INVESTSA Magazine June 2015

R37,50 R37,50 || February June 2012015 5

Years

of democracy The state of our parastatals: is there a cure?

The bond market: what’s in store for the next 10 years?

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R37,50 | June 2015

Years

of democracy The state of our parastatals: is there a cure?

The bond market: what’s in store for the next 10 years?

CONTENTS 06

21 Years of democracy

10

The state of our parastatals: is there a cure?

12

Investing internationally

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The changing face of offshore investing

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The bond market: what’s in store for the next 10 years?

18 21

An overview of investing in bonds

Global capital markets: outlook 2015 to 2016

24

Surveys under the microscope

28

Profile: Roland Cooper, head of the Credit Rating Services Department, Financial Services Board

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From

the editor Financial advisers are in the spotlight.

It’s not a good light. An award-winning colleague has warned investors to beware of some financial advisers who are more concerned about their own financial wellbeing than that of the clients.

These words come from Riaan Strydom, a partner at PSG Wealth who has been awarded Financial Planner of the Year.

Colleague Vivienne Fouché attended the PSG Conference and has a report on the event.

“Notwithstanding a plethora of consumer protection legislation, professional financial planners still report a great deal of product pushing in the market,” Strydom penned in a report after winning the award. The giveaway, he says, is the absence of a real financial planning process. What happens is that the process is reversed. “It is quite obvious when the process is reversed that it is the financial planner’s needs that are foremost in mind, rather than the client’s.”

I thought those bad old days were gone. But who would know better than Strydom. It’s a timely warning for investors. Look at your financial plan, investment portfolio and financial planner very carefully. Product pushing will diminish returns and probably raise your risk level.

I was also fortunate to recently attend an outstanding investment presentation by Allan Gray. Portfolio manager Duncan Artus had this to say: “The unfortunate thing in investing is that we don’t know the final date.” Indeed, if we knew that, investing would be much easier.

Looking at Eskom, the problematic parastatal that I’m also looking at, Artus said, “in the long term it’s almost impossible for the economy to grow faster than the supply of power”. I’m afraid that looks like low GDP growth for some time to come.

Rob Dower, chief financial officer, looked at how much should be invested offshore. “With no constraints, the question is how much risk can I take? And remember that lots of JSE shares are overseas companies, maybe half of them.” That’s also an important point for investors. Having part of your investment portfolio offshore is good diversification. But maybe not too much.

Looking at offshore markets, Anthony Ginsberg has a fine article on global capital markets for 2015 and 2016. On the same subject, Ian Jones of Fundhouse looks at the changing face of offshore investing, with more offshore managers coming to South Africa. On Eskom again, he says one reason more SA investors are investing offshore is because of Eskom.

Don’t miss Marc Hasenfuss’s typically top piece, a nice take on our 21 years of democracy.

There’s much more – have fun,

Shaun Harris

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

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Source: Morningstar data for periods ending 31 March 2015 in the relevant ASISA categories. Prudential Portfolio Managers Unit Trusts Ltd (Registration number: 1999/0524/06) is an approved CISCA management company (#29). Assets are managed by Prudential Investment Managers (South Africa) (Pty) Ltd, which is an approved discretionary Financial Services Provider (#45199). Collective Investment Schemes (unit trusts) are generally medium to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to the future and the Manager provides no capital or return guarantees. Unit trust prices are calculated on a net asset value basis, which for money market funds is the total book value of all assets in the portfolio divided by the number of units in issue.

Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down. Unit trusts can engage in borrowing and scrip lending Unit trusts are traded at ruling prices. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used. All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates. Performance figures are sourced from Morningstar and are based on lump sum investments using NAV prices with gross income reinvested.

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21

Years

of democracy

By Marc Hasenfuss

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worth as an effective platform for raising a surfeit of new capital.

2) We are blessed (or cursed, depending on your particular viewpoint around fiscal responsibilities) with a most effective tax collection system as administered by the SA Revenue Services – that has reinvented itself as a slick bit of state apparatus that resembles nothing of the foreboding and Kafkaesque citadel that the Receiver of Revenue resembled in the apartheid decades.

3) We have seen a supportive embracing of entrepreneurship on the JSE via the Alternative Exchange – or AltX – a subsidiary market that caters for small and developing companies.

Although the AltX is often dismissed because it remains so small relative to the wider JSE, the collective market capitalisation statistics don’t reflect how many companies have been promoted from this board to the Main Board.

CIL, Cognition, Taste, Curro, ARB Holdings and Finbond are all AltX graduates, to name a few.

4) The country has developed a strong political opposition – which tackles the ruling party from two vastly different economic perspectives.

5) Opportunities in Africa continue to open up, with a good number of listed companies now earning a fair chunk of their keep from fast growing economies north of our border.

6) Since democracy, there have been two new listings booms – the late nineties and late noughties. Although there were the usual attrition levels, the JSE has in the process gained a good number of excellent counters.

South Africa celebrated 21 years of democracy recently. Whether the symbolic key to freedom is set to unlock the full economic potential of the country remains open to vigorous debate.

I

decided to compile a list of 21 reasons to celebrate our hard-won democracy… and also 21 challenges that urgently need to be overcome as we move into our more democratic years. If it’s any consolation, I found that I could compile the 21 reasons to celebrate much faster than I could scratch together 21 challenges that South Africa needs to overcome.

Please let’s celebrate that: 1) We have a vibrant JSE Securities Exchange that is well supported by foreign investors, and has – especially in recent years – shown its

7) We have seen – even though it’s probably nearly forgotten – the demutualisation of two of South Africa’s biggest financial institutions – Old Mutual and Sanlam. With clients getting shares ahead of the respective listings, these exercises introduced a slew of new participants on the JSE. Interestingly, the JSE Ltd – the company that manages the local bourse – also demutualised, and listed its shares.

8) The JSE has shifted to paperless trading when shares were dematerialised. This meant no more collecting share certificates from your stockbroker or post office and getting small dividend cheques in the mail.

9) The new democracy also brought to the market the super-entrepreneur – like Jannie Mouton of PSG, Stephen Saad of Aspen, Markus Jooste of Steinhoff International – who created many billions of rands in value for investors fortunate enough to back them from the get go.

10) The new democracy also saw the first black mining magnates emerge – of which Patrice Motsepe, who controls African Rainbow Minerals, arguably remains the most inspiring.

11) We have seen tougher controls to the JSE, and most importantly, insider-trading surveillance has been greatly improved.

12) The market – thanks largely to the Internet

– has opened up to more investors, and ordinary folk with access to a computer could follow JSE developments with SENS (Stock Exchange News Service).

13) Levels of shareholder activism have increased. Even if activism has not been formalised, minority shareholders have learnt the value of standing up for their rights… and won more than a few important battles.

14) We have seen the end of the dominance of the investment industry by a handful of players with a considerable fragmentation of the playing field caused by the formation of feisty boutique investment firms. The sheer number of unit trusts listed testifies to a new-look industry.

15) The introduction of derivatives, futures and Exchange Traded funds has added new dimensions to JSE trading.

16) The JSE is seeing a property boom that has not only seen the creation of real state stalwarts like Growthpoint, Redefine, Resilient and Hyprop, but also seen the secondary listings of global real estate contenders with strong South Africa connections.

17) Although South Africa is no longer the largest economy on the continent, the JSE remains (comfortably) the largest stock exchange in Africa.

18) Shorter settlement times on the JSE, which – in turn – helps curb speculative margin trading that was so prevalent in the bad old days.

19) The creation of ‘local-international’ giants like Naspers, SABMiller, Bidvest, Steinhoff, MediClinic Corporation, Brait, Aspen, Old Mutual and Investec.

20) The recent introduction of SPACS (Special Purpose Acquisition Companies). This is a farsighted move by the JSE to allow companies to list with cash as their sole asset, but with a time frame to acquire new unlisted assets. SPACS could help empowerment initiatives no end.

21) The heightened levels of transparency on the JSE – requiring the disclosure of directors buying or selling shares as well as identifying investors that breach certain ownership levels in companies.

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Top 40 Index is with globally inclined counters. But the weak currency is devastating for the many industries with imported costs.

And it’s difficult, at this delicate juncture, to see the rand enjoying a sustained period of strength.

6) Lack of Tax incentives. Small businesses enjoy some wonderful tax breaks, but perhaps it’s prudent for the National Treasury to show the big industries – that employ so many South Africans – some love as well.

7) Enduring empowerment investment companies. There are a handful of empowerment companies with staying power – Brimstone, Grand Parade Investments and the resurgent Sekunjalo. But we need many more black-controlled investment companies that have the potential to take a role as a ‘share for all South Africans to own’.

8) A cohesive industrial growth plan. SA Inc needs a realistic roadmap for growth, and not pandering to ideological interests that could compromise whole industries in insisting on price regulated inputs.

9) Rigid labour laws. This remains the elephant in the room. For political reasons, this is a nettle that the ruling party cannot grasp – but how long before competitive issues prompt a harsh reality check for the pay versus productivity equation.

Let’s sort out: 1) Exchange control. Jeepers, it’s 2015… do we honestly still need to restrict the outflow of money?

2) Eskom. There is so much that has been said on this topic and apparently still more that can be said. (See the article written in this issue by my colleague, Shaun Harris, on our parastatal organisations.) Here we have monopoly with a captive market (to put it politely) that finds itself in the untenable position of not being able to reliably service its customers.

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3) Dividends and Capital Gains Tax. Perhaps we have not griped enough about these taxes because the extended bull market has more than compensated for these pesky ravagers of returns.

4) Over-the-Counter (OTC) markets. The JSE remains a monopoly market with no serious attempts to set up a rival exchange, and the informal OTC markets under intense scrutiny.

5) Weak rand. The weak rand has been wonderful for the JSE, weighted as its

10) The de-industrialisation of SA. The ominous slide by Evraz Highveld Steel and Vanadium into business rescue recently reminds of how the industrial landscape is buckling. Government needs to pay more than lip service to promoting an economic climate where industry can thrive.

11) Demise of mining. Mining is no longer the growth engine of the SA economy, and it is disturbing to see mining giants like Glencore and BHP Billiton not spouting enthusiastically about their SA projects in their respective production and financial reports. Even Chinese investment in mining has slacked off.

12) Over-regulation of the economy. There is a sense of regulation by stealth by the government. No business owner likes to

operate in an environment where external factors to a large extent dictate margins and corporate activity.

13) Company failures. There are always going to be companies that bite the dust. But what we want to avoid is situations where executives that took decisions to compromise shareholders simply disappear into the sunset without being held accountable for their actions.

14) Not-so-independent directors. Too many companies flout the good corporate governance recommendation that boards of executives should have a meaningful presence of independent non-executive directors. Then again who wants to have the responsibility of keeping tabs on executives.

15) Visa regulations. Tourism is one of the few spots in South African economy, and bureaucratic obstacles that make it difficult for foreign visitors to land on our shores are likely to badly staunch visitor flows (notwithstanding the weak rand).

16) Changing empowerment guidelines.

Is a company once empowered always empowered, or must a company maintain its BEE status if an empowerment participant sells out? Also, what is the preferred level of

empowerments – 26 per cent, 35 per cent or 51 per cent? Certainty is urgently needed.

17) Sluggish economic growth rate.

Crawling along at two per cent is not going to allow for huge job-creating opportunities. Our neighbours to the north – some blessed with an abundance of valuable natural resources – are kicking along briskly, and it’s only a matter of time before our status as the springboard to the rest of Africa starts slipping.

curriculum, perhaps prompted by an insistence that South Africa must have a good story to tell. Forget a higher pass rate, look to long-term solutions by stressing quality of education.

21) An over-reliance on the government to provide. The ‘social spending’ portion of the National Budget continues to grow.

One wonders what could be achieved if more government spending were earmarked to underpin growth platforms for the private sector.

18) Violent strikes. No one disputes the right of trade unions to bargain for better wages and working conditions. But the tendency to resort to violence, intimidation and wanton destruction is no way to allow parties at the negotiating table to find middle ground.

A spate of nasty strike incidents in the last six months would no doubt have spooked foreign investors around asset security in the country.

19) Lack of continuity and accountability in top positions. The deployment of cadres in various key positions has resulted in too many SNAFUs, and then a papering over these costly stuff-ups.

20) Confusion in education. There have been too many changes to the national

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The state of our parastatals: is there a cure?

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By Shaun Harris

Parastatals, the government-owned or controlled entities, of which South Africa has many, are often used as a proxy for the local economy and, in some cases, a source of attraction for foreign investors. South Africa is falling far short here. If anything, most, though not all, of our parastatals are slowing economic growth and have few attractions for investors.

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eading this unhappy pack is Eskom.

It’s a moving target as it sheds nearly as many managers and executives as it does power. Eskom is being reserved for the next issue of INVESTSA. Perhaps by then acting CEO Brian Molefe, following his excellent track record with state transport and logistics group Transnet, would have started to achieve something.

In this issue, INVESTSA focuses on transport, which can be divided into the good, well mostly good, Transnet, the bad (South African Airways), and the ugly (PetroSA). Perhaps let’s clear the bad first.

SAA, the so-called national carrier, is a costly embarrassment. This is an airline that just can’t take off unless it gets a large bailout or cash injection inserted into its rear engine. And even then it only manages a short flight.

Why is a mystery to business analysts, as it can dominate domestic and many regional and international routes. Its smaller rival in the tight margin low-cost market, Comair, is doing well and putting out decent financial results. SAA’s only decent financial year was in 2011. Other years, since parting ways with Transnet in 2006 (no doubt much to Transnet’s relief) have been awash in losses. And that despite more than R30 billion in cash injections and guarantees from the government over the past ten years.

This year started off with yet another R6billion guarantee. And SAA is crying out for more. But it is trying to do something about its dismal performance under what it calls a long-term turnaround strategy. Headed by acting CEO, Nico Bezuidenhout, the airline is looking at ways to cut costs and reduce losses, maybe even leading to finding profitability.

Bezuidenhout has warned the overstaffed airline that this could include cutting staff numbers.

One person who has useful ideas is Professor Kosheek Sewchurran, from the University of Cape Town Graduate School of Business.

On parastatals in general, he says they need to review the way they operate and, more importantly, think about change. The crises many are in present a good opportunity for change, he adds.

“In its 80-year existence, SAA has stared down the barrel of a massive funding shortfall more than once, and on each occasion the response to this has come in the form of a financial bailout or loan.”

Prof. Sewchurran notes that when Finance Minister Nhlanhla Nene confirmed SAA’s latest guarantee in the budget speech, he said guarantees would not be automatic and would depend on state-owned enterprises having sound business plans, strong internal governance and greater efficiencies.

These are some small steps in the right direction for SAA. “I would add that they should also depend on their ability to be open to change the way they operate,” Prof. Sewchurran says. While SAA is going down to the wrong end of the runway, Transnet has been doing a pretty good job running transport on land and sea. Much credit must go to newly departed CEO Molefe, who, among other things, jacked up the rail service, especially to the coal industry, a big exporter. Molefe was also steering a R312 billion programme to increase rail and port capacity.

His successor though, Siya Gama, looks more than capable. He has a, well, interesting

history with Transnet. Before being announced CEO, he headed Transnet Freight Rail, one of the largest and most successful divisions.

He has been with Transnet for more than 20 years, but in 2010 was fired, allegedly for signing two procurement contracts five years earlier. However, in 2011 Transnet reversed the decision and reinstated Gama.

Gama has already announced definite plans for Transnet. He says he wants to relook at the export business in the face of falling commodity prices and the weak rand. “We have to establish new markets that we can bring in so that we reduce our dependence on commodities and mining,” he says, adding that this would include transporting fast moving consumer goods.

He also has bigger plans, which include taking over the ambitious R312 billion capacity project. “We have to put our focus on how best we can assist in the overall economic development of the country, and ensure that our bottom line is healthy so that we can implement our expansion programmes.”

Would it not be wonderful to hear such words from SAA? Imagine: “This is your captain speaking. We have a healthy balance sheet so prepare for a smooth take-off as we fly to new heights.” Maybe one day.

Transnet is also big on training, planning to spend R7.7 billion at its newly amalgamated Transnet Academy. It spent R2.5 billion over the past two years, of which 90 per cent of graduates were black and 25 per cent female.

Now there’s the ugly. Firstly, oil and gas production is an ugly business, all over the world. But it’s a very necessary, strategic business, so South Africa needs PetroSA, which calls itself the national oil company. It mainly looks for oil and gas off Mossel Bay and sells petrochemical products to local oil companies and overseas. It also operates a gas-to-liquid refinery at Mossel Bay. PetroSA plans to reduce its workforce by up to 40 per cent. One can understand why, but it’s very sad for a large chunk of PetroSA’s 1 800 employees.

The really ugly side, though, is former chairman Tshepo Kgadima, who, through the foresight of the Central Energy Fund, was fired last November. Claims against him are that his seemingly bogus company, LontohCoal, ripped off hundreds of investors.

The answer for many parastatals, though not all, is to privatise them, or at least make them open to partial outside investment. This may happen, and already SAA is offering small parts of the business, like Air Chefs, for sale.

At the time of writing, Bidvest was apparently interested. More might follow, though the government and the trade unions have thus far ruled privatisation out. One day though, they might have to consider it seriously.

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Investing internationally Individuals are often driven to invest internationally for the wrong reasons. They frequently only consider investing internationally when the rand starts depreciating against other currencies.

This is a human trait, as emotions start overriding financial acumen. However, investing internationally should rather be a decision taken as part of an overall sound financial plan.

What to consider when investing internationally Any sound financial plan should include diversification to try and minimise risk in various forms, namely to minimise currency risk, geographical risk and the overall exposure to one specific market.

It should be noted that currencies are very difficult to call. It is critical for your clients to consider financial planning for the longer term and not for speculative short-term purposes.

The landscape for South African resident individuals investing internationally There has been a gradual easing of exchange controls over the past decade. In addition to so-called ‘indirect’ international investments (where the proceeds must ultimately be returned to South Africa and paid in rands), in other words investing in South African-based companies that have dual listings or alternatively by investing via an institutional foreign investment allowance (previous asset swap investments), South African resident individuals can obtain ‘direct’ exposure by using the following

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exchange control allowances: • R1 million annual discretionary allowances, which may be used for various purposes, for example as a travel allowance. The unutilised portion, however, may be used for investment purposes.

• R10 million annual individual foreign capital allowances.

• In addition to the above, the South African Reserve Bank is also considering applications submitted on behalf of individuals to obtain permission to externalise amounts over and above the amounts listed above.

Recommendation for international investing Investing internationally differs from one individual to another depending on their specific financial needs and circumstances.

It is, however, important to match ZAR expenses with ZAR income. In other words, it is important to ensure that there is sufficient capital invested locally to produce the required income in order to meet the individual’s financial obligations in South Africa. By doing this, one effectively takes out any potential currency fluctuations.

Tax considerations for South Africans investing internationally South African residents are taxed on a residence-based system of taxation when investing internationally. No matter where in the world one’s assets are situated, or how they were acquired, South African residents are taxed and obliged to declare their world-wide receipts and accruals (worldwide income and capital gains).

Likewise, estate duty is charged on the dutiable amount of all South African residents worldwide assets. The estate of a person ‘consists of all property of that person at the date of his/her death’ (section 3 of the Estate Duty Act, No 45 of 1955). South African residents are, with relatively few exceptions, liable for South African estate duty on their worldwide assets including, in particular, the assets remitted abroad in terms of the investment allowance facilities. This fact and its effect are not commonly appreciated.

With Estate duty rates in South Africa at 20 per cent and the prospect of the South African rand depreciating further, the rand value for Estate Duty purposes of the funds exported

Alternative investment

Structuring your clients’ wealth Before considering international investment options, it is essential to ensure that the right international structure is in place, for both during and after your clients’ lifetimes, in which to manage their wealth.

The ‘pegging’ of the value of assets in rands, for South African Estate duty purposes (as highlighted above) is easily achieved by transferring these assets into an international trust, whether existing or new.

While the original rand value will form part of the individual’s estate for estate duty purposes, any growth in the value of the trust’s assets through asset appreciation and/or rand depreciation will be protected from estate duty. There are, however, various technical considerations, which should be discussed before establishing an international trust, and therefore it is important to seek appropriate advice.

In addition to pegging the value of the assets in rands for South African estate duty purposes, the international assets transferred will not be required to go through the tedious and costly process upon death of applying for foreign probate in the country in which the assets are registered. An international trust also provides for continuity, orderly distribution of assets after death, flexibility, protection for dependants, protection against creditors, protection of assets in the event of divorce and protection of assets against seizure, are among other advantages.

It is also important to determine the tax consequences pertaining to the different investment options. As an example, if a buyto-let residential property is acquired in the United Kingdom (UK), cognisance of the UK tax consequences must be fully considered.

The reason for this is that all UK situs assets held by foreigners are subject to 40 per cent Inheritance Tax (IHT) if the value of such assets exceeds the current NIL rate band in the UK which is currently £325 000.00, with rollover relief between spouses being available i.e. £650 000.00 on death of the surviving spouse. A possible solution, however, may be to consider purchasing such a buy-tolet residential property via an international property holding company, the shares of which are held by an international trust.

While it is never too late to structure your clients’ international wealth, deciding on an optimal structure within which to house their international assets and investments as early as possible can ensure that: • You assist with minimising the impact of costs, such as estate duty and/or foreign death duties, on the capital appreciation of your portfolio.

• You assist with creating optimal structures that are flexible enough to cater for life’s unexpected twists and turns. This means that your clients’ international wealth is both protected and available to beneficiaries should they not be.

• legislative, regulatory and compliance requirements.

• taking consideration of your clients’ entire wealth.

Nedbank Private Wealth has a team of dedicated in-house fiduciary specialists that work closely with international trust colleagues located in the Channel Islands. The diverse talents of experienced and dedicated fiduciary specialists, together with our international trust colleagues, are pooled, enabling them to provide and facilitate (where necessary) highly specialised international structuring services.

This team approach enables fiduciary specialists to stay abreast of the latest legislative and regulatory changes and thus embrace the complexity and nuances of structuring family wealth.

How your clients wish to structure their wealth is determined by: • Their unique needs and circumstances.

• considering the numerous ways in which their wealth could be structured, with preference being given to the most appropriate structure.

Tracy Muller, head: fiduciary at Nedbank Private Wealth

PUBLICISMACHINE 7974/E

is likely to increase over the years, thereby increasing liability to Estate Duty. Therefore, it is important to consider ‘pegging’ the value of the assets in rands, for South African Estate duty purposes.

Our ‘risk first’ approach puts risk last on your mind.

With rigorous consistency and a built-in margin of safety rooted in all our investment decisions, we put risk first when it comes to managing your money.

For more information, call 0800 600 168, email psgassetmanagement@psg.co.za or visit psg.co.za Collective investment schemes in securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. The manager does not guarantee capital or any return on a portfolio. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments Limited. Commission and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Different classes of participatory interest can apply to the portfolios and are subject to different fees and charges. PSG Collective Investments Limited is a member of the Association for Savings and Investment South Africa (ASISA) through its holdings company PSG Konsult Limited. PSG Asset Management (Pty) Ltd is an authorised financial services provider. FSP 29524

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Asset management

The

changing face of offshore investing

One of the more fascinating recent trends in the South African investment industry is the influx of offshore-based asset managers with intentions to register funds in South Africa.

A

combination of the fund registration process being simplified and the increased appetite for offshore investments from local investors is resulting in offshore managers focusing on South Africa. This should lead to a broader offshore fund choice which we view as a material positive – a larger range of highquality offshore funds with more diversity in terms of investment style, currency and risk profile at relatively low fee levels can only benefit the end investor.

• The asset manager is not able to market the fund to South African investors.

• LISPs are not able to include the fund on their open fund lists.

• Financial advisers are not able to suggest investment in those funds under most circumstances.

seems to be changing quickly. For example, the relaxation generally allows funds that are UCITSregistered to more easily become FSB-registered, which has resulted in a renewed interest from offshore managers to register their funds.

For offshore managers to get inflows into their non-registered funds, they generally need to be included in discretionary portfolios or a fund of funds.

FSB registration

In the past, the process and requirements for an offshore asset manager to register funds in South Africa were onerous, resulting in managers staying away. Following the relaxation of requirements for a fund to be registered, this

Over the past year, there has been a noticeable increase in appetite from South African investors for increased offshore exposure. The rationale for this increased appetite appears to be linked to a number of factors, including:

If a fund is not registered with the Financial Service Board (FSB), it is very difficult for the fund manager to attract material flows into the fund:

14 investsa

Offshore fund flows

• Offshore investments have performed relatively well for South African investors over the past few years, mainly on the

back of rand weakness, leading to investors chasing that performance.

• Increased concern over the domestic economy, inter alia Eskom’s challenges, a slowing growth rate, uncertainty over government policy, and labour issues. This has resulted in many investors wanting a higher proportion of their discretionary assets invested offshore.

Apart from certain high net worth investors, it seems that most investors were happy with the mandated maximum 25 per cent offshore investment as part of their retirement savings. However, we are now seeing many clients (and their advisers) wanting a significantly higher allocation of savings offshore.

The offshore funds of local asset managers (or their offshore affiliates) have enjoyed the lion’s share of those offshore flows from South African investors. This has been mainly as a result of the lack of offshore funds registered in South Africa, but also partly down to the comfort that many local investors get from being able to attend presentations from the people managing their money. Many investors want to ‘look into the eyes’ of their portfolio manager – investing with an offshore company that they have never heard of, with a manager they have not met, is a material concern for many.

However, our experience has been that this sentiment is changing. We have noticed an increasing level of comfort for funds to be invested with offshore managers. This has

been helped by improved access to offshore managers due to their portfolio managers being invited to present at local conferences, but also due to many advisers making use of external investment advisers to select funds and manage portfolios. It will be very interesting to watch where future offshore fund flows are allocated on the back of this changing sentiment and the number of offshore based asset managers registering funds in South Africa.

are not saying that premium managers should not be able to charge a premium or that all performance fees are bad (many are, but not all), the fee discrepancy in certain cases is significant – for example, highly rated offshore managers are looking to introduce their global equity funds to South African clients at a flat fee between 0.50 and 0.75 per cent.

Offshore fund fees Furthermore, we expect the destination of flows to be affected by the fee levels on offshore funds. The structure of unit trust fees in offshore markets is often quite different to the South African market. Taking the UK as an example, there are virtually no performance fees on unit trusts (almost without exception).

Most global funds managed by local managers (or affiliates) are still priced higher than their offshore counterparts. While we

Ian Jones, director, Fundhouse

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Asset management

The bond market:

What’s in store for the next

10 years?

Looking back

Allan Gray Bond Fund - Rolling 1-year returns

The Allan Gray Bond Fund was launched just over 10 years ago. Ten years passes quickly.

The most surprising thing about the period has been the lack of volatility, which has been kept in check by the relatively stable inflation rate, a global bond bull market and local equity bull market.

The yield on the 10-year South African government bond has ranged between 6.2 per cent and 10.5 per cent and spent 90 per cent of the time between 7 per cent and 9.5 per cent.

This is a very narrow range compared to the prior 10 years, when yields ranged from 9.5 per cent to 20 per cent. Between today and October 2024 we expect to see substantially more volatility in the South African bond market.

Looking forward There is little doubt that the real return outlook for developed market bonds is worse than it was a decade ago, and there must be questions about the ability of central bankers to keep rates pinned below 3 per cent. A return to normal yields in developed markets is unlikely to favour South African yields, but the timing of any rate increase is uncertain and could be five years away.

More pressing are local issues, which loom large. The government has benefited handsomely from the commodity supercycle, which boosted revenues and papered over the underlying structural problems in the South African economy.

Falling commodity prices and the concomitant effects on GDP growth, and the balance of payments, have brought these issues to light. The government has to deal with the 4 per cent fiscal deficit in order to slow the growth in government debt to GDP, which is approaching 45 per cent.

This will be politically difficult and something the ANC government is unlikely to face head-on.

Interestingly, the government was running a surplus just seven years ago, and bond investors fretted about the shortage of government stock.

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The current account deficit, at 6 per cent of GDP, is another issue that needs resolution. This too will require political action that the government does not relish and is unlikely to take. Over the long term, the resolution requires improving productivity that will come through education and labour market reform.

The easier, short-term solution will likely come through a weaker rand and higher inflation.

What does this mean for the Allan Gray Bond Fund?

bond investments. The assets in the Fund are then optimised to give investors the highest returns based on these assumptions.

This approach has proven relatively successful.

Importantly, the Fund has only once had a negative total return over a 12-month period, as shown in the graph. Achieving this over the next 10 years will probably not be possible, but we will strive to reduce risk and generate solid, absolute returns for our investors.

Our long-term view and focus on absolute, rather than relative, returns are the underlying principles which determine how we manage the Bond Fund. We are generally sceptical about economic forecasts but think it is possible to outperform the bond market by taking a long-term view of the risk/reward balance and positioning the Fund accordingly. We do this by forming a view on the fair value of various bonds.

Numerous factors drive our fair value estimates, with the two most important being our long-term inflation forecast, and our estimate of the real return investors will demand from South African

Andrew Lapping, deputy chief investment officer, Allan Gray

80478

(ii)

(i)

Artist’s impression.

(iv)

(iii)

(v)

THE FURTHER YOU TRAVEL, THE MORE OPPORTUNITIES YOU’LL FIND. The leatherback turtle is a record-holding offshore investor.

They travel an astonishing 16 000km or more every year in search of a particular kind of jellyfish. It’s a long journey covering more than four times the distance across the continental USA. You see, they’ve known for millions of years something that Allan Gray and Orbis, our global asset management partner, feel very strongly about. That to be a successful investor you have to access opportunities beyond the 1% of the global equity market represented by South Africa. We realise that the choices out there can be overwhelming, so we’ve narrowed down the options to what we think are the most attractive offshore investment opportunities, in the Orbis Global Equity Fund. Needless to say, we’d be happy to invest on behalf of the leatherback turtle any day.

For more information call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za Allan Gray Unit Trust Management (RF) Proprietary Limited (the ‘Management Company’) is registered as a management company under the Collective Investment Schemes Control Act 45 of 2002. Allan Gray Proprietary Limited and the Management Company are authorised financial services providers and members of the Association for Savings & Investment SA (ASISA). Collective Investment Schemes in Securities (unit trusts or funds) are generally mediumto- long-term investments. The value of units may go down as well as up. Past performance is not necessarily a guide to future performance. The Management Company does not provide any guarantee regarding the capital or the performance of its unit trusts. In addition to stock fluctuations, movements in exchange rates may also cause the value of underlying international investments to go up or down. The Orbis Global Equity Fund invests in shares listed on investsa 29 stock markets around the world. Funds may be closed to new investments at any time in order for them to be managed according to their mandates. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending.

A schedule of fees, charges and maximum commissions is available on request from the Management Company.

Asset management

An overview of

investing in

bonds Fixed income investments are appropriate for any investor who has a particular income generating need.

Who are these asset classes appropriate for?

Fixed income investments are frequently only associated with long-dated government bonds, which is quite contrary to the truth.

These products comprise a wide variety of instruments of different characteristics. When fixed income fund managers talk about their market, it entails instruments from short-dated money market instruments to long-dated government bonds.

income is required, the allocation to fixed income assets would need to increase due to the need for certainty of cashflow at later stages in life. Retirees need more income to live from, and hence they need higher coupon/interest payments on a regular basis. As ever, the correct blend of assets will depend on the individual and a qualified and experienced financial adviser would be best positioned to assist here.

The pro and cons of investing in bonds:

The great thing about fixed income instruments is that they can be structured to suit individual needs, because all fixed instruments are different. For example, if an investor is looking for a short-term parking bay for cash, there are money market funds, or if the investor is seeking inflation protection, there are inflation linked bonds available. These are just two simple examples of how flexible fixed income instruments can be made to suit investor needs.

Should long-term investors consider fixed income funds?

For investors, it is always a prudent investment strategy to diversify assets across a variety of asset classes. This can clearly be seen in the way that balanced portfolios are constructed, with allocations to various asset classes and within the fixed income space there is diversification between cash, credit bonds, government bonds and so on.

For investors with a long-term investment horizon the allocation to fixed income instruments would be lower, but as the investor approaches the time when a regular, stable

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The pros: • Bonds carry a low risk of default due to the high-quality issuers of long-dated bonds. The government, state-owned enterprises (SOEs) and large banks are the majority of issuers in the bond market.

• Certainty of interest payments, because the coupons are fixed over the life of the bond.

• The government bond market is a large liquid market to trade in for managers of funds.

• Instruments can be structured to suit investor requirements, due to the individual nature of bonds and other fixed income instruments.

The cons: • The risk that inflation erodes the fixed returns of bonds.

• The risk that the SARB has to increase interest rates dramatically, which means bonds will suffer capital losses due to their fixed coupon nature.

• The risk of default in corporate bonds like we saw in African Bank Investments Limited (ABIL).

Did the sovereign bond crisis have an impact on the demand for SA bonds?

Due to the global nature of bond markets, a sovereign default or crisis will have a ripple effect through bond markets worldwide. But this initial knee-jerk reaction passes and the countries in good sovereign standing (no default) bond yields will revert toward more normal levels of pricing.

We have witnessed over the past few years that the demand for bonds globally has surged, and emerging markets like South Africa have also benefited from this flow of funds. Foreigners are currently holders of around 35 per cent of the issued bonds on the JSE. Secondly, due to the changing nature of bank capital regulations (Basel 3 Framework) we have witnessed that banks have become sizeable buyers of South African government and SOE bonds. The issue on the demand/supply dynamic in the South African bond market is not the demand side, but the supply from the government’s side to fund the ever-increasing current expenditure side of the budget.

Ian Scott, head of fixed income, PSG Asset Management

Barometer

HOT

NOT German investor confidence falls German investor confidence unexpectedly dropped after the ZEW Centre for European Economic Research index of investor and analyst expectations – which seeks to predict economic developments six months in advance – fell for the first time in six months to 53.3 in April, from 54.8 in March. Greece’s debt crisis, and its impact on Europe’s largest economy, was hinted at for the unexpected drop.

China’s economy grows at slowest rate in six years

SA top for tourism in Africa South Africa was ranked 48th out of 141 countries for the world’s most friendly countries. This is according to the World Economic Forum’s Travel and Tourism Competitiveness Report 2015, an in-depth analysis of the travel and tourism competitiveness of economics around the world. Citing rich natural and cultural resources, as well as a positive business environment, South Africa rose from its 64th position (out of 140 countries) in 2013 and ranks number one in sub-Saharan Africa, ahead of Seychelles and Mauritius.

US and SA to strengthen relations Following the Trade and Investment Framework Agreement (TIFA) Council meeting in Washington DC in April 2015, South Africa and the United States have agreed to strengthen and deepen their mutual trade and investment relations. The two countries signed a revised TIFA in 2012, which serves as a key platform to address shared concerns and boost joint trade and investment relations.

Rising number of dollar millionaires in SA The New World Wealth’s South Africa Wealth Report for 2015 revealed that since 2007, the number of dollar millionaires in South Africa has grown by nine per cent despite the depreciation of the rand against the US dollar.

It is estimated that the number of dollar millionaires in the country will grow by 19 per cent to reach 55 500 by 2017.

s y a w e Sid

As expected by economists, China’s economy grew 7.0 per cent in the first quarter of 2015. However, it remains its slowest rate in six years. The country’s economy grew 7.3 per cent on an annual basis in the fourth quarter of 2014. The National Bureau of Statistics reported that economic growth slowed to 1.3 per cent between January and March after seasonal adjustments, compared with growth of 1.5 per cent in the last quarter of 2014.

Gold price continues downward trend The GFMS Gold Survey 2015 forecasts the gold price to average $1 170/oz this year, thereby continuing a downward trend in the price from $1 266/oz in 2014, $1 411/oz in 2013, and $1 668.98/oz in 2012. According to the authors of the report, the debate in the market was how low the gold price could fall in a rising interest rate environment, and whether gold could trade at a level experienced before the onset of the global financial crisis in late 2008 ($600 to $700/oz).

Business confidence rises in April but below that of 2013 The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI) rose 0.8 index points from 89.1 in March 2015 to 89.9 in April 2015. However, the BCI is 2.7 index points lower than the 92.6 recorded in April last year.

It was reported by SACCI that the BCI in the first four months of the year suggests that the country’s business climate is heading towards a more dismal 2015 than 2014 if the present inclination continues.

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19

Economic commentary

The profits downturn

and its consequences Apart from a brief bounce in 2011, business profits growth has been disappointing during the current business cycle upswing.

W

e can use gross operating surplus (GOS) and net operating surplus, calculated from South Africa’s national accounts data, as handy proxies for assessing trends in business earnings.

Total gross operating surplus for all South African businesses advanced 7.2 per cent (current prices) in 2014. While this is a bit firmer than the 4.6 per cent recorded in 2013, it is markedly slower than the healthy double-digit growth achieved in the years before the recession of late 2008 and early 2009. GOS growth averaged 6.7 per cent from 2009 to 2014, which is nearly half the average growth rate in the five years to 2008 (13 per cent).

In part, the buoyant earnings momentum of the economy before the recession reflects strong profits growth among financial companies. At the time, credit extension to households was especially strong. Another material influence was the commodity export price boom that started in the late 1990s. This boosted domestic purchasing power, income and profits.

It is no surprise that, subsequently, earnings growth has been weak, given constrained output growth against the backdrop of a generally soft global economy. In recent years, the decline in the share of corporate profits in total GDP has been material. After increasing to 29.5 per cent of GDP by 2008, from 24.2 per cent in 1998, GOS declined to 27.2 per cent in 2014.

Sensible mix of taxes and promotion of savings

20 investsa

Accelerated economic growth

The flip-side of this development is the rising share of worker compensation in GDP, which reflects strong wage growth per worker rather than employment growth. From 1998 to 2007 wages declined from 14.6 per cent of GDP to 42.4 per cent. Labour productivity reflected its strongest growth in decades. However, by 2014 the share of wages increased to 45.6 per cent and labour productivity growth has been tepid.

In contrast, earnings growth of all companies listed on the Johannesburg Stock Exchange (JSE) was especially buoyant in recent years, averaging a healthy 14.6 per cent per year from 2011 to 2014. Admittedly, JSE earnings momentum is not strictly comparable with the ‘profits’ data calculated above. To derive a profits series from the national accounts data comparable with JSE earnings, the gross operating surplus data must be adjusted for consumption of fixed capital, net interest payments and tax. Further, it is estimated that more than 60 per cent of JSE-listed company earnings are exposed to the exchange rate, while the national accounts data includes listed and unlisted companies. Still, the contrast with the national accounts data for the general economy is striking.

The annual advance in JSE earnings has subsequently also weakened, slowing to just 0.9 per cent in May 2015. This largely reflects a 24.8 per cent fall in the earnings of Resources in May 2015. The downturn in export commodity prices was a shock for South Africa’s purchasing power, which has been

Funding for national development

Higher company earnings and investor returns

only partially negated by the fall in oil import prices. This is reflected in weak final domestic demand growth and a generally softer corporate profits environment.

The worrying result of these developments is the dearth of private sector fixed investment, which fell by 3.4 per cent in real terms in 2014. The marginal rate of return on capital is too low to entice corporations to invest, given the relatively high level of uncertainty. Although business confidence has improved since the first half of 2014, it remains depressed.

In turn, this implies GDP and employment growth are likely to remain short of what is required in the foreseeable future. While economic buoyancy is lacking, the National Treasury seems likely to be pressed into raising the tax burden further.

Because revenue growth is disappointing, the question currently asked is how much more tax can we collect from the tax base? What we should be asking is how to structure the tax regime to encourage stronger revenue growth.

To start, the government should consider a shift towards indirect taxes, which constrain consumption and promote saving, away from direct taxes. The latter, if too onerous, are a disincentive to work, savings and investment.

Arthur Kamp, investment economist, Sanlam Investments

Global economic commentary

Global capital markets:

outlook 2015 to 2016 W

ith global equity indices recently hitting new highs across the US, Europe and Asia, valuations are becoming more stretched.

However, with yields remaining at historic lows, there is little competition for investment monies. Bond investing at this stage remains a low-return strategy with considerable risks attached to it, with US and other interest rates set to rise over the next few years.

A US rate hike is expected by October this year. However, hikes will likely be in very small increments of 25 bps, and it will take many years to return to a historically ‘normal’ interest rate level. With the 10-year Treasury hovering around two per cent and equivalent German government bond rates at almost a quarter of this rate, investors have few alternatives beyond equities.

The European Central Bank’s $60 billion quantitative easing programme has helped push up European equity markets by almost 20 per cent year to date (in euros). The weaker euro is a boost for corporates in the Eurozone as the raging US dollar makes US exports less competitive. European Central Bank president Mario Draghi has confirmed his willingness to maintain quantitative easing until inflation approximates two per cent. Consequently, we expect further gains in European equities in 2015 to 2016. We expect global economic growth to gradually accelerate in 2015 and 2016, helped by the Eurozone finally pulling more of its weight.

The US economy remains the most robust despite a weaker than expected first quarter GDP figure, which was affected by bad winter weather. Jobless claims and the unemployment rate are both at almost decade lows. The shale oil and gas revolution in the US has helped power the economy, accounting for almost 25 per cent of all US capital expenditure currently. While lower oil prices driven by the Saudis will slow this momentum, oil at $50 per barrel is effectively a sizable tax break for a US economy dominated by consumer spending.

Since GDP growth remains muted, the Fed has no desire to harm the housing market, which remains one of the leading engines of US

economic activity. Consequently, an increase in interest rates will be done with significant caution. Fed chairman Janet Yellen has paid much attention to the state of the labour market and is keenly aware that housing is the main asset held by working Americans.

Instability remains in Russia, Iraq, Syria and the Ukraine, which could rattle markets later this year. Despite a recent bailout extension, Greece and international creditors remain at odds. Should Greece continue to fight further austerity initiatives, it will become a larger default risk.

experienced during 2013-2014. So we expect further gains as global economic growth rises, which should help many emerging market exporters. The threat of higher US interest rates and a possible outflow of portfolio assets back into US bonds and treasuries will put a lid on excessive emerging market gains. However, with relatively low valuations, the developing world remains a good bet for equity exposure.

Although there is the possibility of a correction in US equities, the consensus for now is for the market to slowly grind higher, albeit with increased volatility due to the higher valuations now experienced.

Brazil and Russia remain in recession.

However, on balance, emerging markets continue to outpace developed markets, and China (comprising 12 per cent of the global economy) is expected to grow by at least 6.7 per cent this year. China’s stock market has bounced back from very low levels seen earlier in the year. The major pessimism previously apparent in China is now largely removed from its stock market, which remains mainly closed to outsiders.

Between March and the end of April, the broad MSCI Emerging Markets Index gained almost 15 per cent from its recent lows.

However, emerging markets still have some way to go to make up for their lack of gains

Anthony Ginsberg, MD, GinsGlobal Index Funds

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Industry associations

FPI supports life-long learning through its

CPD programmes

By Vivienne Fouché

ongoing understanding of changing regulatory and compliance requirements.

CPD programmes could include face-to-face events and conferences (such as the recent PSG 2015 Conference covered elsewhere in this issue), webinars and online courses.

to learn and share knowledge and different points of view. We also hold the FPI Annual Refresher Course from October to November every year. In addition, every month we run sessions where we invite different guest speakers to talk on the topics that we have pre-selected – our website (www.fpi.co.za) offers more information on such events.

Committed to CPD for over three decades The Financial Planning Institute of Southern Africa (FPI) has long been committed to providing lifelong learning and development through its CPD programmes – for over 30 years, in fact. Godfrey Nti, FPI CEO says, “At FPI, we see CPD as being vitally important for financial planners to engage in, to make sure they are up to date with key developments and requirements. It’s a life-long learning process for our professionals and its importance cannot be emphasised enough.

“We value our members who maintain their CPD requirements because South African consumers deserve to deal with professionals, with high standards, for their financial planning needs. Financial planners must keep up to speed with changes in legislation and best practice if they want to be considered a professional. For example, right now the Financial Services Board (FSB) is looking at implementing CPD for the entire financial services industry. This is a good thing and we are in close discussions with the FSB.”

C

ontinuous Professional Development (CPD) is essential for professionals to make sure they are informed of ongoing changes within their particular industry. CPD helps individuals to keep up to date with the necessary skills and knowledge to remain competent in their profession. It is also imperative to cultivate an

Nti says FPI accredits and approves CPD programmes for its accredited organisations as well as other programmes that might be offered in their own right by different financial services companies.

“The FPI Professionals Convention in June is one of the many platforms that offer an excellent opportunity for financial professionals

“As part of FPI’s CPD Policy, not only can our members meet the CPD requirements by attending events but the Institute also recognises members who volunteer their time by serving on FPI committees, pro bono work, reading approved CPD publications as well as authorship to name a few.”

Nti continues, “Ultimately we want the public to see the value of financial planners being true professionals. As the industry becomes more professional, this can only be good for all South African consumers. FPI and its commitment to CPD empowers our members and helps them to adapt to an ever-changing environment. CPD is an approach to life-long learning, not a tick-box approach.”

Godfrey Nti’s own approach to life-long learning “I have been at FPI for nine years and CEO for six of the nine years,” he says. “I have a great interest in life-long learning and doing something for the greater good. I am an accountant by profession and joined FPI as a financial manager.

“At this stage of my life, I find a great deal of satisfaction when I feel that I’m making a difference to society and touching people’s lives. FPI, as an institution, benefits the public and this gives me enormous satisfaction. We are going out there to do good – I wake up every day thinking that we as FPI and its members are helping change lives for the better and this is what really keeps me going.”

The Financial Planning Institute of Southern Africa (FPI) is a non-profit, South African Qualifications Authority (SAQA) recognised professional body and one of the founding members of the international Financial Planning Standards Board Ltd (FPSB). It exists to improve the level of professionalism in the financial planning industry and positively influence the quality of advice delivered by its members. FPI is the only institution in Southern Africa able to offer the CFP® certification, which assures that the financial planning professional has met stringent qualification and competency requirements and adheres to a code of ethics and professional standards.

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Investment strategy

Payers and Growers®

delivering a sustainable income stream

with common characteristics. The Payers and Growers® equities are stable companies with long and stable dividend paying track records and clear dividend policies. They tend to be prominent players in their selected industries, display strong balance sheets and produce high-quality earnings streams that are hedged against inflation through pricing power. The fund is fully invested in equities (40 per cent) on a consistent basis.

We prefer listed property securities with higher than market yields and above inflation growth rates so that over the medium term, both income and capital values can be sustained in real terms (in other words, after adjusting for inflation). The fund holds up to 25 per cent in listed property.

Much is written about the suitability and sustainability of living annuities for the average retired person.

While most retirees have selected living annuities over the last decade, we are increasingly being told that guaranteed annuities are a better bet, as they remove the longevity risk from the retiree.

W

e would argue that in the absence of investment products specifically tailored to address the sustainability of the portfolio supporting a living annuity, a guaranteed annuity may well be the preferred option. The asset management industry globally has focused largely on savings and capital accumulation products. However, it has done a poor job in creating solutions that are structured to address the unique circumstances and risks that occur once capital decumulation (drawdown) begins.

The ideal living annuity portfolio needs to: • Produce a high level of reliable income to pay the monthly annuity.

• Deliver a growing income stream so the annuity payments can keep pace with the effects of inflation throughout retirement.

• Produce capital growth over the long term to protect the principle sum against inflation.

The Grindrod Payers and Growers® portfolio range has been created with pre- and postretirement fund investors in mind. We call these

‘Income Efficient Portfolios.’ The Grindrod Stable Growth Fund portfolio strategy is income efficient as it specifically aims to provide living annuity investors with portfolio attributes that align with the unique requirements of living annuities. The Grindrod Stable Growth Fund produces high levels of reliable income. The income stream has historically grown above inflation over time, as have capital values.

They key requirement of an Income Efficient Portfolio is to sustain an asset allocation that remains stable over time. This means maintaining exposure to asset classes like equities and listed property that may well display short-term volatility but, more importantly, also have the ability to deliver above inflation returns in the medium to long term. This is precisely what a living annuity portfolio demands. Conversely, exposures to low and fixed yield investments like cash and nominal bonds are kept to a minimum, as neither of these asset classes are able to beat or grow at levels above inflation over time.

Within the equity and listed property asset classes, our focus is on very specific securities

From a risk management perspective, the equity and listed portfolio securities are equally weighted. Equal weighting of our investment ideas holds the dual benefit of not being over-exposed to any single corporation or income stream so that any dividend missed does not prejudice the investor’s outcome.

Similarly, equal weighting provides the benefit of disciplined rebalancing of holdings, which reduces portfolio turnover and, therefore, decreases transaction costs.

The fund currently delivers a gross yield (annual income as a percentage of capital) of around 6.5 per cent. This yield is higher than money market yields, so it meets the requirement of a high-level of initial income.

More importantly, we expect this income to grow by around 6.8 per cent per annum for the next three years. This means our retired investors’ income is not stagnant as it would be if it was invested in cash or government bonds, but will grow over time. The retired persons’ income will keep pace with, and hopefully beat, inflation over time.

Investors in living annuities need to carefully consider the portfolio strategy they employ in their living annuity. Income Efficient Portfolios like the Grindrod Stable Growth Fund are specifically designed for this purpose.

Paul Stewart, head: fund management, Grindrod Asset Management

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Investment decisions

Surveys

under the microscope When making investment decisions, there are many measurement options for evaluating funds and portfolio managers.

However, it is probably fair to say that historic performance is still the most well-known and widely used measure for decision-making.

W

e would argue that, despite its obvious retrospective constraints and factsheets appropriately warning that ‘past performance is no indication of future performance’, the performance ranking on surveys continue to dictate flows.

24 investsa

The graph shows the net flows (excluding re-investments) in each calendar year since 2006 to 2014. The universe is, however, split between the preceding year’s top quartile and bottom quartile performers in the sector.

However, given all the factors that play a role in investment outcomes, one has to consider whether there are more encompassing measures to take into account before deciding on an investment route.

A quantitative assessment, on the other hand, will inevitably relate to some sort of historic performance. This takes the subjective constraint out of the measurement and is objective. It is, therefore, easy to make a relative comparison on a consistent basis. The disadvantage lies in its backwards-looking nature – it is based on historic results, and there is no guarantee that this could be repeated in future.

The importance of surveys

Why do surveys have so much power in directing decision-making?

When making an investment decision, one would typically look at both qualitative and quantitative factors in assessing the appropriateness of a fund or portfolio.

Qualitative factors typically measure elements such as the strength of a fund’s management team, the consistency of the philosophy and the durability of the investment process.

However, the inherent problem with this type of evaluation is that it relies on subjective opinion and judgment. It is, therefore, difficult to make consistent and repeatable relative decisions.

However, the shortcomings of surveys are not enough reason to get rid of them, and they still fulfil an important role. Mainly, surveys are an excellent source of reference for both intermediated, as well as institutional investors of all the funds or portfolios that are available in a specific universe. This, however, means that surveys need to be as comprehensive as possible, and there should be a clear set of rules determining when or why funds are included or excluded from a survey.

The other big benefit of surveys is that they typically group like-minded investments

Some institutional surveys take these groupings further, and compare, for example, equity managers according to their benchmark-sensitivity. However, this characterisation decision is currently at the discretion of the portfolio manager, so there needs to be consistency rules to appropriately measure likeminded investment options.

Surveys are not perfect One of the problems with selecting managers based on period specific returns (i.e. rankings based on the last one-, three- and five-years) is that you will most likely end up with a portfolio that is not diversified, as all the managers that do well over a certain period would typically have had the same investment style. For example, after the financial crisis, a lot of money was allocated to investment styles with a lower drawdown, so investors ended up with a portfolio that might have been skewed to more defensive portfolios with less sensitivity to growthassets, meaning you might have missed out on the returns when the recovery came.

The biggest drawback to surveys is that they typically rank managers based on specific periodic returns, which means the results are essentially dependent on where the start and end points are for the comparison. Therefore it does not give you an indication of what happened ‘in between’ these two points, and can also easily make for skewed results, especially when market conditions have been extremely volatile. The ‘base effect’ in calculating the return can have a significant impact even when the performance is measured over a long time period.

For example, in the period leading up to the global financial crisis (2007 – May 2008), value or contrarian managers had a very tough relative performance period. However, during the financial crisis they generally fared well and subsequently came out highly in performance ranking tables for a number of years, due to the low base from which their good performance was measured. Similarly, one might very well see value managers top the rankings again three years from now, given their current relative poor performance.

Therefore, in order to help with making an informed investment decision, surveys should ideally reflect how this performance was obtained. For this, there needs to be some measure of either consistency or risk.

Figure 1: Top performers in one year receive more flows the next year Net flows of funds in the ASISA Domestic General Equity sector 10 000 8 000 6 000 Net flows in R’millions

together. These groupings are usually determined by geographic, asset or sector allocation limits. Therefore, even less sophisticated investors would be able to compare like-minded funds (at least from a broad asset composition perspective).

4 000 2 000 0 -2 000 -4 000 -6 000 -8 000

2006

2007

2008

2009

Topquality quartile performers theprevious previousyear year Top performers the

2010

2011

2012

2013

2014

Bottomquartile quartileperformers performersthe theprevious previousyear year Bottom

Source: MorningstarDirect; ASISA

Measuring risk, volatility Once again, this adds complexity to (and can skew) the outcome of every survey. For example, some managers are ranked according to standard deviation (the most widely-used measure of volatility), while others might be ranked on risk-adjusted performance (where the performance is taken into account relative to the standard deviation or volatility of the underlying fund). Once this is taken into account, one starts to get a sense of what happened between the start and end point.

However, one has to question whether absolute volatility or standard deviation is the most appropriate measure. Most of us as investors are not worried about upside volatility; the biggest concern is volatility on the downside. So, instead of measuring standard deviation, should downside volatility not be considered in terms of ranking the managers?

Conversely, if a manager outperforms by such an extent on the upside that it dwarfs the downside volatility, why should he or she get penalised for having a larger drawdown?

Ranking managers according to risk-adjusted measures will skew the results, based on the specific philosophies, or investment approaches, that typically does well in specific periods. Managers with an absolute mindset in terms of managing funds might not achieve the highest returns, but will emerge at the top if the ranking takes into account some measure of absolute downside volatility.

Enhanced index trackers will give you a return fairly close to that of the market, but will typically rank highly when relative risk measure, such as tracking error, is used for ranking purposes.

What should be remembered with any ranking, is that it must be clear exactly which measures have been used, so that the investor can make

a well-informed decision as to what strategy is appropriate for their specific needs.

For example, rankings in terms of tracking error means nothing for an investor that is highly sensitive to drawdowns; rather, ranking according to drawdown statistics is more useful. Similarly, a tracking error ranking is important for someone who wants to select an equity manager to give consistent performance relative to a market-related index.

Surveys can work better For surveys to be truly supportive in terms of the decision-making process in guiding the quantitative assessment of managers, the variables need to be expanded – it cannot just focus on performance. Other measures such as ranking funds on relative/absolute/downside risk, consistency, etc. should also be considered.

Unfortunately, this means that surveys will become immensely large and so comprehensive that it might overwhelm end investors in terms of information. Also, the end investor needs to be educated to understand what these measures mean, to make a well-informed decision which will meet their specific needs, or alternatively getting a good investment advisor.

Louis Niemand, investment director, Investec Asset Management

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Structured products

Structured

products

101 Structured products have soared in popularity globally over the past decade. Where it used to be the exclusive domain of wealthy investors and institutions, it is now available to everyday retail investors through financial advisers, thanks to some new product innovations from Itransact.

M

uch like the exchange traded fund (ETF) market, it is only a matter of time before this revolutionary way of investing for retail investors also goes main stream in South Africa.

Here are some key learnings for financial advisers derived from currently available structured products from Investec, Absa Capital, Societe Generale and BNP Paribas who are all best of breed and highly experienced structured product providers to the Itransact Exchange Traded Products Investment Platform for independent financial advisors.

Company

Societe Generale

Index

Product overview

Top40

Capture the growth when the Index is in a rising trend (up to a maximum return of 9.00 per cent per month), and avoid 100% losses by investing in a hypothetical deposit yielding 9.00 per cent p.a. fixed interest rate, when the Index is in a falling trend.

Best Global A Participation Level estimated at 140 per cent of the BNP Paribas Brands optimised basket performance payable at maturity.

Basket** Designed to lock in and protect annual returns of the index Investec Top40 growth up to 20 per cent per annum.

Absa Investors will receive full participation in any upside growth, Top40 Capital or some positive returns even if markets fall.

Capital Protection

Term

Min Investment Amount

5 Years R10 000

0.75%

100% up to a barrier of 5 Years R10 000 -50% drop in the market

0.75%

100%

5 Years R10 000

0.75%

100% up to a barrier of 5 Years R10 000 -40% drop in the market

0.75%

*Based on current available products. Includes platform administration fees, endowment wrapper fee and VAT. Excludes financial advice fees. ** Apple, Google, IBM, Walt Disney and sixteen other well-known global brands.

Source: Itransact 2015

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Total Costs Per Annum*

Explaining the mechanics

Investment term, fees and amounts

Structured products are listed on the JSE. Investors can take comfort that structured products are well-regulated and offer other advantages such as daily liquidity, transparency and accessibility. In fact, structured products have dual regulation since they are also governed by the FSB, making them one of the most wellregulated product types in South Africa.

The "iStructure" range of retail structured products available from Itransact are wrapped in a 5 year endowment for financial planning purposes and attract a total administration fee of 0.75 per cent per annum which is made up of: • Platform administration fees 0.35 per cent per annum, including Vat (may be lower for large amounts) • Endowment wrapper fees 0.40 per cent per annum (No Vat on endowment wrapper)

Structured products typically provide a defined return based on a formula which tracks the return of an index, such as the Top 40 index.

In addition, structured products contain derivatives that provide potential enhanced returns, (gearing) underpinned by varying levels of capital protection depending on the product type. Investors typically give up the dividend stream of the listed security in return for these benefits.

One cannot be blamed for sitting upright when hearing the word ‘derivative’, but the truth is that we are all exposed to derivatives on a daily basis. A simple example is your personal bank account where derivatives such as swaps, are employed by the bank on a daily basis to derive the interest rates applicable to your account.

• Investors who have already made good gains on the markets and wish to protect those gains while still continuing to be exposed to the market.

• Investors who are retiring and want to protect their gains.

• Investors who have medium term investment goals such as saving for children’s university education, overseas holiday or paying off their bond.

Investment minimums start at as low as R10 000 making structured products highly accessible to retail investors.

Risk Investors are required to understand and accept the creditworthiness of the issuing bank as rated by global rating agencies such as Fitch and Moody’s.

Who should own a structured product?

Some practical uses for structured products include: • Investors who require exposure to the market, but want their capital protected.

Lance Solms director: business development Itransact

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Profile

Roland Cooper Head of the Credit Rating Services Department, Financial Services Board (FSB) Please provide a brief outline of your responsibilities

What would you describe as your greatest challenges at work?

It entails taking on the responsibility for the supervision and oversight of registered credit rating agencies operating in South Africa. Credit rating agencies play a vital role in financial markets. They issue statements on the creditworthiness and quality of entities and debt instruments which are used by investors when analysing and making investment decisions. It is expected that the agencies provide consistent, high quality, independently assessed and objective credit ratings.

Working with the various credit rating agencies and keeping up-to-date with international developments are always a challenge. The ongoing challenge of meeting international requirements and expectations has assisted the FSB in drafting world-class legislation. The effects of the financial crisis are still with us and having remedies in place to prevent another global financial market catastrophe is what we strive for.

These agencies are required to adhere to the standards and provisions of the Credit Rating Services Act. The standards provided in the Act are in alignment with accepted international standards for best practice in regulating credit rating agencies.

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

I am very passionate about the credit rating industry and the quality information produced by them about countries and various entities worldwide. Reading reports published by the global agencies is educational and provides good insight into the world economy, and how well or poorly countries are doing economically post the financial meltdown.

Working within the international regulatory environment and keeping abreast of the continuous developments in this area are an ongoing challenge. Having and maintaining market integrity and efficiency is our reward.

What personal qualities lend themselves to making a success of your position?

It is important to want to contribute to the process of reforming the Financial Market’s responsibilities and to understand the limitations of the regulatory role.

At the same time, you need stamina and staying power to see the benefits of what can often be a lengthy process of implementing the reforms. You need passion and commitment for what you are doing.

What would you describe as being your greatest personal success to date?

There was a great deal of sacrifice made by my family and by myself in order for me to be successful in my studies and in my career.

Completing a Masters in Business Leadership opened up a whole new

world of continuous learning and the tremendous opportunities offered to me post earning the qualification have made it all worthwhile.

This has been financially rewarding and has also afforded me the opportunity of being a key part of developing and enhancing oversight of world financial markets.

If you had R100 000 to invest, what would you do with it?

I would use it as a deposit on a habitable property, rent the unit out to a good tenant and earn an increasing monthly income which in turn can be reinvested in one of the higher yielding unit trusts. There is also capital appreciation on the investment.

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

Family is important, and I spend quality time with my wife and children. We love going away to quiet, out of the way places, be it the mountains, the coast or out in the bush. I do my bit for the community and have served on the school governing bodies of my children’s schools.

My work schedule is very busy and requires long hours to complete. I love what I do and find it to be fulfilling. I make sure I contribute as best I can whenever the opportunity arises.

Balancing my personal life and my work responsibilities has not always been easy but I make the effort and commitment to both and manage them to ensure that work does not eat into my family time and vice versa.

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PSG conference

Grow

with the flow

The 17th PSG conference was held at Sun City during May, themed ‘Grow with the flow’. Presentations and information sessions took place over two days and featured individual PSG leaders, motivational speakers and panel discussions for each strategic division.

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T

he first day began with an overview and strategy outline from Francois Gouws, CEO, PSG Konsult. This was followed by an economic overview from Dawie Klopper, Investment Economist with PSG Wealth. Finally, Dan Hugo, CE PSG Distribution, gave his insights on how, in order to chase the ‘flow’, advisers need to continue looking at opportunities from servicing existing clients as well as finding new clients in order for their businesses to constantly keep on growing.

By Vivienne Fouché

Insure, facilitated by Derek Watts; Session 2 from PSG Wealth, facilitated by Jeremy Maggs; and Session 3 from PSG Asset Management, facilitated by Alec Hogg. Thereafter the delegates were treated to a presentation from Jannie Mouton, chairman of the PSG Group, as well as a motivational talk from former Springbok rugby coach Nick Mallett.

The evening ended with the annual Gala and Awards evening.

Francois Gouws, CEO PSG Konsult

The second day began with a presentation from American Michael Falk, of the Focus Consulting Group. Day two also featured three panel discussions: Session 1 from PSG

Acknowledging that PSG is a growing firm, Francois Gouws said that the business had grown significantly since 2005, with headline

From left to right: Francois Gouws, Michael Falk, Nick Mallett and Jannie Mouton

• The rand would strengthen against the euro – correctly foreseen by Klopper • European equities would do well – correctly foreseen • There would be more volatility in equity markets – correctly foreseen • US bond yields surprised to the downside – not foreseen within the time frame in question.

From left to right: Francois Gouws and Riaan Strydom, Financial Planner of the Year, PSG Wealth Port Elizabeth need to do the right thing. The intention going forward is that employment equity will start being more strongly reflected in the business.

There are clear changes and trends coming into the market. These need to be addressed in a very specific way.”

Touching on the bull equity market, Gouws said, “We know that this bull market has been running for almost seven years. Investing history tells us that roughly every seven years, something happens. Although it is hard to predict where the next bubble will come from, the longer the cycle elongates, the more severe the subsequent adjustment needs to be, so we need to position the firm.

“However, I think we have been identifying and looking at these challenges for a long time and there are plans in place to address these issues.

We are a confident, capable organisation that can compete with the very best. We grow somewhere between three and five per cent every quarter.” earnings up by a compounded annual growth rate of 41 per cent going back 10 years. The business now spans close to 200 offices with over 650 advisers.

“Generally we do the right thing, make the right decisions and deliver value for our shareholders,” he commented. “We have a high-quality advisory force. Three years ago, we said we should consider the currency depreciation and investing offshore, and this has been supported by what the advisers have done.”

Gouws touched on employment equity with these words: "We are a SA firm and we

Dawie Klopper, Investment Economist, PSG Wealth Dawie Klopper gave his presentation in the form of an interesting question and answer session with renowned economic journalist Alec Hogg, during which they looked at macroeconomic variables and also compared Klopper’s economic predictions of 2014 with how events had actually played out.

Overall, Alec Hogg gave him credit in this regard for getting three out of four right (within a time frame of roughly a year). The ‘scorecard’ was as follows:

“We’ll give you three out of four,” said Alec Hogg with a smile, “which is not bad!”

Later in the presentation, Hogg asked, “Did anything surprise you?” to which Klopper answered that the oil price had surprised, as well as the move in US bonds.

“The decline in the oil price is a game changer and the extent of the decline was a surprise.

Of course, it’s a fantastic thing for the world’s consumers to support their spending patterns, and this is good for economic growth. I was also surprised by the move in US government bonds and the extent of deflation taking hold in Europe and in the world. The current low inflation levels need to be solved. Deflation is not good for anyone.”

On the local front, Klopper commented, “South Africa is still struggling. Commodities are under pressure because of what is happening in China, and this is having an effect on South Africa.

Our trade balance is struggling as a result, and our balance on the current account is under pressure. We are not exporting as much as we could or should. The P:E ratio on our market is expensive, and the portfolio construction in this environment becomes critical.”

Asked by Alec Hogg whether he thought South Africa was at a crossroads, Klopper answered, “Yes, I believe we are. We are facing issues such as our unreliable electricity supply, declining confidence in our leadership, strikes, and our low rand/dollar/euro exchange rates.

Privatising Eskom could be the way to go. I’m quite happy with Brian Molefe having been appointed as acting Eskom CEO. I think he is a very good choice and that he could make a difference, but he needs time.

"As far as Eskom is concerned, consumers are aware that we have a problem. Now

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Francois Gouws and Brian van Rensburg from PSG Namibia – Stockbroker of the Year

PSG advisers and conference guests

Prof. Piet Naudé, Director: University of Stellenbosch Business School received a standing ovation after his inspiring speech at the Gala Dinner

Left to right: Francois Gouws, Jannie Mouton, Willem Theron and Piet Mouton

the government needs to admit it as well.

Nonetheless, there are still pockets of excellence in South Africa, and these are excellent examples of investment opportunities that remain despite the negatives. For example, I find hope in the election of Mmusi Maimane as the new DA leader and believe that this could be good for investments. He is still young, and he will develop significantly over the next five years.”

Dan Hugo, CEO Distribution Harking back to the theme of ‘Grow with the flow,’ Dan Hugo opened by saying, “Flow is the new word and what we are chasing going forward. In order to keep growing constantly, we need new funds from existing clients as well as an ongoing need for new clients. Among other factors, ‘flow’ is dictated by economic growth, inflation, equity markets, the battle for financial adviser distribution and regulation.

“As far as regulations are concerned, we have always been early adopters of legislation. TCF has been implemented by the industry and adopted by PSG; POPI’s implementation is

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Great coffee mugs and beans from the Liberty stand

still being confirmed by the industry and is a work in progress at PSG, and as far as RDR is concerned, it is in draft form in the industry and we at PSG are providing regular opinion and input.”

change and use the PSG brand and resources effectively.”

Hugo gave some very useful input which he termed guidance from PSG’s top growers, as follows: “Take time to think, be patient, mine your actual database, stick to the basics and constantly enhance your expertise. Don’t neglect your personal relationship with your clients, your commitment to your staff, the value of a longterm view, investing in your practice, constantly growing your expertise, the value of simplicity and staying relevant.”

The second day began with a presentation from Michael Falk, Partner, Focus Consulting Group (USA). His presentation was entitled ‘Robo Robo, your client’s boats… huh?’

Mentioning that PSG had interviewed 24 Wealth advisers who, between them, represented six per cent of the total Wealth Flows, he gave some recommendations from these advisers as follows: “Conduct reviews with all your clients at least annually and offer them holistic advice.

Use the support you have from the firm to stimulate growth, maximise your time with your clients and ensure that you have an effective administration process. Be early adopters of

Michael Falk, Focus Consulting Group (USA)

Naturally, with a title like that, the room was mesmerised as he touched on the issue of robo-advisers (not here in South Africa yet, but definitely taking off in the US and Canada, with existing ramifications) as well as how financial advisers can deliver greater service to their clients.

He asked, “Are you engaged in what your clients want to talk about? Are you listening to your clients? This is an important issue for the work that all of us do when it pertains to investments, because how we think about investments is emotional. For investors, reaching their goals is more important than beating a benchmark. It’s about your clients’ needs and

PSG Wealth Pretoria East: Office of the Year

wants, and helping them to save the money necessary for when life happens.”

Jannie Mouton, chairman of the PSG Group The founder and chairman of the PSG Group held the audience in the palm of his hand as he discussed the ‘20 Lessons I have learned since I was fired in 1995’. His presentation was a highlight for many of the delegates, who had been looking forward to his words of wit and wisdom since first registering for the PSG conference.

Mouton said, “Being fired was a defining moment in my life. It was the best thing that could ever have happened to me but at the time I was obviously a worried man.”

He proceeded to outline 20 lessons that he had learned since that time. Some of the highlights included the following: read and study, particularly business books and stories of winners, to help you see more opportunities in life; analyse yourself with an honest assessment of your strong and weak points; formulate and then execute your own plan; acknowledge the importance of friends and family; compare yourself with selected blue chips; communicate honestly and transparently with the outside world; strive to be a long-term investor; seize opportunities; believe in yourself and give back to society.

Nick Mallett, former Springbok rugby coach After lunch, Nick Mallett, who really needed no introductions in the room, gave a stellar and extremely funny presentation as he shared some interesting and moving stories from his career as an international rugby coach, and also related back some themes to the world of business. “Set the right targets for yourself,” he

Portfolio Manager of the Year: Johan Borcherds, PSG Wealth Pretoria East

Francois Gouws and Schalk Roelofse from PSG Wealth: Nelspruit – Best increase in production

advised. “You’ve got to reach certain achievable goals first in order to reach extraordinary goals later. And have fun in the process!”

The evening ended with the annual Gala and Awards evening, with prizes being handed out for the winners across a number of categories, and featured an uplifting commentary from guest speaker Professor Piet Naude, director of the University of Stellenbosch Business School.

Dawie Klopper, Investment Economis t, PSG Wealth and Alec Hogg

PSG 2015 award winners • Best supportive Professional Firm of the Year: Grant Clinton and Associates • Newcomer of the Year: Schalk Louw (PSG Wealth: Old Oak) • Best increase in production: Schalk Roelofse (PSG Wealth: Nelspruit) • Best Healthcare practice: Ann Havinga, Sylvester Appasamy & Tinus Havinga (PSG Wealth Midlands: Healthcare) • Employee Benefits practice of the Year: Neels & Nerine Brink (PSG Wealth: Route 21) • Short-term practice of the Year: Riana Wiese (PSG Insure: Meesterplan) • Stockbroker of the Year: Brian van Rensburg (PSG Namibia) • Financial planner of the Year: Riaan Strydom (PSG Wealth: Port Elizabeth) • Portfolio Manager of the Year: Johan Borcherds (PSG Wealth: Pretoria East) • Office of the Year: PSG Wealth Pretoria East

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Practive management

Managed

estate planning for the modern wealthy family

PRICE 99 00 9 R 3 3

The successful transfer of wealth from generation to generation is dependent on a proactive process and cooperation between succeeding generations.

T

he fiduciary industry has largely reduced this process to a passive process of ‘estate planning’ where the real work only starts after the death of a person. Basic estate planning is not good enough for high and ultra-high net worth families with substantial multi-generational and multi-jurisdictional wealth.

We prefer to talk to our clients about ‘estate management’ and it helps to think of the process as a ‘living relay’ in which wealth is carried and passed on like a baton between relay runners. The more momentum is preserved in the handover process, the better the chance of successfully retaining and growing the wealth from generation to generation.

The wealth ‘baton’ consists of four parts, each with its own set of legal and tax rules and rules of transfer. Estate planning is about making sure that the relevant legal and tax formalities are in place for all four parts and that the rules of transfer have been documented and are being safeguarded.

The four parts we examine are: 1.

2.

3.

4.

Trust assets held for the benefit of the client’s descendants The client’s estate assets Their business assets Their pension assets.

Estate management, as opposed to estate planning, is a process of maintaining a level of constant and proactive readiness for the transfer of the baton. It needs proactive

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collaboration between specialist advisers, the ‘implementation team’ and the client.

In the spirit of proactive collaboration, these are the types of question we ask our clients and encourage them to ask us: • Should I not meet the people who will be administering my deceased estate prior to my death?

• Should I not get informed when those I have met have moved to a different business?

• Should I not see them once a year, to update and reset the plan?

• Why can’t I get a pro-forma liquidation and distribution account prior to my death and have that maintained and updated on a regular basis during my life?

• Why are the persons who are entrusted to actually execute my wishes not part of the planning team?

• How can I be sure that what I have agreed with the advisers can practically be fulfilled after my death?

• Are the people who will be administering my estate actually part of the business which did the planning or will my estate be referred into a volume-driven estates department of a large institution with a ‘kickback’ agreed from the executor’s fees?

Accountability improves professional services and invites caution and diligence from advisors. I would not entrust a surgeon I had not met and witnessed make the diagnosis and plan the procedure. A surgeon executing on the ‘plan’ of a GP is unheard of. So why would one do that with the tricky process of transferring wealth? Modern specialists are

required to explain the procedure to patients in order to obtain informed consent, and that includes sharing possible negative outcomes without any sugar coating.

Many estate planning mistakes are discovered by the estate administrators after the client’s death. Estate planners who bury their mistakes and leave them to emerge in the subsequent deceased estate administration process (where administrators can just shrug off responsibility for any bad planning done) are doing no one any favours.

That approach is simply not good enough for wealth that transfers over generations. Remember that a relay is not about the baton itself, it's about the running with the baton and being involved in the active transfer of it. Those who have plenty left over to transfer need a higher level of planning than those who will consume most after a life of working and retiring. This differentiates high and ultra high net worth individuals from the rest of the population.

Louis Venter, head of private clients (SA), Maitland

Retirement

Why it remains critical to consolidate into

umbrella fund structures The shift from stand-alone retirement funds towards umbrella structures continues to be a key theme shaping the evolving retirement fund industry in South Africa.

T

he shift is being driven on two fronts: by the government through retirement reform proposals and also by the industry, as service providers and funds seek to align themselves and stay competitive.

The current environment necessitates a more customer-centric, simplified and cost-effective approach to retirement funding.

It is clear that over the last few years, fewer employers have chosen to set up their own funds and have instead opted for the simplicity and often cost efficiency provided by umbrella type schemes, along with reduced fiduciary responsibility for the employer.

Many existing stand-alone funds of varying sizes are also opting to transfer to umbrella funds, including some very large employers.

The Sanlam Benchmark Survey of 2014 also indicates that 55 per cent of standalone fund boards stated that they had considered a transfer to an umbrella fund structure, a significant increase from the 44 per cent in 2013.

Umbrella funds, backed by established retirement fund administrators, provide expertise and best-practice management at a competitive price, by capitalising on economies of scale. This allows the funds to decrease per-member costs as they gain in size, while simultaneously providing true value to members through proper governance structures and innovative products.

These factors were highlighted in the 2014 PricewaterhouseCoopers’ Trustee Retirement Fund Strategic Matters and Remuneration report, which surveyed 183 retirement funds, including 31 umbrella and 116 standalone funds. According to the results, 76 per cent of respondents say there is scope for simplification and cost reduction in their funds, compared to 68 per cent in the 2012 survey.

Costs of umbrella funds have reduced significantly over the past three years. The above survey reflects that members on average contribute roughly one per cent of pensionable salary more towards retirement than three years ago. This is mostly due to a reduction in costs. The average member now saves 10.5 per cent of pensionable salary, compared to 9.5 per cent in 2011. The survey also indicates that average umbrella fund administration costs remain lower than those for standalone funds.

Furthermore, 20 per cent of respondents say they favour moving to umbrella funds as a key costreduction strategy, up from 13 per cent in 2012.

In the 2015 Budget Review, the Minister of Finance advised that the next draft paper on the Retirement Fund Reform series can be

expected in the middle of 2015. The paper will provide an indication of the extent to which government intends to cap costs on retirement funds. Umbrella funds are expected to be in a good position compared to other retirement vehicles, due to the costs already being relatively low.

Having an umbrella participation in place frees up employers to focus on their core businesses. By moving to an umbrella fund, employers and members get access to professional and experienced trustees that they may not easily have had access to in a standalone fund. Regulation of minimum levels of trustee qualification and knowledge on retirement funds is expected in the near future.

This responsibility lies with the professional trustees in the umbrella fund and does not affect the employer or employee to the same extent as it would in stand-alone funds.

This trend towards umbrella structures has signalled that there is a desire to simplify retirement fund solutions for both employers and contributing members. The Financial Services Board expressed a similar desire in the Treating Customers Fairly principles.

Insurers are increasingly focusing their strategy on customer needs in order to meet these demands from customers and the regulator. As retirement solution providers, we need to meet this demand head-on to alleviate retirement challenges faced by our customers. This will in turn result in more people achieving financial freedom in the future.

Umbrella funds are expected to be at the forefront of providing answers to the challenges and opportunities discussed above.

Movement into umbrella funds is, therefore, expected to continue into the future.

Arno Loots: head, umbrella fund solutions, Liberty Corporate

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NEWS

Momentum Asset Management’s Money Market Fund’s rating affirmed by Fitch ratings

Global ratings agency Fitch Ratings has affirmed the Momentum Money Market Fund an ‘AA+(zaf)’ National Fund Credit Rating (NFCR) and a ‘V1(zaf)’ National Fund Volatility Rating (NFVR). This ranking is determined in accordance with Fitch’s global bond fund rating criteria and is the highest money market fund rating in South Africa.

The fund’s ‘AA+(zaf)’ NFCR rating is driven by its high current and prospective weighted average credit quality. Funds in this rating category are considered to have very high underlying credit quality relative to other entities in the South African market. The fund’s ‘V1(zaf)’ rating is driven by its low exposure to interest rate and spread risk resulting from the short maturities on its assets.

Investec Australia Property Fund new acquisition Investec Australia Property Fund (‘IAPF’) has announced the acquisition of an industrial warehouse in the heart of Sydney’s western industrial corridor worth AUD 19.17 million.

The acquisition increases the fund’s exposure in New South Wales (NSW) and brings the value of the fund’s total portfolio to AUD 347 million. The acquisition will be fully funded with debt which will take the fund’s gearing to 29 per cent.

The 16 461 square metre industrial warehouse, situated in Glendenning, is located 35 kilometres from the Sydney CBD. Graeme Katz, CEO of IAPF, says the acquisition is the seventh property acquired by the fund since the rights issue in October 2014.

“Management has now deployed approximately AUD 177 million in the past six months and investors should begin to see the benefit of increased gearing in the fund in the 2016 financial year. The acquisition further demonstrates management’s ability to source opportunities in a very competitive market.”

He added that they were pleased to increase the fund’s exposure to the NSW market, particularly in a location such as Glendenning. “The acquisition aligns well with the fund’s strategy of investing in well-located, high-quality assets underpinned by strong tenant covenants.” IAPF, listed on the Johannesburg Stock Exchange under the Real Estate Holdings and Development sector, provides South African investors with direct access to the Australian commercial property market.

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The fund held assets under management worth approximately R10 billion as at 1 April 2015. It invests in fixed and floating-rate money market instruments, including negotiable certificates of deposit, promissory notes, fixed deposits issued primarily by the major South African and foreign banks with local operations and corporate issuers. The fund primarily invests in issuers rated in the ‘F1+(zaf)’/‘AA(zaf)’ rating category, but can also hold securities in the ‘BBB(zaf)’ rating category.

Momentum Asset Management is a subsidiary of JSE-listed MMI Holdings, which is rated AA-(zaf)/Stable in its own right. As at end-June 2014, Momentum Asset Management’s total assets under management were approximately R182 billion, of which R84 billion was managed by the fixed-income capability in the business. The Momentum Money Market Fund is managed by Conrad Wood and Richard Klotnick, both of whom have extensive experience and tenure.

Grindrod to rebrand and expand etf suite Grindrod Bank announced that its ETF suite, GTrax, and broader passive investment management business will be rebranded CoreShares as part of the firm’s broader push to offer low-cost index products and services to the investment market.

Gareth Stobie, head of the new CoreShares, says that the name ‘CoreShares’ is principally derived from the growing trend to structure an investment portfolio using a ‘core-satellite’ approach. Stobie explained that CoreShares will offer a range of passive investments in addition to ETFs, which continue to boom globally with circa US$3 trillion under

Active approach

Core-Satellite approach

Index approach

Combines best of both worlds • Seeks to outperform • Higher cost • Higher manager risk • Shorter term focus • Lower potential tax efficiency

• Seeks market returns • Lower cost • Low manager risk • Long-term focus • Highter potential tax efficiency

Index core

Active Satellites

management. Although the local ETF market is still comparatively small, Stobie says it is not unusual for countries to have a slow build up and South Africa is expected to follow global trends.

“It currently has five JSE-listed ETFs across mainly general equity and listed property.

It will also offer two additional ETFs later this year, should an amalgamation

agreement entered between CoreShares and Nedgroup Beta Solutions (NBS) in February 2015 get regulatory approval.

It is also in the process of listing a Top50 ETF focused on South African equities in partnership with S&P Dow Jones Indices.”

The Top50 ETF together with the NBS suite will broaden the CoreShares offering to eight ETFs, he says.

PwC where he was a director in PwC’s Advisory Services business for three and a half years and developed and led PwC’s South African renewable energy practice.

Elzahne Henn

New director appointed at Mazars Cape Town Elzahne Henn has been appointed as a director at professional services firm, Mazars Cape Town.

She joined the Mazars tax team in 2001 and went on to obtain her Masters in international tax cum laude in 2008. She was previously appointed as associate director in 2011.

Elzahne has more than 19 years’ experience advising on personal taxation and employee tax matters; 11 years of which were spent in the South African Revenue Service (SARS) Audit Department.

She currently leads Mazars Expatriate Tax Services, which includes personal

Kasief Isaacs and international tax planning advice for individuals and the interpretation of the Double Taxation Agreement. In addition to advising on PAYE matters, Elzahne assists clients to navigate the process of a SARS audit as well as resolve any disputes with SARS through the objection, appeal and Alternative Dispute Resolution (ADR) process.

Mergence hires senior energy/ infrastructure fund manager Mergence Investment Managers has appointed Kasief Isaacs as portfolio manager responsible for infrastructure equity investments.

Isaacs has over 20 years of industry experience, with a specific focus on the energy industry. He joins Mergence from

He qualified as a chartered accountant in 1998 and has a BCom Honours degree from the University of the Western Cape.

He started his career with PwC in South Africa before moving to the UK, where he built up significant project management experience over nearly 10 years, managing projects and leading teams spanning several countries and multiple time-zones and languages.

Isaacs has advised extensively to both local and foreign developers, investors and contractors in the SA renewable energy market and has led the teams responsible for supporting 20 successful bids under South Africa’s Renewable Energy Independent Power Producer Procurement programme. These bids spanned a portfolio of wind and solar energy projects with services ranging from transaction advisory to project management and model audits.

Isaacs is a regular commentator on the energy industry. He also serves on the advisory board of GreenCape, an agency that aims to unlock the manufacturing and employment potential in the green economy in the Western Cape.

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Products

Prudential Investment Managers introduces new tax-free class of unit trusts Prudential Investment Managers has launched a new tax-free class of unit trusts.

etfsa.co.za launch Living Annuity Funds EtfSA.co.za is due to launch Living Annuity Funds, based solely on Exchange Traded Products (ETPs) as the portfolio constituents and the LA Funds will be offered in conjunction with Prescient Life, a JSE listed Life Insurance company. Mike Brown, managing director of etfSA, says the etfSA Living Annuity Funds will be low cost with the composite total cost covering all life license fees, client administration, portfolio management, benefits distribution and transaction fees, including brokerage, settlement and custodianship: • Up to R5 million: 1.26 per cent per annum (including VAT).

• Between R5 – R10 million: 0.95 per cent per annum (including VAT) • Above R10 million: 0.79 per cent per annum (including VAT).

The etfSA LA Fund will offer portfolios with CPI plus three per cent, CPI plus five per cent, CPI plus seven per cent and an all equity fund mandate.

“The use of ETFs in such balanced portfolios has provided marking leading performance in the RA Fund market. JSE listed ETFs, giving access to various asset classes, with the convenience of a single trade, have significantly reduced transaction costs, helped manage volatility and other risk factors and provided a modular strategic asset allocation strategy,” he said.

Prescient launch new hedge fund Prescient Investment Management, the quantitative investment house in the Prescient Group, has launched a new hedge fund that employs a market neutral strategy using statistical arbitrage to deliver uncorrelated returns in an investor’s portfolio.

Dr Nafees Hossain, fund manager at Prescient Investment Management, says the Prescient Market Neutral Hedge Fund, which has been in operation since October last year, aims to extract value by exploiting relative price anomalies between stocks in similar sectors.

“We believe that changes in the investment environment, notably rising volatility, will be good for market neutral strategies. While the market neutral strategies have continued to deliver risk-adjusted returns, these have been lower than in the past.”

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He says the primary purpose of hedge funds in an investment portfolio is diversification through the delivery of alpha in an uncorrelated manner, as well as capital preservation.

The Prescient Market Neutral Hedge Fund seeks to deliver STeFI Call plus six per cent over any rolling 12-month period, with the volatility of returns below six per cent a year. The fund aims to produce active alpha by exploiting equity market inefficiencies regardless of market direction.

Investments are made in the top 100 liquid listed equities. Risk is controlled to ensure stable returns, with gearing currently around 140 per cent.

Dr Hossain explains that the fund is suited to investors with a long-term horizon who are seeking capital growth and who have some tolerance for volatility. It is also suitable for retirement funds looking to make use of their five per cent allocation to hedge funds.

John Kinsley, MD of Prudential Unit Trusts, says that they place a great deal of importance on the government’s initiative to encourage savings by introducing Tax-Free Savings Accounts, and are happy to be able to participate in such a valuable and accessible savings tool.

“Investors will be able to access Prudential’s award-winning Inflation Plus Fund, as well as four other unit trusts with different risk profiles investing across a variety of asset classes. This means 5 of the total of 12 unit trusts Prudential offers will be available for taxfree investments,” he says.

Kinsley explains that the minimum monthly investment (via debit order) is R1 000, while the minimum initial lump sum investment is R10 000; thereafter no minimums apply for lump sums.

“Withdrawals can be made at any time and are free of charge. There are no lock-in periods or early withdrawal penalties. It is also important for investors to remember that the maximum contribution limits imposed by the Financial Services Board are R30 000 per year and R500 000 over the investor’s lifetime. Investors should keep close track of their contributions as they could face huge penalties from SARS should they exceed these limits.”

The world

AUSTRALIA, NIGERIA, VENEZUELA, FRANCE, INDIA, SOUTH AFRICA, GERMANY

Rise in Chinese property investment in Australia Recently released figures by Credit Suisse indicate that there has been a significant rise in residential Chinese investments into the Australian property market. Chinese investment into the residential investment from Chinese-based investors and new immigrants from China is predicted to double over the next six years to 60 billion dollars. In recent years, China has made up 23 per cent of new housing stock in Sydney and 20 per cent in Melbourne.

Nigeria borrows heavily for salaries Throughout early 2015, the Nigerian government has been forced to borrow large amounts of capital as the country has struggled to pay its public workers due to the recent drop in oil prices. According to Finance Minister Ngozi Okonjo-Iweala, the government has had a projected borrowing allowance for 2015 of 882 billion naira (4.4 billion dollars/4 billion euros) grant, with 473 billion naira already used up to meet recurrent expenditures, including public worker salaries.

Venezuela increases minimum wage Venezuelan President, Nicolas Maduro, announced that minimum wages would increase by 30 per cent during the first half of 2015. This increase will affect both private and public sector workers including

employees, pensioners, and members of the armed forces. According to Maduro, the wage increase is part of the government’s ongoing efforts to support workers amid spiralling inflation, which surpassed 69 per cent in 2014, as well as lower oil prices which resulted in the depletion of Venezuela’s reserves.

France announces tax-breaks programme In order to boost industrial investment and improve France’s economic growth rate, a five-year programme of tax breaks worth 2.5 billion euros (2.7 billion dollars) will be implemented. The country’s Prime Minister, Manuel Valls, announced that the new programme will allow organisations to subtract 140 per cent of the value of their industrial investments against taxable benefits over five years, as well as reduce business taxes. According to Valls, in order to accelerate the recovery all economic obstacles are to be removed, and all the available tools are to be used, of which investment is a key tool.

Exports to double in India India plans to double annual exports to 900 billion dollars over the next five years in an effort to improve the economy and increase employment opportunities. This will be achieved by encouraging local manufacturing companies to increase the country’s global exports from two per cent to 3.5 percent, says India’s Commerce Minister, Nirmala Sitharaman.

According to Sitharaman, the new strategy positively supports improved global trade engagements with India.

SA falls on FDI confidence index The 2015 Foreign Direct Investment (FDI) Confidence Index reveals that large businesses around the world looking for global opportunities for growth are not considering South Africa. In 2014, South Africa was ranked number 13 in the index, but in the latest report the country, along with the rest of Africa and the Middle East, had fallen in the ranks, although South Africa remains in the top 25. Paul Laudicina, founder of the FDI Confidence Index and chairperson of AT Kearney’s Global Business Policy Council, says investors are moving their capital into markets that are perceived to be more secure – like the EU and the US. German consumer confidence rises According to a recent poll, the Consumer Climate study for Germany shows that consumer confidence in Germany is at the highest recorded level in 14 years due to low inflation. Gfk, a leading market research company which ran the poll, reveals that income expectations continue to rise, but economic expectations and consumers’ willingness to spend fell slightly. It is said that sentiment in Germany is on the rise as a weaker euro and falling oil prices provide a boost to the country’s exporters.

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They said

A collection of insights from industry leaders over the last month

“Subdued recovery is expected in South Africa because electricity shortages affect activity and investment. It’s a complex issue and a range of interventions are happening, but it will take a couple of years until electricity shortages are no longer binding.”

International Monetary Fund (IMF) Mission Chief for South Africa, Laura Papi, explains why the IMF revised SA’s growth forecast down to two per cent for 2015 and 2.1 per cent for 2016, adding that SA’s industrial relations (meaning strike action), price competitiveness in sub-Saharan Africa, and structural unemployment issues need to be resolved to make the economy work.

“South Africa’s power shortages are a very expensive and painful wake-up call.”

International Monetary Fund’s Deputy Managing Director, David Lipton, spoke recently at the University of Cape Town about South Africa’s woes of a meagre 1.5 per cent economic growth rate last year – the lowest since 2010, which led to zero growth in per capita income for the working population. With unemployment still hovering around one quarter – one of the highest of all G-20 countries – it is hoped that falling inflation rates will improve households’

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purchasing power so that private consumption can help revitalise the local economy.

“If we do take the rating down in June, it will only be by one notch and South Africa would still remain investment grade.”

Fitch’s head of Middle East and Africa sovereign ratings, Richard Fox, commented at a public briefing in March that the country’s weak economic growth and inability to stabilise debt and reduce its budget deficit affect its rating of South Africa. What is worrisome is that Fitch joins two other ratings agencies that bear a negative outlook on SA’s rating, in effect implying that it is more than 50 per cent likely that a rating downgrade may still occur over the next two years.

“Where the next Trade Commissioner will need to be particularly vigilant is TTIP – it is our most demanding negotiation and certainly the most debated by the public. TTIP is not the only answer but it is part of it. As the world economy has become more connected, more and more people depend on trade for their livelihoods.”

EU Commissioner-designate for Trade, Cecilia Malmstrom, comments during her public hearing on the Transatlantic Trade

and Investment Partnership (TTIP) between the European Union (EU) and United States (US), which strives to create a unified, single market of approximately one billion consumers covering half the globe. Potentially the world’s biggest free-trade pact, TTIP attempts to harmonise trade regulations and scrap tariffs from California to Bosnia. But half the European Parliament’s committees and 97 per cent of Europeans have rejected the impending deal, joining a growing international opposition to pacts that allow multinational companies to sue governments whose policies damage their interests. Opponents claim investor-state dispute settlement (ISDS) poses a threat to democracy as it compromises food standards in the EU (enabling GMO products to be sold unlabelled), seed sovereignty globally, the environment, banking regulation and the sovereign powers of individual nations. South Africa is opting out of similar trade deals with the US, with many Latin American countries to follow.

"We want to set free the peer-to-peer power of traders around the globe.”

Copenhagen-based Saxo Bank founders, Kim Fournais and Lars Seier Christensen, said in a joint statement they want their world-first, social media-style multi-asset trading platform to make financial trading easily accessible to all and serve those who do not wish to engage with salespeople at banks. Tradingfloor.com, which offers trading in foreign exchange, contracts for difference, options, futures, bonds and equities at no subscription fee, encourages users to share information, tips and strategies publicly. That said, chatrooms in which traders at different banks communicate electronically have been a focus for regulators investigating manipulation of the Libor and Euribor benchmark interest rates and possible rigging in the $5.3 trillion-a-day foreign-exchange market.

“Tourism is our bread and butter, especially when it comes to employment. We’ve had large numbers of Chinese tourists in South Africa. But our bilateral relations, our engagements, are so deep that there will not be an impact on Chinese investment in South Africa.”

South Africa’s consul general in Hong Kong, Phumelele Gwala, comments on the xenophobic attacks after governments in Beijing and Hong Kong issued travel warnings and the Chinese Foreign Ministry issued formal complaints to South Africa. Dozens of Chinese-owned shops were looted and damaged and thousands of foreign nationals, mainly from elsewhere in Africa, were displaced on the eve of South Africa’s Freedom Day celebrations (marking the 21st anniversary of the first post-apartheid elections in 1994). In December 2010, South Africa joined the BRICS bloc at China’s invitation and 2015 is deemed the ‘Year of China in South Africa’, with 200 events and cultural exchanges planned. Between 2 000 and 2 500 South Africans live in Hong Kong.

You said

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

@WayneMcCurrie: “World has low growth and low inflation.

SA has low growth and high inflation. So we can’t cut rates to try and boost growth as Europe can” Wayne McCurrie – Portfolio Manager – Momentum Wealth.

@viv_govender: “So much for the smart money. Greek bonds that were 8x over subscribed last year, now going at 60 cents on the dollar” Viv Govender – Senior Analyst, Market Commentator, Financial Speaker/Educator.

@MichaelJordaan: “The long run (starting 1900) average real return of SA Equities is 7.4 per cent. If you want that, accept volatility”

Michael Jordaan – Venture capitalist and wine enthusiast. @GoogleFacts: “Only 8 per cent of the world's currency is physical money, the rest only exists on computers.”

Google Facts – Learn new things every day. When you doubt our facts, Google is your friend.

@Josh_CityIndex: “#Tesco property valuation now worth £22.9bn, loss of £7.6bn in 1yr.

Basically a 25 per cent decline in value = clearly overstated before” Joshua Raymond – Chief Market Strategist at CityIndex.

Regularly appear on CNBC, Bloomberg, Sky News, BBC. Arsenal fan!

@dean_dsa: “Talked to investors about #Africa bond

markets. There’s a big diff between the perceived level of risk and actual level of risk” Dean D'Sa – Managing Director, Investment Manager, Corporate Adviser, Golfer, Daddy, Husband. Based in Mauritius with an Africa focus.

@MichalBodi: “Understanding the #investment #timeframe comes from understanding why we invest in the first place #moneybehaviour” Michal Bodi – Money Behaviour Coach | Blogger | Dad to Sid & Mila | Hungry for Life | Listed in FSPower50 – The 50 Most Influential Social Media People in Finance.

@SongezoZibi: “The man who presided over the collapse of the SABC board is now Acting

Chairman of Eskom. We never learn.”

Songezo Zibi – Editor of the Business Day.

@Richards_Karin: “"Investors have been brainwashed to think the market owes them something and [it] is always supposed to go up” ~JC Parets” Karin Richards – Investor.

Technical share trader. Semi-retired CA(SA). Conservationist. Happily trading and charting the ASX and JSE for more than 20 years.

@pinkandtweed: “I think #Tesco have just made #Greece feel good about themselves for the first time in years” Philip Harding – I like tweeting about politics & beer mostly.

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And now for something completely different

The

pen

is mightier than the sword Many of the most poignant moments in human history started with a single person penning their thoughts and ideas down on paper.

W

hile most people in the 21st century have moved on from this more traditional way of writing, in the world of alternative investments and collectibles, the mighty pen still has the ability to produce significant results.

so special is that some of the greatest innovations and advancements were made in pen manufacturing – most notably the move by companies to start developing pens that were made from precious metals instead of the more commonly used hard rubber at the time.

Like most forms of collectables, investors are warned not to jump into this market by simply purchasing highly valued pens. Even if a pen is expensive, it doesn’t necessarily mean that it will be able to provide a great return. As with many collectible items, the simple tenets of rarity, quality, design and history all play a significant role in the investment worth of a pen.

While modern pens can cost less than pre-war pens, this doesn’t necessarily mean that they are less valuable. When it comes to investing in a modern pen, particularly fountain pens, it is generally best to go with a Montblanc, Parker, Pelikan, Waterman, Caran D’Ache, Cartier, Conway Stewart or Montegrappa pen. What sets these brands apart is that most of them have been in business for over 100 years, meaning that their pens have been perfected over time and, depending on a pen’s age, could be classified as being an antique.

The most sought after pens are those that were developed during the ‘Golden Age of Fountain Pens’ – a period between the 1920s and 1930s. What makes this period

42 InvESTsa

Valuable pens Fulgor Nocturnus $9 million A magnificent pen encrusted with 945 black diamonds and 123 rubies made by Tibaldi sold at a Shanghai auction in 2010 for $9 million – making it the most expensive pen ever sold. The pen was inspired by the mathematical proportion of Phi. Equating to the ratio 1:1.618, Phi appears in vast amounts of natural and man-made phenomena, from plant veins to the Parthenon.

Heaven Gold Pen $80.2 million Designed and developed by the renowned international designer, Anita Tan, the Heaven Gold Pen is considered one of the most expensive luxury pens in the world. The pen itself is made of pink gold and has been covered in 161 brilliant colour diamonds, as well as 43 carat Tsavorite gemstones.

Caran d’Ache 1010 Diamonds Limited Edition Fountain Pen $1.2 million Designed and developed by Caran d’Ache, the Swiss makers of some of the finest writing instruments in the world, the Caran d’Ache 1010 Diamonds Limited Edition Fountain Pen is studded with 850 pure diamonds and the body is crafted from white gold. In addition to this, the actual pen cap is encrusted with 26 lines of 22 baguette-cut diamonds.

Aurora Diamante Fountain Pen $1.5 million Italian-based luxury pen manufacturer Aurora designed the resplendent Aurora Diamante Fountain Pen. The fountain pen is known to be the only 30 carat pen in the world and features 2 000 diamonds encrusted throughout its body, boasting a gold nib.

Primarily because of the pen’s high price tag and the plethora of precious gems, Aurora has planned to craft only one such pen per year, thereby preserving exclusivity.

investsa investsa 43 00 27

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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 December 2014. Since inception 1994.

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