Finweek 22 October 2020

INVESTMENT

DON’T UNDERESTIMATE SMALL CAPS

SIMON BROWN

TIPS AND TRICKS OF THE TRADE

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ENGLISH EDITION

22 October - 4 November 2020

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EVERY TWO WEEKS

CAN SOUTH AFRICA AFFORD NHI?

SA: R 36.00 (incl. VAT) NAMIBIA: N$ 36.00

THE COST OF FIXING A BROKEN HEALTHCARE SYSTEM

HOW TO MANAGE YOUR RETIREMENT FUNDS IN UNCERTAIN TIMES

contents

from the editor

a

JANA JACOBS

s I wrote in my previous editor’s note, I was recently on KwaZuluNatal’s South Coast. While there, I needed to visit a doctor. Having comprehensive medical cover, I didn’t need to think twice about being able to book an appointment with the local GP at his private practice. The consultation fee was steep and had to be paid in cash, but can be claimed back. The medicine I needed was billed straight to my medical aid. Within a couple of hours I was back at work, with everything I needed to get on the mend.

The majority of South Africans do not have this privilege.

At present, only about 15% of our population can afford private medical care through medical aid scheme membership (see p.31 of our cover story).

And this cover is becoming increasingly expensive.

When the monthly bills come in, opportunity costs have to be weighed.

Those who can afford medical aid may opt only for a hospital plan – which doesn’t include day-to-day doctor’s visits or medication.

For those without coverage, visiting a public hospital is the only option.

And while we certainly have dedicated and excellent medical professionals in our state hospitals, there are myriad issues that hinder their ability to provide timeous and quality healthcare. More often than not, there are staff and medical supply shortages. In many cases, doctors and nurses have to provide care to patients amid crumbling infrastructure. Yet, roughly 85% of the population that does not have medical aid and needs to be served by the overburdened and fragile public healthcare system. They cannot visit a private practice for a minor issue as I so easily could – let alone undergo a necessary elective procedure.

With two siblings who are healthcare professionals and have worked both in the public and private healthcare sectors, the stories of the vast discrepancies and struggles faced in the public healthcare system are harrowing. This is not to say that the private healthcare sector is without fault.

But if the Covid-19 pandemic has proved anything, it is the importance of having access to quality healthcare – across the board. And providing our medical professionals with the resources they need to provide this care.

The introduction of National Health Insurance in South Africa is a thorny issue. And the alleged looting of funds aimed at providing Covid-19 relief raises the alarm in terms of state funding being used to procure and provide healthcare services to the country’s citizens.

While the concept of making healthcare accessible for all is something we should strive for, there remains a lot of work to be done in fixing our healthcare system first – while striking a balance for already overburdened taxpayers. ■

Opinion

6 The power of a good reference

In brief

8 News in numbers 10 Navigating carbon concerns in mine production 11 The Northern Cape holds key to unlock SA’s mineral riches 12 Filling the African medical supplies gap

Marketplace

14 Fund in Focus: Momentum Resources Fund 15 House View: Metrofile, Reunert 16 Killer Trade: Cashbuild, Motus 18 Invest DIY: Why bigger isn’t always better 19 Investment: Five mistakes investors make 20 Simon Says: Barloworld, Capitec, FirstRand, Multichoice, Murray & Roberts, PPC, PSG Konsult, Sasol, shareholder payouts, Spur 22 Technical Analysis: Why it pays to scrutinise conspiracy theories 23 Invest DIY: The market’s neglected opportunities 24 Trader’s Corner: Wells Fargo’s governance overhang makes it cheap 26 Analysis: Are listed banks still a viable investment option?

Cover

28 National Health Insurance: How the state shot itself in the foot

In depth

34 Retirement: Uncertain markets and your pension money

On the money

42 Spotlight: Beating a path in property 44 Personal finance: Building a comprehensive risk portfolio 45 Quiz and crossword 46 Piker

EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Johan Fourie, Moxima Gama, Mariam Isa, Glenneis Kriel, Schalk Louw, Paul Marais, David McKay, Timothy Rangongo, Petri Redelinghuys, Peet Serfontein, Melusi Tshabalala, Amanda Visser, Glenda Williams Sub-Editor Ellen Hugo Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli Advertising Paul Goddard 082 650 9231/paul@fivetwelve.co.za Clive Kotze 082 335 4957/clive@ mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/tanya@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@newmedia.co.za Published by New Media, a division of Media24 (Pty) Ltd Johannesburg Office: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 713 9601 Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: newmedia@newmedia.co.za Printed by Novus Print Montague Gardens - Sheetfed & Digital and Distributed by On The Dot Website: http://www.fin24.com/finweek Overseas Subscribers: +27 21 405 1905/7

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opinion

By Johan Fourie

ECONOMY

The power of a good reference

o

Recent research suggests that reference letters can help solve unemployment – and close the gender gap. ne of the many hidden tasks of an academic is to write To show this, the authors conduct three experiments. Experiment 1 reference letters. And lots of them. Almost all students need tests whether employers are more likely to respond when a reference this for their first job application, and who better to write one letter is attached to an application. Experiment 2 explores whether than the professor who has read their work and witnessed reference letters lead to higher employment. Experiment 3 tests their progress over the last few years? how best to encourage employees to use reference letters in their Do these letters make a difference? One school of thought takes the applications. The field work is done at labour centres in Johannesburg view that they provide little additional information to what a potential and Polokwane and exclusively focuses on black South Africans employer can already – and more objectively – glean from an academic between the ages of 18 and 34. Almost 500 job seekers participated. record and CV. They are, at best, a reflection of the information already For the first experiment, the authors search four of SA’s most provided and can, at worst, only distort the very clear signal that popular job websites to identify vacancies for semi-skilled jobs. something like an academic record provides.

They then submit applications on behalf of job seekers, In some cases, reference letters may even expose the randomly attaching the reference letter to only some of the For the same applicant, biases of the referees: such as in the use of gendered applications to test whether they get better responses if attaching a letter increases the probability of receiving language. A 2019 paper in the Journal of Surgical it’s attached. The results suggest that it does: for the same a response from 4.2% to Education studies 311 reference letters for a transplant applicant, attaching a letter increases the probability of 6.7% – a surgery fellowship. It finds that male applicant letters were receiving a response from 4.2% to 6.7% – a 60% increase. more likely to contain terms, such as superb, intelligent One unexpected result is that this is almost entirely a and exceptional, while female applicant letters were more female effect: female applicants’ response rate doubles! likely to contain terms, such as compassionate, calm and It’s not only that the response rate improves. The results delightful. Male applicants were also more likely to be from experiment 2 show that female participants who were increase. described as ‘future leaders’. The paper argues that such encouraged to use reference letters “are significantly more letters may explain the gender bias in the field. likely to receive job interviews and to be employed after Should reference letters rather be done away with? Not so fast. three months”. No impact is found for men. The authors conclude that Most unemployed South Africans did not complete secondary reference letters help to reduce the gender gap in the labour market. education and have limited or no work experience. This creates what If reference letters are so useful at securing jobs, why are so few economists call an information asymmetry between the employer and employees using them? Experiment 3 helps answer this. It shows that employee: the employee has more information (about their own skills providing information on the benefits of having a letter increases the and work ethic) than the employer. Employers do not simply share of participants that obtain one. By contrast, offering cash want to hire anyone: they want a good match. incentives to obtain letters has no effect on the number of One way to solve this gap is through social networks participants that obtain one. The authors conclude that – hiring the friends and family of existing employees. many job seekers simply underestimate the potential Using such ‘referrals’ reduces the costs of acquiring benefits of asking their former employers to provide information about new potential employees, as (informative) reference letters. the current employees can ‘vouch’ for their quality.

Technology has rapidly changed the way In fact, this is a common practice in South Africa: workers match to jobs. LinkedIn and other online economists Volker Schöer, Neil Rankin and Gareth platforms offer employees the opportunity to easily Roberts show that up to 68% of workers found communicate their credentials, work experience employment via such networks. and endorsements to potential employers. But large But the problem with social networks is that they parts of the labour force – in SA and beyond – are are limited. Employers may miss out on a potentially working in markets that have not (yet) been affected valuable pool of employees if they only hire the friends of by these technological innovations. In those markets, as their existing staff. Current employees may have personal interests this study reveals, there are still large information frictions – in other in referring family and friends that conflict with the interests of the words, many job seekers that should get jobs don’t because potential employer. And informal referral systems may disadvantage less employees have no way to affordably assess their quality. connected groups. The challenge is to find a way to increase the One option is for government to provide reference letter templates or information about future employees from outside existing networks. other tools that will reduce these frictions. Another option is for a bright Reference letters from a third party that provide additional entrepreneur to build a technological solution. As this research shows, information about the employee can potentially solve the information such tools would not only lead to lower unemployment, but also help asymmetries problem. But would they work at all in a setting where to level the playing field for female job applicants. Another advantage is half the unemployed population has not even completed matric? that firms end up with better workers and are therefore more productive.

A new paper by labour economists Martin Abel, Rulof Burger Reference letters, it seems, can help with redress and development. ■ and Patrizio Piraino suggests that reference letters may be more editorial@finweek.co.za Johan Fourie is professor in economics at Stellenbosch University. successful at job matching than we think.

Photo: Shutterstock

60%

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finweek 22 October 2020

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in brief

>> Mining: Measuring emission compliance p.10 >> The untold mineral riches of the Northern Cape p.11 >> Trend: Young entrepreneur fills Africa’s medical supplies gap p.12

“THE BILL BRINGS CERTAINTY TO SOUTH AFRICANS AND INVESTORS BECAUSE IT CLEARLY OUTLINES HOW EXPROPRIATION CAN BE DONE.” Patricia de Lille

“OBSTACLES TO A FASTER RECOVERY ARE ELECTRICITY SHORTAGES AND RECORD-HIGH GOVERNMENT DEBT LEVELS.” – The South African Reserve Bank stated in its bi-annual Monetary Policy Review (MPR) that power cuts and high sovereign debt are likely to be the biggest obstacles to SA’s recovery from the Covid-19 crisis, . The MPR confirmed that while the Reserve Bank expects the repo policy rate to gradually move higher through 2022, it is likely to remain at low levels for an extended period. It expects that the repo rate will be kept unchanged at the current 3.5% through the end of 2021.

— Minister of public works and infrastructure, Patricia de Lille, announced the submission of the Expropriation Bill, 2020 to parliament. If the bill, to replace the current Expropriation Act of 1975, passes, authorities would be required to negotiate with owners of land to try to reach an agreement on the acquisition of the property, before it can be seized. Land would be confiscated without reimbursement in certain cases if it is unused, abandoned or poses a safety risk, among other conditions. The bill was certified as constitutional by the chief state law adviser.

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finweek 22 October 2020

– Philip Amoateng, managing director of Vodacom Lesotho, said the telecoms giant has no option but to seek relief in the courts to have the decisions of the Lesotho Communications Authority (LCA) reviewed Philip Amoateng and set aside, in a statement. The LCA imposed a 134m maloti (R134m) fine on Vodacom Lesotho for alleged contraventions of the Companies Act and certain conditions of its license, which was revoked. The LCA alleges that Vodacom Lesotho flouted corporate governance rules by hiring an auditing firm allegedly owned by the sister-in-law of the operator’s chairman, Matjato Moteane. www.fin24.com/finweek

Photos: Gallo/Getty Images | Vodacom Lesotho

“An excessive fine.”

DOUBLE TAKE

THE GOOD

BY RICO

The United Nations World Food Program (WFP) was awarded the Nobel Peace Prize for its efforts to combat hunger and prevent it being used as a weapon of war. The Nobel Committee said the WFP’s work toward providing food security can help to improve prospects for stability and peace, and noted how it has taken the lead in combining humanitarian work with peace efforts in South America, Africa and Asia. The WFP’s largest emergency response effort at present is in Yemen, where a nearly six-year war has caused a humanitarian catastrophe and left two-thirds of the population (about 20m people) food insecure.

THE BAD Eskom CEO André de Ruyter said the risk of load shedding will not be eliminated but only reduced by September 2021. De Ruyter was speaking at the Joburg Indaba when he revealed that Eskom anticipates the benefits of Eskom’s maintenance programme, which is expected to ease the risk of load shedding, to be felt by April next year. De Ruyter said Eskom’s revenue challenges are the result of lower sales volumes of 1% per year over the past ten years, as well as the non-cost-reflective tariff increases granted by the National Energy Regulator of South Africa (Nersa).

THE UGLY Former president Jacob Zuma lambasted the Zondo commission of inquiry into state capture as “nothing but a bastardisation of legal processes to achieve political ends for those who pull the strings from behind” in a statement by the Jacob Zuma Foundation.

Last month, Zuma’s lawyers wrote to deputy chief justice Raymond Zondo and asked him to recuse himself due to his “biased disposition” towards the former head of state. The foundation questioned the legality of an application for a summons against the former president to appear before the commission. Nevertheless, the deputy chief justice granted an order to issue summons to Zuma. The date set aside for Zuma’s appearance is from 16 to 20 November 2020. @finweek

finweek

SPUR RECOVERY

73.8%

The Spur Corporation said in a trading update that its restaurants reported a steady month-by-month recovery in turnover since Covid-19 lockdown restrictions were relaxed to allow sit-down restaurant service at the end of June 2020. John Dory’s, RocoMamas and Panarottis are some of the group’s eateries. Its SA restaurants traded at 73.8% of the prior year’s turnover for the month of September, improving from 36.5% for July and 56.7% for August. It also announced Val Nichas as its new CEO, set to succeed the departing Pierre van Tonder in January 2021 (see p.21).

WHERE DID THE EQUIPMENT GO?

R5.08bn

Parliament’s Standing Committee on Public Accounts (Scopa) was told by the Special Investigating Unit (SIU) that it is probing 658 questionable Covid-19 personal protective equipment (PPE) tenders and other pandemicrelated contracts worth R5.08bn. The SIU also said that it is investigating the department of water and sanitation’s deployment of over 17 000 water tankers, according to the meeting report. In Gauteng, the SIU is probing 157 companies and contracts worth R2.2bn, in Eastern Cape, at least 347 tenders worth R1.9bn and 79 contracts worth R557.6m in KwaZulu-Natal, among others (see cover story on p.28).

finweekmagazine

TRUTER SENTENCED

10 years

Former chief financial officer of VBS Mutual Bank, Philip Truter, pleaded guilty to charges of racketeering, fraud, corruption and money laundering. He was the eighth suspect implicated in the alleged looting and subsequent demise of the bank. Truter entered a plea bargain with the National Prosecuting Authority and will testify against his co-accused in the upcoming R2bn fraud case. He was sentenced to ten years in jail, three of which have been suspended for five years.

EURONEXT BUYS BORSA ITALIANA

€4.33bn

The London Stock Exchange Group (LSE) agreed to sell Borsa Italiana Group for €4.33bn to a consortium led by panEuropean rival Euronext, a divestment meant to smooth approval of its separate, much larger, acquisition of financial data company Refinitiv Holdings, reported The Wall Street Journal. Borsa Italiana is Italy’s only stock market platform. LSE said it opted to divest the Italian bourse to persuade the EU regulator to approve its takeover of Refinitiv.

Euronext aims at spreading its footprint across Europe, building scale and diversifying to include bond trading. finweek 22 October 2020

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in brief in the news

By David McKay

MINING

Navigating carbon concerns in mine production

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As mining companies come under increased pressure to adhere to environmental, social and governance criteria, the standards by which emission compliance is measured may require more formulation. he investment focus on how mining companies interact with society has sharpened profoundly in the last three years; now, controlling emissions is as important a metric to fund managers as production.

However, two UK fund managers are asking whether the current formulation that measures emissions specifically, the scope 1 to 3 standard, is entirely appropriate. In fact, the environmental, social and governance (ESG) movement as it currently exists has prototypic faults, they say.

“The way we’re doing ESG is we’re looking up every drain pipe in the company and trying to measure what’s coming out,” said Douglas Upton, an investment analyst and partner at Capital Group, a US fund manager with over $1tr under management.

“But I feel like we’re measuring stuff that we can measure and not really stuff that’s important,” he said. Upton was speaking earlier in October at the Joburg Indaba.

According to the greenhouse gas (GHG) protocol corporate standard, to which mining companies comply, emitters have to control and reduce their own GHGs – the so-called scope 1 of the standard – and the emissions of their suppliers in a scope-2 level of scrutiny, which can be managed through procurement.

The more controversial element of the protocol is managing the emissions of endusers, or scope 3 as it’s called.

According to a report by Bloomberg News on 1 October, the 182-page, 15-category guidance for scope-3 compliance in the standard “offers so much scope for discretion and ambiguity that companies can more or less mark their emissions to model – or even refuse to disclose them at all”. In fact, about a fifth of the world’s total GHG emissions comes from a group of companies that don’t disclose their numbers at all, according to Bloomberg News.

“I don’t think scope 3 belongs within ESG,” said Upton. “If you look at everything about ESG outside of carbon, we kind of look at it and say: ‘Ok, does the company comply with the laws, with the rules, maybe with best practice?’

But what is Kumba [Iron Ore] supposed to do about ejection of steel emissions when they put coal into a furnace and burn their iron ore?

What can they do: just stop selling iron ore? So I think we’re measuring the wrong thing here.

Scope 3 doesn’t belong,” he said.

Another problem is that mining firms are reporting their own numbers based on in-house criteria. This would appear to make a mockery of the standard, since standardisation is not being achieved.

George Cheveley, a portfolio manager at Ninety One in London, said evaluating the contribution of mining firms to the ESG debate could fall on metrics other than just reducing emissions, which would remain of critical importance.

For instance, mining firms with coal as a major part of revenue could declare they were managing those assets “for cash”, and then reinvest the proceeds into metals that contribute towards decarbonisation, such as copper or nickel. That might be a better strategy than oil producer BP’s approach, which was its declaration to reinvest oil profits into renewable power. What does BP know about renewable power, Cheveley asked?

“We have to go through this stage, and we have to engage in it and get through to a set of standards,” said Cheveley of scope 3. One standardisation would be to narrow the accountability between mining and consumer-facing industries to one of understanding the whole value chain.

“Consumer-facing companies are using materials that are coming from those miners. So the miners are all terrible, whereas consumerfacing companies are fine even though they are all part of the supply chain,” he said. ■ editorial@finweek.co.za

Photos: joburgindaba.com | ninetyone.com

“I feel like we’re measuring stuff that we can measure and not really stuff that’s important.”

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finweek 22 October 2020

Douglas Upton Investment analyst and partner at Capital Group

George Cheveley Portfolio manager at Ninety One

www.fin24.com/finweek

in brief in the news

By David McKay

MINING XXXXXXXXXXXXX

The Northern Cape holds key to unlock SA’s mineral riches

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Photos: angloamericankumba.com | orionminerals.com.au

Exploration in South Africa’s mining sector has been neglected for too long, reckons an industry stalwart. The country’s Northern Cape province is home to some of the richest mineral deposits on the planet. he lack of minerals exploration in South Africa’s mining sector goes back to its corporatisation more than 60 years ago, following the creation of Anglo American and its counterpart, General Mining.

In those days, mining houses did their prospecting in-house, where the parent company charged service management fees to the underlying businesses, some of them listed. Apart from its inefficiency, it resulted in an investment tradition that applauded the mighty and gave short shrift to the two-bit entrepreneur; ironic, given the manner of Johannesburg’s own mining town origins.

Errol Smart, a South African who has worked in the Australian minerals development sector, which has a varied, mixed bag of a minerals exploration sector, is convinced the time is ripe to change history. It would be apposite: President Cyril Ramaphosa’s economic recovery plan is crying out for the kind of vigour Smart and other miners say they can bring, especially in the Northern Cape province.

“Geologically, I can tell you, having gone around the world and looked at terrains, the Northern Cape is an absolute dripping roast,” said Smart at the Joburg Indaba, a mining conference, which was held virtually this year.

Said Smart: “Just on our 3 000 km2 of mining and prospecting rights alone, we have got 23 commodities of interest. It has everything from uranium and nickel and cobalt, to platinum [group metals] and gold, and all the base metals you can dream of. There are very few places in the world where you can find a terrain like that”.

What’s needed is political certainty, regulatory liberalisation, and an online minerals rights registration system that works properly and isn’t victim to corruption, previously endemic in the department of mineral resources and energy, according to mining sources.

With a mining cadastre in place, and the adoption of tax incentives specific to minerals exploration, such as flow-through shares currently being studied by mineral resource and energy minister, Gwede Mantashe, minerals exploration can be transformative in rural landscapes where investment and employment is most needed, said Smart.

Glen Mc Gavigan, executive head of technical and projects at Kumba Iron Ore – a company @finweek

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finweekmagazine

Errol Smart Managing director and CEO of Orion Minerals and chair of the Minerals Council of SA’s junior and emerging miners leadership forum

“Geologically, I can tell you, having gone around the world and looked at terrains, the Northern Cape is an absolute dripping roast.”

Glen Mc Gavigan Executive head of technical and projects at Kumba Iron Ore

controlled by Anglo American – said the surface had barely been scratched in terms of prospecting in the Northern Cape, literally.

Given the lack of exploration activity in SA over the last 20 years, there was an opportunity to apply new technology to old prospects. In July, the company approved the R7bn Kapstevel extension of Kolomela, a mining deposit that Kumba first found in the 1950s, said Mc Gavigan. “The Northern Cape is under-explored and even the area we operate in,” he said. Other exploration targets have been discovered by Kumba.

“Because we had these great tier-one assets, we didn’t need to look. But now we all need to look again. We had pre-conceived ideas about the geology.”

New technology led to the development of the $400m Gamsberg zinc project by Vedanta Resources near the Northern Cape’s Aggeneys, even though the project had been picked over and rejected for years by successive owners, first Gold Fields of SA and then Anglo.

Laxman Shekhawat, business head of Vedanta Zinc International, said a further expansion of Gamsberg and a new zinc smelter – helping to fulfil the government’s long-held dream of industrial beneficiation – is planned, but the green light for the expansion project is waiting on transport capacity improvements from Transnet.

This is the other major bottleneck standing in the way of the country’s exploration sector. Eskom, with its compound tariff increases of more than 50% over three years, also casts its shadow over the sector.

“At the current rate of mining, Gamsberg will mine for more than 100 years. This has to be sped up because time is very important in this,” said Laxman.

“In the long term, we want to look at building a steelmaking hub in the Northern Cape.”

“I want to speak to Laxman about what we can do on base metals together in the region,” said Smart. “Equally, I want to speak to African Rainbow Minerals about its smelting technology, and I want to be speaking to Kumba about how we can cooperate on SLPs (social and labour plans) and training.

“Exploration will play a leadership role. It’s not a small difference, but an absolute ground-moving difference.” ■ editorial@finweek.co.za finweek 22 October 2020

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By Glenneis Kriel

trend

Filling the African medical supplies gap

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McPherson Trading uses tender-based procurement consulting to fill the medical consumables and disposable supplies gap in difficult-to-reach regions in Africa.

n 2017, after the sudden death of his maternal grandfather, work. After six months of unsuccessful pitching, he finally landed Ivor Duncan – the founder and inventor of EmOXTM Oxygen his first contract with a local security company in Somerset West.

Systems – Tony McPherson, who was then only 17 years old, was Less than a year later, the business, McPherson Consultancy, had appointed as EmOx International’s interim CEO. over 25 clients on retainer.

Coming from a family of serial entrepreneurs, and knowing the “I did not have any overheads, since I did all the work myself. As business like the back of his hand, McPherson was more than up to the business grew, and turned into two and then three, and a charity the task. After only six months in the position, he managed to settle foundation, my team grew. The infrastructure and costs also grew, but all the company’s debt, increase profit margins and implement a within limits and our means,” he says. worldwide sales team, while juggling his school work.

He identifies import and export permits along with infrastructure His success led to his permanent employment in the position and in consignee countries as the biggest obstacles to business in turned him into the World’s Youngest CEO of an International Africa. “Permitting can slow down delivery times, which costs Pharmaceutical Company – a title bestowed on him at money every day products sit in customs’ warehousing.

Informa Market’s Arab Health Conference held in Dubai Some countries also issue large fines if consignments last year. Having employees, suppliers and clients – arrive with incorrect permits.” many the age of his parents – accept his leadership and Besides this, every country or region has different authority was one of his hardest initial tasks. import protocols, which complicates matters when “People tend to think that you don’t know what working with multiple African countries at once. you are doing because you are younger than them.

To overcome this, McPherson appointed an in-house To overcome this notion, I openly admit that I don’t permit controller to prevent hiccups and ensure know everything; we learn something new every day. excellent timing with deliveries.

Once everyone got over the notion that I was younger Technology also plays a huge role in his business than what they were used to a CEO being, it created a ventures, most importantly in the management of teams and Tony McPherson dynamic and positive energy,” McPherson says. businesses across different parts of the world and time zones.

Founder and CEO of Slack is used for team messaging and communication, McPherson Trading Lattice for sales management, lead generation and tracking McPherson Trading of queries, while Bamboo is used to replace the human resource While exporting EmOx products internationally, McPherson became management position and allows staff to administer their own HR. aware of the absence of companies specialising in the procurement of “All the programmes are aimed at promoting independence and medical consumables and disposables in certain parts of Africa. productivity,” he says.

To address this, he launched McPherson Trading in January 2019, which specialises in helping procurement companies source products and overcome delivery bottlenecks – from poor Plans for the future infrastructure that renders road deliveries impossible to staffing and McPherson Trading is growing its footprint monthly, as work is resource limitations, and language and administrative barriers. continuously done on new projects in new countries. To date, It was a great idea, as this niche market had not been entered into roughly R33 million’s worth of stock has been consigned to Mali, yet. Many international companies were supplying African countries, Malawi, Tanzania, the DRC, Sudan and Somalia. but none specialised in procurement for hard-to-reach regions, such Since it only does tender work, the company does not operate in as jungles and rural communities with no infrastructure.

South Africa because of the BEE system making it difficult to win “I already had extensive knowledge of the business obstacles tenders. McPherson is, however, servicing South Africa though his and a strong relationship with NGOs and pharma company and philanthropic ventures.

To date, stock of roughly governments in these countries, so it only made His goal is to service all 55 countries in Africa by sense that I developed a solution to address this 2024, with established branches in various parts of the gap,” McPherson says. continent to improve access to medical product supplies.

Being a firm believer in doing business with no While the coronavirus pandemic has resulted debt, McPherson has self-funded all his business in increased demand for his product, it has also has been consigned to Mali, Malawi, Tanzania, the DRC, Sudan and Somalia. ventures so far. obstructed growth.

He started his first business when he was “I despise having to work over Zoom and Skype and 15 years old, after developing a website for the real estate business of cannot wait for the borders to open, so I can get back in front of my his paternal grandfather, with whom he shares his name. clients and stakeholders, to grow the company and assist in creating “I started this company with savings, which allowed me to buy a easier access to healthcare for all,” McPherson says. second-hand Apple MacBook Pro with which I started my social media In recognition of his passion and effort to improve quality healthcare marketing company. Since then, I reinvest a large portion of profits to communities across Africa, McPherson has won the 2019 NSBC back into my companies to ensure longevity and allow growth without Youth Entrepreneur Champion Awards and the company was placed outside investment or funding,” McPherson says. among the top 20 SMMEs in SA. ■ With one website under his belt, he decided to look for more editorial@finweek.co.za

Photo: Eben Photography

R33m

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finweek 22 October 2020

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BEE RoI

Spending money for the sake of BEE points only?

Are you part of the “begrudging camp”, the laissezfair group, or the “how much – give me my BEE points” brigade?

What is a BEE RoI? Return on Investment (RoI) deals with the money you invest in a specific project, and the subsequent return you realize from that investment. In the case of BEE, most people will measure “BEE RoI” in the form of BEE points, and eventually a BEE Level. No. Your costs should be reflected in relation to your business gains. You should always strive to spend less and earn more. An effective RoI model should clearly measure costs, and be portrayed in relation to revenue generation, client retention, and overall organizational benefits.

Pivot back to basics: Unpacking the Underlying Principles of BEE Writing a cheque to make the effort go away and delegate the entire BEE initiative to a third party is theoretically not a half-bad idea. However, the key to maximizing your BEE RoI is by taking control of it through, first of all, understanding the basic principles of the BEE Codes, secondly, understanding the cost of BEE projects leading to BEE points, thirdly through successful implementations, and lastly, followed by accurate RoI measurement.

The BEE Codes are based on five main principles; • a procurement incentive to businesses: a higher BEE level should lead to increased revenue • an equity drive: getting black people to earn shares • people development: skills development should feed employment equity with black talent • supply chain development: enterprise and supplier development funding should feed new black owned suppliers into your supply chain • and a strong community outreach principle.

These principles should cascade into the foundation of your BEE strategy. They are feeding channels to strengthen the main BEE elements, and eventually you earn BEE points without incurring direct BEE costs. This strategy will satiate scorecard compliance sustainably, increase economies of scale, and significantly improve RoI for the long haul.

Follow the nifty BEE Weighted Scale Model as developed by BEE Analyst.

Tipping the Scale If you do it right, you can earn 73 BEE points (BEE Level 6) without spending money on BEE specific projects. And this is a fact.

In essence, you have Ordinary and Extraordinary Expenses (BEE) in the Weighted Scale RoI model. On the one side you “Earn BEE points without spending money”, as opposed to the other side; where you have direct BEE expenditure, year on year, to earn BEE points.

Conclusion BEE is here to stay, regardless of our economy being in ICU, in junk status or Covid-19. The South African economy must become more inclusive.

A mind-shift should occur from implementation focused (scorecard elements) to a strategically aligned (four pillar) approach. Equity transfer, people development, supply chain optimization and community outreach.

Simply follow the key principles to BEE success: Understand the basic principles of the BEE Codes, understand your costs, plan your investments, implement your projects, and measure your RoI.

BEE Analyst has a proven track record, and digital solution, to navigate the byzantine BEE legislative environment, achieve desired BEE levels, and reduce BEE costs.

Contact: gerhard@beeanalyst.co.za

BEE INTELLIGENT

BEE SMART

market place

>> >> >> >> >> >> >> >> >>

House View: Metrofile, Reunert p.15 Killer Trade: Cashbuild, Motus p.16 Invest DIY: Simon Brown’s tricks of the trade p.18 Investment: How to avoid fundamental mistakes p.19 Simon Says: Barloworld, Capitec, FirstRand, MultiChoice, Murray & Roberts, PPC, PSG Konsult, Sasol, shareholder payouts, Spur p.20 Share View: Why 5G is a good example of an investment theme p.22 Invest DIY: Don’t underestimate SA’s small- and mid-cap stocks p.23 Trader’s Corner: Wells Fargo is trading at cheap multiples p.24 Analysis: The investment case for local banks p.26

FUND IN FOCUS: MOMENTUM RESOURCES FUND

By Timothy Rangongo

Resource fund for discerning investors Maximising long-term growth from investing in a select group of JSE-listed resource companies.

Fund manager insights:

FUND INFORMATION:

Benchmark: Fund managers:

FTSE/JSE Resources Index Norman MacKechnie and Werner Burger

Fund classification:

South African – Equity – Resources

Total investment charge:

2.18%

Fund size:

R120m

Minimum lump sum/ subsequent investment: Contact details:

R2 000/R250 0860 111 899/ci.clientservice@momentum.co.za

TOP 10 HOLDINGS AS AT 31 AUGUST 2020:

1

BHP Group

15.02%

2

AngloGold Ashanti

13.41%

3

Impala Platinum

12.8%

4

Anglo American

9.14%

5

Exxaro Resources

8.3%

6

NewGold ETF

6.66%

7

Gold Fields

5.33%

8

NewPlat ETF

5.31%

9

Pan African Resources

4.56%

10

Rio Tinto

3.91%

TOTAL

84.44%

PERFORMANCE (ANNUALISED AFTER FEES)

as at 31 August 2020: ■ Momentum Resources Fund

■ Benchmark

35 30

33.24%

30.39%

25 20 15

Why finweek would consider adding it:

10 5

6.55%

0 1 year

14

The Momentum Resources Fund is one of a handful unit trusts that aim to maximise long-term growth from investing in a select group of resource companies. The fund, launched in August 1987, seeks to outperform the FTSE/JSE Resources Index, an index of mining companies listed on the local bourse, over the longer term.

Due to the fund being concentrated and only investing in one sector of the market, this makes it riskier than a general equity fund. For instance, the fund’s benchmark was not spared from the wrath of the coronavirus pandemic, contracting by around 25% in the first quarter of 2020, as demand for commodities dissipated.

The revelation of the extent of Sasol’s financial woes, coupled with an oil price slump of as much as 60%, did not make matters any easier. It is no surprise that fund manager Norman MacKechnie says Sasol was one of the most challenging holdings to manage this year. The fund held 3.39% of Sasol in August 2019, which featured in its top ten equity holdings at the time, and is now underweight on the energy and chemicals company.

MacKechnie remarks that the fund did not exit its position in Sasol despite the underperformance because they see “potential softness in the oil price and in Sasol’s share price, which we would use to add Sasol exposure. We did earlier, sell out the bulk of our holding at R250 plus on balance sheet concerns.”

Though things turned around in the second quarter of the year, as most resource companies enjoyed gains in commodity prices, assisted by a weaker rand and investors fleeing to gold as a safe-haven investment amid the pandemic – the uncertainty of stimulus packages has been on the fund’s risk radar.

The biggest challenge has been understanding the size and impact of the stimulus packages that we have seen this year, says MacKechnie. He is concerned that the size of these packages in the various economies has been overwhelming and underpinned growth in the US, eurozone, UK, Japan and Chinese economies and growth in financial markets.

“When the quantum of financial support slows there is likely to be a pullback in equity and commodity markets, which is a future uncertainty.”

Overweight positions in holdings such as Pan African Resources positively benefitted the fund. In its results for the year ending 30 June, the gold miner declared a record final dividend and reported that it had reduced debt by 41.2%, amid soaring gold prices and better-than-expected production output.

finweek 22 October 2020

10 years

6.02%

The fund offers specific exposure to an outperforming resource sector. The fund’s holdings comprise of attractively valued companies that could offer strong longterm growth. ■ editorial@finweek.co.za www.fin24.com/finweek

house view BUY

METROFILE XXXXXXXXXXXXXXXX

SELL

marketplace

HOLD

By Simon Brown

Stronger with less debt

Last trade ideas

The offer to delist document storage company Metrofile* at 330c was announced in December last year and was on track to happen around May. But the lockdown put the deal on hold.

The reason being that the buyers, the Housatonic Consortium, weren’t “in a position to be able to finalise [their] arrangements with potential funding and BEE partners”.

With travel now allowed (including from the US for investors, albeit with restrictions), the final steps can now be concluded.

Part of this includes considering how the business managed during the lockdown and Metrofile’s annual results for the year through 30 June. These were released in September and showed a business in better shape, with less debt than a year ago. Furthermore, the buyer will be funding the deal in dollars; the rand has weakened by about 10%, making the deal cheaper.

So, I expect it to conclude in early 2021 at 330c.

Reports of a higher offer price or a second-party offer are floating around. However, I don’t expect either to happen. Even at the current 261c a share, the original offer price of 330c apiece is a 26% return in under six months. ■

BUY

Sea Harvest 8 October issue

BUY

Aspen Pharmacare 24 September issue

BUY

PSG 10 September issue

BUY

Distell 27 August issue

*The writer owns shares in Metrofile.

BUY

REUNERT

SELL

HOLD

By Moxima Gama

Buyers resurfacing

Photos: metrofilegroup.com | reunert.co.za

Reunert specialises in industrial goods and services. It manages several businesses focused on electrical engineering, information and communication technologies and applied electronics.

Reunert owns well-known brands, such as Nashua, CBI-electric and Reutech.

Reunert has been trading in a bear trend, which tested a new low at 2 800c/share in September, from a high once touched at 8 875c/share in August 2018. Its bear trend steepened after the group announced in June that it expected a decline in revenues as the coronavirus hit some of its businesses, especially its electrical engineering unit. Reunert swerved into a loss of R327m for the six months through 31 March, from a profit of R377m in the comparable period a year earlier.

After testing a new low at 2 800c/share, Reunert traded sideways for a few weeks, while encountering strong resistance at 3 560c/share. It breached that major resistance level during the first week of September, which means buyers are resurfacing and are finding current levels reasonable to invest. However, its overbought weekly relative strength index (RSI) has triggered a pullback on 12 October. If Reunert reverses above 3 015c/share, then upside should persist in the short term.

How to trade it: Go long above 3 560c/share after Reunert has pulled back from its overbought position. Upside to 4 860c/share should then ensue. If buying persists beyond that level, stay long as next resistance at 5 400c/share may well be tested. Refrain from going long if Reunert reverses below 3 015c/share as Reunert could fall back to its all-time low at 2 800c/share. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

Last trade ideas BUY

Transaction Capital 8 October issue

BUY

Tiger Brands 24 September issue

BUY

Massmart 10 September issue

BUY

Sasol 27 August issue

If Reunert reverses above 3 015c/share, then upside should persist in the short term.

finweek 22 October 2020

15

marketplace killer trade

By Moxima Gama

XXXXXXXXXXXXXXXX CASHBUILD

Resuming its primary bull trend

c

ashbuild said last month that it lost an estimated R621m due to the impact of store closures during level 5 of the nationwide lockdown. Cashbuild’s revenue and gross profit for the year decreased by 7% and its headline earnings per share decreased by 40%.

Outlook: After retaining support at 7 000c/share buyers trickled in, and now Cashbuild has regained sufficient upside to escape its bear trend and potentially resume its previous primary bull trend.

On the charts: Cashbuild is teetering on the support trendline of its primary bull trend that would be resumed on continued upside. Failing which,

CASHBUILD

52-week range: R70.00 - R253.98 Price/earnings ratio: 19.46 1-year total return: 9.20% Market capitalisation: R5.54bn Earnings per share: R11.39 Dividend yield: 3.21% Average volume over 30 days: 43 053

SOURCE: MetaStock Pro (Reuters)

SOURCE: IRESS

it will remain bearish.

Go long: Though a buy signal would be triggered above 23 100c/share, the overbought three-week relative strength index (3W RSI) is warning that a near-term pullback may be on the cards. If so, Cashbuild could fall towards support at 16 850c/ share. A reversal above that

level – thereby forming another rising bottom – should boost further upside through 23 100c/ share. Above that level, it would resume its primary bull trend and potentially recover its losses towards 32 150c/share. Increase positions above that level, as next resistance at 39 330c/ share could then be tested. If

the upside momentum should persist, Cashbuild could retest its all-time high at 52 650c/share.

Go short: A reversal through support at 16 850c/share would mean Cashbuild is failing to resume its previous bull trend, which is a bearish sign. The share price could topple back to support at 7 000c/share. ■

MOTUS

Ascent phase of a bullish pattern?

a

fter an extended sideways movement, Motus’ share price is regaining upside within its long-term bear trend.

Like many of its peers, Motus was hit hard by a sharp drop in tourism, including a fall in demand for new vehicles as the country remained in a recession.

Outlook: Thanks to car replacement parts sales – which the company is already seeing a robust demand for – Motus fared better than its rivals. Overall, car sales and rental constitute more than two-thirds of the group’s revenue.

On the charts: Motus is testing the resistance level of its sideways pattern between 4 380c/share and 2 300c/share.

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finweek 22 October 2020

MOTUS

52-week range: R23.00 - R85.98 Price/earnings ratio: 14.90 1-year total return: -38.02% Market capitalisation: R8.26bn Earnings per share: R2.88 Dividend yield: Average volume over 30 days: 872 783

SOURCE: MetaStock Pro (Reuters)

SOURCE: IRESS

Breaching the 4 380c/share level could prompt a recovery within its current bear trend.

Go long: A move through 4 380c/share would end the seven-month consolidation phase of a potential bottomingup pattern – thus triggering a buy signal. The ascending phase would commence towards the first resistance at 5 500c/share.

Long positions could be increased above that level as Motus could extend its gains further to either the 6 430c/share mark or the resistance trendline of its bear trend. Positions may have to be reversed once that trendline is tested as Motus could fail breach it. Otherwise stay long.

Go short: Refrain from going long if Motus encounters strong

resistance at 4 380c/share and reverses below 3 430c/share.

Downside to 2 300c/share could ensue, thus extending the sideways pattern even further. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa.

She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

www.fin24.com/finweek

marketplace invest DIY

By Simon Brown

TRADING

Why bigger isn’t always better

a

Photo: Shutterstock

Discipline and transaction sizes are important when learning the tricks of share trading. s well as being a long-term investor, I am also a short-term trader on the JSE, trading index futures before the equity market opens. Although the profits (or losses) are small in every trade, the profits are larger than the losses and I get a few more winners than losers over time. So ultimately, it’s profitable.

The key point is that the process is very different to long-term investing. Firstly, price is my only guide. I am not concerned at all with the fundamentals. Sure, they matter, but they matter and reflect into the price over the longer term.

In trading, price is my only truth.

Either something is going up and I should be long, or it is falling, and I should be short. Secondly, as price is all that matters, I don’t use indicators and oscillators.

They’re pretty, but they’re merely a mathematical derivative of the price so I ignore them, with one exception: limited use of moving averages.

Over the last few months I have been trading equity contracts for difference (CFDs) on local shares, having not traded shares since 2005. In the last decade and a half I have only traded indices as I prefer the lower volatility and the fact that they don’t have singleevent risk – whereby a trading update or management shuffle can send a stock soaring in seconds, potentially costing me money if it gaps against me overnight.

My reason for getting into equity CFDs is that I want to relearn an old skill, but also to see how easy it would be to transfer my index trading skills into equity.

My index skills are simple, but important: discipline at entry and exit (including a stop-loss) and risk management. That is all.

Two months in and my account

18

finweek 22 October 2020

is smaller than it was when I started. I expected this, but it has been a rude awakening. The good news is that I am improving.

I analyse every trade and look for ways to improve my strategy, with my most recent change being learning to respect the 200-day moving average.

But the most important reminder so far has been the importance of position sizing. This is how much of my portfolio I risk in any single trade.

I started with a R25 000 account and am only willing to lose 1.8%, or R450, per trade.

This risk is not my stop-loss, but the money at risk. If I am entering a trade at 1 000c and my stop-loss is 900c, I am risking 100c per share.

So, I take 450 shares in the trade. If stopped, my loss is R450.

Always, 100% of the time, exiting at the stop-loss, coupled with smaller trade sizes, has saved me. As mentioned, I am in the red so far, but if I had been trading larger – say risking a couple of thousand every trade – I’d have busted out already.

When I started a number of people said I was trading too small. But this isn’t the case; I was trading to survive.

Going big, even as a pro, will ensure I bust out in double-quick time. Going small keeps me in the game and gives me the time to adapt my strategy as I learn.

When I start becoming consistently profitable, I still won’t risk more than 1.8%, I’ll just increase the capital.

So, trade sizes will increase but the percentage of capital at risk in a trade will not. The idea that in order to make serious money you need to trade big is wrong; trading big only ensures you’ll go bust quicker.

Keeping the risk small and being disciplined with your stop-loss is the secret to trading. ■ editorial@finweek.co.za

Going big, even as a pro, will ensure I bust out in double-quick time.

Going small keeps me in the game and gives me the time to adapt my strategy as I learn.

www.fin24.com/finweek

marketplace investment

By Schalk Louw

FUNDAMENTALS XXXXXXXXXXXXXXXX

Five mistakes investors make

w

Tips for managing your portfolio, especially in uncertain times.

2. Higher fees do not necessarily mean lower returns I passionately believe that if you monitor and manage your investment costs, you most certainly will benefit from it over the long term. That doesn’t mean, however, that higher management fees are always a bad thing. Let’s use the SA general equity unit trust sector as an example. Over the last ten years, only six fund managers managed to outperform the JSE. Interestingly enough, their average total expense ratio (TER) over the last 12 months (at an average of 1.46%) was nearly three times more expensive than the average TER of exchange traded funds (ETFs) in the same sector. So, expensive may not always be better, but it definitely isn’t always worse.

3. Not being willing to wait at least ten years When we take a look at the graph showing the returns on shares over a one-, two-, five- and ten-year period, it becomes clear that the longer the holding period, the lower the volatility and the less the chances for capital loss. In fact, when you look at the JSE over the last 34 years, shares have never shown negative performance over any ten-year period. The worst your investment would have performed over any rolling ten-year period, would have been at 4% per year (excluding dividends). If you add dividends of around three percentage points to your returns, your worst performance would have been 7% per year, provided you had properly monitored your share portfolio over a ten-year period.

4. A market correction does not necessitate a correction in your portfolio A market correction, or even a total collapse in the market, usually @finweek

finweek

finweekmagazine

80 60 40 20 0 -20 -40 Jan ’18

Jan ’20

Jan ’14

Jan ’16

Jan ’12

Jan ’10

Jan ’08

Jan ’04

Jan ’06

Jan ’02

Jan ’00

Jan ’98

Jan ’94

Jan ’96

Jan ’92

-60 Jan ’90

Bad news can very often leave investors so worried, that they forget the fundamentals.

When we have a look at a long-term graph of the FTSE/JSE All Share Index (JSE) and compare it with a negative event timeline, clearly one of the biggest mistakes would have been to sell. The US presidential election is approaching fast, and I can’t help but think back to their previous election. With the surprising news that Donald Trump defeated opponent Hillary Clinton on 8 November 2016, the Dow Jones Industrial Futures immediately declined by about 800 points (or more than 4%), only to see the index jump by 256 points the next day. In fact, today, nearly four years later (by 6 October 2020), the same index is trading roughly 64% higher in US-dollar terms. Investors that acted on the ‘bad news’ by selling, would have regretted doing so today.

Return (%)

Jan ’86

1. Bad news leads to bad decisions

AVERAGE ANNUAL RETURNS FOR THE FTSE/JSE ALL SHARE INDEX OVER DIFFERENT PERIODS

Jan ’88

hen it comes to managing our personal investments, we are often so focused on doing the ‘right’ thing or following those who do, that we don’t realise that by eliminating small mistakes early on, we can actually increase our earnings. In this issue I’d like to have a look at five such mistakes I think many investors make when it comes to managing their personal investments, especially in share portfolios.

— 10-year average — 5-year average — 2-year average — 1-year average SOURCE: PSG Old Oak & Iress

happens when most buyers fall away, and prices are driven by sellers. Let’s say you’ve done your homework, you’ve invested within your risk profile and nothing newsworthy happened in the company in which you invested. Why on earth would you want to sell? Out of fear?

Even if you had invested in the JSE at the beginning of this year, and watched your investment decline by nearly 30% up to the end of March, the only way you would have made a loss would have been if you had let fear get the better of you and sold your shares, as the market is now back to the levels seen at the beginning of this year.

5. Impatience can cost you dearly Just because a particular share or investment isn’t doing what you wanted it to do overnight, or even what other shares are doing at any given time, doesn’t mean that you should sell it.

Let’s use the S&P 500 over the last 20 years, as an example. If you invested R10 000 in the S&P 500 at the beginning of 2000, your investment value would have varied constantly between R7 500 and R12 500. In fact, you would have been heartbroken to see the value below the initial investment value after the first ten years. An impatient investor most probably would have cashed in their loss, and in doing so, would have missed out on a portfolio that would have been worth more than R65 000 today.

It’s easy to understand that investors are panicked and impatient, especially with the noise and turbulent times we have experienced so far in this rollercoaster year. It may be extremely difficult to be patient right now, but good things do come to those who wait. ■ editorial@finweek.co.za Schalk Louw is a portfolio manager at PSG Wealth.

finweek 22 October 2020

19

marketplace Simon says

By Simon Brown

CAPITEC

Bad debts rise Capitec’s* financial results for the six months through 31 August showed the impact of the hard lockdown and the resultant job losses as bad debts spiked to record levels. That said, Capitec’s systems managed the hit as the bank pulled back on lending and rolled over loans. Those rolled loans (and payment holidays by the large banks) worry me as it may just be kicking the bad debt can down the road. But assuming the worst is behind – even as we have an awfully long road back to a pre-Covid-19 economy – the banks will survive the next couple of tough years. That all said, valuations on the big four remain very cheap (Capitec is never cheap) but I see no reason to rush in to buy as I expect them to be cheap for easily another year or more.

BARLOWORLD

A takeover target?

Zahid Tractor & Heavy Machinery (a Saudi Arabian company) has been slowly building its stake in Barloworld, which is now at 15%.

Zahid Tractor & Heavy Machinery is owned by the Zahid Group, which operates a Caterpillar delearship, car rentals in Saudi Arabia and green energy interests in Germany, as well as operations in Kenya, among other businesses.

So, why does it want 15% of Barloworld? Zahid Group is an unlisted company, so information about it is hard to find. But the group certainly doesn’t seem to take minority stakes and has been expanding globally over the last decade or so. A 15% stake is not much use to anybody who is not an investor, which Zahid Group is not. So, is Barloworld a potential takeover target?

20

finweek 22 October 2020

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

MURRAY & ROBERTS

Aton may lick its lips again Staying with takeovers, the bid by Aton to buy Murray & Roberts collapsed a year ago.

This means Aton can make another attempt – at a markedly lower price as Murray & Roberts now trades at around 650c. Last time regulators blocked the deal, but Aton never appealed and could agree to sell off Murray & Roberts’ local mining assets as Aton only wants the former’s oil operations.

Personally, I expect another offer, but this time at under 1 000c a share.

The money will be used to reduce Sasol’s debt to about

$8bn.

MULTICHOICE

A French affair Finally, a possible takeover is the news that Canal+ has acquired a 6.5% stake in MultiChoice. The stock exchange announcement included an odd line: “As a publicly held company, MultiChoice regularly engages with its strategic partners and maintains an open dialogue with the investment community. The Group’s policy is not to comment.” The market seems to have taken the view that Canal+ (owned by French Vivendi) will make an offer, but I don’t think so. Firstly, our laws prevent foreign ownership of more than 20% in broadcasting services, which DStv certainly is – blocking any possible takeover deal unless MultiChoice did some corporate restructuring. This is not impossible, but I think it’s unlikely. However, I do think a strategic partnership would make great sense. Canal+ operates mostly in French-speaking African countries, while MultiChoice focuses on English-speaking countries on the continent. And MultiChoice does continue butting heads on the rest of the continent. Agreeing to stay out of each other’s territories and sharing movie and sporting rights, as well as original content, would work well for both parties.

SASOL

Selling assets Sasol announced a sale of 50% of its Lake Charles Chemicals Project’s (LCCP) base chemicals unit for $2bn. Sasol’s shares fell on the news, while the buyer, LyondellBasell’s, rose – clearly revealing who the market thinks got the better deal. The base chemicals business is only a part of the $13bn LCCP spend, but it still seems the buyer got a good price. The money will be used to reduce Sasol’s debt to about $8bn. But even with other sales and savings from Sasol, a rights offer will still need to be undertaken next year; and it will likely be a huge offer with the possible $2bn still on the table. www.fin24.com/finweek

marketplace Simon says

SPUR

PSG KONSULT

SHAREHOLDER PAYOUTS

Encouraging signs

Pressure from income assets

Don’t hold your breath

Turnover in Spur Group’s restaurants “exceeded management’s expectations” in September, although still below the comparable month a year ago. This is according to a trading update for the period May to September released on 9 October.

The recovery ranged from The Hussar Grill at 93.7% for September (0.2% in May) to Pizza and Pasta, down at 63.2% (11.1% in May), with the average being 74.8% (up from 14.3% in May).

I would have thought the takeaway or delivery option of pizza and pasta would have seen higher numbers. But overall, this is a positive update.

The question is how much of this was pentup demand as we were all tired of cooking for ourselves? Even if it is mostly pent-up demand, it indicates the confidence of South Africans to eat out and that’s important. However, what we really need to see is how this continues into the holiday season and beyond. Nevertheless, these are certainly encouraging signs so far.

PSG Konsult’s results for the six months ending August saw headline earnings per share (HEPS) up 5% and dividend and assets under management both 7% higher.

The asset-management division was hard hit with HEPS slumping 39% as clients withdrew money and performance fees dropped to zero. It reported the same trend as Anchor Securities did with clients moving into income funds that have lower fees. The question is: When will this money return into equity investments where higher fees can be earned? Certainly, I would have expected more overall from the group, especially with a wide branch network of advisers, but the results were solid. I just wonder how long before they start improving again. Next year may be too soon, depending how the pandemic plays out in 2021 and when clients move back into equity investments. That said, PSG Konsult’s share price does seem to have momentum and has broken important upside levels after the results and could power towards around 1 000c.

Several readers have asked me whether they will get anything back from their investments in stocks, such as Comair, Phumelela Gaming and Leisure, Basil Read and Intu Properties.

The short answer is probably nothing and even if there is any payout to shareholders, it will be little. Maybe a few cents per share at best. Debt holders, staff and Sars will have to be paid first and this usually leaves extremely little – if anything – for shareholders.

FIRSTRAND

Photos: Archive

A boom in ETNs FNB has listed several new exchange traded notes (ETNs) over US stocks, such as Netflix, Tesla, McDonalds, Apple, Amazon, Microsoft, Facebook and more. Each of these ETNs has a Q and a C version. The Q version will not be impacted by the currency, while the C version will include rand-dollar exchange rate moves.

They are also fractional and listed at 1 000c each, so we’re not having to hand over R54 000 for an Amazon share. For those with money abroad in large enough amounts to buy an Amazon share at over $3 000 apiece, these ETNs serve no real purpose. But for smaller investors the ETNs trade on the JSE in rand and are a great addition to the current exchange-traded products listed on the bourse. FNB plans to issue more of these products in time. @finweek

finweek

finweekmagazine

PSG Konsult’s share price does seem to have momentum and has broken important upside levels after the results and could power towards around 1 000c.

PPC

Debt issues cause a drag Cement maker PPC’s full-year results show a company struggling as debt spiralled to R5.8bn and it announced a loss of R2.4bn on a market cap of only around R1bn. But it has cleaned up most issues except for its dollar debt linked to the Democratic Republic of the Congo, which still needs to be resolved ahead of a likely rights issues in March.

A rights issue always worries me, but with infrastructure spending likely a big part of our economic recovery, PPC certainly could be worth a speculative trade on the risky side.

Afrimat is, however, the higher quality and lower-risk infrastructure investment. ■ editorial@finweek.co.za * The writer owns shares in Capitec.

finweek 22 October 2020

21

marketplace share view

By Peet Serfontein

TECHNICAL ANALYSIS

Why it pays to scrutinise conspiracy theories

o

Believing the buzz around the unproven health risks of 5G could cause an opportunity to slip through your fingers.

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finweek 22 October 2020

2018

2020

But should you buy?

If you believe in the Bollinger squeeze and that it could possibly play out, it would probably be advisable to buy the share. However, you will have to be patient, since these Bollinger squeezes could arise quickly, but could take time to play out too.

The graph is the long-term (monthly) graph of Verizon’s share price (the scale is a logarithmic scale). The bottom panel of the graph indicates the Bollinger squeeze of the share: The lower the reading, the lower the volatility. The expectation is that the volatility could increase.

The width of the Bollinger bands indicates a possible target price of about $70. It’s advisable to take profits here. Should the price drop to below $51, I would become worried and use this level to place a stop-loss.

It is always advisable to determine a profit target price and a stop-loss beforehand. You can always adjust your profit target price – but then you at least have a target, which is better than not having one. ■ editorial@finweek.co.za Peet Serfontein is an independent market analyst.

2022

$48.84 - $62.22

Price/earnings ratio: Market capitalisation:

11.13 2.93% $246.42bn

Earnings per share:

$5.35

Dividend yield:

4.22%

Average volume over 30 days:

0.40

2014

A Bollinger squeeze arises when the volatility of a share is low in relation to previous periods. Remember that volatility is a statistical calculation, which determines to which degree the prices move up and down.

A decrease in volatility usually means that the share is in a period of consolidation, so that it’s trading in a narrow band. A Bollinger squeeze is usually recognised by the narrowing of the Bollinger bands. Bollinger bands are a technical indicator commonly used to determine the volatility of a share (see the bands around the price action on the graph). The best technical price movements usually arise from a period of low volatility.

1-year total return: 34 0000 28 0000

2012

What makes the share attractive as an investment option?

52-week range: 70.00 51.00

2010

classic example of such an investment theme is 5G technology. In these uncertain times, you should be careful of what you read and listen to – you might just miss an excellent investment.

This is where Verizon Communications caught my eye. The code for Verizon is VZ and the company is listed on the New York Stock Exchange.

Verizon is a holding company involved in the supply of communication, information and entertainment products to consumers, businesses and government agencies.

Photo: Shutterstock

ne of the weird commentaries on the outbreak and spread of the coronavirus is a theory that it’s linked to the recent implementation of 5G technology. In times of crises, conspiracy theories can spread as quickly as the virus itself.

While the coronavirus pandemic has tightened its grip on the world, we have all struggled – and are still struggling – to understand the magnitude of the situation. The cherry on top was 5G. But what is 5G really? It’s an upgrade of the previous generations’ 2-, 3- and 4G, but it’s more than that. This powerful technology is going to be the basis of what the telecommunications industry calls a ‘revolution’.

It will allow far more complex applications of the internet. Virtually everything is online nowadays. 5G is necessary to run self-driving cars, do remote surgery and maintain smart cities and houses, including rapid access to movies and music.

To enable this, the 5G network will use the millimetre wave portion of the frequency spectrum. These are low-frequency short waves that cannot penetrate through walls or other obstacles, such as trees. They can be transmitted via small antennae from a base station to avoid obstacles and reach their destination. These stations are mostly small.

This will force data businesses to erect thousands of these small base stations at strategic places inside, as well as outside buildings. Now, the 4G network uses far fewer antennae, which are not as conspicuous, thanks to the longer transmission distances.

Owing to the vast number of additional antennae that will be required, people fear that the radiation emitted by these antennae will be dangerous to their health.

Most of the research done on the health risks caused by radiation emitted by mobile technology was done on 2G and 3G technology. As the world has entered the 5G era, scientists can consult thousands of studies and calculations to determine the health risks caused by the radiation emitted by 2G and 3G technology, but there is a difference of opinion on how to interpret the findings – and the implications for the 5G network, which is new and lacks studies.

For me, it rather has to do with an investment theme. Thematic investment involves the creation of a portfolio (or a portion of it) by several companies grouped together in certain sectors, which could possibly deliver returns that beat the market over the long term. A

14 677 969 SOURCE: IRESS

SOURCE: TradingView

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marketplace invest DIY

By Simon Brown

XXXXXXXXXXXXXXXX STOCKS

The market’s neglected opportunities

t

Small- and mid-cap stocks are overlooked in the South African market, but there are gems to be found.

he general thinking around our seriously undervalued ones. market, which is by global standards How do we get some of the small-cap small and concentrated, is that the action? real mispricing is going to happen First is to always be extra cautious. It is in the small-cap share space. The FTSE/ easy to get sucked into a great story, but is JSE Top40 Index’s stocks are covered by that great story truly as great as we think? hundreds of analysts and has billions of new What if a larger competitor decides to move funds pouring into them every month due to into their space with a new product? How regular pension contributions. likely is this? How possible is it? Do they Graeme Körner of Körner Perspective, have long-term contracts with customers an asset manager, has often said to me and a product that is uniquely different to that local investors should only focus on the competition? the small- and mid-cap space. If you want Then, as always, focus on cash to buy a luxury goods company, why limit generation and the balance sheet. Debt yourself to only the one JSE-listed luxury can cripple a small business, even a goods stock, Richemont? Buy the world’s profitable business. And remember cash is best. The same goes for every other sector always king. we have locally; often with only one or two Have a look at the company’s stocks in the sector and in many cases, we shareholdings. I like management to don’t even have any listed companies in hold a fair chunk, but not too much. If some sectors. management holds much over AdaptIT’s share price has This was all brought home 50% then liquidity can be an doubled in value to with the recent AdaptIT trading issue and raising money can be update. At the time of the hard as management may not update, the tech share was be able to chip in their share for trading at 120c apiece. The a capital raise needed to grow company then reported an the business. and is still cheap on a P/E of just over four times. anticipated headline earnings I also like to speak to per share (although it gave management. I find CEOs of several different versions small caps very engaging and thereof) of at least 65c. This will place the keen to talk over coffee, even to a small stock on a forward price-to-earnings ratio investor. Just be warned, management of under two times. By the time of writing always love their own company’s shares. this article, the stock has doubled in value to The final point is something that I wrote 277c and is still cheap on a P/E of just over about recently. What will get buyers in four times. Surely it should be closer to a and spur the share price higher? Sure, an P/E of ten times? update indicating a P/E of under two times The lack of re-rating to a fairer P/E of works, but that’s not going to happen ten times is because of a general disinterest often. You must be happy holding with in the small-cap space. Large institutions modest or even negative price moves. For can’t invest in the space as the stocks this you’ll be compensated by dividends, are too small, but even retail investors are which means a strong and dependable staying away due to several fears. dividend payment is hugely important.

Fears such as South Africa’s lacklustre Basically, we must treat these small caps GDP performance, high unemployment, like private equity investments in which and concerns around corporate buying is hard (low liquidity) and selling scandals (albeit they’ve mostly been in even harder. Be prepared to hold them the larger stocks). So, appetite for the for a long time. Thus, make extra sure stock exchange’s listed small caps has you’ve bought the best stock at an disappeared, yet there are some really good excellent price. ■ companies and, as AdaptIT shows, some editorial@finweek.co.za

Photo: Shutterstock

277c

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There are some really good companies and, as AdaptIT shows, some seriously undervalued ones.

finweek 22 October 2020

23

marketplace trader’s corner

By Petri Redelinghuys

ANALYSIS

Wells Fargo’s governance overhang m

w

The US bank that got it wrong back in the day is now trading at cheap multiples. And analysts may still be too pessimistic on ells Fargo was once Wall Street’s The question needs to be asked though: biggest bank and a favourite of why would anyone want to own such a bank?

Warren Buffett. He still owns It’s simple: it seems like things are changing.

3% of the company. At its peak, There is a new CEO at Wells Fargo and he has Wells Fargo had a market cap of over $300bn, an impressive CV. Charles Scharf is the former today that is less than $100bn. The bank traded CEO of Visa (the credit card company) and was at a premium to its tangible book value; it was head of the retail division at JPMorgan Chase. In the highest-rated Wall Street bank when using fact, JPMorgan’s CEO, Jamie Dimon, would use this metric. him to turn businesses around and cut costs. So, A scandal caused the company to lose its Scharf is a person who has experience in turning premium rating. After the financial crisis of 2008, businesses around. the bank began to accelerate its cross-selling Scharf immediately pointed out that the Wells business. Cross-selling is when the bank uses its Fargo’s costs are too high. The bank has the access to the customer and cross-sells multiple worst efficiency ratio of the major US banks. The products to them. efficiency ratio refers to a bank’s costs divided With the push to increase, crossby its revenue. Wells Fargo’s financial Most analysts have selling eventually got the better of head recently said that it will take pencilled in around $2 the bank and led to many problems. between two and four years to get the in earnings for Wells Fargo, which leaves it Staff were heavily rewarded for lender more in line with its peers with an fairly valued at cross-selling and penalised if they efficiency ratio dropping to 57%. Scharf didn’t achieve daily targets. This led aims to cut $10bn in costs. to shortcuts, where Wells Fargo’s Most analysts have Wells Fargo staff eventually opened accounts earnings somewhere in the region of on behalf of customers without their $2 a share in a normalised environment a share. consent. In September 2016, Wells after the Covid-19 pandemic. But Wells Fargo paid a $185m fine for having Fargo has the ability to cut costs – as its opened 1.5m checking accounts and issuing management structure has managers covering 500 000 credit cards without client consent. In very specific roles – and a move to a more February 2020 Wells Fargo settled with the US broad coverage will allow the bank to cut layers securities and exchange commission and the US of management. Most analysts have pencilled department of justice for a $3bn fine. in around $2 in earnings for Wells Fargo, Due to the scandal in 2018 the bank was which leaves it fairly valued at $24 a share. barred by the US Federal Reserve (Fed) from Three kickers, however, could result in those exceeding $2tr in assets. This resulted in the bank earnings being underestimated. We have already having to cut $100bn in assets (normally loans to mentioned how Wells Fargo has the highest customers) in 2020 to avoid breaking this rule. cost base and should it bring those costs down

$24

Charles Scharf CEO of Wells Fargo

In September 2016, Wells Fargo paid a $185m fine for having opened 1.5m checking accounts and issuing 500 000 credit cards without client consent.

WELLS FARGO DAILY SHARE PRICE

Photos: Gallo/Getty Images I Shutterstock

51 49 47 45 43 41 39 37 35 33 31 29 27 25 23 9 16 23 2020 13 21 27 Feb 10 18 24 Mar 9 16 23 Apr 6 13 20 27 May 11 18 26 Jun 8 15 22 Jul6 13 20 27 Aug 10 17 24 Sep 8 14 21 28Oct 12 19 26 Nov SOURCES: Herenya Capital and Stockcharts

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finweek 22 October 2020

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marketplace trader’s corner

makes it cheap its turnaround plan. it all goes to the bottom line. They’ve already started closing some branches.

The other kicker is the bank’s net interest margin. Net interest margins are the difference between what the bank pays to get access to money to lend to customers, and the interest earned on those same funds. The net interest margin has narrowed to a historical low.

Basically, to improve the net interest margin, the longer-dated US yields need to rise and this is a distinct possibility as many economists foresee a rise in inflation sometime next year, which should push longer-term rates higher.

This will allow Wells Fargo to charge more on its loans and thus earn more.

The third kicker we have identified is buybacks. Since Wells Fargo is trading at 60% of its book value, buying back shares makes sense. In 2019 the bank bought back a staggering $25bn worth of stock – that’s 9% of the outstanding shares. The Fed has banned share buybacks for banks until next year, but once buybacks resume, we expect Wells Fargo to be permanently on the buy side until the stock trades at a more reasonable valuation.

Bear in mind that Wells Fargo traded at two times its book value for most of the previous decade, so the current 0.6 times is a steal.

What are the risks? The pandemic has cost many people their livelihoods and the longer lockdowns are used to try to control the spread of the virus, the more people will lose their jobs. And people without jobs don’t repay their mortgages. This is where we have a bit less to worry about than in 2008. Both US banks and US consumers are in a much healthier financial position compared with 2008. Wells Fargo is only leveraged 10 to 1 compared with 13 to 1 in 2008; this is a much better position to be in and should ensure it can weather the rest of the coronavirus damage to the economy.

So basically, we have a stock with a great customer base, a great CEO and the possibility to cut costs and realise higher earnings, trading at 60% of its book value. We think the market has underestimated how much costs can be cut at Wells Fargo and analysts’ estimates of $2.01 in earnings for 2021 is probably underestimated by a fair bit. We see this company returning to at least $4 of earnings by 2022 putting it on a forward price-to-earnings ratio of roughly six times. ■ @finweek

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finweekmagazine

A contrarian technical indicator

s

The daily sentiment index was developed to gauge market participants’ optimism. entiment indicators are rarely used by technical analysts because they are contrarian by nature. Being a contrarian isn’t always fun and you will get a lot of pushback.

The value of contrarian indicators comes from looking for extremes – the crowd’s greed and fear tend to be extreme at turning points. The condition of excess optimism is not necessarily a condition to sell a market, but it does increase the probability that a short-term high is close. The same applies for lows.

There are many sentiment indicators, but we will cover only one.

The daily sentiment index (DSI) was started by Jake Bernstein in 1987 to gather the opinions of traders on all active US futures markets and later in the European and Asian markets. The poll is conducted daily, and all markets are updated after the US market close each day.

The numbers range between 0 and 100, with numbers above 80 showing excess optimism and numbers below 20 showing excess pessimism. Often numbers will stay above 80 for several weeks in a strong bull trend but once they get to the high 90s it normally coincides with a parabolic market. We’ll use gold as an example.

WHAT IS A SENTIMENT INDICATOR?

A sentiment indicator refers to a graphical or numerical indicator designed to show how a group feels about the market or economy.

A sentiment indicator seeks to quantify how current beliefs and positions affect future behaviour, according to Investopedia’s definition.

Gold is one of the most emotional trading instruments, as it goes from extreme pessimism to extreme optimism and rarely stays in between. One must understand that just because sentiment is extreme it does not mean the market will go the other way. It’s like a warning sign indicating the increasing probability that the market will either reverse or that the gains will slow.

One way to use the DSI is to run a moving average on it and when sentiment has remained extreme for a certain period, the chances of a reversal are exceedingly high. In the graph, which was posted on Twitter by @andrewThrasher, he uses a 21-day moving average of the DSI on the Nasdaq and when its above 85 the market has almost always peaked. ■ editorial@finweek.co.za Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.

NASDAQ QQQ ETF: PRICE AND DAILY SENTIMENT INDEX (DSI) 280 258.39 240 200 160

21-day average sentiment crosses above 85.5 (bullish)

Nasdaq QQQ

120 80 60 50 40 30 93 85.7 70 50 30 10 2004

2006

2008

2010

2012

– daily closing price ($) – 21-day simple moving average daily sentiment index level

2014

2016

2018 2020 SOURCE: Twitter - @andreTharsher

finweek 22 October 2020

25

marketplace analysis

By Paul Marais

LOCAL BANKS

Are listed banks still a viable investment option?

a

Photo: Shutterstock

Despite increased bad debts and impairment provisions, investors should wait for a clearer picture come December. n important consideration when weighing up the investment viability of different commercial banks is that not all JSElisted lenders are purely South African. Similarly, not all locally listed banks are purely involved in the business of banking. Consider, for example, Discovery, which has a large insurance and medical aid business, and Sasfin with its large stockbroking and wealth management businesses.

Given that not all South African banks are listed – think African Bank – making a comparison between and across SA banks and understanding their respective impairment charges, as well as their specific investment cases, is challenging.

The SA Reserve Bank (SARB) lists 13 locally controlled banks.

The market, however, tends to focus on the traditional big four: Absa, FirstRand, Nedbank and Standard Bank, followed by Investec and Capitec. This ranking is unfair to Capitec, given its size. According to Bloomberg (as of 25 September), FirstRand is the largest in terms of market capitalisation, but Capitec’s market cap is bigger than both Absa’s and Nedbank’s.

Current market caps are roughly 40% lower than their 2020, pre-Covid peaks, and around 50 %to 60% lower than their 2018 peaks.

Market cap, however, is not the only measure of a bank’s stature relative to its peers. Other measures include its share of total transactional volume.

Another factor complicating comparisons are variances in their reporting schedules. Standard Bank, Nedbank and Absa all have December year-ends and recently published their interim results for the first half of 2020.

FirstRand’s year-end is in June, so its most recent report was final results.

Capitec reported its interim results for the period ending August 2020 at the end of September. Investec’s year-end is March, so its first set of interim results will be for the period ending September 2020.

Essentially, what these different periods indicate is that while Absa, Standard Bank, Nedbank and FirstRand can be grouped together to cover the same Covid period, Capitec’s results include extended Covid time, while Investec’s interim results will cover a completely different period.

Nedbank, Absa and Capitec’s earnings were all down around 80% to 90%; Standard Bank was an outlier, with earnings down just 40% to 50%. The latter was protected by its African operations and its investment in London-based ICBC, which generated profits. Listing regulations require entities to disclose if earnings are likely to be significantly lower than previously communicated ahead of time, so all four banks would have done this and decreases in earnings would have been widely anticipated by the market.

An important change in accounting disclosure has taken place recently, which requires banks to provide for expected losses over the upcoming 12-month period against incurred losses. With this change coming into effect in the current pandemic environment, the

26

finweek 22 October 2020

upcoming 12-month period is likely to be significantly worse – and the first to require meaningful changes in impairment charges.

In a nutshell, three key items need to be kept in mind. Firstly, this is a change in accounting and disclosure standards rather than a change in economic reality. In other words, these accounting losses would ultimately have been experienced, regardless of the change in standards. Secondly, it is for the forthcoming 12-month period, which implies that if economic conditions remain poor for longer than a year, further impairment charges should be anticipated. Lastly, the disclosure required is based on forecasts which require assumptions that may – or may not – be accurate.

According to its most recent results, FirstRand took the highest impairment charge at 3%; Absa was at 2.8%; Nedbank at 1.9%; and Standard Bank at 1.7%. In addition, so-called ‘payment holidays’ amounts to 15% of their total debt book; this is unusually high and impairment charges related to this are subject to increased estimation risk.

Local banks have been instructed to withhold dividend payments for the foreseeable future. Although this is sensible guidance, it does mean that those banks with stronger capital structures are being treated on the same basis as those who are perhaps less well capitalised.

The SARB’s May Financial Stability Review says the banking sector is stable and resilient, despite lower profitability and slightly higher credit losses. It adds that the sector remains profitable and well capitalised, although profits are likely to come under pressure in the near term as a result of Covid-19. These comments, however, need to be taken with a pinch of salt, given that the SARB has a social obligation to maintain confidence in the banking system, which would be undone if any bank was singled out over another.

Of interest is the fact that the outstanding debt of the local banking sector trades at a lower yield than that of the equivalent SA government bonds, indicating that the market views the domestic banking sector as less risky than the government.

Given that the SARB has not raised any previously unforeseen concerns; that bank share prices and earnings have already meaningfully adjusted downwards; impairment charges have been taken and have been done with a 12-month view despite the percentage of total book under payment holidays being high – the first tranches of which are only maturing now, which means there is very little information to go on; dividends are being withheld to improve capital resiliency (which is a good thing) and the bond market considers the banking sector less risky than the state – the banking sector is certainly still an investable option.

However, investors would be well advised to wait until December earnings are published for a clearer picture. ■ editorial@finweek.co.za Paul Marais is the managing director of NFB Asset Management.

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cover story National Health Insurance

By Mariam Isa

28

finweek 22 October 2020

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cover story National Health Insurance

Rushing universal health coverage through the legislature threatens SA’s already teetering healthcare sector.

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Photo: Gallo/Getty Images

HOW s THE STATE SHOT ITSELF IN THE FOOT

outh Africa is on course to launch its hotly debated National Health Insurance (NHI), an ambitious but controversial plan to bring free quality healthcare to all South Africans, by pooling the resources of the public and private sectors and establishing a single state entity to procure and pay for their services.

While there are no arguments against the ultimate goal of improving healthcare for the majority of South Africans in a deeply unequal society, there is widespread alarm at the sweeping reforms proposed in the NHI, which critics say could collapse the country’s entire health system.

An overriding concern is that there is huge scope for corruption in a monopolistic entity that will be run by political appointees, particularly as the existing public health sector has already become a hotbed of corruption, inefficiency and mismanagement.

The looting of money that was made available by government to purchase personal protective equipment (PPE) and other materials in response to Covid-19 has only reinforced those fears, and the government’s bid to identify and bring culprits to book have so far failed to restore public trust.

Many of the country’s top health professionals warn that the NHI overlooks – perhaps deliberately – the crisis in the public health system, which has deteriorated rapidly over the past decade.

They argue that the new entity will fail to achieve what is most important – rehabilitating public healthcare and regulating private healthcare, which is becoming increasingly unaffordable. Money paid to private medical aid schemes will be channelled into the NHI, threatening their survival.

“What is on offer is a chimera,” said Aslam Dasoo, a doctor who co-convened the Progressive Health Forum, a voluntary association of health experts from the private and public sector, and a member of the ANC Stalwarts and Veterans group. In Greek mythology, a chimera was a monstrous fire-breathing hybrid creature composed of the parts of more than one animal. The word is also used to describe an illusion, or a dream that is unattainable.

“The noisy propagation of the concept, and the extended timeline for implementation, masks the continuing deterioration of public services. At best, it will be used as a political fig leaf by a health administration that is being exposed daily as not being up to the task it is constitutionally obliged to perform,” Dasoo said.

finweek 22 October 2020

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cover story National Health Insurance

“The role of the government must be to immediately and pointedly focus on rehabilitating the public health system. You can’t do that if you’re going to have a fund that acts as a large medical scheme with all the language of insurance in it, and huge overhead costs.”

The government says that Covid-19 both highlighted the urgency of establishing the NHI and demonstrated that it would work, as the public and private sectors mounted what it describes as a coordinated and effective response.

“Now everyone has had an opportunity to see that not only is it possible to pool and share resources to mitigate the effects of public health shortcomings, it is absolutely necessary and the only logical step in the right direction,” health minister Zweli Mkhize said in an interview with finweek.

He cited, among other things, a coordinated testing and tracking strategy, quick agreements with private hospital groups for pricing and accepting state patients, and the deployment of thousands of healthcare and community care workers for a nationwide screening and testing programme.

But the reality is somewhat different. Most of the testing was carried out by the private sector, particularly in the early stages of the pandemic, and it took weeks for the hospital agreement to be reached – by which time the peak of the pandemic had passed. Only a handful of public sector patients were treated in private hospitals, although the hospitals were prepared to take them.

Professor Mkhululi Lukhele Former head of the Gauteng health department

Zweli Mkhize Minister of health

Mkhize also said that refurbishment and building of infrastructure to handle Covid-19 patients took place “almost instantly”. That is true to some extent, but it is now apparent that some of the facilities were unnecessary and shockingly overpriced, as was much of the PPE purchased by health departments during the pandemic.

The (former) head of Gauteng’s health department, Professor Mkhululi Lukhele, was forced to resign in October after the Special Investigating Unit (SIU) found that he failed to exercise his responsibilities in the awarding of contracts to certain companies for procurement of goods and services that were part of the province’s Covid-19 response.

The SIU, tasked with investigating allegations of corruption during the pandemic, is probing PPE and related health department tenders worth R5.08bn – roughly half of the Treasury’s R10.38bn Covid-related expenditure.

Many, if not most of the products, were sourced from companies that were not licensed by the SA Health Products Regulatory Authority, the country’s watchdog for healthcare products.

“The pandemic raised the issue of corruption and showed us what we expected,” said Angelique Coetzee, the chairperson of the South African Medical Association (SAMA), an industry body for private and public sector doctors.

“Unfortunately, that is a huge concern for us with the NHI. We don’t think there should be a lot of power in the

‘WE HAD A PRETTY SEVERE EPID The government’s handling of its response to the coronavirus pandemic is examined by the Professor Salim Abdool Karim, chairperson of the Ministerial Advisory Committee (MAC) on Covid19, says that he could “write a book” on things that should have been done differently to manage the spread of the disease in South Africa, which imposed one of the strictest lockdowns in the world on 26 March.

He believes the biggest problem with what the country did first was bringing in the military to police the lockdown, which resulted in the death in April of Collins Khoza, who was allegedly assaulted and killed in his yard by members of the South African National Defence Force (SANDF), and the Johannesburg Metro Police Department.

“I don’t think they (the military) really know how to do policing – they go around killing people. The situation we saw with Collins Khoza was emblematic

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finweek 22 October 2020

of the problem. This (policing) is not what they are trained to do, and they didn’t do it,” he said.

Abdool Karim was also critical of the way in which Khoza’s death was handled. “It was really sad the way they dealt with the matter. The few people that are bad apples ... we expect the government to bring those people to book. And all we got was a cover up. The perpetrators of that injustice should have been dealt with really harshly – I was disappointed in that,” he said.

A court order forced SANDF to suspend the soldiers who were involved in the assault after they were cleared by an internal inquiry, which found that there was no link between his death and the injuries he sustained. The legal team representing Khoza said in June that they will be suing the ministers of defence and police for R10m.

Second on Abdool Karim’s list of mistakes was the opportunities for corruption opened by the haste in which steps were taken to speed procurement of personal protective equipment (PPE) and other medical equipment. SA’s Special Investigating Unit is probing R5.08bn in pandemic related contracts – just under half of National Treasury’s planned R10.38bn Covid-19 spending.

“People were using their proximity to power to benefit. That for me really hurt. That was a really big mistake. We needed to have better systems in place to protect us from that. That it happened on the scale in which it happened really shook me,” he said.

The third item on Abdool Karim’s list, which he described as “hundreds of pages” long, was the effectiveness of systems that were put in place to ensure that families under stress had access to

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cover story National Health Insurance

hands of people in political positions.”

The corporate governance model of the NHI is a political one, points out Professor Alex van den Heever, chair of social security systems, administration and management studies at the Wits School of Governance.

All appointments to the board, including of the CEO, will be made by the minister of health, who also currently appoints the board and executive of the Office of Health Standards Compliance – which is the entity that will be responsible for accrediting health providers contracted by the NHI. District health management offices will be set up and establish units to receive funds from the NHI to contract with the accredited primary care providers.

“The intention to contract both public and private must not end up as lip service. Strategic purchasing must be impartial and must draw on the full capability of the private sector,” SAMA said in its response to the tabling of the NHI bill in parliament last year.

SAMA warns that the NHI must also ensure that its goal of obtaining services at the “lowest possible price” does not endanger the sustainability of service providers or the quality of care provided to patients.

The contracting and payment models to

be established by the NHI are so complex and precedented, questions have been raised about its capacity to manage the efficient processing of claims and repayment. There are presently no requirements for the NHI to pay claims within 30 days.

Olive Shisana, chairperson of the NHI Ministerial Advisory Committee, is dismissive of concerns over capacity and change management, saying that running the NHI will not be as complex as running a big medical aid scheme – primary care packages will be standardised in terms of price and content.

“We just want to know how many people come and once you know you multiply that by the cost,” she says.

SA’s health system is badly in need of reform – only 15% of the population, or about 8.9m people, can afford private medical care using medical insurance schemes. But skilled professionals follow financial resources, and the health department says most are concentrated in the private sector.

The discrepancy is even more glaring when you consider the fact that the global average of doctors to patients stands at 152 to every 100 000 — in SA, the ratio is 60 to every 100 000.

An exodus of South African healthcare professionals has gathered momentum in the face of uncertainty over how they will be affected by the NHI

EMIC’ healthcare specialist who advised them. state resources, although he acknowledged that the problems there were actually deeper than the Covid-19 relief response. “I just feel we should have had better systems in place,” he said.

The MAC chaired only had an advisory role for management of the pandemic in SA – the government’s response was managed by the National Coronavirus Council (NCC), which comprises 19 cabinet ministers, their respective directors-general, the head of SANDF, the national police commissioner, and a secretariat.

The NCC’s recommendations had to be endorsed by cabinet before implementation.

In terms of the medical response to the pandemic, Abdool Karim believes that testing and contact tracing could have been handled better. But he said it was unclear whether this

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would have made much difference to the course of the epidemic in SA, because the country’s younger population meant that there was a higher proportion of asymptomatic and mildly symptomatic individuals, who would be difficult to trace.

There has been much speculation on why SA’s death rate has been lower than anticipated, and Abdool Karim said at this stage there were no definitive answers, although the ‘youth dividend’ played a role. On 12 October, the number of officially recorded Covid-19-related deaths stood at 17 863, compared with initial mortality projections of up to 48 000 by November. But the number of fatalities is generally believed to have been underestimated as there have been 40 000 excess deaths – those above the historical average – since the pandemic began. A revised model by the Actuarial Society of

SA has put the probable range for SA’s death count by year-end at between 27 000 and 50 000.

“I don’t think we can say we got away lightly – we had a pretty severe epidemic,” Abdool Karim said, noting that SA still ranked in the top ten of countries globally that were worst affected by the pandemic. Although the benefit of hindsight meant that the duration of SA’s hard lockdown could be debated, there was little evidence at the start on which to base decisions, which were made with good intentions, he said.

Early intervention succeeded in pushing the peak of the pandemic from April to July, a delay which helped ensure that hospitals had plans and materials in place – an outcome very likely to have been one of the reasons for the country’s lower death rate, he noted. ■

finweek 22 October 2020

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cover story National Health Insurance

Photos: Gallo/Getty Images

An exodus of South African healthcare professionals has gathered momentum in the face of uncertainty over how they will be affected by the NHI and presently there is no training pipeline adequate to meet the needs of the new system.

and presently there is no training pipeline adequate to meet the needs of the new system.

Another worrying indication of NHI performance is that more than R5bn has been spent on pilot projects in the past four years, but a detailed evaluation by private consultancy Genesis Analytics was unable to conclude whether they had improved any district’s overall health because of problems with data quality.

Projects were rarely implemented or completed due to a lack of planning and funds not being released in time, while the funds that were released were used mainly for new infrastructure without addressing critical maintenance at existing facilities, the head of Genesis Analytics, Saul Johnson, said.

Plans for the NHI have been in the works for more than a decade. Concerns over cost have been a major obstacle and there is still no clear financial model in place, apart from an outdated estimate that there will be an annual price tag of about R256bn.

Finance Minister Tito Mboweni said the NHI was unaffordable during his medium-term budget last October, and state finances are now in worse shape because of the economic impact of the pandemic.

Shisana says the project will be financed by repurposing the existing healthcare budget and the gradual removal of tax credits for medical aid, which has already begun. The state will be able to stop spending money on private healthcare for its own employees.

Since the NHI Bill was finally tabled in parliament last August, submissions flooded in, and the portfolio committee on health is sitting with 32 217 handdelivered and 32 634 emailed submissions. There has been talk of outsourcing the work, which may prompt legal challenges.

Nonetheless, government is pushing ahead.

“We are almost ready to go; we just need to get the bill through parliament and as soon as it goes, we are moving. I can’t predict exactly when, but I’m hoping that before April next year we should at least have gone through the National Assembly,” Shisana said.

Mkhize says that it will probably take about nine to twelve months before the bill begins to be implemented.

But Van den Heever believes the timelines are still unrealistic.

“The idea that the poorly drafted bill will make it through parliament is a further stretch. They still have to process thousands of technical comments and then make amendments. The health committee 32

finweek 22 October 2020

WHICH DEPARTMENTS’ FINANCIAL HEALTH NEEDS THE MOST ATTENTION? “The financial health of provincial departments of health and education needs urgent intervention to prevent the collapse of these key service delivery departments. In comparison with the other departments, these sectors (particularly the health sector) are in a bad state.” – Auditor General’s report on national and provincial government departments’ compliance to the Public Finance Management Act for the 2018-2019 fiscal year.

Health departments Education departments Other departments

62% (5) 14% (1)

38% (3) 72% (5)

40% (56)

14% (1) 52% (74)

8% (11)

(The health department in the Northern Cape and the education departments in the Eastern Cape and Limpopo are among the departments excluded from the analysis, as these audits were finalised after the cut-off date.)

■ Good

■ Of concern

■ Intervention required

lacks the technical knowledge to completely redraft the bill, which is what is required for it to reach finality without legal challenge.”

Many private healthcare providers and medical insurance companies are putting their best feet forward on a path which they know is inevitable.

Richard Friedland, CEO of Netcare, says that Covid-19 exposed some of the fault lines in primary healthcare, showing that non-communicable diseases like diabetes, asthma and hypertension – the ‘co-morbidities’, which made fatalities more likely – were not under control.

“I do believe that we’ve got to find an equitable way of providing healthcare for all in SA. To do that we also need to strengthen primary healthcare. I think that the NHI is potentially a springboard for that and we stand ready to support those initiatives,” he said.

Discovery Healthcare CEO Ryan Noach says that the company is “looking forward” to participating in parliamentary deliberations on the NHI bill in the final quarter of 2020.

“We are seeking clarity on the potential impact of the bill on the future role of private healthcare and medical schemes. The bill creates room for differing interpretations, and we will play a constructive role in this important debate, aimed at achieving a sustainable future for private healthcare and medical schemes,” he said. ■

SOURCE: Auditor General of SA, 2019

Tito Mboweni Minister of finance

Richard Friedland CEO of Netcare

editorial@finweek.co.za Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

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in depth retirement

UNCERTAIN MARKETS AND YOUR PENSION MONEY

With lacklustre local stock returns, questions about the creditworthiness of government debt and record-high offshore markets, those close to retirement may be left with daunting choices. Amanda Visser spoke to retirement specialists about the options.

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finweek 22 October 2020

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in depth retirement

i

nvestors globally and locally are finding themselves in an ‘investment yield drought’, which started in 2008 with the financial crisis in developed markets and rippled through to the rest of the world.

Then came Covid-19, which wreaked havoc on the markets. Retirees and those planning for retirement have justifiably panicked. But the constant refrain from the financial planning industry remains: Do not take short-term decisions for longterm plans.

In South Africa there is a unique combination between the Covid-19 market crash and the SA sovereign risk downgrade by rating agencies that caused long-term interest rates on bonds to increase, says Deane Moore, CEO of retirement income specialist Just.

“Higher long-term interest rates are good news for pensioners because life annuity rates improved significantly. This means those in or close to retirement

have an opportunity to purchase guaranteed income for life at some of the cheapest levels in decades.”

Alexander Babich, managing director at Alexander Babich & Associates and deputy chair of the SA Independent Financial Advisors Association (SAIFAA) says SA has an incredible tendency to bounce back from the brink of disaster.

Internationally, interest rates are at either 0% or close to it. In SA investors can get a fixed rate on a three-year SA retail savings bond of 6% and a fixed rate of 8% on five years.

“We do not believe SA is going bankrupt just yet. Although there are credit risks, we think it is still a calculated risk. We believe fixed income funds with short-duration government bonds are still a safe space.”

Babich has also invested clients in global franchise businesses and offshore passive funds with a strategic allocation of between 30% and 40%.

Alexander Babich Managing director at Alexander Babich & Associates and deputy chair of SAIFAA

Deane Moore CEO of retirement income specialist Just

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Offshore property investment for retirees

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City is receiving growing investment from South Africans Alternatively, for those who don’t want to spend the because of the immediate access to commercial opportunities, required R6m (depending on the exchange rate), a excellent private schools, local and international universities, Mauritian residency permit can now be obtained by leading private medical care, retail and entertainment. It foreign retirees on the proviso that they bring into also provides a range of excellent sporting facilities and the country $1 500 a month or $18 000 per year access to the Moka Mountain range for hiking, biking and (approximately R300 000 per year). The Mauritian other adventure sports. authorities don’t prescribe how this money is spent; Rob Hudson, a consultant at ENL Property says: they just want the assurance that it comes into the “The properties range from two-bedroom apartments at country to cover the retiree’s cost of living. approximately R2.7m, up to premium penthouses of four The Helvetia These policy developments have ramped interest in bedrooms selling at approximately R7.5m. If the purchase is precinct, already Mauritius by South Africans looking for retirement alternatives to support future retirement planning, the rental yield being home to 200 residences. on this accessible, safe and secure tropical island. achieved in Moka is 6.5% and capital growth 7% per year. Thus, The Moka Smart City, developed by ENL Property, has brought a highly performing offshore property investment coupled with secure apartments and duplexes to the SA market at a far more affordable level rental income, with the benefit of a sound retirement in paradise to than foreigners have traditionally had to spend to obtain residency. look forward to.” ■ More information: www.moka.mu The Moka Smart City, located 12km inland from Port Louis, is the Rob Hudson email: rhudson@enl.mu Tel +27 83 309 0760 residential and commercial property high-growth node of Mauritius.

@finweek

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finweek 22 October 2020

35

in depth retirement

“Interestingly, although fees are often quoted as a selling point, investor focus should rather be pointed at the fund’s strategic asset allocation, mandate and ultimately performance.”

“We have not been as aggressive about offshore investments as other market commentators have been.”

Active or passive funds?

The debate about actively managed funds against passive funds has become more pronounced with the increase in new passive unit trusts and exchange-traded funds (ETFs) in the past decade.

An ETF is an investment fund operating on the stock exchange holding assets, such as stocks, bonds, or commodities. An index fund is a mutual fund or an ETF constructed to follow a specific industry or index, whereas an actively managed fund has an investment team, led by a fund manager who decides which companies to invest in, based on various research models.

According to Zama Dikana, business development manager of retail and savings at Old Mutual, index funds have been outperforming actively managed funds for an extended period, both locally and internationally.

Index-linked funds are generally cheaper than actively managed funds.

They require less research, less trading fees, and have smaller investment teams.

“However, it is important to consider both index-linked and actively managed funds when investing for a long term, because it offers the investor more diversification,” says Dikana.

John Browett, financial planner at Blue Key and member of SAIFAA, says the range of returns over ten years between the three largest actively managed funds and index-based funds has been 9.5% per year and 10.2% per year respectively.

“The most important point is that it is time that matters, not which active fund or index fund you are invested in. The long-term investment timeframe and tax efficiency of retirement savings should be

36

finweek 22 October 2020

Zama Dikana Business development manager of retail and savings at Old Mutual

John Browett Financial planner at Blue Key and member of SAIFAA

highlighted, and not a particular fund.”

Babich believes a passive fund should form part of a core holding. There are various passive index funds but there are noticeable variances according to their Association for Savings and Investment SA (Asisa) categories.

“Interestingly, although fees are often quoted as a selling point, investor focus should rather be pointed at the fund’s strategic asset allocation, mandate and ultimately performance,” says Babich.

Investors must consider the different price structures of the different funds. In many instances the more expensive fund that is not doing so well is being punted and has the most assets, whereas the smaller fund that is doing well has the least assets and is the cheapest.

“One must remain diligent and not just follow the funds that are beating their drums the hardest. Do your homework,” advises Babich.

The decision about the portion allocated to passive funds in the portfolio depends on the individual, their risk tolerance and needs.

“But having said that, we are comfortable with a minimum of 30% and a maximum of 70%,” says Babich.

Understanding the risk

Vivienne McDonald Director at Wealth Planners

Vivienne McDonald, director at Wealth Planners, says the choices available in constructing a passive investment portfolio are arguably almost as daunting as building an actively managed portfolio.

Comparing costs should never be the only consideration in deciding which fund to invest in. Understanding the risk inherent in each fund and the correlation to other funds held, is of utmost importance. As a handful of shares dominate the SA stock market, a passive fund that replicates this exposes the investor to significant risk should one of these companies collapse.

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in depth retirement

“Adding in the total value of your property ensures that you assess your full risk exposure to the property market, rather than including only rental property.”

She says if investors decide to pick their own funds, they may be better off choosing a low-cost, risk-profiled passive solution and sticking to it.

“Especially if you know that you won't be able to resist the urge to switch over time to the best performing local or offshore passive or active fund; which, in our opinion, almost always results in wealth destruction.”

Photo: www.allangray.co.za

A fixed base income

38

With market fluctuations, many investors have considered investing in rental property to ensure a ‘fixed base income’.

Earl van Zyl, head of product development at Allan Gray, says when investors consider buying property for the purpose of renting it out, they should also include their own residential property in their portfolio.

“Adding in the total value of your property ensures that you assess your full risk exposure to the property market, rather than including only rental property.”

The investor should assess the risks and potential benefits of rental property against alternative investment assets, he adds. There are many unit trust funds that aim to deliver high income yields to investors and invest in a range of incomegenerating assets, including listed and fixed property to do so.

Browett says residential property for rental is generally a high-risk, concentrated asset that requires highly active management. Income certainty can be better accessed through inflationlinked bonds or life annuities.

Covid-19 has exposed the ‘soft underbelly’ of the property market, adds Babich. In the residential market he warns against potential increases in rates and taxes. “Municipalities are desperately looking for revenue and the easy lowhanging fruit will be increases in rates and

finweek 22 October 2020

Earl van Zyl Head of product development at Allan Gray

COVID-19 AND PENSIONS

R5.217tr

- The value of assets under management in SA’s savings industry on 30 June 2019 (excluding multi-managed funds).*

91%

- The proportion of Sanlam consultants who said some of their clients applied for temporary retirement contribution suspensions due to the Covid-19induced lockdown.**

4 months

- The mean period which those Sanlam clients who opted to suspend their retirement contributions were expected to do so, according to the company’ s consultants.**

R119.3bn

- The gross inflows from institutional pension and provident funds into the ASISA’s member collective investment schemes in the three months ending 30 June.*** SOURCES: * Alexander Forbes Manager Watch Annual Survey December 2019 ** Sanlam's Benchmark 2020 Consultants Survey *** ASISA second-quarter fund flows data for the period ending 30 June 2020

taxes.” Property is not his asset class of choice now.

Dikana says another way of investing in property is in a property unit trust. The investor does not have to worry about maintenance or finding a reliable tenant and increased rates and taxes.

The fund manager does all the research, and only invests in listed property. “It is important to note that listed property has not done well recently, and investors should have a long-term investment horizon if they would like to be able to draw an income from their property unit trust,” says Dikana.

The ‘right’ approach

Van Zyl notes that the SA equity market returns have indeed been very disappointing for four or five years now.

The prudent approach is to plan for modest real returns and position investments to achieve real returns – allocating to a good multi-asset fund with equity exposure that can also invest offshore to diversify from SA markets, he says.

Where investors can afford to, they should supplement their retirement savings with discretionary savings.

“This will allow them easier access to their savings before retirement and can enhance their diversification beyond what is achievable in retirement products alone,” says Van Zyl. The approach to retirement should always be the same – regardless of market conditions, says Moore. It should be focused on the sustainability of retirement income using the best possible solutions available in the market to meet financial needs for life.

Valuable advice from Babich is to remain vigilant when comparing products from service agents or advisers who profess to be independent. ■

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in depth retirement

Living annuity or life annuity – you can have both A blended approach to retirement savings may be the best option now.

The annuity market has evolved to such an extent in the past few years that it is no longer a matter of choosing between a living or a life annuity at retirement.

Deane Moore, CEO of retirement income specialist Just, says it is now possible to have a ‘blended’ annuity that offers a combination of a living and life annuity.

Moore believes a life annuity should be the ‘core building block of a retirement plan’ to secure sufficient income to cover essential expenditure. The balance can be allocated to a living annuity that provides flexibility.

“A blended annuity, which combines a life annuity and a living annuity in a single vehicle, allows people to purchase tranches of lifetime income protection as their needs change.”

Key financial objectives

The two key financial objectives in retirement are to protect income against inflation and to make retirement income last for as long as a retiree and their spouse live.

Life annuities are insurance products specifically designed to protect against longevity risk. They offer a measure of comfort and safety by providing a guaranteed income for life. Some life annuities also provide additional protection against investment and inflation risks.

Income from a living annuity can go up or down depending on market returns and is not guaranteed for life. While drawdown rates can be adjusted to match income needs, this can only be done once a year.

“The ability to adjust drawdowns, especially after periods of poor market returns, could leave retirees with a false sense of security that their living annuity income will be sustainable for life,” says Moore.

Inflation and draw-down rates

Photo: Shutterstock

Ansie de Beer, wealth manager at PSG, says the time that one acquires a life annuity is sensitive to the interest rate environment.

“Currently interest rates are relatively low, so one buys in low. The danger is that inflation can suddenly increase, and you are locked into a guaranteed annuity where the return you earn is the same or even lower than inflation.”

De Beer says if retirees withdraw ‘soberly’ from their living annuities (between 2.5% and 4%) they may see an increase in capital growth every year.

“However, the danger with a living annuity is drawing down more than the potential growth on your capital. It would be really risky to

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finweek 22 October 2020

draw down more than 4% in the current economic environment.”

She adds that the performance of the living annuity depends on the underlying assets in which it is investing. In the current environment it would be wise to have a bigger offshore exposure with the potential depreciation of the rand.

However, she warns against being ‘too heavily’ invested in offshore assets as there is always the danger that the markets can collapse.

There is still place for ‘buffers’, such as a small percentage of cash, unit trusts and cautious balanced funds in a living annuity. However, the exposure to these ‘more conservative’ investments should be limited.

Although life annuities provide a guaranteed income for the policyholder’s life, they leave no capital to heirs at death. A living annuity provides no guarantee of capital value from which to draw an income, but the capital at death can be left to heirs.

Discretionary investments

John Browett, financial planner at Blue Key and member of the South African Independent Financial Advisors Association (SAIFAA), says clients who have half of their retirement capital in compulsory retirement funds and half in discretionary funds are in an efficient position to optimise their retirement income.

He says they advise people whose marginal tax rate is below 30% to rather invest in tax-free investments and unit trusts than endowment structures.

“Endowment structures are taxed effectively at 30% when the policy holder is an individual.

An individual who has a marginal tax rate below 30% can therefore make more tax efficient use of local interest exemptions and an annual capital gain exclusion, currently at R40 000, when invested directly in unit trusts.”

There is no tax payable within a tax-free investment structure. It is more tax efficient to structure income for retirees from either tax-free investments or unit trusts than from an endowment, adds Browett.

It is important to consider the age, health, finances, legacy wishes, and if people have a spouse, when designing a financial plan for retirement, says Vivienne McDonald, director at Wealth Planners.

“We find that many clients’ chronological age is very different from their biological age. You might find an 89-year-old with the health, vitality, energy and enthusiasm for life of someone much younger.”

It would then make sense to use a blended solution, where you buy a life annuity to cover fixed costs and other non-essential expenses are covered by a living annuity. ■ editorial@finweek.co.za

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on the money

>> Personal finance: How to diversify your risk profile p.44

COO INTERVIEW

By Glenda Williams

Beating a path in property

y

Emira Property Fund’s COO, Ulana van Biljon, helped steer the company to become more resilient to economic downturns. ou can count on one hand the number of women who sit at the listed property leadership table. Ulana van Biljon, chief operating officer (COO) at Emira Property Fund, is one of them. And as one of the first female executive directors to sit on a board of a JSE-listed real estate investment trust (Reit), she is carving out a path for women in the property sector.

As COO of diversified SA Reit Emira, Van Biljon applies her 25 years of experience in the listed and unlisted property sector to execute and implement the company’s strategy, while ensuring its operational results are achieved.

Making her mark

The art of crafting a path for female leadership is not without its challenges, since property has historically been the realm of men. While the real estate sector is changing, property remains a mostly male-dominated industry. However, that did not deter Van Biljon from making her mark on her own terms early on.

Her entrance to the property industry was unexpected and quite the shift from her role as a human resources officer.

“I got one of the very first centre management jobs, managing the Musgrave Centre in Durban for Sanlam,” she recalls. As if that was not challenging enough, the centre was in the midst of a major redevelopment. She had the front row seat to resistance from the all-male environment.

“Knowing I had come from HR, the men just ignored me. They knew I knew nothing, and they didn’t want to share.”

But rather than fighting against the maledominated environment, she embraced it.

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finweek 22 October 2020

“I made a conscious decision to focus on excellence and collaboration and embrace the strengths of the men to achieve results,” she tells finweek.

That stint in human resources paid dividends and it was not long before tenants, contractors and staff were won over by this self-proclaimed people’s person.

It’s a whole lot easier for youngsters today, she observes. “While it is still very male dominant at executive level, the rest of the industry – asset managers, quantity surveyors, property and centre managers – is very balanced.”

But why so few female leaders? Van Biljon believes it’s a combination of women not being given the opportunity at leadership level, and women not taking opportunities. “We do have opportunities, we just need to grab them,” she says.

Women, she says, need to know that to get into the boardroom they need to be skilled and show they are skilled.

“We need to lead by example. We need to show by outputs that we can do the job. It is not about getting a job because we are women, it’s about getting a job because we are skilled. You can’t be in the boardroom and not show outputs, because then you are just window dressing.”

Van Biljon is certainly not window dressing.

She was appointed to Emira’s board of directors in 2012, and in 2015 when the company underwent a change in management, she was appointed COO. At the time of her appointment, Emira was heavily invested in the office sector, overweight particularly in cheaper B-grade office space.

The portfolio has changed significantly since then, with Van Biljon playing a pivotal role in

Emira’s office to residential conversion, The Bolton, in Rosebank, Johannesburg.

Emira has a 49% holding in ten convenience shopping centres in the US. Shown here is Woodlands Square in Tampa, Florida.

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on the money spotlight

“We believe there will still be a lot of pain in the next two to six months for businesses; I think that wave is coming now.”

rebalancing and refocusing Emira’s operations.

Today, less than 25% of Emira’s assets are allocated to offices, those assets now predominantly P- and A-grade. Emira has been successfully repositioned defensively to counter a weak economic environment and is now invested in a balanced portfolio of office, retail, industrial and residential properties. It has 79 directly held South African properties valued at R10.2bn and is diversified offshore with equity investments in ten grocery-anchored open-air convenience shopping centres in the US, giving the Reit a 12.5% exposure offshore.

The company also invests indirectly in 24 lower-LSM shopping centres through its exposure to Enyuka Property Fund. Van Biljon considers lower-LSM rural retail such as this particularly defensive in a Covid-19 environment.

Smaller neighbourhood centres and open-air value-orientated convenience shopping centres, like those in Emira’s US portfolio have also proven to be more resilient, she says.

Residential assets

Few Reits move away from the staples of retail, office and industrial to invest in the residential space. Emira is one of those few. It is directly invested in The Bolton in Rosebank, together with co-investors, the Feenstra Group, and has a 34.9% stake in JSE AltX-listed Transcend Residential Property Fund, giving Emira indirect exposure to the rental residential sector.

“Emira recognised the opportunity that the residential asset class presented a few years ago,” says Van Biljon. Following on that, the repurposing of office property into residential space became a consideration. The Bolton was the product of that. The decision was also made to invest with Transcend, which not only has skin in the game, but also residential expertise.

Indirect residential exposure remains Emira’s preference, says van Biljon.

Photos: Supplied

A second wave?

“Our base is as strong as we can have it. Our vacancy is 4.1%, equating to about 33 000m2.

Even if we doubled that, it would take us to 8%, which is still very good for the market.”

The current operating environment is challenging and uncertain, says Van Biljon. @finweek

finweek

finweekmagazine

Who is Ulana van Biljon?

Durban born and bred, 53-yearold Ulana van Biljon holds a BCom degree from the University of the Free State.

Married for 25 years, her husband, she says, is her biggest supporter. “You need support to be able to accelerate.”

The aim was to go into finance, but just before obtaining her degree she was offered a human resources job with Sanlam.

Looking back, those people skills she acquired laid the foundation for her success within the property sector. “Property is not about bricks and mortar; it’s about people,” she says.

Apart from being Emira’s COO, Van Biljon also serves on several committees: she is an executive committee member and invitee to the audit committee, risk committee, investment committee, finance committee, social and ethics committee.

She is an avid runner, loves to travel and is passionate about all sports, tennis being her favourite.

Is there anything she hankers after? “A Mercedes-Benz E- Class – silver with a red roof.” ■

“We believe there will still be a lot of pain in the next two to six months for businesses; I think that wave is coming now.

“At Emira we adapt and stay close to our tenants. Do we change to accommodate tenants including shortening leases or reducing rentals?

Yes, we do, because this next year is important.”

Corporates though, have thrown a spanner in the works, still silent about the reopening of their offices and evolving requirements.

“Corporates have to tell us what they propose to do,” says Van Biljon.

Championing a cause

An accomplished executive, Van Biljon has also played a key role in uplifting women in business.

Those efforts were recognised when last year she was honoured with the top award in the property category at the Standard Bank Top Women Awards.

Her leadership style means she is a sought after mentor by women new to leadership.

“I’m a coaching leader. I’m extremely good at reading people and knowing what they require.”

Since joining Emira, her focus has shifted from external mentoring to mentoring interns in the company’s internship programme. It’s a programme she was instrumental in setting up nine years ago and one that embraces both females and males.

“We focus on BSc Hons Property Studies,” she explains. “We select two or three interns every year for a 12-month internship and, depending on whether we have a position, appoint one or two each year.

Van Biljon says she never wanted an internship where interns only spend a month with a division at a time because “they only pick up snippets”.

“Our interns are part of our team, fully integrated into the company. They get a job with the analysing team for the full 12 months.

They also spend time with our property managers and get assigned to asset managers.”

This animated coaching leader does not confine her mentoring to women.

“Mentorship is not only female driven. For me, mentorship is both male and female. I have so much to share.” ■ editorial@finweek.co.za finweek 22 October 2020

43

on the money personal finance

By Timothy Rangongo

Building a comprehensive risk portfolio

a

As you should diversify your investments, ensure you have sufficient and wide-range risk management in place too.

life insurance contract is typically between a client and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person (often the policyholder).

Depending on the contract, other events – such as terminal or critical illness – can also trigger payment.

Other expenses, such as funeral costs, can also be included in the benefits. The inclusion of other events can, however, become confusing for the consumer, as some of these events require separate cover.

“Sometimes all the covers can be integrated and sometimes they are standalone,” says Ana Scott, executive financial planner at Momentum.

She says that people often think they have adequate cover with, say, R2m life cover. However, in the event of a disability, for example, the claim can actually erode the life cover. If the disability cover was for R1m, and you claim on it, it could deplete the life cover to just R1m as opposed to the full R2m.

This is one of the reasons Scott advocates for the use of a financial planner to design what she calls a risk portfolio that is well-diversified.

“What you do with investment policies is what you must also do with risk (insurance) policies.”

Scott advises diversifying the risk, ensuring that you’ve got a little bit of cover in place – in case of death, liabilities, critical illness and loss of income.

Life cover

A life cover policy pays out a full benefit amount as a lump sum on the death of a life insured. This capital can be used to pay off liabilities and cover ongoing expenses, explains Wynton Mahome, affluent market senior manager and Jacky Maritz, distribution manager, both at Hollard Life.

Mahome and Maritz say it is important to consider your family set-up and what your needs are, which can be achieved through a financial needs analysis conducted with a financial adviser or broker.

“A financial needs’ analysis, done by a financial adviser will look at the needs of your family, how old your children are, your debt situation, what your aim is and what you want to achieve with the cover provided for the family.”

Ultimately, as Scott puts it, it all depends on one’s lifestyle.

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Ana Scott Executive financial planner at Momentum

A critical illness lump sum takes care of medical expenses not covered by medical aid.

She warns against the risk of taking out a R3m life cover policy, for instance, solely because your bond currently stands at R3m. “If one spouse passes away, yes sure, the surviving spouse can pay off the R3m bond, but what about the rates and levies afterwards?”

Some clients tend to fall into the trap of thinking the R3m is adequate, until a financial adviser points out other areas that require money. Liquidity within one’s estate is therefore important. If an executor that is winding up your estate does not have liquidity, and you owe money to several parties, family members would have to cover the shortfall in the estate. If there is no money, then assets are sold off to cover that.

Liquidity could, however, be created via life cover, according to Scott.

You can have five different death benefits or life covers for five different things, for example. One for a bond, the second for education, the third for your spouse, the fourth for liquidity purposes and the fifth for whatever else you may need. But such a policy would have to be properly structured with the help of a financial planner, so that it does not become too expensive.

Funeral cover

Funeral cover provides capital that can be used to provide for a proper funeral for the deceased, explain Mahome and Maritz. They say these types of policies pay out quickly, as their sole purpose is to give comfort to the family and provide for a dignified funeral of their loved one.

Critical illness cover

Critical illness cover provides capital when the insured is diagnosed with a critical illness, such as cancer, a heart attack, coronary artery disease or a stroke, among others. This capital can assist with additional expenses incurred due to a critical illness event.

What financial planners try to do is to create a safety net for clients who become critically ill with cancer or some debilitating disease, says Scott. The crux of this cover is whether you will be able to generate the income you have earned before the illness.

“If this is not the case, we need to put a buffer in place, to ease the pressure, so you can get better without worrying about finances,” explains Scott.

Out-of-pocket medical expenses are a stark www.fin24.com/finweek

on the money quiz & crossword Fancy yourself a general knowledge whizz? Then give our quiz a go!

You can complete it online via fin24.com/finweek from 1 July.

1. Which supercar manufacturer appointed South African, Brett Soso, as managing director of its new Europe, Middle East and Africa regions?

■ Ferrari ■ McLaren ■ Lamborghini 2. True or False? In 2007, Dis-Chem Pharmacies listed on the JSE.

reality with critical illnesses. Medical aids tend to pay limited expenses. A critical illness lump sum takes care of medical expenses not covered by medical aid.

The critical illness cover also provides liquidity when you are under immense stress with an illness.

The money could be directed towards eradicating debt, such as paying off a car or bond.

Photos: Shutterstock I Supplied

Income protection cover

Scott calls income protection cover the powerhouse of insurance products. She says it’s the most powerful product that you can have in your portfolio because it can stop and start. Keep in mind, if you take a disability or critical illness lump sum, once it gets paid out that is it, she says.

With income protection cover, if you become ill, a monthly amount would be paid to you (not a lump sum) to sustain your income and lifestyle as if you were still working.

Once you get better, or recover from the illness, the monthly income protection will not be paid to you any longer, but the protection cover will still be part of your portfolio for future events.

These types of policies pay out a monthly income benefit while the person insured is disabled (temporarily or permanently) and unable to work.

This is important when the employer no longer pays a salary to the insured person after their sick leave has been exhausted, and even more so if the person is self-employed, explains Mahome and Maritz.

“An income protection product is also linked to and keeps up with inflation. So, even though it's a bit more expensive than a lump sum policy, it's extremely valuable in that if you do get sick, it never falls away,” says Scott.

Though people seldom think about comprehensive cover because it can be a bit more expensive, Scott emphasises not to make a decision based on a premium. “You need to understand what you are covered for.”

The bottom line, according to Mahome and Maritz, is to talk to your financial adviser to map out a financial plan that takes your affordability and personal circumstances into consideration and navigate through this potential minefield to safety, for you and your family. ■ editorial@finweek.co.za @finweek

finweek

3. French broadcasting giant Group Canal+ took a 6.5% stake in which large African pay-TV operator?

4. Fill in the correct term: SA’s trade balance recorded a of R38.87bn in August 2020.

■ Surplus ■ Shortfall

5. True or False? British low-cost airline easyJet reported its first annual loss in 25 years.

6. Name the CEO of South32?

7. True or False? SA’s telecoms regulator has invited applications from mobile operators to bid for high-speed broadband spectrum.

8. How many border gates are there between SA and Lesotho?

9. True or False? Acclaimed Kenyan writer Ngũgĩ wa Thiong'o won the 2020 Nobel Prize in Literature.

10.On what type of court is the French Open played?

CRYPTIC CROSSWORD

ACROSS 1 Polite refusal by Bob, expressing no confidence in outcome (3,1,4) 5 Writer – leaving out the second line (4) 9 Banker runs out of energy (5) 10 Harry in a mood, a burden to carry (7) 11 Short trade-up for one flying (4) 12 Am in on Cockney’s chronic restlessness (8) 13 Understanding it’s written “Derrick” (6,7) 18 Have fewer objections not requiring skill (8) 19 Very small amount due to lion-hearted volunteers (4) 20 Unfortunate mishap has Ian suffering partly a loss of speech (7) 21 Thinking there’s no male employment (5) 22 Samples bars in cars (4) 23 Under pressure making upside-down puddings (8)

NO 763JD

DOWN 2 Shock about railway power failure (7) 3 Notice a point editor made differently (7) 4 Best to arrange parting (3,2,3,5) 6 Once more stumped up (7) 7 Cut margin by the roadside away from the wind (7) 8 African country swopping sides to get wool (6) 13 Night fighters? (7) 14 Sister’s tenure when finally put ashore (7) 15 Come into force (6) 16 Religious education question – circulate it again (7) 17 Departed from the previous colour (7)

Solution to Crossword NO 762JD ACROSS: 1 Misdirected; 9 Date’s OK; 10 Rabbi; 11 Iceni; 12 Nail set; 13 Yardie; 15 Play up; 18 Receipt; 20 Nerve; 22 Nitre; 23 The yips; 24 Altercation

DOWN: 2 Istle; 3 Dashiki; 4 Raking; 5 Corgi; 6 Embassy; 7 A daily trend; 8 Aim to please;

14 Recital; 16 Lenient; 17 Static; 19 Irene; 21 Rhino

finweekmagazine

finweek 22 October 2020

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Piker

On margin Getting out of the lockdown rut

This issue’s isiZulu word is umzimba.

Umzimba is a body.

Usually this time of the year is a nightmare, with people pressuring us to work towards summer imizimba (plural). So, while Covid-19 and the lockdown have been awful, we thank them for the respite from people who made us feel bad for not working towards a summer umzimba. We all have lockdown umzimba now, and we shall carry it with pride. Say it with me: “I LOVE MY LOCKDOWN UMZIMBA. YES, YES – I DO”.

If you want to work on your summer umzimba anyway, that is also fine.

You see, we non-summer umzimbaobsessed people aren’t pushy. We won’t pressure you into keeping your lockdown umzimba. Oh, no, we aren’t like the summer umzimba KGB. Nyet.

However, lockdown umzimba does have its drawbacks in that one now only fits into tracksuits and needs new jeans that work with the new umzimba.

Lockdown umzimba is also problematic because South Africans will not hesitate to point out how much you have gained weight, when they bump into you after not seeing you for a long time. We are a nation of umzimba police, and it is not right. Bheki Cele needs to rein in his umzimba warrant officers, sergeants, constables, colonels, lieutenant-colonels, majors, captains and lieutenants.

On a serious note though, we all have to take good care of our imizimba because the one you have is the only one you will ever have. Once it’s wrecked, you cannot trade it in for an upgrade to the latest model.

You can nip here, tuck there but you are stuck with your umzimba, so you have to love and respect it. But if I could put my consciousness into a different umzimba, I would jump at the opportunity because my current umzimba is a wreck – it creaks and pops whenever I walk.

– Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

Nate Silver @NateSilver538 Looking forward to some random Sunday afternoon three years from now when I’m like “Why do I follow like 100 epidemiologists on Twitter?”

Manda @amandayuen13 It’s finally October. That means Michael Bublé is defrosting as we speak.

Dumi Gwebu Edits @dumigwebu I can’t believe Meghan’s friends introduced her to Prince Harry.

Mine introduced me to Jägerbombs.

Thula Sindi @thulasindi The fact that I use my yoga mat as a bathroom mat should tell you everything you need to know about my level of dedication to exercise and fitness.

Stephen King @StephenKing THE LORD OF THE FLIES, starring Mike Pence! Coming soon to a streaming platform near you.

Tamaryn @HellaTamaryn What takes people so long at the ATM? Honestly, are they refinancing their mortgage? Playing a hidden crossword puzzle?

A Bearer Of Dad News @HomeWithPeanut My oldest wanted a juice box, so I told him to go pick one out. He came back with a bottle of apple cider vinegar, thinking it was apple juice. So, my question is: how horrible of a parent am I that I just went along with it?

“Business opportunities are like buses, there’s always another one coming.”

— Richard Branson, English business magnate (1950 - )

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finweek 22 October 2020

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KINGJAMESJHB 3490

Allan Gray is an authorised ďŹ nancial services provider.