPY index of 16 listed property stocks as prescribed by the FTSE/JSE index constituent weightings and does not seek to outperform the index, closely shadows the performance of the Prudential Enhanced Index fund, but with a lower risk factor.

However, the Satrix DIVI Plus ETF has the outstanding total return (18,4 per cent p.a.) over the last three years, indicating the clear JSE focus on high dividend paying shares in the absence of comparable interest rate returns in the money and capital markets.

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

RETIREMENT INVESTING - Maya Fisher-French

Whose responsibility

is it to ensure a secure retirement?

by Maya Fisher-French

D

espite the billions of Rand that is made out of the retirement industry, members, who ultimately pay the fees receive very little advice.

As a personal finance journalist, the most frequent question I receive is: I am resigning from my company, what should I do with my pension fund? The question I want to ask is why am I getting these questions? Is it because the member does not trust the advice provided by the fund or is it simply because there is no advice?

Judging by the results of the Old Mutual annual retirement funds survey it seems the latter – there is simply no advice for people who need to make serious decisions about their retirement savings. The survey shows that the majority of fund members do not know anything about where or how their funds are invested and fear they will not have enough to retire on.

28

Most members do not understand their benefit statements and do not know what to do at retirement.

We also know that the majority of people who resign from a company receive a form from their retirement fund with cash as the first option. If the member would like to know more about the other options on the form, they don’t even know who to go to within the company or fund – hence they turn to the media. Given the lack of financial education, is it any surprise that while the Old Mutual survey showed that about 43 per cent of members believe that they will have enough on which to retire; fund trustees believe that figure is closer to 26 per cent and the reality is probably closer to six per cent.

These are alarming figures and if we are to have any impact on the savings rate in South Africa or increase the number of financially secure retirees, we need to address these issues.

But where does the responsibility lie?

March 2011

Certainly members need to take ownership of their retirement, but in light of the history of moving from defined benefit to defined contribution, have the industry and employers actually geared individuals up for taking on the entire risk of their retirement?

Craig Aitchison of OMAC believes that the defined benefit mind-set prevails; ultimately members believe that the trustees will ensure that they have sufficient funds to retire on.

This is understandable as certainly anyone retiring today would have started work in the DB environment. Younger employees would have seen their parents retiring on DB pensions and there is an entire section of the population whose parents were never formally employed and where retirement planning was never discussed. Leaving it to the member and chance is clearly not a responsible response.

The survey also shows that when members are provided with information, only 13 per cent of

them act on it. But is that really surprising? Very few people are financially savvy enough to act on the information which is usually provided in a complicated format which they couldn’t bother trying to figure out.

increasing the risk profile of the investment or post-postponing retirement. Members who are two years from retirement may also receive a retirement income statement that projects what income they can expect in retirement.

As a journalist I have to ask the obvious question – where is the financial advice? You only need to read the paper Whose Money is it anyway by Rob Rusconi to understand the incredible feeding chain that lives off the retirement industry. Yet this feeding chain focuses on the investment choice by the trustees, not on member needs.

However, Linda Sherlock from Alexander Forbes, said this is only the first stage of the educational process. People tend to look at a piece of paper and file it or throw it away. The challenge is to get them to engage by raising their awareness. You have to explain what a net replacement ratio is and how you can start to implement a retirement strategy. “With human apathy you need to be more in your face, you need more awareness than a piece of paper.”

As Andrew Warren, marketing executive of retail at Liberty highlights, the difference between contributing 15 per cent of your salary vs 11 per cent, or not cashing in when you change jobs, will have a far bigger impact on the final retirement lump sum than if you were invested in a fund that delivered one per cent or two per cent above the average. This is where the industry needs to be focusing if we are to improve our appalling retirement statistics.

Aitchison said in many cases trustees are doing a good job in running the fund but if the member is making the wrong choice, then all the good work trustees have done is gone.

Kenny Meiring, head of broker sales and marketing at Metropolitan Employee Benefits, said the problem is that the role of the supplier of retirement products is to provide benefit statements and newsletters, but they don’t actually talk to members unless invited by the broker. “Here is part of the problem, companies like us are wholesale providers of products and the actual relationship with the fund and their members lies with the brokerage. This results in much of the communication from the pension fund suppliers happening at too general a level to make it really meaningful for a member,” said Meiring, who added that as an industry, “we need to find ways of providing meaningful advice at a member level without incurring the costs that using a qualified financial planner will incur”.

Fortunately there is a growing awareness in the retirement industry that more needs to be done to educate members. Some of the financial services companies are working on improving member education. Many of them such as Alexander Forbes, Liberty and Old Mutual are putting more information onto the benefit statements showing, for example, the projected net replacement ratio (NRR) at retirement.

Some funds also include information on what the members’ options are to improve the NRR figures such as increasing contributions,

“We also know that the majority of people who resign from a company receive a form from their retirement fund with cash as the first option.”

Alexander Forbes holds annual presentations for members to explain the statement and members can also sit down with one of their consultants to discuss their benefit statement and options.

At all the major cities, there are retirement seminars to deal with pre-retirement planning.

This forms part of Alexander Forbes’ Integrated Personal Financial Management programme and is provided as a complementary service.

Many of the major players offer educational workshops for employees from budgeting to retirement planning.

At this point, one can make it the responsibility of the member to take advantage of the information and education on offer. “You can give someone a training programme, a doctor can tell them if they don’t exercise they will die; but at some point, the person has to get up and go for a run,” said Warren.

While major retirement fund players are offering these types of services, smaller firms may not be quite at the same level. This is where the role of the employer and corporate broker become crucial in raising the awareness of services providers. By ensuring that their staff is financially sound, employers would improve productivity levels – someone who is sitting worrying about money is not focused and could also be tempted into making a quick buck.

Employees would welcome assistance with their financial planning and it can become a value add for a company wanting to attract talent.

Employers, who by and large are footing the bill

March 2011

of the retirement fund, need to start demanding more member education.

Aitchison said this tends to be a bigger problem for smaller funds. Large companies can leverage off their infrastructure and economies of scale. For smaller companies, this needs to be done by the umbrella funds. “An umbrella fund will do an orientation workshop when they first sign up the company, but it needs to be more frequent, employers need to make that one of their requirements to help drive the attitude.”

Corporate brokers needs to move the focus away from the business owner to the members and apply pressure to product providers to offer education. Warren said the focus of the corporate financial adviser is to advise the business not the member. Because of this relationship, you will find that the business owner is serviced by the employee benefit consultant, receiving the one-on-one advice.

Therefore the business owner is assuming that all the staff is receiving the same service.

There is also a concern that the number of small companies signing up for retirement funds is declining, possibly because they are not really seeing the benefit for their employees and the costs are higher per member. A corporate broker who is prepared to include financial planning as part of the offering could swing the deal for a business owner who is concerned about the well-being of his or her staff.

Sherlock said corporate brokers are also in a position to offer unfettered advice. For example, an RA is not necessarily the starting point for a person who needs to increase their retirement provision. Are they maximising their contribution in the company retirement fund which is usually more cost effective? If they are a member of a pension fund, have they taken advantage of their R150 per month additional voluntary contribution (AVC)? Or it may be that paying off debt right now is a bigger priority than retirement savings. If the advice is offered as part of the retirement fund benefit, then the broker is less inclined to push product.

While an individual, and their family, may be the only one affected by a lack of retirement provision, underfunding as a collective has far-reaching implications. Not least of all in the undermining of the role of the retirement industry to provide for an individual’s retirement needs. This is already clearly demonstrated by government’s intention to introduce a centralised retirement fund.

29

Retirement Investing - Craig Aitchison

The importance of member level investment choice overcome to effectively implement member level investment choice. He believes that probably the toughest challenge facing trustees is helping members understand where they are currently positioned in terms of meeting their retirement goals. Results from the Old Mutual Retirement Monitor showed that 77 per cent of fund members were not sure if they had done enough to secure their retirement.

Craig Aitchison | MD of OMAC Actuaries & Consultants Over the last few years, the choice of investment options available to members of retirement funds in South Africa has risen significantly. Unfortunately, many members still do not possess the necessary skill and understanding to select the appropriate portfolios that will enable them to reach their retirement goals.

The Old Mutual Retirement Funds Survey 2010 revealed that almost half of the fund respondents (48 per cent) included in the study now offers investment choice to members. However, even though more funds are offering member level investment choice, 68 per cent of members in all types of funds still choose the default option for investments.

A further 22 per cent of members cannot remember which portfolio they chose.

Craig Aitchison, managing director of OMAC Actuaries and Consultants, says there are a number of challenges that trustees need to

30

Other challenges include equipping and helping members to understand the choices that are available to them as well as the implications of the decisions that they make.

“There are tools that are now available that will show members the implication of any choice available on the fund in terms of their potential fund value at retirement,” he said. “It is important that trustees familiarise themselves with these tools and ensure members have access to them.”

In addition, Aitchison believes that members must have easy access to simple, comprehensive educational material. Statistics compiled by Old Mutual reveal that 95 per cent of retirement funds provide some communication to members when joining the fund. However, only 17 per cent of fund respondents believe that members have a good understanding of the communication they receive and only 13 per cent believe that members actually act on this information, most of the time.

Part of the reason for these poor levels of understanding is due to the nature of the communication channels. Printed material remains the dominant communication medium, with 94 per cent of funds using this as their primary communication channel.

“Unfortunately, this is not always the best way to communicate what many people perceive to be a complex subject,” said Aitchison.

He commented that an increasing number of funds have recognised the shortcomings of

March 2011

relying primarily on written material. “Personal communication through workshops and oneon-one sessions were cited in the survey as the channels that were set to experience the biggest rise in popularity, in line with member preference.”

Trustees also need to understand how much choice is enough. “Too much choice is not necessarily in the best interests of members.

Companies need to offer enough choice to allow members to craft different strategies, but not too much that it becomes overwhelming,” advised Aitchison. He refers to studies conducted in the US, which often found that where members were offered 10 investment choices, they generally took 10 per cent of each – indicating an unwillingness to make a definitive decision.

“I recommend three to five choices or choice categories as the optimal amount of choice to members,” said Aitchison. “This would probably include conservative, mid-level and aggressive investment options as well as alternative categories such as cash.

“Member level investment choice is still an excellent way to cater for all member’s needs and situations. Importantly, it allows members access to the best personal investment choices available to them. However, members also need to understand how to take ownership of their own retirement.

According to Aitchison, by demanding consistently high-quality education from their funds, members can equip themselves with the tools they need to form realistic retirement goals. Based on this, members can draw up achievable retirement budgets which can be regularly evaluated and assessed against their current circumstances.

ALTERNATIVE INVESTMENTS

Hedge fund

industry faces exciting road ahead

W

ith significant changes expected on the regulatory front, South Africa’s hedge fund industry faces an exciting period of opportunity, according to Carla de Waal, head of funds of Hedge Funds at Novare Investments.

De Waal pointed out that expected changes to Regulation 28 of the Pension Funds Act, which governs where and to what extent retirement funds can invest, could significantly alter the investment landscape.

recognised and given an independent position as a separate asset class within the new regulation,” said Thomas Schlebusch, CEO at Blue Ink Investments.

“In the past hedge funds, together with other asset classes were all lumped together in one category called (other). Not only has the industry now been given the recognition, but the allocation to these investment styles has also been increased,” said Schlebusch.

In early December 2010, National Treasury published the second draft of Regulation 28, presenting a version significantly different from current legislation as well as from the first draft of the revised Regulation 28 that was published in February 2010.

De Waal said that according to the second draft, a pension fund would be allowed to invest up to 10 per cent of its assets in alternative investments. “This formal recognition of alternative investments in pension fund regulation should help to expand the investment opportunity set pension fund consultants look at when advising their clients.”

One of the most significant changes is that for the first time hedge funds have been

Given that South African pension funds have more than R1 trillion in assets, the local

hedge fund industry (currently estimated to be less than R50 billion in size) could benefit from significant inflows.

“If more pension funds make use of the opportunity to increase their exposure to hedge funds, the industry has scope for significant growth,” said De Waal.

“The proposed increased allocation in the new regulatory draft to hedge funds will hopefully lead to more investors, advisers and consultants using these investment styles in their overall portfolio. One key element still to be addressed is the standardisation of accounting on illiquid or distressed assets held in hedge funds as well as the standardisation of the tax treatment of hedge funds. These are however aspects that we hope further regulation will address in the future,” said Schlebusch.

Has gold

finally run too far?

Q

uestions are being raised about whether gold, the runaway success story of the last decade, has finally run its course. Since the end of 2010, the price of the yellow metal has declined by more than six per cent (as of 3 February).

Dr Prieur du Plessis, chairman of Plexus Asset Management, said the decline was probably an overdue correction following a stellar performance (+29,6 per cent) last year.

said Du Plessis. “Analysts are talking about gold correcting down to 1,200 or even 1,000. However, I believe the gold bull market has much further to go on the upside.

“Although it is difficult to pinpoint short-term bottoms, I believe the gold bull market remains intact, especially with inflation blowing up all around the world,” says Du Plessis. “Meanwhile, China and other Asian countries keep adding gold to their reserves. These purchases should provide a floor to price declines – an ‘Asian put’ so to speak.”

“The question is whether we have seen the worst of gold’s decline,”

March 2011

31

Shaun Harris

Are we heading

for a bonus bubble?

Checks are in place but some bonus payments look excessive

32

March 2011

D

o bonuses benefit anybody but the recipient of the bonus? It’s a question receiving more critical attention in the wake of the global financial crises as minority shareholders, investors and just the person in the street buying a company’s products wonder if big bonuses can be justified.

This would apply to most industries, like the construction sector in South Africa. Share prices have collapsed but senior management, often the owners of the companies, are walking away well rewarded with bonuses and share options exercised before the crash.

But it’s probably in financial services that large bonuses become most contentious. It’s an old story but no less relevant today. When a company is doing well, a shareholder in a bank or investor in a unit trust fund generally doesn’t care what size bonuses are being taken home.

But when economic conditions turn down and share prices are under pressure, executive and even fund manager and analyst remuneration becomes an issue. It’s an issue now.

The tone was set in dramatic style by Bob Diamond, chief executive of Barclays Bank and reportedly the richest banker in Britain.

At a time when people in the UK are losing jobs, losing homes and not getting much help from the banks, many of which were bailed out with taxpayers’ money, he told the House of Commons treasury committee that he was accepting a £6.5 million bonus. This from a banker said to be worth about £95 million.

It wasn’t just the size of the bonus, more than R100 million, and dark economic backdrop that rankled observers. In a live television interview, Diamond appeared smug and quite justified in taking the bonus. To be fair Barclays was one of the few British banks not to receive a taxpayers’ lifeboat and Diamond had waived a bonus in the previous two years. Maybe being smug is just an unfortunate personal characteristic. But it has people asking: even if this is the best banker in Britain, why is he worth so much money?

Banks will tell you they need to pay generous bonuses to attract and retain quality staff. But in the end bonuses make up a larger proportion to total remuneration than high salaries. And as the bonus is coming out of the bank’s profits, it is eating into returns to shareholders.

Closer to home, Barclays is the 55.5 per cent owner of Absa. As a group listed on the JSE, it has to disclose bonuses and share options in its annual report, and while there are what seem like robust controls in place, it makes instructive reading.

Absa has a remuneration committee made up of non-executive directors and uses independent, outside consultants in determining remuneration. But it openly says that what it

calls “variable remuneration” (bonuses and share options) has the potential to be higher than fixed remuneration (fees and salaries).

And so it was in the last annual report for the 2009 financial year. Group chief executive Maria Ramos earned a salary of R5.2 million as well as a performance bonus of R2.9 million and “deferred accrual plan” of R5.4 million. This is a share-based plan, based on a phantom share scheme settled in cash at a future date.

However Ramos, known to be tight on costs and incentives and probably getting a firm grip on Absa’s bonus payments, did not receive the highest variable remuneration. Just as an example, and because he is listed right below Ramos, group executive director Lois von Zeuner scored a performance bonus of R3.5 million and deferred accrual plan of R6.5 million. That’s more than double his salary of R3.9 million.

It wasn’t just the size of the bonus, more than R100 million, and dark economic backdrop that rankled observers. In a live television interview, Diamond appeared smug and quite justified in taking the bonus. To be fair Barclays was one of the few British banks not to receive a taxpayers’ lifeboat and Diamond had waived a bonus in the previous two years.

And this came in a financial year when Absa’s attributable earnings fell by 35.9 per cent.

Various targets and operational goals are listed, but you have to question where the performance was in these bonuses.

While South African banks pay excessive bonuses despite the argument that it’s necessary to retain key staff they don’t seem to have fallen, at least not yet, into the obscene bonuses paid overseas. And at times executives will take bonus cuts. For instance, following the huge global banking wobble in 2008, Investec’s CEO Stephen Koseff cut his bonus to £1.25 million from £2.9 million in the previous year.

Investec is dual listed on the JSE and London Stock Exchange. Similarly, Standard Bank CEO Jacko Maree cut his bonus to R8.5 million from R13 million the previous year.

instance, when Standard Bank was announcing staff retrenchments of more than 2 000 people, it didn’t refer to cutting or stopping bonuses. Much the same applies to the asset management industry. Perhaps the only concession is that the financial value fund managers create for clients, or lack thereof, can be more closely tracked.

“At times managers take on too much risk trying to get a big bonus, but that’s changing now, for the better,” said the owner of a niche asset manager, who asked not to be named at it was an internal and external issue. “It’s very much a relative game. If you want to keep good staff you have to pay bonuses. Otherwise another, usually larger asset manager, will come in with a better offer and poach your staff.” He added, however, that his firm is careful about how it manages bonus payments.

What about investment research analysts who don’t actually manage clients’ money but still receive large bonuses? The same argument would apply of attracting and retaining top professionals but these large bonuses are harder to justify. However some groups have checks in place. Old Mutual Investment Group SA (OMIGSA) tracks the buy-and-sell calls made by analysts. If, over time, an analyst is consistently getting the calls wrong, then bonuses will be cut or not paid. The analyst might even be looking for another job.

In this tougher climate it looks like bonus payments are under pressure. A survey by Ernst & Young for the last quarter of 2010 on asset management payments notes: “Bonus payments contracted, in line with greater equity market volatility and contracting performance fees.”

The biggest potential problem for financial advisers lies with life insurance companies connected to or with an in-house asset manager. In a blog on Moneyweb, Rory Maguire, founder of Fundhouse UK, which monitors both British and South African investment houses, writes the promotion of entrepreneurship amongst advisers is not helped with them being enmeshed with the product providers, even the independent ones.

“In SA, we estimate that 98 per cent of all trail commission amounts are paid from the bank accounts of product providers, rather than the client who receives the advice.”

Ideally, as Maguire notes, the adviser should be paid directly by the client. And this is where advisers who consider themselves independent have a tough call to make. Bonuses in financial services are not going to go away (though possible legislation looms). The adviser must decide if excessive bonus payments are hurting clients’ returns or compromising shareholders. If so, alternatives must be sought.

But the large amounts have to be questioned, as does the bonus culture of the banks. For

March 2011

33

ASSET MANAGEMENT NEWS

Investors remain cautious in spite of market recovery

T

Index in the next month, in contrast to the 12-month view throughout 2010, with between 70 per cent and 90 per cent of respondents expecting a positive outcome.

he recovery in equity markets that continued throughout 2010 does not appear to have won over South Africa’s fund managers and financial advisers, despite a much stronger performance locally than many other markets.

The latest results of the Sanlam Investment Management Investor Confidence Index (ICI), for January 2011, reveal that confidence in the sustainability of the recovery remains shaky. Candice Paine, head of SIM Retail, says the continuing sovereign debt crisis in the peripheral European economies has weighed on European equity markets with the MSCI Europe Index returning just one per cent over the year, while the JSE All Share Index delivered 30.7 per cent in US Dollars versus 16.4 per cent for global emerging markets over the period.

“With such a large portion of returns notched up in the final quarter of last year, there was little performance persistence during the year,” said Paine.

Investors are also far less confident now than they were last year. Sixty-five per cent of respondents expect a positive outcome on the JSE All Share

“Few respondents in both the institutional and financial planners’ groupings considered the market cheap during 2010,” added Paine. However, the possibility of a 1928-style crash was not high on investor’s minds, with 68 per cent of all survey respondents believing that there is less than a 10 per cent chance of such an event occurring.

International stocks offering better prospects

W

hile emerging markets have curried much favour in recent months, it seems some of South Africa’s fund managers are increasingly turning their attention back to developed markets for further growth.

Gail Daniel, portfolio manager at Investec Asset Management, said the asset manager now favours US equities over emerging market equities, particularly with economic growth in the world’s biggest economy proving better than expected. “We expect US equities to outperform those of emerging economies not only because valuations are more attractive, but also on the back of positive earnings revisions and improving GDP growth. We believe growth in the US will surprise on the upside, as corporate profitability will drive job growth.

“We are expecting returns in the lower 20 per cent (in Rand) for US equities; while return expectations in the mid-teens out of the SA equity market would be reasonable,” added Daniel.

She said a good way for SA investors to increase their offshore exposure is to invest in developed market equity funds. “Both US and European equities are doing well so far this year, with Greece in particular posting a return of 21 per cent year to date.”

Likewise, Peter Brooke, head of macro strategy investments at OMIGSA, also said international equities will be the best performing asset class this year. “A strong chance that the Rand will depreciate; the logic of diversification; and attractive relative valuations offshore are all significant factors that make 2011 a good time for investors to increase their international equity exposure.”

In fact, Brooke said he believes international equity will be the best

34

March 2011

ASSET MANAGEMENT NEWS

performing asset class in real terms over the next five years; however, contrary to Investec, OMIGSA has highlighted Japan and Africa for growth.

“These markets sit at the two extremes of the development spectrum, but both offer their own attractions. Japan offers a contrarian trading opportunity – the Japanese equity market has experienced massive underperformance for years, and is currently trading at the same levels in real terms seen 30 years ago,” said Brooke.

“On the other hand, Africa represents a longer-term opportunity for higher returns, albeit with higher risk. The continent is truly the last investment frontier, with good growth prospects but underdeveloped equity markets,” he added.

Allan Gray SEEKS to alleviate concerns

A

llan Gray has sought to calm any concerns investors may have about the recent performance of its funds in an article to its investors.

Rob Dower, chief operating officer at Allan Gray, said that 12 months ago Allan Gray did not think share price valuations were justified by the fundamentals of SA-listed stocks, and that

investors would be wise not to expect future returns from South African investments that matched those of the preceding decade, especially not in Dollar terms.

“In the last few months, the markets have let neither the weak local recovery nor the fickleness of foreign investors bother them at all. The JSE is up 18 per cent in Rands and 29 per cent in Dollars. Foreign appetite for JSElisted shares has been such that many of their prices have risen along with a strengthening Rand, despite their fundamentals in some cases being theoretically helped by a weaker currency.”

Dower said that as a result of the decision to reduce equity exposure, while the absolute returns of most of Allan Gray’s portfolios have been satisfactory, many of them have lagged their benchmarks over the last year.

“It is worth noting that as much as we focus on returns, our investment approach seeks to limit risk of loss. As a result, our investors sometimes suffer relative short-term underperformance when there are market rallies and consensus views on specific stocks that we don’t hold as a consequence of our investment approach,” said Jeanette Marais, director of distribution and client services at Allan Gray.

“We have found that over the long term, the potential risk of loss to our clients far outweighs the upside of taking advantage of shorter-term momentum in the market. But this also means there will be years when we do not win awards,” said Marais, following the company’s success at the Raging Bulls in January.

INDUSTRY NEWS

Appointments

Markus Jooste Capitec Bank has announced that Markus Jooste, CEO of Steinhoff International, has been appointed as a non-executive director to the boards of Capitec and Capitec Bank.

Jooste is also a director of the PSG Group.

Jonathan Stewart

MMI Holdings has announced a leadership team for its asset management business following the merger of Metropolitan Asset Managers and RMB Asset Management.

Jonathan Stewart has been appointed chief investment officer, Wayne McCurrie will be responsible for specialist investments and Romeo Makhubela is responsible for house view investments.

L

iving annuities are currently facing a major credibility crisis as the consequences of three years of market weakness and volatility hit home. This is according to Lara Warburton, managing director of Imara Asset Management SA, who said that while living annuities were never the retirement income panacea for every consumer, over the past five years there has been a substantial take-up of the product.

“Living annuities are flexible options with underlying investment in a range of assets, often biased toward equity unit trusts. Clients decide how the money is invested and the income they need. The danger is that too much will be taken too soon, depleting capital and reducing earning power,” said Warburton.

She warned that all this is doing is deferring the day when clients are forced to face the fact that the remaining sum is woefully inadequate. “The longer the dread day is deferred, the bigger the impact and resultant financial distress.”

Warburton added that she has already begun fielding calls from living annuity buyers that have endured a painful reality check.

crisis looming

for living annuities

36

Wayne McCurrie

“The gulf between pre-financial crisis assumptions and post-crisis realities is often to blame. Post-meltdown, experts suddenly say we must all get used to low returns and high volatility.

“Key assumptions in the living annuity market are that buyers are knowledgeable enough to work things out for themselves or will receive continued advice. When both assumptions are flawed, you have a recipe for financial distress.”

Raging Bulls

winners announced

(Left to right): Bruce Cameron, editor, Personal Finance; Nic Oldert, Profile Data; Jeanette Marais, Allan Gray; Prieur du Plessis, Plexus; Ryk de Klerk, Plexus.

The Raging Bull Awards 2011, which recognise South Africa’s top-performing unit trust funds for 2010, were held at The Wanderers Club in Johannesburg at the end of January.

Allan Gray was announced the Domestic Management Company of the Year, followed

by Nedgroup Investments and Prudential in second and third place respectively.

“We understand that our clients look to us to provide positive, absolute returns and to grow their money in real terms and we will continue to focus on these goals. If we win awards along the way, that is a bonus,” said Jeanette Marais, director of distribution and client services at Allan Gray.

Investec was named Top Offshore Management Company of the year. “What the award means for our clients is that we have consistently been able to deliver investment performance for them across our range of offshore funds, in what has arguably been some of the toughest market conditions our business has yet experienced,” said Hendrik du Toit, CEO of Investec Asset Management.

Ashburton’s Euro Asset Management Fund was named Best Offshore Global Asset

Allocation Fund for the third year running.

“We are delighted to retain this Raging Bull Award in what has been a very challenging investment environment in recent years. The success of the fund is based on a rigorous and consistent investment process which is applied dynamically to help our investors profit from the opportunities that arise as market conditions evolve,” said Ashburton’s head of asset allocation, Tristan Hanson.

Coronation Fund Managers also won three awards. “The strength of Coronation Fund Managers’ investment performance across our entire fund range has recently been confirmed by the three Raging Bull certificates for best performing unit trust performance over three years in the industrial, financial as well as low risk asset allocation categories,” said Pieter Koekemoer, head of personal investments at Coronation.

Among the other winners, Absa won two awards including Best Domestic General Equity Fund. “Our goal is to become and remain the go-to fund for serious investors who are in the market for the long haul.

Awards success is welcome but maintaining our go-to positioning is our primary concern,” said Errol Shear, chief investment officer of Absa Asset Management.

Other winners included: - Best Broad-based Domestic Equity Fund: Marriott Dividend Growth Fund - Best Domestic Fixed-Interest Fund: Nedgroup Investments Bond Fund (A class) - Best Foreign (South African-domiciled) Equity Fund: Allan Gray – Orbis Global Equity Feeder Fund - Best Offshore Global Equity Fund: RE:CM Global Fund

RMB came away with two awards – for Best Domestic Equity Growth and Equity Smaller Companies Fund. “We are extremely proud that two of our unit trust funds were recognised for their outperformance by receiving the Raging Bull Award. These awards acknowledge the stars of the unit trust industry in terms of the top outright performers,” said Vina Naidoo, head of marketing at RMB.

March 2011

37

PRODUCTS

PRODUCTS New JSE platform enables traders to go faster

New Standard fund targeting African equities

The Johannesburg Stock Exchange (JSE) has announced that it has concluded a licensing agreement with technology solutions provider MillenniumIT to move its equity market trading activity onto a new platform known as Millennium Exchange.

Standard Bank has announced a partnership with London-based asset manager Duet Group to launch a quoted $100 million fund for African equities in March. The fund will list in London with Duet acting as fund manager and Standard Bank as market maker.

The migration, which is planned for the first half of 2012, is expected to benefit JSE members by speeding up the time it takes to execute transactions by almost 400 times, compared with the present trading solution.

“The fund will seek to replicate a proprietary benchmark index composed of companies listed on the stock exchanges in sub-Saharan African countries, excluding South Africa, with a market capitalisation above $250 million that meet minimum trading liquidity requirements,” said the two firms in a statement.

The agreement will also see the JSE’s trading system relocated from London to Johannesburg. This follows a number of incidents over the last year in which the JSE was forced to stop trading due to problems with international connectivity.

“In our experience, whenever we take a step forward with our trading technology, trading volumes also follow. If we want to remain a world-class and relevant exchange in a highly competitive industry, we must remain abreast of technological advances,” says Leanne Parsons, JSE chief operating officer and head of the Equity Market.

38

Sanlam launches new empowerment funds Sanlam Personal Finance (SPF) has launched a new range of retail funds that will enable previously disadvantaged individuals to invest in empowerment transactions, including private equity deals, via a collective investment-type mechanism.

The move is groundbreaking in South Africa, as it is the first of this kind to be offered as an underlying investment

March 2011

choice by a life assurer. SPF said the aim is to offer competitive investment performance while at the same time promoting social and economic upliftment.

“The funds will allow previously disadvantaged clients to participate in listed and unlisted empowerment transactions, as well as allow exposure to socially responsible investments and community builder property, said Bongani Mncwango, executive of SPF Distribution.

“The empowerment funds work in the same way as any other Sanlam fund.

When a previously disadvantaged client purchases an endowment policy from Sanlam, they have the option of selecting these empowerment funds as their underlying fund choices in the endowment.”

Due to legal restrictions on the ownership of BEE assets, the empowerment funds will be available only to previously disadvantaged individuals.

Snippets | THE WORLD

Hong Kong property most expensive Runaway property prices in Hong Kong have left inhabitants in the city with the world’s least affordable housing. An annual survey by Demographia found that the cost of buying a home in the Asian financial hub costs more than 11 times the city’s average salary, beating both New York and London. After the slump in North American property prices, the most affordable homes were all in the US and Canada.

1 000 jobs. The bank said the decision was taken after a review of the division concluded that it would be unable to deliver a sufficient return on investment. The news sparked anger from trade unions.

Africa set to soar with strong growth predicted The World Bank raised its forecast for economic growth in sub-Saharan Africa to 5.3 per cent this year from 4.7 per cent in 2010 in its Global Economic Prospects report, citing the recovery in the global economy. The report said South Africa’s economy is expected to expand by 3.5 per cent this year, but warned the country is likely to continue being affected by the appreciation of the Rand.

South Africa set for major rail network project South Africa is expected to give the green light to a massive multi-billion Rand high speed rail network later this year, according to reports.

The development will see lines connecting Johannesburg to Durban (566 km), Cape Town (1 264 km) and Musina (520 km) in an effort to cut congestion on the roads.

Cote d’Ivoire leader urged to step down The European Union sought to ramp up pressure on Cote d’Ivoire leader Laurent Gbagbo to step down by freezing assets of the country’s ports, state oil company and three banks. The November election in Cote d’Ivoire that returned Gbagbo to power has been widely disputed with rival Alassane Ouattara, who is seen as the legitimate leader.

Germany property eyed by investors Germany has overtaken the UK as the most favoured investment spot in Europe for unlisted real estate funds, according to Dutch research specialist, the European Association for investors in non-listed real estate funds. The UK held the top spot for the previous two years.

Egypt president resigns as protests boil over Civil unrest in Egypt, said to be the worst in 30 years, saw thousands take to the streets to protest against President Hosni Mubarak’s government. The president refused to resign, saying that to do so would cause chaos but said he will not stand for re-election in September.

Europe faces possibility of losing a member The majority (59 per cent) of investors in a poll of 1 000 analysts and traders conducted by Bloomberg predicted that at least one country would leave the Euro area within the next five years. Eleven per cent said it would happen in the next 12 months. A majority of investors also predicted that Greece and Ireland will default.

Alarm as China’s growth continues to race ahead Economic growth in China continues to surprise on the upside as growth in the emerging superpower accelerated to 9.8 per cent in the fourth quarter of 2010. Analysts said the central bank will likely start raising interest rates soon to stem the expansion.

UK bank to axe 1 000 financial planners UK bank Barclays announced plans to close its financial planning division, with the loss of

American consumers confident despite house slump US consumer confidence hit an eight-month high in January, up to 60.6 from 53.3 a month earlier, well ahead of expectations. The news was warmly welcomed after a leading house price indicator showed prices fell for a fifth successive month in November.

March 2011

39

BAROMETER

Allan Gray rated top fund manager Allan Gray was named Domestic Management Company of the Year at the 2011 Raging Bull Awards. Nedgroup Investments came in second with Prudential in third place.

Fellow asset manager Investec was also awarded the title Offshore Management Company of the Year.

Global appetite for equities remains strong Investor’s appetite for global equities has hit its highest level in more than three years, according to the latest Bank of America-Merrill Lynch Survey of Fund Managers for January, on the back of positive economic sentiment. Fiftyfive per cent of asset allocators said they are overweight in global equities, the highest level since July 2007.

Outlook for South Africa raised Ratings agency Fitch revised South Africa’s outlook from negative to stable as it said the country’s recovery from the global economic crisis has been smoother than expected, due in part to the current low interest rate environment.

in pace in test s r a e f w s erpo 0, it 201 the sup n i it ent to h er c .3 p ial crisis 0 1 rew anc my g ect a fin ono p c x e nt e he r ce ed t how t 45 pe s s c sti tha .

Stati wed ts u of erg sho er 2016 wai a a e r s t i u f b is B a r m l s c a ona Bloo t a crisi but Nati tors by ates hina’s xpec s r e e v l nt e n r ce acce ed by C global i e h p t l 40 row blish l of na g ures pu r, a pol dditiona Chi e g a i v f an cial s. Howe hile Offi rs, w Trader fined after admitting insider trading year a e e y e thr five t x e A former senior asset consultant at Sasfin Advisory n the Services has been fined R16 000 by the Financial

Services Board for insider trading. Gerhardt van Niekerk admitted he was privy to inside information on a possible merger between Sasfin Bank and Mercantile Holdings when he bought shares in the latter.

MMI loses battle for retrenchments Newly merged insurer MMI Holdings withdrew its appeal against the Competition Tribunals’ ruling that prevents it from retrenching staff for at least two years. The company is instead focusing on its integration of Momentum and Metropolitan and looking for new opportunities across Africa.

Foreign investment in SA plunges Foreign direct investment in South Africa plunged last year, according to a new report by the United Nations Conference on Trade and Development which showed the country attracted just $1.3 billion, down 78 per cent on the $5.7 billion in 2009.

40

March 2011

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Hollywood can offer more

I

than just escapism

f it was ever clear that President John F Kennedy and Marilyn Monroe had more than a professional relationship, it was on 19 May 1962. At Kennedy’s 45th birthday celebration, the blonde bombshell sang a seductive birthday song wearing a dress so tight and curve-hugging that she literally had to be sewn into it. This particular appearance was deemed so important because it was one of Monroe’s last major public appearances before her sudden death.

In 1999, Manhattan collectible company Gotta Have It purchased this dress at auction for a whopping $1 267 500. When asked why he had paid so much for a simple dress, company president Robert Shargen said that he would have paid twice what they got it for, and that he regarded the sale a ‘steal’.

Monroe’s infamous dress is just one of many items of Hollywood memorabilia that have sold for record amounts. Because of their iconic stature, the magical slippers that Dorothy used to get back home in the original 1939 Wizard of Oz movie are now considered among the most treasured and valuable of movie memorabilia.

As was customary for important props, a number of pairs were made for the film, though no one knows exactly how many. Five pairs are known to have survived. One of these was stolen in 2005 and never recovered; however in 2000, a pair of ruby slippers was sold for $666 000.

More recently, in 2005, an original poster for Fritz Lang’s 1927 science fiction film Metropolis was sold for a world record price of $690 000. An unnamed US collector bought the art deco work by graphic artist Heinz Schulz-Neudamm – one of only four known copies – through London’s Reel Poster Gallery. The previous highest price paid for a film poster was in 1997 when an original from the 1932 Boris Karloff horror classic, The Mummy, went under the hammer at Sotheby’s in New York for $452 000.

While there’s no way to predict what current films may spawn classic memorabilia, if you ever have the chance to obtain original pieces from the sets of Avatar or Pretty Woman, it may just be your ticket to fortune.

March 2011

41

THEY SAID...

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

“It is abundantly clear that risk questionnaires do not establish anything meaningful about clients’ investment risk appetites and requirements.

Risk profiling has resulted in poverty rather than prosperity of many clients who have gone through the process.” Andrew Bradley, CEO of acsis.

“I think it’s great. We have all these banks squirming, thinking maybe it’s them.” WikiLeaks founder Julian Assange, who said he enjoys making banks think they might be the next targets of his website which has published US diplomatic and military secrets.

“We believe the Rand is overvalued at its current levels and some factors that made the Rand attractive to offshore investors last year are becoming less supportive.” Riaan Le Roux, chief economist at Old Mutual Investment Group South Africa (OMIGSA), on the prospect of a depreciating Rand.

“South African equities no longer trade at a discount and therefore no longer justify an overweight position. We are forecasting a real return of six per cent per year over the next five years from SA equities.” Peter Brooke, head of macro strategy investment boutique at OMIGSA.

“The ANC would like to state categorically it has no interest in running a nightclub or in endorsing its owners. The ANC is not into nightclubs or partying, but it is a

42

revolutionary movement.” ANC secretarygeneral Gwede Mantashe following claims

by Julius Malema that a nightclub owned by tycoon Kenny Kunene belongs to the ANC.

“We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not Mother Nature or computer models gone haywire.” According to a draft report written by the Democrat majority Financial Crisis Inquiry Commission, which blamed poor decision-making in Washington and leading financial firms for the financial crisis.

“South Africa is moving forward at a rapid pace and, as an outsider, I would tell my friends that their money is safe here.” Richard Branson, who said he believes South Africa is a healthy investment destination as he announced plans to open hotels across the country.

“This notion that there is a scramble for Africa between China and the US is overplayed. China shares a lot of similar goals with the US … in Africa.” Eric Silla, special adviser to the assistant secretary for African affairs in the US, who said the US administration was planning to aggressively increase its foreign direct investment in Africa.

“To tell you the truth I am not particularly excited about any of the banking stocks. Among the top four banks we think FirstRand, through RMB Holdings, is the preferred stock on the back of a slightly more attractive valuation.”

Chris Steward, head of equities research at Investec Asset Management.

“For those of you recruiting employees who believe education verifications are unnecessary, every qualification under the sun is now available online through a diploma mill.” Kirsten Halcrow, managing director screening and vetting agency EMPS, who says aspirants with as many as 12 criminal convictions fail to disclose them.