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Why state entities are
bumbling along so badly
Solution requires a major policy shift
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The Advantage of Knowing
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CONTENTS
Why state entities are
bumbling along so badly
Solution requires a major policy shift
06
Why state entities are bumbling along so badly
08
Examining South Africa’s healthcare industry
14
The rise of alternative investments within multi-asset invesTING
16
The fixed-income bubble: the case for a bear market in bonds
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Interest rates and uncertainty
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EAST AFRICA IN THE SPOTLIGHT
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Profile: Ronel Williams, Fiduciary specialist, Nedbank Private Wealth
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the editor JSE share ratings are generally severely distorted upwards. There are other investment hurdles in South Africa, yet despite this anyone with a decently constructed investment portfolio should be earning decent investment returns. The size of the return is a relative matter. It’s not a competition. Most of us are probably investing and saving for retirement; others might have longer or shorter investment time frames. The question I’m looking at is what we do with our investment returns. Most probably get reinvested in the portfolio to enjoy the magical effect of compound interest. I’m a no-nonsense guy about investing. It’s your money, you take the risk, and the returns are yours to do whatever you like with. But I’ve been thinking about investment returns and what we can do with them, for ourselves, and others. I’m not sure what inspired this: maybe it was a long car trip I had a few weeks ago. I drove past several areas, some informal settlements, and wondered: there are all these people here, trying to make a living, and I know nothing about them. So I decided to do something with my very modest investment returns. I went on a big shop, bought some basics, and visited an area near where I live. I wasn’t invited inside for a cup of tea, but the people living there were very grateful. And this is where investing some of my returns practically paid off for me. I met Sipho Dlamini. Sipho must be in his early 20s and, like me, is very interested in music. He invited me inside to show and play me his music collection. What a collection. It ranges from rock and soul to the blues. A week later Sipho was at my house listening to my music. I now have a music companion, not easy to find when you have a specialised taste in music. It’s a return that’s hard to imagine, way beyond the bit of money I spent on some basic charitable groceries. This is being written at the start of Ramadan, the holy month for Muslims. But for some Christians it could be Lent, for Jewish people Passover, for atheists like myself a jolt like a heart attack. That gives you a new perspective on life, and death. The point I think I’m trying to make is to reflect on investment returns, and on different ways they can be used. The result might surprise us all. For example, as I argue in my article on South Africa’s parastatals, opening up around 40 per cent to private investors could solve many of our current economic woes that are naturally having a knock-on effect on investing in the country. Our investment strategy section outlines how, by investing in a balanced fund, an investor is essentially outsourcing the asset allocation calls to a professional portfolio manager and, in so doing, is also removing emotion from his investment decision-making. There’s nothing wrong with emotion – in the right place, of course. Which, arguably, is using the results of your successful investing rather than during the investment decision-making process itself.
Shaun Harris 4
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Why state entities are
bumbling along so badly
There is a solution, but the unions and others baulk at it. By Shaun Harris
O
f all the delinquent, badly-run parastatals in the country, Eskom is the one that stands out. Because it’s the most important. South Africans, from households to factories to business, rely on electricity. But they are not getting it. That cripples economic growth. To such an extent that until Eskom can consistently start to produce more energy on a regular basis, South Africa will not get above its moribund two per cent economic growth rate. You could write a book about Eskom. What follows is limited to two issues – bad management and outrageous payouts, and prospects for privatisation. The one bright spark in this dark landscape is new CEO Brian Molefe. He has an excellent business record and much experience running
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state-owned entities. He has outlined some plans, which sound encouraging. But Eskom is sure to be the toughest nut he is yet to crack. Former and recently departed CE, Tshediso Matona, who had hopes of getting his old job back, is now gone after an ‘amicable parting’. What that means is that Eskom paid him a lot to go. His exit package is still a secret (but probably not for long) but it was no doubt very generous. It follows a long list of generous send-offs – that's the way Eskom gets rid of people. Before Matona, it was Brian Dames: he left in 2014 with a total package of R22.8-million. And before that it was Jacob Maroga, who left with R4.7-million, for seven month’s work. “Of all the government-owned enterprises, Eskom probably boasts the juiciest and best trappings for a quick buck and self-
enrichment,” writes Sechaba ka’Nkosi in his column, Poisoned Chalice. What really stirred things up were vague comments about privatising Eskom, or parts of it. It started with Finance Minister Nhlanhla Nene saying the government was committed to selling stakes in Eskom. He did not say full privatisation, only selling parts to bring in muchneeded cash and equity injections. Sounds like a jolly good plan! Naturally the trade unions howled. So did the ANC, but in a confused way. Secretarygeneral Gwede Mantashe said the party did not want the government to privatise Eskom. But colleague Enoch Godongwana said an ANC conference last year decided to sell parts of Eskom. Now we all know, well, nothing.
local post office told her it would take six weeks to get there. Six weeks! The dear old lady might not be around in six weeks. Why is Sapo so slow? Here is just one reason. In what must be the irony of ironies, our dysfunctional national carrier SAA has suspended its contract to carry post. The reason, says SAA spokesman Tlali Tlali, is unpaid bills. This was recently confirmed in parliament by Siyabonga Cwele, Telecommunications and Postal Services Minister. In reply to questions, he revealed the problems at Sapo. “The situation at the South African Post Office has been severe in that service providers and suppliers have in some instances withheld services, which has had a detrimental impact on the operations of the organisation.” And why are these service providers and suppliers being so nasty? Cwele said some suppliers had not been paid for up to 10 months, in contravention of the Public Finance Management Act which prescribes 30 days as the maximum period for payment.
Two absurdities from Eskom Durban (eThekwini) residents have just been informed that their electricity tariff is going up by 12 per cent. That’s a stiff increase. But harder to swallow is the reason. The municipality says blackouts have reduced their collections by R120-million. So while residents have to endure two hour blackouts nearly every day, they now have to pay more because of them. The logic would confuse the best philosopher – you use less of something therefore you must pay more! Then there’s Soweto. Its residents owe Eskom R3.6 billion in unpaid bills. Some residents apparently have not paid for decades. Do you think they will?
Now for our national broadcaster, the SABC. Its board has been spinning faster than a roulette wheel and with as little logic, casting members off for reasons hard to fathom.
does not have. Last year it spent R3-million on its company choir. Promoting music is great, but it seems the function of this choir is to sing complimentary songs at in-house functions.
Communications Minister Faith Muthambi has been given a hard time about it, told by a parliamentary committee that she must stop interfering in SABC board matters and disposing of board members as she sees fit. This includes six senior members this year – three resigned, three were fired.
Then there are TV licences. Paying them might be the right thing to do but the SABC has a knack for messing up the whole process. Demands are sent for TV sets at the wrong premises and for the wrong number of TV sets. This is a function the SABC should outsource.
The real disgrace, however, is former chairwoman Ellen Tshabalala, who has lied to parliament about a university degree she does not have. She may still be in trouble about it as police investigations continue. And the SABC is good at spending money it
Here’s a question I would like to know the answer to. What exactly does the South African Post Office (Sapo) do? It seems they are quite good at going on strike. Beyond that? To call their services snail mail is an insult to snails. For example, about six weeks ago my daughter wanted to post a letter to her grandmother in Ireland. An ordinary, standard-size letter. The
Sapo is under administration due to financial problems, apparently worsened by more than five years of mismanagement. Is there a way out? Cwele says government will permit Sapo to approach banks to raise finance. That’s going to take a brave bank. Telkom is a partial state entity that does a pretty good job. The main reason, I suspect, is because it’s partly privatised, listed on the JSE. Telkom provides a compelling argument for partial privatisation of state entities. It is also proactive in looking at deals to expand its operations beyond just fixed-line services. The Competition Commission recently okayed Telkom’s proposed acquisition of Business Connexion. It is also in discussions with MTN about extending roaming agreements. So here is one parastatal, along with Transnet, that is running along fine. And investors can buy Telkom shares. And that is the way all the parastatals have to go, despite union opposition. The state wants to maintain control of the parastatals, as it should. But open up around 40 per cent to private investors. It would bring in welcome cash injections that all the parastatals need. Most importantly, let those private investors put their own management in place to run these entities. Professional private managers, rather than poor state managers in place for dubious reasons, could sort out the parastatals and get them running properly.
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By Marc Hasenfuss
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Examining South Africa’s
healthcare industry
Affordable healthcare for all seems to be the new catchphrase not only in South Africa but in other parts of the world as well. But the terms of reference for the commission are quite specific – and not without merit, one might add.
sector is not the only one being picked on, as it seems the retail sector will face a similar inquiry.
W
hether healthcare is a right and not a privilege is much more a political debate than an investment debate. But investors need to take note of any revised regulatory prescriptions. For the providers of private healthcare services – and that would be the three big private hospital groups listed on the JSE – efforts to regulate pricing as well as the service parameters would obviously rattle well-set business models rather dangerously. Almost 10 million people in South Africa use private healthcare, resulting in a huge medical aid spend market that certainly clears R100 billion in annual spending. In fact, the combined annual turnover of the three big private hospital groups in South Africa alone would top R40 billion. The ongoing Competition Commission inquiry into the private health care sector stems from concerns about the high price of healthcare in the sector. The healthcare
In a perfect world, the commission would make recommendations to improve the private sector that would insulate consumer interests without compromising the fairness and competitiveness of this vibrant market. Now the commission, of course, can scratch around as much as it wants into pricing in private health care – but the point remains that the purveyors of these services are seeing demand for their services and facilities from consumers more than willing to fork out premium prices. As far as the old supply/demand equation goes, private health care is a robust business. And it does seem that the main private hospital groups compete extremely hard for business, and the struggle for appropriate real estate to erect new hospitals hardly betrays signs of any collusive behaviour. Cynics may be tempted to write off the commission as a political ploy to ensure the public hospital sector – which is clearly flagging in some parts – is not shown up as a hopelessly inefficient state-managed situation.
These include unpacking the fees charged to medical aid holders compared to those self-funding their treatment. Ultimately, the commission can recommend around policies, legislation or regulations. But it will not draft regulations or set prices during this process. It’s still scary stuff… potentially. But looking at the share prices of the three listed private hospitals groups and one might swear it was halcyon days for health care providers (whose combined market capitalisations are stretching close to the R190 billion mark). The earnings multiples all sit above 20 times – hardly a market rating associated with an industry besieged by regulatory challenges. But that’s only half the story. Two of the local private hospitals groups have bulked up substantial offshore interests – Medi-Clinic, mainly in Switzerland and Netcare in the UK. Life Health earns most of its keep in South Africa, but it has snagged an influential stake in an Indian private hospitals company and shifted into what appears to be an underserviced market in Poland. While this holding pales in comparison to the local operations, a foothold in a mass market in a vibrant economy could pay off in droves later. The offshore operations belonging to MediClinic and Netcare are of the scale that, to be perfectly frank, if there is deemed to be an over-concentration of private hospital ownership then it would probably not be a complete train smash for the three groups to relinquish parts of the South African operations to new or smaller players.
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In the interim, the local private hospital groups hold strong market share, boast efficient management, hold trusted brands and generate reassuring (even impressive) cash flows. Regular dividend doses are a tonic for the troops. In a perverted way, investors might secretly hope that the inquiry into the private health sector will shake out a few bedpans, allowing sentiment to take on less rosy aspects so that share prices retreat to more affordable levels. Recently, Netcare CEO Richard Friedland commented that, notwithstanding a weak local economy and low levels of growth in formal employment, demand for private healthcare should remain resilient. He said the company would continue to concentrate on growth projects and initiatives to “drive operational excellence and quality improvement, in line with our commitment to best outcomes, best experience and cost-effective care for our patients.” But he did declare that Netcare was also continuing to evaluate international opportunities. Life CEO André Meyer said over 170 new beds will be added in southern Africa in the next six months through 80 ‘brown field’ expansion beds and the addition of the 94-bed Life Hilton Private Hospital. Perhaps more importantly, Myer noted that Life recognised the shortage of healthcare skills
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and would continue to invest heavily in the training of doctors, nurses and pharmacists. But it might also be significant that Life called off its proposed acquisition of the 50bed Lowveld Hospital – “as per the seller’s wishes, due to the slow approval process of the Competition authorities”. Mediclinic, which has the biggest offshore exposure, still looks firmly committed to local operations with CEO Danie Meintjes reporting a number of building projects completed at various hospitals that created 271 additional beds, as well as new consulting rooms. The most significant commissioning was the Mediclinic Midstream, which added 176 beds to Mediclinic’s portfolio in March this year. Meintjies disclosed that the number of beds was expected to increase from 7 885 to 8 044 during the next 12 months. If the Competition Commission inquiry is too much of a dangerous distraction to focus on mainstream private health care – despite their defensive attributes – then perhaps it’s at least worth glancing at newcomer Advanced Health. With surgical precision, Advanced Health intends cutting a slice in the short-procedure day-surgery niche. This entails offering costeffective healthcare to the benefit of patients, surgeons and medical funds. Earlier this year, Advanced’s directors expressed confidence that, by the end
of June 2016, the company’s local operations would be in control of at least nine day hospitals compared to the current two operational units. The company revealed that projects in the pipeline for South Africa included Advanced Durbanville Surgical Centre (set to be operational in the third quarter this year) as well as Advanced Panorama Surgical Centres at the Soweto Day Hospital, Waterkloof, Somerset, Knysna, Worcester and Groenkloof (all operational in the first quarter of next year). Advanced offers a ground floor entry to the local private healthcare sector – albeit not without development risks. Early indications, however, are that Advanced has cornered a viable niche. But don’t expect the large private hospital groups to sit by idly and watch an upstart – whose founder has deep roots in the sector – stitch up market share unchallenged. Perhaps, and underwriting a healthy free market system, it will be Advanced Health that introduces a new element of competitiveness into the private healthcare sector rather than a Competition Commission inquiry. Interestingly, Advanced Health has a working relationship with financial services giant Discovery, which shook up the medical aid industry and later the assurance sector in South Africa for the better for consumers… and, in retrospect, investors too.
If you could choose the colour of your unborn child’s eyes, would you? It is in the pioneer’s nature to question everything; to critically assess the situation and cast off the bowlines in search of meaningful questions. With questioning at the core of our nature, backed by our expertise and proven track record, not only do we find new investment opportunities, we create them. If you value questions as much as their answers, join us as we pioneer The Spirit of Pursuit.
info@emperor.co.za. +27 (0)87 940 6121. www.emperor.co.za EMPEROR ASSET MANAGEMENT is an Authorised Financial Services Provider, FSP 44978.
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KINGJAMES 33781
The Sanlam Investment Management Balanced Fund
It’s not about who gets there first. It’s about who gets it right. At Sanlam Investments, we believe there’s a time to be bold and a time to be cautious. Knowing when to be which is what makes us Wealthsmiths™. Take our Balanced Fund, for example: it’s where we risk less to gain more for our clients and adopt a consciously cautious approach to managing their money. The power of this restraint has been proven time and again, with our Balanced Fund consistently outperforming the category average* and inflation over the past three, five, seven and ten years.
To find out how we can help you deliver consistently favourable returns for your clients, visit www.sanlamintelligence.co.za.
Investments www.sanlamintelligence.co.za
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R Londiwe (35) wants to put away money for her retirement, so she will be able to live her best possible life in her golden years.
Now that his kids have left home, Brent (50) and his wife are looking forward to taking that long-awaited overseas trip in three years’ time.
Since women statistically live longer than men, Kate (60) wants an additional retirement investment to ensure she has enough money for the rest of her life.
Sanlam Investment Management (SIM) Balanced Fund
Cumulative return since inception
Cumulative return over last 3 years
396% 333% 87% 2004/06/30
2015/04/30
SIM Balanced A Balanced fund category average* CPI SIM Balanced A annualised return since inception: 15,94%
2012/04/30
Cumulative return over last 5 years
55% 52%
91% 82%
17%
29%
2015/04/30
2010/04/30
2015/04/30
SIM Balanced A Balanced fund category average* CPI
SIM Balanced A Balanced fund category average* CPI
SIM Balanced A annualised return over the last 3 years: 15,73%
SIM Balanced A annualised return over the last 5 years: 13,79%
Let our Wealthsmiths™ make the difficult decisions. They know how much and when to invest in the most appropriate asset classes at any given time. Managed by
Patrice Rassou
Gerhard Cruywagen
Team
42 300
No. of investment professionals
Years of cumulative experience
Asset classes include (local & international)
Equity
Bonds
Cash
Property
*SA Multi Asset High Equity category average. Source: Morningstar as at 30 April 2015 Disclaimer: The Retail class is the most expensive class offered by the Manager. The actual highest and lowest 12-month return figures during the ten-year period to 30 April 2015 are 44,44% (highest) and -14,49% (lowest). Past performance is not an indication of future performance. A schedule of fees is available from the Manager, Sanlam Collective Investments (RF) (Pty) Ltd, an approved Manager in Collective Investment Schemes in Securities. Sanlam Investment Management (Pty) Ltd is an authorised financial services provider. Please refer to the fund’s Minimum Disclosure Document (MDD) to view more information. Annualised returns are period returns re-scaled to a period of one year.
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Alternative investments
The rise of
alternative investments
within multi-asset investing Private equity
hedge funds As multi-managers, we are able to gain a broad perspective of industry trends. Themes over the last five years have included changing perceptions of the value style of investment; the back-and-forth debate over active versus passive investment management; the rise of absolute return investing since 2003; and, over the last 15 years, the dominant re-emergence of multiasset investing.
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T
he flexibility offered by multi-asset investing also ties in with the expectations of investors themselves. In its simplistic form, this is specifically to grow as much of the investment as possible when risk is rewarded, and to protect capital when risk is penalised. This can only be done when fund managers are flexible with their risk allocations, and they are equipped with a number of diversified opportunities. Multi-asset investing offers this flexibility and diversity.
part of the traditional asset management thought processes and not ultimately related to traditional mandates and benchmarks.
The ongoing evolution of multi-asset investing
Private equity
We expect multi-asset investing to develop further in two main ways: Firstly, we expect investors to be less concerned with labelling according to investment style or methodology, but rather by the investment return experience. This would include both how much risk was employed, and the level of return realised. Secondly, we expect multi-asset fund managers to be more open to including alternative investments in their portfolios. Allocations to private equity, hedge funds and Africa are useful tools in this regard which are currently mostly ignored. Alternative investments as part of a multiasset investment strategy Using private equity, hedge funds and investments in Africa will provide investors with more options of risk-managed and sustainable investment growth. In my opinion, allocations to a variety of investment strategies inclusive of private equity, hedge funds and investments in Africa have been mostly neglected on the simple premise that they are currently not
If we were to remove the constraints of traditional approaches, the investment manager has typically more freedom and flexibility to exploit the increased tools of finance that are available. These tools are great diversifying instruments, which can provide a balance to the absolute risks of the portfolio.
Private equity allows you to invest in growth assets that are not actively traded on markets and may offer more price inefficiencies that the investor can benefit from. On the downside, as a non-mainstream investment it may offer a reduced liquidity and be difficult to model. Hedge funds A hedge fund is a privately owned asset pooling vehicle, which uses an expanded investment toolkit to invest into equity, fixed income, commodities and currencies instruments. A hedge fund can use leverage, short selling and derivatives in its management of money. Hedge funds can thus manage downside risk better as a result. Hedge funds are for me the ultimate form of unconstrained investment, allowing the investment manager to allocate risk wherever they deem it will be rewarded. Given their styles and objectives, this strategy has the potential to generate growth despite the market conditions that prevail. Hedge funds are not homogenous, but the South African hedge fund universe can be broken down into a few strategies. The biggest hedge fund strategy is the Equity Long Short strategy. This strategy seeks to maintain a larger directional bias to the market, and will seek to outperform in both up-markets and down-markets. Market Neutral funds apply a market strategy which has no bias to the market. Fixed Income hedge funds invest primarily in interest rate instruments. These instruments include listed and unlisted debt instruments, as well as over the counter (OTC) derivatives such as forward rate agreements (FRAs), swaps and other unlisted derivatives, as well as commercial paper issued by local institutions. These hedge funds maintain long and short positions as well as gearing to achieve their respective returns. The underlying funds can be neutral in terms of risk exposures, but do take directional exposure from time to time. Other hedge funds employ a multi-strategy investment style, whereby they invest across several hedge fund strategies and across different asset classes.
The market has been through a multi-year bull market, which has been supported by very low interest rates. With the US Federal Reserve Bank expected to start normalising its interest rates, a market neutral approach to equity investing, or an ability to participate in a market downturn, is highly recommended. Africa – not to be ignored Investing in Africa is now regarded as the ‘last frontier market’ following on from China, which until recently offered the biggest growth market in the world. Africa as an investment destination is right on our doorstep, and we should not ignore it. While the growth prospects in Africa are quite evident, the main problem is a lack of liquidity and the relative immaturity of the market. But again, these issues do provide greater opportunities when markets are naturally inefficient. We would recommend a multi-asset class approach to investing into Africa. In Africa, traded markets are much less broad and deep than in developed markets, therefore, there is a far bigger dislocation between a country’s GDP and the performance of single asset classes in the market. Hence to try and replicate the growth in GDP in Africa, we recommend a multi-asset class approach, investing in both listed instruments and off market instruments. Alternative investments within the limits of Regulation 28 In 2011, Regulation 28 was amended to increase more allocation to alternative investments. As it stands, investors can invest a maximum of 10 per cent to hedge funds, and a further five per cent to private equity. Investors can also allocate a maximum of five per cent to Africa. Most of this alternative investments allocation is hardly ever used by institutional investors, even though regulation allows and encourages it.
Selwyn Pillay, chief investment officer, Sanlam Multi Management
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Asset management
The fixed income bubble:
the case for a bear market in bonds Fixed income instruments move inversely with interest rates, so bond prices fall as interest rates rise. Bonds are also particularly sensitive to inflation, as the real value of future income from coupon payments can be quickly eroded by rising prices.
Why are bond prices inflated? Over the past decade, the BRIC nations, particularly China, have aggressively purchased US Treasuries to stop their own currencies from appreciating. Foreign central banks have gone from owning 15 per cent of US Treasuries in the 1990s to more than 40 per cent at present. The Federal Reserve itself has additionally added to US Treasury demand by buying Treasuries as part of its Quantitative Easing Programme (QE). This dual demand,
coupled with near zero short-term interest rates in the United States, Eurozone and Japan, has created a great distortion in bond prices. The effect of low yields One of the effects of low developed market interest rates has been an ‘infatuation with yield’. There have been substantial inflows into high-yielding asset classes, which has led to overvaluations in high-yield, corporate and emerging market debt instruments.
Current market environment Today’s climate sees many market participants expressing complacent views on inflation, with many expecting an environment of permanently slowing inflation or disinflation. Both short- and long-term interest rates are currently at very low levels. When assessing longer-term interest rate levels like those on 10-year bonds, we need to understand three different components. Views about inflation, expectations about future short-term rates and what is called ‘term premium’ are important. The term premium is the additional return that bond investors require for holding longer dated bonds. US Treasury 10-year interest rates are currently much lower than expected by traditional economic theory and bond prices are also far higher. There are several factors which help explain the current market environment.
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Inflation with ‘yield’ Cumulative fund flows as % of AUM: HY + MLP + EM dept 200
180
160
140
120
100
80 04
05
06
07
08
09
Source: BafA Global Investment Strategy, EPFR
10
11
12
13
14
15
Asset managers have sought to profit from the resultant ‘carry trade’ whereby market players borrow cheaply in US dollars and invest in high-yielding instruments. The fact that the large inflows into these assets have been funded by cheaper borrowings creates a significant risk that this situation may unwind at some point in a disorderly way.
7,50 7,00 6,50 6,00 5,50 5,00 4,50
Triggers for falling bond prices
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Another factor which we know feeds into longer-term interest rates is inflation. Inflation expectations are currently low, but there are several dynamics in developed economies which may threaten this benign view. The most important of these is wage growth inflation. The average unemployment for the G5 nations, namely the United States, China, Japan, Germany and the United Kingdom, is at its lowest level in 25 years.
3,50
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
3,00 1991
The normalisation of US Interest rate policy will reduce the incentive for the carry trade. In China, the Central Bank would seek to maintain its currency peg against the US dollar in the face of potential outflows from the Chinese mainland due to the carry trade unwind. This could result in it becoming net sellers of US Treasuries. Also, as the Fed QE programme ends, the demand for US Treasuries from the Fed itself will fall away. The demand support for US Treasuries, which has pushed down yields and pushed up prices, could thus reverse.
G5 unemployment rates (AVE)
As the labour supply pool dwindles relative to the demand for workers, basic economics dictates that the price of that labour should increase. Recent wage growth in the US, Japan and Germany has accelerated. Between 1990 and 2010, cheap labour from China suppressed global prices of Chinese goods and created a powerful global disinflationary force. However, wage costs in China have risen substantially and are no longer ‘cheap’. Importantly, China’s labour force is also not growing due to its historic one child policy and increasing
Chinese labour costs are expected to have a significant inflationary impact on the global economy over the next decade. This scenario creates considerable headwinds for bonds. Risks for South Africa South African bonds have been recipients of the ‘search for yield’ and the carry trade has increased bond prices while strengthening the currency. The rand has shown historic sensitivity to moves in global bond yields in that it tends to weaken as yields increase.
EMFX sensitivity to higher bond yields
2,5 2 1,5 1 0,5 0 -0,5 ZAR BRL TRY COP IDR CLP PHP MXN THB EM SGP RUB PEN KRW MYR INR TWD CZK HUF PLN -1
Leandro Gastaldi, portfolio manager, Blue Quadrant Capital Management
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Barometer
HOT
NOT South Africa not on list for FDI – index The 2015 A.T Kearney Foreign Direct Investment Confidence Index® revealed that two-thirds of companies plan to return to pre-financial crisis levels of foreign direct investment (FDI) by 2016. While global business leaders are pursuing FDI growth strategies, no countries from subSaharan Africa were ranked in the top 25 FDI destinations in 2015, despite South Africa being ranked 13th in the 2014 index.
SA falls in global competitiveness ranking
Africa’s rising future growth The African Development Bank estimated African economies will grow by 4.5 per cent and five per cent in 2015 and 2016 respectively due to rising demand for exports. In its annual African Economic Outlook report, it states that financial inflows will rise by nearly seven per cent to $193 billion, supported by higher foreign direct investment and a spike in portfolio investments.
SMES optimistically upbeat despite increasing economic woes The 2015 first quarter Business Partners Limited SME Index (BPLSI), which measures attitudes and confidence levels among South Africa’s small and medium enterprises (SME) owners, reported record average confidence levels of 81 per cent that their business will grow in the next 12 months – an increase of seven per cent quarter-on-quarter and eight per cent year-on-year.
International leading business school IMD’s 2015 World Competitiveness ranking of 61 economies placed South Africa 53rd, down one spot from 52. The IMD World Competitiveness Center looks at several aspects of each country as a place to conduct business. It attributed the drop to deteriorating government and business efficiency, with government efficiency declining to 40, down from a ranking of 29 in 2012.
Leading business economic indicator drops The Reserve Bank’s composite leading business cycle indicator decreased by 0.2 per cent on a month-to-month basis in March 2015, and by 1.6 per cent year-on-year. The largest negative contributions to the movement in the composite leading indicator in March came from a decrease in the number of residential building plans passed, and a decrease in the US dollar based export commodity price index.
Gold output rises in Tanzania Africa’s fourth-biggest gold producer, Tanzania, recorded an increase of 1.26 per cent in its gold output in 2014 after falling for two consecutive years since 2012. State-run Tanzania Minerals Audit Agency (TMAA) revealed that government revenues from gold mining companies, in the form of taxes and royalties, increased 29.5 per cent in 2014 to 428.24 billion shillings ($210 million).
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Local economy grows, but slower than previous quarter While South Africa’s economy grew 1.3 per cent in the first quarter of 2015 from the previous quarter, economic growth slowed from 4.1 per cent reported in the fourth quarter of 2014. Statistics SA GDP data reported curbed output due to factors such as load-shedding, weak demand and drought weighing down on growth.
Chris Hart
Interest rates
and uncertainty Financial repression in the form of suppressed interest rates has been the policy of choice, particularly in the developed world, to try to generate a recovery from the 2008 global financial crisis.
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even years on and the global economy remains in convalescence. Europe, Japan, and China are intensifying their efforts while Europe is experimenting with negative interest rates. The United States, in contrast, is signalling that rates are due to rise. This is important as the US Federal Reserve is the most globally influential central bank.
financial repression. Government debt levels have ballooned on the back of low yields. Regulatory requirements that force banks and insurance companies to hold government debt add to the repression. However, when yields move to zero and even into negative territory, the risks associated with sovereign bonds as an asset class become asymmetrically skewed to the downside. Negative bond yields provide an assured loss, which has no investment merit at all.
However, the US economy has been giving decidedly mixed signals. While employment growth has ostensibly been relatively strong, other indications are that the US economy has struggled with a soft patch. The economic ‘surprise’ index has reflected a surge in negative surprises and first-quarter growth was negative. Weather has been cited as the key factor in the subdued growth, but second-quarter data indicates a relatively tepid rebound.
The accumulation of debt has also been incurred for consumption purposes – paying pensions and civil-service salaries, while the tax base has become stretched and exhausted. Sovereign government debt in the developed world has been turning Ponzi in nature over the past decade. Monetary authorities are trapped as a consequence – interest rates cannot be raised back to normal levels because debt levels have become too high to be able to service higher rates.
The debate now is whether the Fed will raise rates sooner or later. The effect on markets has seen a reversal of relationships. Poor data is boosting markets; strong data is weakening markets. Two important observations can be made.
Consequently, the highly anticipated US rateincrease cycle will be very cautious and not rise to any point sufficient for savers. The debtdriven consumption-growth model will continue to dominate until it cannot be sustained. If higher rates derail the housing market and stock market, rates will revert to zero and QE4 will be heralded. But expect the next few quarters to reflect uncertainty in global financial markets while policy is buffeted by contradictory economic data.
The first is that markets have reached stretched valuations on the back of easy monetary policy. If the Fed tightens policy, it is very possible a deep correction in bond and equity markets may unfold. The second is how the Fed may have trapped itself. Its commitment to quantitative easing and zero interest rates was a monetary-policy experiment, and extrication may prove difficult. The Fed’s recovery mechanism has been pinned on a rising stock market, a housing market recovery and strengthening consumer demand. Essentially, the US recovery has depended on speculation and consumption debt. Higher interest rates will have the effect of derailing the US recovery if the housing market stalls and the stock market drops. The US markets may well return to a risk-off mode, which will also be reflected in the rest of the world. But the US dollar's rise from mid-2014 to April 2015 was in a risk-off period in markets. The MSCI emerging markets index fell, and bonds strengthened along with the
greenback. However, the risk-off patterns of previous periods were not fully repeated. US Treasuries strengthened, as expected. But this was more muted, given the extent of dollar strength. And US equities actually rose during this period instead of falling. This may well be an important shift in market perception of risk. Equities are usually regarded as risky assets, but this time US equities have also acted as a safe-haven asset class. The shift in asset-risk perception is probably a consequence of sustained and prolonged
Chris Hart, chief strategist, Investment Solutions
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Discovery
Discovery
Financial Planning Summit
Making sense of today’s financial complexities By Vivienne Fouché
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he second Discovery Financial Planning Summit took place on 19 May 2015 at the Sandton Convention Centre. The theme was ‘Making sense of today’s financial complexities.’ About 1 300 financial advisers attended. Speakers included outgoing FirstRand CEO, Sizwe Nxasana; the Minister of Finance, Nhlanhla Nene; the deputy executive officer at the FSB Insurance Division, Jonathan Dixon; Investec Asset Management’s economist and strategist, Nazmeera Moola; Peter Rosengard, insurance expert (UK), and Canadian-based British author and communication expert, Nicholas Boothman. The summit was opened by Hylton Kallner, Discovery’s chief marketing officer. “This year the aim is to give financial advisers access to knowledge from local and global thought leaders to enable better financial advice to consumers of financial services,” he said. “Our industry is going through unprecedented
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change, in particular, the Retail Distribution Review. In our view, best advice is consistent with delivering the best products to our clients.” Bruce Whitfield was the MC and added his usual insightful and often amusing wisdom to the day. He also chaired a panel discussion on ‘A global perspective on financial planning’ featuring three international panellists: Justin Gilmour; MD Integra Private Financial Consulting (Australia); Howard Sharfman, president, NFP Insurance Solutions (USA); and Andrew da Silva, MD Direct Finance Solutions (UK). The panel discussion gave an international perspective on coping with regulatory reform, consumer trends, changing demographics and the role of technology in a planner’s business. The state of the financial services sector In his presentation, FirstRand CEO Sizwe Nxasana, who has been at the helm of FirstRand since 2008, gave an overview of the financial
services sector and highlighted trends and opportunities for sustained growth. Nxasana said South Africa’s financial institutions and financial planners would need to continue embracing change and technology, particularly in an environment in which the direct distribution model is presenting increasing challenges. Splitting the R6 trillion savings and investment sector into the institutional sector (worth around R3.2 trillion) and the retail sector (worth around R2.8 trillion), Nxasana said the retail sector is where the main growth is taking place, with direct distribution growing at about 30 per cent a year. He outlined significant game changers including technology, the advent of the digital age, regulatory arbitrages, the growth of the direct distribution model and black economic empowerment. The road ahead: Finance Minister Nhlanhla Nene shared his vision for SA “We cannot do without the financial services industry,” said the minister, “and it requires
South Africa due to different processes in the two countries. He offered assurance about the checks and controls implemented.
Master of ceremonies Bruce Whitfield and Minister of Finance Nhlanhla Nene
“For example, the UK saw the simultaneous introduction of professional qualifications and RDR. In South Africa, we have already begun the qualification processes. We are aware that complex issues are involved with far-reaching results at stake, and we are aware of concerns about the scale of change and calls for a phased-in approach to avoid disruptions to the market. RDR will be introduced in three phases. We expect to see some changes this year while others will need more deliberation. Final implementation is estimated as being during 2017. “We have created six internal RDR implementation project teams to engage with the industry on a technical level, including financial advisers. There will be extensive consultation and also a steering committee.” Africa: a growth story
Hylton Kallner, Discovery chief marketing officer He concluded: “We are trying to grow the fiscal space we have lost over the past two years due to lack of growth. Our vision is that of a society that is robust and a financial services industry that treats its customers fairly at all times and can team up with the government.” Retail Distribution Review
regulation to protect consumers and the industry. Regulation is always justified for the financial sector, with its enormous capacity to disrupt both global economics and ordinary lives. “As the country moves towards the Twin Peaks model of financial regulation, there is one area that we have not paid enough attention to, namely how financial institutions treat their clients. We should not have to regulate good behaviour.” Minister Nene distinguished between two forms of wellness, namely financial and physical wellness, while noting that the two are most certainly linked. “The one impacts on the other. Debt has ravaged our society in the past decade. It is imperative that employers ensure that employees are being looked after beyond just getting a salary. We should start taking an holistic picture of our employees' wellness."
Jonathan Dixon: deputy executive officer, FSB Insurance Division, discussed some of the likely outcomes of RDR. He emphasised, “The primary aim of RDR is to ensure that it supports fair outcomes, especially fair advice and distribution. We need to understand the nature of advice and cost. We see quality professional advice as being a critical delivery for customers. RDR must support a sustainable business model for financial advice. FAIS has raised the benchmark, but concerns exist. We need to change incentives and business models. To change behaviour, we need to change incentives. “We need to move to a new model where there is no conflict in remuneration. We believe that financial advisers should be better remunerated for their advice. Often, they receive no remuneration for professional advice if this doesn’t result in a product sale. Inappropriate incentive structures expose IFAs to regulator risk. Financial advisers must be regarded as true professionals.” Dixon said that when comparing RDR outcomes with what has already taken place in the United Kingdom, we are likely to see differences in
Despite the ravaging effects of such factors as war, communicable diseases like Ebola and natural disasters like floods or drought, strong growth is nonetheless still predicted for Africa. Nazmeera Moola, economist and strategist, Investec Asset Management, gave her insight and thoughts on possibilities in Africa and South Africa over the next ten years. “We struggle the most with exports,” she said. ‘Our exports are mainly commodities. We need more electricity to be able to change this picture.” However, Moola commented that this current South African problem was not unique in Africa. “When we look at Africa’s growth outlook, there is not a lot of electricity being generated in Africa but it must be said that this is improving. When we look at a growth in light generation and supply in Africa between 2005 and 2013, it increased by 10 per cent per year. This is real growth and growth that companies like MTN are accessing.” She was upbeat about the fact that we are starting to see a diversification of economies in sub-Saharan Africa. On South Africa’s negative points, she was blunt: “The wage bill is too high and with the recent sovereign ratings downgrades, we are in danger of losing our investment status. We need to stabilise the deficit. However, fortunately, the foreign currency portion of our debt is still low. We need to control public sector spending, and we need to deal with over-regulation. Our education problem must be solved, and its solution must be supported by the private as well as the public sector. “Our banking sector is still relatively strong and we do well on innovation and business sophistication. However, we do really badly in our labour market and primary healthcare. We need to show more fiscal restraint and control public spending. The international ratings agencies are looking for a growth plan.”
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Brokers vote for SA’s top
financial brands By Vivienne Fouché
The 2015 Financial Intermediaries Association of Southern Africa (FIA) Awards gala dinner took place on 4 June 2015 at the Sandton Convention Centre, Johannesburg. This was the 17th awards evening and saw more than 1 000 financial services stakeholders gathering to congratulate the insurers, underwriters and investment companies that provide the best support to South Africa’s risk and financial advisers.
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ine FIA Awards are issued every year to cover the four main disciplines in the financial advice space: employee benefits, financial planning (including risk and investment advice), healthcare and short-term insurance. The categories are voted on by financial intermediaries themselves. The awards are fiercely contested. FIA communications manager Gareth Stokes commented, “Competition in the short-term insurance space is really tough, and the FIA Awards finalists in the category are often separated by only a few points.” The evening began with a brief introduction from the immediate past-president of the FIA,
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Arnold van der Linde. On 3 June 2015 the FIA Board elected Jay Ramsunder as the new president of the organisation, as Van der Linde’s term had come to an end. Van der Linde then welcomed Ramsunder on stage and wished him well. In turn, Ramsunder thanked Van der Linde and said he had ‘big shoes to fill’, commenting further: “I am grateful that Arnold is still on the exco board and I will continue to draw on his vast experience.” Moving on to the awards, Ramsunder said, “To excel in the FIA Awards process a financial services firm must meet and exceed our members’ expectations of product supplier quality under the headings product, service and relationship.” He added that the FIA membership provides a good proxy for South
Africa’s overall financial advice landscape. “We, the intermediaries, know this industry and have a passion for it. We facilitate and promote this ‘grudge purchase’ that is risk management. This evening is about celebrating excellence.” FIA CEO, Justus van Pletzen, said, “We believe that professional and appropriate advice is the cornerstone of fair treatment to the consumer and that FIA members are a step ahead of the crowd when it comes to delivering the best possible financial outcome.” The evaluation process An extensive survey of FIA members was conducted independently by Bluestream
FIA awards 2015 FIA Awards winners Category
Company
Product Supplier of the Year – Investment Products Single Premium
Allan Gray
Product Supplier of the Year – Investment Products Recurring Premium
Sanlam
Product Supplier of the Year – Employee Benefits
Sanlam
Short-Term Insurer of the Year – Personal Lines
Santam
Short-Term Insurer of the Year – Commercial
Hollard
Short-Term Insurer of the Year – Corporate
Hollard
Underwriting Manager of the Year
CIA
Long-Term Insurer of the Year – Risk
Discovery
Product Supplier of the Year – Healthcare
Bestmed
The 2015 winners Allan Gray took the honours in the category ‘Investment Products: Single Premium’ for a third year running. Jeanette Marais, director of Distribution and Client Services at Allan Gray, commented, “It’s difficult to pinpoint one thing from the past year that has made us successful, as we continued to do what we have always done. We still offer a simple range of funds that we believe serve the needs of most of our clients. We do not respond to fads. We only create new funds when we believe there is a long-term, sustainable need. We believe that more choice does not necessarily lead to better decision-making. We are steadfastly focused on creating long-term wealth for our clients.
Research, which has now been involved in the survey for a decade. The process begins when the FIA provides Bluestream with a complete list of FIA members. Bluestream then selects a subset of members to participate. This year 7 000 contracts were evaluated over an 11-week period, and more than 24 000 telephone calls were placed to finalise the interviews. Bluestream asks respondents to rate the investment houses, insurers and underwriters that they deal with based on product quality, service quality and relationship quality before collecting, collating and computing their responses to determine the overall award winners.
“Everything we do is centred around achieving this end. We continue to follow the same investment philosophy that we started with more than 40 years ago, and remain focused on this goal. We do what we believe is right for our clients, at all times, and we are passionate and uncompromising when it comes to service. We try to have an open door policy and always encourage ongoing feedback from financial advisers who support us. We take criticism very seriously and are constantly reviewing how we do things, to ensure that it is – and stays – easy for financial advisers to do business with us.” Sanlam won two awards: in the ‘Investment Products: Recurring Premium’ category as well as in the ‘Product Supplier of the Year: Employee Benefits’ category, the latter for the second year running. Commenting on Sanlam’s win in the Investment Products: Recurring Premium category, Karin Muller: head of Sanlam Growth Market Solutions, said, “At Sanlam we believe that we are successful in developing solutions that meet clients’ needs, and that make it easy for intermediaries to assist clients to meet those needs. This award, together with other feedback from clients, is confirmation that we are on the right path. We truly believe that we lead the pack in terms of being in tune with the needs of our
clients. Our research is thorough and underlies every element of our product development, as does our engagement with intermediaries. Sanlam goes to great lengths to effectively engage intermediaries and to obtain their feedback. “But we don’t stop there: we constantly evaluate our processes and service to clients and intermediaries in order to improve. The FIA Awards is evidence of how critical the role of the intermediary is in the South African financial services landscape. Advice and the quality thereof, as well as the engagement between intermediaries and clients, are key elements that drive the understanding into what people need to live their best financial lives. The awards also confirm our belief in the value of longterm relationships between brokers/advisers and clients. We, therefore, enable brokers and advisers to properly advise clients and meet their needs and make it as easy as possible for them to do so.” Dawie de Villiers, CEO of Sanlam Employee Benefits, commented on Sanlam’s win for the second year running in the Employee Benefits category. “The market, and particularly the employee benefits market, has evolved. Brokers and clients have businesses, and they want their businesses to grow and they are looking at what they need from us to expand their businesses. Therefore, service excellence is the first priority when they are considering a product provider. The next two elements of the decision-making scorecard are flexibility and the quality of the people they engage with at the product providers. Brokers have a high knowledge base, and the plans they wish to execute for their clients are at a high level. They need to deal with people at the product providers who can not only understand what they are seeking to achieve but who can also add value to that process.” The big overall surprise in the 2015 FIA Awards was the dethroning of Discovery Health as Healthcare Supplier of the Year, after the country’s largest open medical scheme had won the award each year since its introduction in 2008. This year, the award went to Bestmed.
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Economic commentary
Bleak prospects loom over
L
SA's economic landscape
ooking at the current economic landscape in South Africa, our cyclical and structural economic growth prospects continue to get bleaker, a trend that may ultimately threaten South Africa’s investment-grade rating. There are unfortunately no simple solutions, so the pressures for marketfriendly, growth-enhancing economic reforms continue to mount relentlessly. News on the economic front has not been particularly encouraging recently. In addition to a surge in load-shedding in May as Eskom performed maintenance ahead of winter, first quarter GDP slowed to only 1.3 per cent at an annualised rate, down from over four per cent in the final quarter of last year. While a number of temporary factors dragged down the first quarter growth number, most of which should at least partially reverse in the second quarter, the numbers once again highlighted how weak and fragile the local economic growth picture is. Indeed, growth forecasts are being revised down again, to around two per cent for the full year, barely better than the 1.5 per cent recorded in 2014. The latest data is even more depressing, given the release of the first quarter’s unemployment numbers, showing an unemployment rate of over 26 per cent: 5.5 million people are unemployed and a further 2.4 million have given up on trying to find work. These numbers continue to highlight the urgency of the government implementing growth-enhancing economic reforms – something which there appears to be little appetite for due to an apparent fear of alienating the politically-affiliated trade unions. What is more, inflation rose in May to 4.6 per cent, up from 4.5% in April and the recent
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cyclical low of 3.9 per cent in February. Hopes that the lower petrol price would induce a more structural shift in inflation closer to the middle of the target range were quickly squashed by the heavy petrol tax hike in the budget, the rebound in the oil price, the renewed weakening of the rand, Eskom’s request for a gigantic increase in electricity tariffs, sustained far-in-excess of inflation wage settlements and a surge in the maize price on account of a drought-induced slump in maize production. So, hopes of an improved medium-term outlook for inflation very quickly gave way to concerns that inflation might spike to well outside of the South African Reserve Bank’s (SARB) inflation target range by early next year. Against this background, the Reserve Bank’s post-Monetary Policy Committee meeting statement after the March meeting was exceptionally hawkish, indicating the SARB is ready to raise rates – as they have long been indicating is necessary. As a result of the drastically changed inflation outlook and the hawkish SARB, we have changed our interest rate forecast from seeing only rate hikes in 2016 to at least two 25bp hikes before the end of 2015, with possibly more to come if the inflation outlook deteriorates further.
With the deterioration in the growth and inflation outlook, the government seemingly in a ‘no-reform’ frame of mind and an increasingly threatening global environment, the chances are that we could see a downgrade of South Africa’s sovereign rating by rating agency Fitch later in the year. While such a downgrade will come as no surprise, it will leave South Africa with two ratings at the
lowest investment grade level (the other being Standard & Poor’s). South Africa can no longer afford to allow its macroeconomic prospects to continue to deteriorate and government action is urgently required to stabilise the labour environment, instil confidence among foreign and local business through greater policy certainty and a reduced regulatory burden, and provide a tough line on underperforming state institutions. Failing an improved macroeconomic outlook, South Africa’s investment grade rating will eventually be taken away, an event that will make the already poor economic outlook even worse. Rian le Roux is Sake24’s 2015 Economist of the Year. Now in its 27th year, the competition requires participants to do monthly forecasts on 14 economic variables, including economic growth, value of the rand, inflation, interest rates and the current account deficit. The ultimate annual winner is the economist whose forecasts are consistently closest to the actual figures in the SA Reserve Bank’s (SARB) quarterly report.
Rian le Roux, chief economist at Old Mutual Investment Group
The
Global economic commentary
United States on the rise
The United States has now added over a million jobs in total during 2015. While this all points to a likely US Federal Reserve Bank (‘the Fed’) rate increase before year-end (September possibly), wage growth remains anaemic, at just 2.3 per cent on an annualised basis. Ultimately there are a number of Fed members keen to get interest rates away from the zero level they have effectively been locked in at for the past six and a half years.
I
nflation is unlikely to pass the two per cent mark this year, below the Fed’s target. The level of wage growth the Fed is seeking is closer to 3.5 per cent. This means there remains much slack in the US economy, and it is clearly far from full employment. Interestingly, the broader U6 measure of unemployment remains at an elevated level of 10.8 per cent and includes discouraged and marginal workers. The benchmark 10-year US Treasury yield has begun moving higher, surpassing 2.4 per cent for the first time in months. Historically low rates have boosted the real estate market where 30year mortgage (fixed) rates hover around four per cent. First time home buyers and those with low credit scores continue to struggle getting onto the US property ladder, while those with access to credit benefit from rising prices. Increasingly, a number of large US cities mirror markets such as London and Paris, where locals are pushed to the margins of house affordability, as foreign buyers push up prices. In California, Chinese buyers are now a major influence in many upmarket suburbs – often paying cash for their homes. The demand for US dollars continues apace – the dollar recently hit a 13-year high against the yen and continues to crush many emerging market currencies. The weakness in crude and commodity prices has helped boost US consumer spending and savings, while helping to drive down the inflation numbers.
The US is seeking fast-track approval for a variety of trade deals including with Japan (part of the aggressive Trans Pacific Partnership). This will enhance US exports and ensure that the US businesses increasingly pivot towards the AsiaPacific region. US merger and acquisition activity has surged with a number of larger media, telecoms, IT, and communications deals being announced over the past few months. The US stock market has traded in a narrow band the past few months. With 12-month trailing P:E ratios at high levels (S&P 500 at 21, Dow Jones Industrial Average at 16 and Nasdaq at 23), there is clearly more upside potential for European and Emerging Market valuations that currently trade at significant discounts to the US market.
from many US and European businesses. Consequently, we remain bullish on China. The IMF's recent vote of confidence in the Chinese yuan renminbi (RMB) currency, which effectively allowed it to become one of the four main currencies used by the IMF, points to a stronger RMB over the next few years. While free convertibility is some way off, moves to open a new free trade/currency zone in Shanghai and new, far greater access by foreigners to purchase domestic Chinese stocks, together indicate a loosening of exchange controls. Negative political issues in Brazil and Russia have pushed those markets to historically low valuations with significant upside if they regain investors’ favour.
The Greek drama remains a concern as it continues to be pushed out. Ultimately the amount of money required to restore Greek confidence is small, and many believe it will be resolved through a combination of International Monetary Fund (IMF) and EU financing. The European Central Bank (ECB) has agreed to push forward some of its Quantitative Easingrelated asset purchases. This is intended to help limit any volatility in bond or currency markets during the European summer. Despite worries that China is slowing down, the shift to a consumer-led economy and away from giant infrastructure-led growth is a net positive
Anthony Ginsberg, MD, GinsGlobal Index Funds
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Investment stategy
An unpredictable QE world shows the real value of balanced funds
Quantitative easing (QE) has had an enormous impact on global investments over the past few years, with many major global economies now moving in different business cycles. The United States is reducing QE, while Europe has only just begun to print money in the Eurozone. Japan and China have also adopted a QE approach.
T
he massive effect of QE has led to the creation of too much money chasing too few assets in the financial systems across the world, and has pushed asset values to stretched valuation levels. The longterm repercussions of this ‘new normal’ or unconventional economic policy are yet to be seen, but what we can be sure of in the short term is a marked increase in market volatility as a result. In times of volatile market movements, it is challenging for most investors to keep their emotions in check. The current bull market has been running for over six years now, and the bull is beginning to look tired. Many investors tend to join the herd mentality when markets are rising and to sell out in panic when a correction occurs – almost certainly exposing themselves to a permanent loss of capital by reacting emotionally. Balanced funds enable the investor to be invested across various asset classes, and in weightings which the professional portfolio manager feels are optimal given the current market environment. Keeping an investment
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portfolio that is invested across various asset classes is a sound strategy to ride through periods of adverse and unpredictable market movements. The last few years have seen large amounts of investor flows into balanced (multi-asset) funds, due to individual investors becoming weary of trying to ascertain what the market is going to do. Various studies have shown that asset allocation calls are the single biggest driver of alpha, which is generating returns above a fund’s benchmark.
as fund managers with a proven track record of being able to manage money through both bull and bear market cycles. Morningstar’s Capture Ratios give an indication of how much of the upside in a bull market a fund was able to participate in and how much of the downside in a bear market a fund participated in. Ideally you would want to choose a fund that participates as much as possible in the upside and as little as possible in the downside. This is a true measure of preserving capital and creating wealth.
The Rezco Value Trend Balanced Fund was ranked first over a five-year period in a recently-released Towers Watson Review of Balanced Funds.
By investing in a balanced fund, an investor is essentially outsourcing the asset allocation calls to a professional portfolio manager, whose job is to constantly monitor the market and determine the optimal weightings of the various asset classes in the fund’s portfolio. In so doing, the investor is also removing emotion from his investment decision-making. When selecting a balanced fund, investors should choose funds that have a long-term track record such as 10 years or more, as well
Brian du Plessis, Rezco Asset Management
Investing in Africa
East Africa
Rwanda Uganda
in the spotlight
Kenya Burundi Tanzania
Caveo Fund Solutions recently attended an East African conference in Nairobi, followed by a trip to Tanzania. The East Africa community comprises five countries: Burundi, Kenya, Rwanda, Tanzania and Uganda. It is a very well integrated part of Africa.
K
ey themes of the conference included: the issue of power generation and distribution across the different countries in the region; technology and its impact across different sectors; financial inclusion and the need to use technology to formalise banking; and finally, the problem of traffic congestion in the big cities and a lack of alternative transport options. Key investment messages The trip involved meetings with companies from across the region covering a wide spread of sectors including banking, telecoms and power generation. The Kenyan equity market has performed very well in the last year. Businesses are seeing good growth in their respective sectors and opportunities across the region. However, as investors in the equity market, it is extremely important to balance the opportunity with what has already been included in the share price. Most companies highlighted their key business risks as: • Security • Cheap imports • The impact of poor rainfall on the agricultural sector However, the key external risk to equity market investors is the US interest rate outlook. As a net beneficiary of lower oil prices, global emerging market flows into Africa have focused on the East African region. When we see a change in interest rate policy, these markets will be harder hit than other African markets when funds flow out. Asset management: a focus on real estate and retirement reforms Asset management capabilities are limited.
Those that do exist sit within the large insurance companies, primarily managing balance sheet assets, the biggest component of which is their real estate books. In Nairobi, a common theme has been the development of what are called ‘master plan’ communities. These are multi-use estates combining residential and commercial space. Harking back to the congestion problem mentioned above, it must be noted that core infrastructure is, in general, lagging behind private development. Recent retirement reforms are expected to impact on the local asset management industry. The reforms make contributions mandatory across the formal workforce. The implementation of the regulation has already been delayed for some time at the request of business to get processes in place. The implementation date remains unclear. Over-supply of cement Cement is an important component of infrastructure development and can be a good gauge to economic activity. East Africa is experiencing robust demand growth of 10 to 12 per cent per annum. However, cement companies locally are challenged as there is a regional oversupply. In addition, local companies are also competing against cheap imports, mainly from Pakistan.
this year in the region have been very low. In some areas there is a drought, and the impact is already being felt in higher food prices. Risks to investment • Liquidity: The liquidity in these markets remains low by international comparison. While Kenya is one of the more liquid countries in Africa, the free float of many of the companies we saw was less than 50 per cent, and most had a closely-held majority shareholder. The other countries in the region have much smaller markets, with only a handful of listings if you exclude those dual-listed in Kenya. • Valuation: Valuations on traditional measures looked stretched in Kenya, as the largest market in the region. The outlook for the Kenyan economy and companies operating there is robust, but most of this has been priced in. There are pockets of opportunity, but investors should feel more cautious about their entry points, especially relative to other areas of the continent.
Risks to business • Security: In Kenya this was the number one risk cited from businesses for not achieving their targeted growth. • Drought: Throughout East Africa, agriculture is a large employer of the people. The rains
Gyongyi King, chief investment officer, Caveo Fund Solutions
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Profile
Ronel Williams Fiduciary specialist, Nedbank Private Wealth What is it about your job that most excites you as you come to work every day?
What is your comment on female representation at a senior level in the financial services industry?
Every day brings new challenges. I find it fascinating that, after 25 years in the industry, I still now and then come across scenarios that I’ve never dealt with before. My colleagues at Nedbank Private Wealth are amazing, dedicated people who are passionate about the work they do and that makes coming to work a real pleasure.
I’m happy to see that there are more and more females in senior levels and that it is because they deserve to be there. We clearly still have some way to go, and it's my aim to ensure that women are given the opportunity to prove that they are capable of doing the job.
Congratulations on becoming the chairperson of the Fiduciary Institute of Southern Africa (FISA). How did you come to reach this professional milestone? I’ve been a member of FISA for many years and was elected onto the national council in 2013. When the previous chairperson’s tenure ended earlier this year, I was elected as chairperson.
How long will you be the FISA chairperson and how do you balance its responsibilities with your normal work?
What would you describe as being your greatest business and personal successes to date? I think the fact that I still love coming to work and tackling problems after all these years in the fiduciary/financial industry is a success. From a personal point of view, I’m an eternal student who loves to learn and attain more knowledge, so I’m proud of my postgraduate studies and view this as a success. My qualifications include the following: Postgraduate diploma in Financial Planning (UFS), Advanced certificate in leadership (UCT), Postgraduate diploma in Tax law (UCT) and LLM (cum laude) (UNISA).
The chairperson is elected for a two-year period, after which they may stand for election for a further one-year term. Balancing the responsibilities of the chair with my normal workload is always a challenge, but I have the support of a very capable council comprising eight other members, so teamwork helps a lot.
If you had R100 000 to invest (excluding in Nedbank products), what would you do with it?
Your work as a fiduciary specialist must bring with it a keen sense of ethics. If you hadn’t become a fiduciary specialist, what other career paths could possibly have interested you?
How do you strike a balance between your personal life and your work schedule?
I have never really considered another career path, but am quite interested in psychology and understanding why people act the way they do.
I would love to say that I’d spend it on an overseas holiday, but the (more boring) reality is that I would invest it in my bond or shares.
That is a never-ending quest! I think every person must find his or her own balance. I work long hours, but it makes me happy. I have a very supportive husband who never complains when I take out my laptop, and I try to balance my work commitments by singing in a choir and playing the organ.
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Retirement investing
Both employer and employee buy-in needed for good
retirement outcome
Most employees who belong to employer-sponsored retirement funds will fund their retirement years almost entirely from the retirement plan provided by their employer. And yet, only 25 per cent of South African retirees are expected to be able to maintain their standard of living in retirement, according to the 2015 Sanlam BENCHMARK Survey, which annually reviews South Africa’s retirement industry. By Vivienne Fouché
T
he Sanlam survey found that the two main reasons why South African retirees struggle during their retirement years are firstly because retirement fund members cash in on their savings after retrenchment or resignation, and secondly because they exhibit apathy when providing for their own retirement. The need for buy-in from employers and employees Steven Nathan, CEO of 10X Investments, says it is crucial that retirement fund trustees, together with employers, make sure that the retirement plan offers an optimal solution. Nathan says, “From the employee’s perspective, there are two key stakeholders
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in their employer-sponsored retirement fund, namely the trustees, with their decision-making responsibilities and the fund’s advisers. The combination of these two stakeholders can determine the ultimate effectiveness of the size of an employee’s final pension fund and income in retirement. “It is critical to remember that seemingly similar decisions (such as choosing a high or medium equity fund) that are made are not innocuous at all, because very different decisions will lead to enormous differences in the final result, namely the amount of money that is available to an employee on their retirement.”
showing an increasing interest in their own retirement outcomes. Mayuri Reddy, marketing strategist at Sanlam Employee Benefits, says the number of fund members not engaging with their retirement savings or understanding investment decisions is a matter of ‘serious concern’. The survey highlights the fact that of the 42 per cent of members invested in their fund’s default investment portfolio, the majority (70 per cent) did so because they trusted the trustees of the fund to make sound investment choices. But 87 per cent said they had not voted for the trustees, and 75 per cent could not name a fund trustee.
At the same time, however, the retirement industry needs to see employees themselves
When considering retirement funds as part of the employee benefits arena, critical factors
include members’ life stage-related investment risk and contribution levels, as well as fees charged and member education. All of these factors should be considered, where possible, by both employer and employee.
on maximising their investment at retirement, not on short-term market movements, which are unpredictable and unavoidable.”
The need for retirement funding education is paramount – from both sides. The fund’s trustees (some of whom will be employerappointed, and some of whom will be employee-elected) need to educate their members with material that is pitched at the right level and across appropriate channels, and in turn the members themselves need to be more engaged.
Nathan says, “Fund members must understand their ‘investment risk’ and invest accordingly. For short-term investors (less than five years) the risk lies in volatile returns. The risk for long-term investors is that their returns are too low to meet their retirement goal. In other words, members must learn to match their investment portfolio to their investment time horizon.”
Where members are apathetic (and most are), the construction of appropriate default investment portfolios will go a long way towards helping members, in general, to improve their overall retirement outcomes. In the meantime, the jury is still out on what the government is going to do with enforced preservation when retirement fund members change employers.
An appropriately constructed default portfolio that is suitable for most members of the retirement fund will help in managing this investment risk. Reddy points out that the Sanlam survey highlights member apathy as one of the reasons why members invest in a default investment portfolio.
Member education Nathan says, “Employers cannot assume financial responsibility for their employees’ retirement, but they do have a moral responsibility to educate them in order to help them achieve a comfortable retirement.” Reddy says that not preserving retirement savings when changing jobs, for example, is the biggest mistake fund members make on their retirement savings journey. “The survey results indicated that many people are not aware of the tax implications of non-preservation (49 per cent of members surveyed), nor do they fully understand the impact on their retirement outcomes (45 per cent).” Nathan says that the employer and trustees should educate members about not responding to short-term volatility. “Investors should focus
be explained to staff on a regular basis, to encourage them to save at the required rate.” Fees
Lifestage considerations
“This, together with the fact that few members will revisit their retirement decisions during their working lifetimes, means that trustees are taking on huge responsibility for ensuring that members are appropriately invested at various stages of their lives. As a result, we see many trustees (61 per cent) using life stage strategies as the default option in order to provide younger members with sufficient exposure to growth assets, while ensuring that members closer to retirement are not exposed to excessive risk.” Contribution levels Nathan says that as a rule, investors need to save at least 15 per cent of their gross salary over their working life (40 years or so) to build an adequate retirement pot. The later that they start saving, the more they will need to save. “The employer must be aware of the contribution rates required in order for their staff to retire comfortably. This must
Nathan says that when employer-sponsored retirement funds followed the defined benefit model, the financial burden was all on the employer and the employee had relative certainty and relative security. “However, the defined benefit model also only worked really well for the employee when the employee didn’t change jobs – the model was designed to benefit employees who stayed for many years. So that was a shortcoming. With the advent of defined contribution funds, the onus of responsibility changed to the employee. "It is my opinion that the retirement industry, in general, has not looked after its clients sufficiently well. Of course, this doesn’t include everyone but there are many in the industry who earn a very good living off managing other people’s money. The fees paid by members result in revenue earned by those in the industry.” Nathan says that every one per cent per annum that investors save in investment fees can sustain their retirement income level up to 12 years longer. “Investors should never pay total fees of more than 1.0 per cent per annum of their investment balance, as high costs can derail even a diligent 40-year savings plan. While fees are inevitable, some can be avoided, negotiated or minimised. “A formal retirement planning programme is an invaluable employee benefit, which can be used as a tool to achieve financial independence. The individual employee needs a retirement fund, with education and planning around this, to do the best possible job for themselves in a complex environment. The two key variables that drive a person’s long-term investment return include an investor’s specific portfolio choice and the fees that they pay.”
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NEWS
ReturnX investment app
launched in South African market An innovative investment app, ReturnX, was recently launched in the South African market. The app sources analyst estimates for companies listed on the JSE and calculates expected returns for the companies’ shares, based on these analyst estimates. Although well-suited to investment specialists and financial services professionals, the app is purposefully intended to be simple enough to use by anyone who is looking to make astute investment decisions. The app has been designed and developed by South African fund manager and actuary Ivan Missankov, backed up by a team of IT developers based in Europe. Missankov explained that the app sources analyst estimates for companies listed on the JSE from Bloomberg and then calculates expected rates of return for the company based on each analyst estimate and taking into account the current share price and the long-term rating of the share. The value of the output of the app is: 1. 2. 3.
4.
It converts analyst estimates into actual percentage returns which are easy for investors to understand and use. Each return is based on the estimate of a professional analyst who is covering the company. Because no analyst is correct all the time, by calculating returns based on several estimates for the company, the app presents a holistic view of a range of return possibilities for the share – from the estimate of the most conservative analyst to that of the most optimistic analyst. The app updates analyst estimates globally every 24 hours and share prices are quoted with a one-hour delay.
“In addition to the South African market, the app offers results for the shares in the US and UK markets, covering approximately two-thirds of stock market values around the world. The developers intend to extend the coverage to continental Europe, for example, France, Germany, Switzerland, Hong Kong, Singapore and Australia,” said Missankov. The app is currently available for free on the Apple app store, Google Play, the Google app store for Android phones, and is exclusively available for mobile phones.
PSg Wealth opens Plettenberg Bay and Walvis Bay branches Financial services company PSG Wealth has opened a new office in Plettenberg Bay, situated at the Market Square Shopping Centre. Jannie Mouton, chairman of the PSG Group, attended the opening of the office, saying that he was pleased to have a PSG Wealth office in the area at last. “Our client base in the Plettenberg Bay area has grown substantially, and our presence here will ensure personal face to face service, in keeping with our company policy,” he said. In addition, PSG also opened a new branch in Walvis Bay in Theo BenGurirab Street. Wealth Management, stockbroking and corporate finance are the core offerings of this new branch including retirement planning, portfolio management, financial planning, wills and estates. Niël Swanepoel has also been appointed as the branch manager for the PSG coastal office. Prior to joining PSG Namibia, Swanepoel gained extensive experience in the fields of investment management, corporate finance and research. He consulted on and facilitated numerous corporate finance transactions in Namibia, and as portfolio manager for Sanlam Investment Management, where he managed various listed portfolios.
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jse equity market achieves new trading record The Johannesburg Stock Exchange (JSE) continues to beat its record highs after recording 1 025 million trades on the Equity Market at the end of May 2015. The new record is well above the previous all-time high of 1 018 million shares, which was last recorded in July 1999 on the listing day of Old Mutual Plc. Leanne Parsons, director: Trading and Market Services at the JSE, said that this
was an encouraging milestone for the JSE as it reinforces its value proposition as an enabler of capital markets. “In comparison to the corresponding period in 2014, the daily average volume traded on the JSE has increased 15 per cent to 281 million shares, further illustrating the growth in market sentiment led by resource stocks.” The mining, life insurance and property
Mary Vilakazi
Executive moves at mmi Mary Vilakazi, current chief financial officer of MMI, has been appointed as the new group finance director. Vilakazi succeeds Preston Speckmann, who has retired as the group finance director after 16 years of service within the group. Speckmann will also step down as an executive director and Vilakazi will be appointed as executive director to the MMI Holdings and MMI Group Boards. Vilakazi’s association with MMI started when she was a partner at PwC responsible for the Metropolitan audit. She then served as a non-executive director of Metropolitan and subsequently non-executive director of
Anne-Marie Woolley MMI, where she was a member of the audit and actuarial committees. In May 2014, she was appointed as an executive of MMI as the CEO of balance sheet management and became MMI’s chief financial officer in September 2014.
New head of energy and metals at Nedbank Commodity Finance Nedbank Capital’s Commodity Finance division has announced the appointment of Anne-Marie Woolley as its head of energy and metals unit, which forms part of its global commodity finance division. London-based Woolley, who was formerly Standard Bank’s head of structured trade
sector contributed to this record breaking performance. • Mining traded 746 million shares. Merafe Resources Ltd traded 725 million shares on the JSE for the same period. Life insurance traded 31 million shares, with Old Mutual plc taking the lead at 21 million shares. • REITs traded 25 million shares, with SA Corp Real Estate Fund leading the charge at 19 million shares.
Ronel Williams and commodity finance Africa, provides a key component in the revised trade structure, with three new divisions aligned across sector coverage: agri-commodities, energy and metals and bank risk.
fisa announces new national chairperson Ronel Williams has been appointed as the national chairperson of the Fiduciary Institute of Southern Africa (FISA) following the results of internal elections. Williams is a highly experienced fiduciary practitioner with a career spanning 25 years. She succeeds Angelique Visser, who held the position of FISA national chairperson for the past three years.
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Products RMB Inflation-X ETF (30%)
Coreshares lists top 50 etf
Grindrod Bank PrefTrax ETF (15%)
ETF TAX FREE INCOME ACCOUNT NewFunds GOVI ETF (30%)
Grindrod Bank’s passive investment management business CoreShares, in partnership with S&P Dow Jones Indices, has listed a Top 50 ETF focused on South African equities.
Grindrod Bank PropTrax Ten ETF (25%)
Gareth Stobie, head of the CoreShares franchise, said the new investment fund will track the S&P South Africa 50 Index, which represents about 90 per cent of the capitalisation of the South African equity market. “Given how the South African market has matured, we believe there is wisdom in tracking this wide scope of equities.”
etf launch new tax free investment accounts A new tax-free product has been launched by etfSA.co.za as the portfolio managers and financial advisors together with Computershare (Pty) Ltd as the administrators. The fund uses only Exchange Traded Funds (ETFs) as the investment constituents.
In addition to broad market exposure, the Top 50 ETF with its 0.2 per cent service charge offers the benefit of investing at low cost, as well as lower manager risk. The ETF is also aligned with CoreShares’ Core-Satellite investment approach, in which index investments form the majority – or core – of an investment portfolio, stated Stobie.
The new tax-free investment accounts fully comply with new tax concessions, conditions and requirements as announced in the 2015 Budget Speech introduced under Section 12T of the Income Tax Act. Mike Brown, managing director of etfSA.co.za, said the ETF Tax Free Investment Accounts (ETFIA) are distinctive from other products as they focus purely on investment accounts and use only ETFs in portfolio construction. “The new tax-free accounts will incur a maximum charge of one per cent per annum for administration and portfolio management, making them a highly cost-effective product in this competitive environment.”
He explained that the Top 50 ETF enables both retail and institutional investors to position active or other passive strategies, such as smart beta, listed property, offshore or fixed income, around a core holding of 50 stocks.
He stated that ETFs are ideal for the tax-free schemes, as they pay a very high percentage of income received through to clients as dividends or interest, so the tax-free impact of reinvested income is maximised. The ETF Investment Accounts will offer two distinct portfolio options, or the investor can choose a combination of the two options. The first is a low risk income-bearing tax-free account, with income growth rather than capital gains being the key objective. It gives a clear total return advantage to fixed income government bonds or money market savings accounts on a historic investment return basis. The second one is a higher risk portfolio with the intention of generating tax-free capital growth over time.
Michael Orzano, director of Global Equity Indices at S&P Dow Jones Indices, said they were delighted to be working with Grindrod Bank once again in providing the underlying S&P South Africa 50 Index. This is the sixth low-cost index product in CoreShares’ range. If an amalgamation agreement entered between CoreShares and Nedgroup Beta Solutions (NBS) in February 2015 gets regulatory approval, CoreShares will offer two additional ETFs later thisWhere year. smart money works
Investec ims launches Tax Free Savings Account Investec Investment Management Services (IMS) announced the launch of its Tax Free Savings Account (TFSA), which offers investors access to a wide range of underlying unit trust funds from Investec Asset Management and other third party managers. Daryll Welsh, head of product at Investec IMS, said that in addition to the fact that investment platforms offer an extensive choice of local and international funds covering all risk profiles, asset classes and sectors, investors also have the flexibility to switch between them. “Furthermore, investors can easily see a consolidated view of their entire portfolio, which might include a
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corESharES launchES retirement annuity and discretionary corESharES Topinvestments 50 ETF in addition to a TFSA.”
.
The fee structure is also very competitive, Welsh annual STandard dEviaTion stated. “While a flat administration fee of 40 basis points per annum is charged on the TFSA, 15,0% investors also benefit from an aggregation of 12,9% 12,2% 12,0% the entire value of their portfolio on the Investec 10,0% IMS platform when the overall administration 8,0% fee is calculated, where discounts over certain 6,0% thresholds apply.” 4,0%
Sector COMPOSITION
SEcTor compoSiTion 2% 4%
4%
27%
Energy Health Care 15%
Service Charge VAT All in Bank Charges and Audit fees Total Bill
0.200% 0.028% 0.228% 0.030% ‹0.26%
Disclaimer: The above costs are for illustration purposes and cannot be used as an
Telecommunication Consumer Staples
2,0%
There are0,0% approximately 60 funds available for South Africa 50 FTSE/JSE Top 40 (J200T) investing via theS&P Investec IMS TFSA, of which * Calculated over a 5 year period ending 31 March 2015. around half have been quality approved by an Source: I-Net and S&P Dow Jones Indices independent investment consultant after a thorough due diligence process. Top50 FEES corESharES
Industrials
7%
Materials Financials 24%
18%
Consumer Disc.
indicaTivE TimElinE • • • •
20 april: Offer period opens 09h00 05 may: Offer period closes at 12h00 06 may: Issue letters of allotment against cash 13 may: CoreShares Top50 lists
The prelisting statement will be made available on request.
The world
CHINA, AFRICA, JAPAN, GERMANY, BRAZIL, CANADA, UNITED KINGDOM
Made in China 2025 strategy to boost Chinese growth In an effort to boost the country’s economic growth, which is currently at its lowest level in decades, the Chinese Cabinet recently released its Made in China 2025 strategy. The strategy is intended to move the country’s economy away from its manufacturing model to a world of prosperity achieved through space, e-commerce, green energy and bioengineering ventures, among others. New African trade area to bring investment flow across 26 countries It was recently announced that negotiations around the establishment of a single free trade area spanning 26 nations in Africa, also known as the Tripartite Free Trade Area, have been finalised. The Tripartite Free Trade Area is said to bring about positive improvements to the continent which include improved investment flow, the facilitation and flow of goods in the region and strengthened economic integration of the southern and eastern Africa region. Jonathan Horn, MD of Maersk Line Southern Africa, says that once implemented, this new trade block will boost opportunities available to South Africa across the entire continent. Unexpected first quarter growth in Japan Japan, the world’s third largest economy, experienced higher than expected economic growth during the first quarter of 2015, with an increase of 0.6 per cent instead of the predicted 0.3 per cent. Despite the fact that the country seems to be slowly recovering from
a brief recession, economists do not predict a full recovery in the near future. From January to March 2015, the economy grew by 2.4 per cent in annualised terms, mostly due to capital spending and the housing market showing signs of strength. Consumer confidence in Germany at its highest in 13 and a half years Consumer confidence in Germany is at its highest level since October 2001, according to market research company GfK. The increase, which is being fuelled by consumers’ eagerness to spend money, is a vital component for economic growth. According to a statement released by GfK, very strong domestic demand and the low rate of inflation are fuelling economic expectations and consumers’ willingness to spend. Brazilian President’s unpopular belt-tightening In an attempt to reduce expenditures and shrink the growing budget deficits, Brazilian President Dilma Rousseff recently announced a rise in income tax for banks. This comes over and above spending cuts and indicates further that Rousseff’s government is ready to push ahead with austerity despite stiff political opposition. Since winning a close re-election in October last year, Rousseff has raised taxes and limited spending, to rebalance public accounts and shield Brazil’s credit rating after years of lavish spending. IMF chief Christine Lagarde, visiting Rio for a central bank event, applauded Rousseff’s austerity drive. However, as in Europe, fiscal austerity is raising political tensions and starting to weigh on Brazil’s once-booming economy.
Canadian economy hit harder than expected in first quarter of 2015 During the first quarter of 2015, the Canadian economy was hit harder than expected, contracting by an annualised 0.6 per cent, its first drop in nearly four years. This was due to the falling oil and gas activity as the crude prices plunged. Business investment also fell and household spending slowed between January and March while both exports and imports declined. According to Statistics Canada, the data has impacted on the Canadian dollar, which has dropped by half a cent to 79.96 US cents. German concerns over UK referendum around EU membership A referendum on Britain’s membership of the European Union could be held as early as 2016 if treaty negotiations are successful. British Prime Minister David Cameron won the general election on a pledge to hold the referendum by the end of 2017. Cameron says he wants to reform the European Union and then recommend that the UK stays within the EU “…because we need those trade links, we need those markets open, we want that influence in the world, that is good for Britain.” Volker Treier, the deputy chief executive of Germany’s Chambers of Commerce and Industry, has warned that a UK exit from the European Union (EU) would be ‘disastrous’ for Britain and Germany. He has also voiced concerns that if the UK receives concessions on its EU membership, other nations might also demand negotiations over their own terms of membership.
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They said
A collection of insights from industry leaders over the last month
With investment in education, health and infrastructure increasing, the prospects for much of Africa are bright.” United Nations Secretary-General Ban Ki-moon on Africa Day, celebrated worldwide on 25 May each year. “We have spoken with the banks and asked them to cooperate fully with the Competition Commission. A misdemeanour may have affected the currency’s price and it was essential that people in the market have the confidence that the market is fair. The extent of any malpractice wasn’t yet clear. My sense is that the investigation is as a result of a whistleblower or a confession.” South African Reserve Bank deputy governor Kuben Naidoo spoke to reporters in Johannesburg as an investigation by South Africa’s anti-trust regulator into alleged foreign currency manipulation involving the rand gathers momentum. Finance Minister Nhlanhla Nene has said he was ‘very concerned’ by the allegations and wanted to understand the impact on the country’s financial system. “Notwithstanding the unfortunate pronouncements and continuous encouragement by the detractors of the project, law-abiding citizens have continued to register and pay – they are doing the right thing,” Transport Minister Dipuo Peters told parliament regarding the approved e-toll decision.
“Manufacturing is not doing great. It’s electricity constraints, policy uncertainty, labour uncertainty. In the past month, rolling blackouts have come back with a vengeance.” Dennis Dykes, chief economist of Nedbank Group Ltd in Johannesburg, as recovery in South Africa is struggling to gain traction. A five-month strike at the world’s largest platinum mines in 2014 was followed by stoppages at factories that reduced the GDP growth rate by one percentage point to 1.5 percent, according to the central bank. “A significant amount of the money has to date been spent on assisting larger companies in reducing energy consumption and carbon emissions through the NBI’s Private Sector Energy Efficiency programme (PSEE).” Valerie Geen, head of energy at the National Business Initiative (NBI), talks about how the UK government, through its Department of International Development, awarded £8.6 million in funding to the NBI to implement a countrywide support programme for the private sector in South Africa to improve energy efficiency.
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“Most of our base stations and switches are powered round-the-clock by diesel generators and the current fuel shortage has drastically reduced the availability of diesel supply to key locations.” MTN’s corporate services executive Akinwale Goodluck said in a statement as Nigeria’s severe fuel shortage has started to cause widespread disruption to everyday services, with the telecommunications and banking sectors the latest hit hard by the worsening crisis. According to a report via the BBC, the party of new Nigerian President Muhammadu Buhari has accused the outgoing government of ‘sabotage’ for failing to deal with the crisis. “The dominant story of the year has been the Ebola crisis that swept West Africa, claiming at least 11 000 lives and threatening hard-won social, economic and political achievements. Overall, the continent’s economy grew by roughly four per cent in 2014, creating one of the longest stretches of uninterrupted positive economic expansion in Africa's history. As a result, a growing number of Africans have joined the middle class each year.
“In any event, the undue delay undermines two of the important stated objectives of the Commission, namely bringing closure to the victims and ensuring accountability on the part of those found to be causally connected to the massacre and its consequences. Justice delayed is justice denied.” Acting on behalf of the mineworkers and union, Andries Nkome had sent a letter to the Presidency regarding the delay of the Marikana Report. “If there are things that are wrong in Operation Fiela, they must be dealt with. You can’t throw away the programme, whose intention is clear and good for society, on the basis of incidents that happen in the process of implementing it.” African National Congress SecretaryGeneral Gwede Mantashe said it would be impetuous to end Operation Fiela, a complex interdepartmental security operation intended to target illegal weapons, drug dens, prostitution rings and other illegal activities, because of its unintended consequences if it was yielding positive results in the process.
You said
A selection of some of the best tweets as mentioned by you over the last four weeks.
@ReformedBroker: “The employees of investment banks that were rescued by taxpayers still look down on you and laugh at the rules.” Downtown Josh Brown – Chairman of the Twitter Federal Reserve Author of Clash of the Financial Pundits, star of CNBC’s The Halftime Report, CEO of Ritholtz Wealth Management.
Carl Richards – Helping people make smart, simple decisions with money. Creator of The Sketch Guy Column at The New York Times. I use email for conversations.
George Papadopoulos – Independent Fee Only Certified Financial Planner (CFP) & CPA. I provide top quality personal finance advice. Wall Street Journal Expert panelist.
@mark_barnes56: “Valuations are now popularity contests you like so I like so we like so algorithm buys, so you like so ...” Mark Barnes – South Africa.
@themotleyfool: “Quit day trading and donate your money to charity instead. Same financial result for you, better outcome for society.” The Motley Fool – Helping the world invest - better.
@bstover2: ‘“If people weren’t so often wrong we wouldn’t be so filthy rich” – Charlie Munger #quoteoftheday #BRK2015’ Brooke Stover – I’m an adventure enthusiast living and loving life in #Omaha! When I’m not physically traveling the world I'm doing so through books.
@InvestSA_ #PSGconference2015 #FrancoisGouws We are a confident capable organisation that can compete with the very best. We grow somewhere between 3 & 5% every quarter.
@behaviorgap: “Money is not just about spreadsheets and calculators. It’s also about behavior and emotion (ignore the second part at your own risk).”
@feeonlyplanner: “Hey you long term investor checking the futures this morning. You know doing just that will make absolutely no difference right?”
@DougHirschhorn: “Poor impulse control is a major cause for rushing into trades and fear of missing out. The Marshmallow Test is a must read for traders.” Dr Doug Hirschhorn – Peak Performance Coach to Hedge Funds and keynote speaker.
@InvestSA_ #PSGconference2015 @NickMallet17:” Set the right targets for yourself. You’ve got to
reach certain achievable goals first in order to reach extraordinary goals later. And have fun!”
@Richards_Karin: “Which day of the week are investors/traders most bullish? On a Sunday says @Stocktwits” Karin Richards – Investor. Technical share trader. Semi-retired CA(SA). Conservationist. Happily trading and charting the ASX and JSE for more than 20 years.
@Independent_Sec: ‘“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” – Ben Graham’ Independent Securiti – Independent Stockbroker specialising in local & global share portfolio management. Joburg, Stellenbosch & Pretoria. Comments are not advice. Authorised FSP.
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And now for something completely different
yachts Imagine owning a 30-metre yacht covered in more than 100 000 kilograms of gold and platinum, adorned with meteoric stone embellishments and dinosaur fossils. With a hefty price tag of $4.5 billion, the History Supreme superyacht created by UK designer Stuart Hughes may be out of the average investor's price range. However, the idea of investing in a yacht shouldn't necessarily be thrown out altogether.
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he yachting industry has flourished for many years and continues to grow at a steady pace. While it may not be a traditional investment for many, this is definitely a worthwhile option for those who are a bit more financially endowed. While many may have the idea that yachts are all ridiculously expensive and unaffordable, yachts actually range in price depending on the size and type that you can choose. Yachts are generally divided into two main categories: sailing yachts and motor-driven yachts. However, in these two broad categories are a variety of designs to suit any individual’s taste. What many people don’t know is that there is a growing trend to time-share yachts. For many, investing in a yacht outright may be a bit too expensive. But nowadays, larger, more expensive yachts can actually be bought in a form of time-share that would allow each owner the freedom to use the vessel during specified periods each year. Looking at a grander scale, superyachts are increasingly seen as a perfect investment for high profile businessmen and companies. With the advanced technology, communications and entertaining capabilities that these yachts offer, they truly do become a great platform for entertaining business clients and rewarding top employees by offering them a corporate yacht charter. In addition to this, there has been a rise in superyacht owners also chartering the boats in order to create a secondary charter income that can contribute to the running of the yacht itself.
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An important consideration to take into account when investing in a yacht is where it will be moored. The reality is that, regardless of where you choose to dock your yacht, the mooring costs are important to factor in when determining the value in investing in a yacht. Alternatively, if you are looking for a more permanent solution, purchasing a mooring or berth for your yacht may be a good idea. Before you sign on the dotted line, however, it is essential that you speak to an expert who will be able to advise you on exactly what is being bought, any charges or levies that you may incur from the marina managers, as well as the tax implications that you may face. Probably the most important thing to remember is that, once you have bought the boat and it is moored at the local yacht club, you should enjoy it.
Masters of the ocean
Superyacht A $323 million Named for the first initial of its owners, Russian billionaire Andrey Melnichenko and his wife Aleksandra, this incredible superyacht was designed and constructed by the legendary Philippe Starck. Its bold styling has caused divided opinions since its launch. The yacht was initially launched from the dockyard in 2008, only to return shortly after its first tour for further repairs and enhancements. In 2009, the yacht was finally handed over to its owner as a fully furnished floating mansion. The vessel can accommodate 14 guests and is run by 37 crew members and five support staff.
Dubai $350 million Originally known as Platinum 525, the Dubai is owned by Brunei’s Prince Jefri Bolkiah who initially requested its construction in 1996. Due to financial delays, the superyacht was resurrected in 2001 by Sheik Mohammed bin Rashid Al Maktoum, the United Arab Emirates Prime Minister. This 525-foot yacht is complete with luxurious facilities including a helipad, spa, and a swimming pool. The interior is graciously designed with a glass staircase leading to the deck.
Eclipse $800 million After the History Supreme, the Eclipse is ranked as the second most expensive superyacht in the world. With a length of 528 feet, the magnificent yacht carries its staggering price tag due to its sophisticated security and defence system on board. It has an intruder detecting system, top of the range security features and lights that all work together to protect its owner’s privacy. Owned by Russian billionaire Roman Abromavich, the Eclipse has 24 rooms, two helicopter pads, and its very own mini submarine.
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The rand’s performance is up today, down tomorrow, but one thing that doesn’t change - your dreams and goals. Whatever the rand does, what you really need to know is how many rands invested is enough for your lifestyle, today and tomorrow. How much is enough? At Old Mutual, we’ll help you work out exactly how much is enough for you. Then Old Mutual Investment Group provides the investment solutions to deliver on those goals. Solutions like the Old Mutual Global Equity Fund – a consistent top quartile performer over all periods and since inception*. Speak to your Financial Adviser today about how this fund can help ensure you have enough to do great things.
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Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium to long-term investments. Past performance is no indication of future performance. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. *Performance periods to 31 March 2015. Since inception 1994.
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