31 May 2019 | www.moneymarketing.co.za
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WHAT’S INSIDE
YOUR MAY ISSUE
MoneyMarketing's insight on the short-term insurance industry
THE INCREASING IMPORTANCE OF DFMs IN THE WEALTH MANAGER’S BUSINESS It will be interesting to see how DFMs adapt as their role grows Page 7
RISKY ASSETS: ARE THEY WORTH IT? The temptation in volatile markets is to try and time them Page 27
page 15
The trade-off between risk and return
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e are living in a time of heightened risk in global markets, taking into consideration factors that include the US coming off the longest period of unbroken growth in its history, ultra-low interest rates that exist in the developed world, rising economic populism in several countries, a fragile China and the UK’s Brexit, while South Africa’s economy faces challenges that include load shedding, unemployment and rising levels of frustration. Coronation’s Chief Investment Officer, Karl Leinberger, believes that in general in the asset management industry, “people talk far too little about risk as they’re obsessed with returns, never really knowing about the risks taken to deliver these returns”.
RISK IS AN UNDERSTANDING ‘THAT MORE THINGS CAN HAPPEN THAN WILL HAPPEN’
In his presentation to the Investment Forum 2019, entitled Managing the trade-off between risk and return in challenging times, Leinberger explained that Coronation is not simply a return house and that managing risk and understanding the frailties of retirement capital is deeply ingrained in the asset management company’s values. He points out that among the noise, numbers and short-term pressures, the industry is seeking to preserve capital, protect capital and grow capital – all this over several decades – a daunting task, bearing in mind how many succeed over periods of a few years, but how few succeed over multi-decade periods of time. By contrast, mental bandwidth on a day-to-day basis includes an obsession with performance over very short periods of time, as well as an obsession with relative performance – as opposed to what really matters to the client. There is also an obsession with return league tables “with far too little thought on the risk taken to deliver those returns”.
At Coronation, risk is defined as “the risk of a permanent loss of capital” and managing risk is deeply woven into its values and research process, Leinberger emphasises. “I firmly believe that after twenty years in the industry, a manager reaching for return at the expense of risk can get away with it for much longer than any of us realise – for many years – but over a long period of time, like 20 or 25 years, they will ultimately be exposed.” He adds that managing retirement capital “is not a game”, and the first rule of investing is to never lose money. In an industry of smart people with intimidating IQs, it shouldn’t be forgotten that no one knows what the future will bring. “Hubris needs to be fought on a daily basis as the world is extraordinarily complex and uncertain.” Leinberger explains that Coronation sees risk as mattering more than returns – and that it The meaning of risk constantly forgoes extremely cheap For Leinberger, risk is the single most poorly considered assets that it believes carry high concept in financial theory. Risk should not be seen levels of risk. “There are many as volatility, as most textbooks would suggest. “Risk is stocks that we think could go often the highest when volatility is low and complacency up three, four or even five abounds, and we would use the Minsky moment* to times in the next five to ten debunk the myth that risk means volatility.” years – and yet we don’t Risk is an understanding “that more things can own them because the happen than will happen – just because your house risks are too high,” he says. Karl Leinberger, didn’t burn down, doesn’t mean you wasted money Chief Investment on insurance”. Continued on page 3 Officer, Coronation
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Annualised performance shows longer term performance rescaled to a 1-year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up and as well as down as past performance is not necessarily a guide to future performance. CIS’s are traded at a ruling price and can engage in script lending and borrowing. Performance has been calculated on the A2 class using net NAV to NAV numbers with income reinvested. The performance of each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and the dividend withholding tax. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of the capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF)(PTY) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Ltd, Registration number: 2007/026029/07 is an authorised Financial Services Provider (FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochure and application forms please go to www.lauriumcapital.com
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NEWS & OPINION
31 May 2019
Continued from page 1
Coronation owns no construction shares, Leinberger says rising economic populism even though there are a couple of construction in countries like the US, Italy, Mexico, Brazil, companies that could deliver great returns. Turkey and Russia is also a concern as it threatens Neither does it own gold shares. “South Africa’s to undermine the globalisation dividend – and gold isn’t needed by the world. We have marginal it is likely to increase as artificial intelligence businesses with low quality reserves and high cost continues to replace more and more jobs, leaving bases, as well as unstable labour large sectors of the electorate forces. While gold shares could unemployed. And China, the HUBRIS NEEDS TO double, we think they could just world’s second largest economy, as easily halve in value, so we is currently a fragile place as it is BE FOUGHT ON A don’t own them.” imbalanced and highly leveraged. DAILY BASIS AS Coronation, he says, Coronation is managing this risk THE WORLD IS endeavours to build ‘anti-fragile’ through capped China exposure portfolios “and we are great EXTRAORDINARILY and derivative protection believers in diversification around Naspers. In the UK, COMPLEX AND across sectors, industries, Leinberger says he is watching regions and currencies. We also the parliamentary circus around UNCERTAIN have a strong bias towards highBrexit. “UK assets and pound quality businesses with good management teams.” sterling are cheap, but there is a lot of risk. We’ve Leinberger points out that Coronation’s generalist capped UK exposure in all our funds and we use culture greatly reduces risk in the asset allocation derivative hedges on pound sterling.” process. “We have built an investment team with a deep skill set across all asset classes working Domestic risk together in one integrated process.” Meanwhile, back in SA, Leinberger states that the He makes the point that asset allocation is not hard work done in the first 15 years of democracy as simple as taking equity, bond, and property could be unravelling. Not only has confidence building blocks and adding them all together, been shattered by chronic load shedding, but and that in order to manage risk, one needs a there are also rising social tensions – “and most deep understanding of every single security in business owners we speak to are shrinking the a portfolio. number of people they employ”. Education is another concern, with only 37% of people who Global risk start school passing matric. Only 25% of grade Leinberger emphasises the heightened risks four learners can read for meaning, while 11% of presenting themselves in global markets: “Many teaching time is lost to absenteeism. people don’t realise that we are coming off the Coronation manages domestic risk “through longest period of unbroken economic growth in high rand hedge exposure, low look-through the history of the US and the obvious question exposure to the South African economy, and very is: How much longer can this last?” The US is low exposure to economically sensitive stocks”. also experiencing the longest equity bull market Leinberger says investors will never get away in its history. Coronation resolves to manage from the million dollar question: Is SA going these issues through three mechanisms: capping to be able to pull itself right? He adds that no exposure to global equities, higher exposure to amount of work will provide this answer. “Our much cheaper emerging markets and the tactical investment team agonises over this on a daily use of derivative hedges. Meanwhile, Coronation basis, because if the country can pull itself back is managing the risk of ultra-low interest rates in from the current situation, there are very cheap the developed world at a time of unprecedented domestic stocks available.” levels of government indebtedness, through zero exposure to developed markets’ government *Minsky moments refer to risks that build up in bonds as well as capping exposure to stocks with times of prosperity and low volatility – eg. The US stretched balance sheets. housing and banking market in 2006/7
EDITOR’S NOTE
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’ve never watched an episode of Game of Thrones. I was put off the series by the ads and trailers that were screened when it initially began, and believe it or not, I don’t feel like I’ve missed anything. Last month was all about GoT. People around me were agonising over who would live and who would die as the final series of one of the most popular programmes in television history hit screens around the world. I have to question how a fantasy drama that features gratuitous gore and fire-breathing dragons as well as zealous zombies, took hold of our culture. Surely, American fantasy writer George RR Martin – on whose work the series is based – must be laughing all the way to the bank? I think GoT has most appropriately been described by Financial Times writer, India Ross, who says the series has perhaps been “the guilty pleasure of an infantilised generation who can no longer be bothered to put themselves through the rigours of serious works of art”. Or maybe people just want to escape from events and people around them – like Donald Trump and Brexit – or in the case of South Africans, from this month’s elections. I wonder what the turnout will be for these polls. It’s obviously a foregone conclusion that the ANC will win the national vote – but by how much, we cannot say. Will South Africans take the advice of Tiso Blackstar’s editor-at-large, Peter Bruce, and vote for Cyril Ramaphosa – and the ANC? I suspect many will as Ramaphosa is seen as a decent man. And there’s a view that the bigger the ANC’s majority, the more likely Ramaphosa will be to complete the clean-up of his party. Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za
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NEWS & OPINION
PROFILE
31 May 2019
VERY BRIEFLY
IAIN POWER, CHIEF INVESTMENT OFFICER, TRUFFLE ASSET MANAGEMENT
How did you get involved in financial services – was it something you always wanted to do?
My interest in financial markets started at an early age, in high school, when I started investing in shares on the JSE. My interest was sparked by my father, who owned a portfolio of shares himself. I joined my high schools’ team that participated in the JSE Investment Challenge, where the winner was the team who generated the highest return for the portfolio. We didn’t win that year, but we had great fun and it taught me a lot about investing! After school I obtained a B.Com degree from UJ with a focus on finance and investments. After completing my studies, I was very fortunate to get a position in the investment administration department of RMB, which had just started a new asset management company in 1993.
What makes a good investment in today’s economic environment?
The most important decision when making an investment is the price you pay for the asset. Before making any investment, you need to ensure that there is a sufficient margin of safety vs the underlying intrinsic value. This ensures that you reduce the probability WE TYPICALLY of permanently LOOK FOR SOLID impairing capital and increases BUSINESSES the probability THAT ARE GOING of generating an acceptable real THROUGH A return. At Truffle, TEMPORARY we typically look for solid SETBACK businesses (that have a clear competitive advantage) that are going through a temporary setback, either due to company-specific issues or cyclical reasons. This gives us a good entry point to buy into the
business at a cheap price when the stock is out of favour, knowing that at some point in the future you will make a good return as its fundamentals normalise.
What was your first investment, and do you still have it? I made my first investment when I was in high school in the 1980s – I bought shares in a company called Lebowa Platinum. It was a marginal platinum mine in the Anglo American Platinum stable that looked cheap, but as I found out, it was cheap for a good reason as it was running a high-cost operation. The mine was eventually closed in the 1990s due to poor economics. The lesson I learned was that cheap doesn’t equal good value!
What have been your best – and worst – financial moments?
It’s impossible to single out one best moment, but one of the best feelings is when your specific investment thesis, as you have forecast it, plays out in the way you imagined and this in turn enables you to deliver on your clients’ expectations. The stand-out worst time for me was during the global financial crisis when there was a very real possibility that the global financial system could collapse.
What’s the best book on investing that you’ve ever read – and why would you recommend it to others?
Security Analysis by Benjamin Graham and David Dodd was first published in 1934 and formed the foundation of value or value-based investing. If you want to read a good book on fundamental analysis, I don’t think it gets better than this. The focus of the book, although written 80 years ago, remains timeless and reminds us that careful analysis of balance sheets is the primary road to investment success, with all other considerations little more than distractions.
UPS & DOWNS
Nissan has announced a R3bn investment in its facility in Rosslyn, Pretoria to prepare the plant for production of the next generation Nissan Navara pickup. Production is expected to start in 2020 and will create around 1 200 new jobs directly at the
facility, as well as across the local supply chain. Depending on market conditions, it is anticipated Navara’s arrival will add 30 000 units to Rosslyn’s current annual production volume of 35 000, creating the need for a new, second shift at the plant.
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Last year was a financially devastating year for South African households, which saw the purchasing power (real value) of their net wealth shrink by R449.8bn between Q4 2017 and Q4 2018. This is according to the Momentum/ Unisa South African Household Index Q4
2018, which found that 6.3% of households’ real net wealth was wiped out over the course of just one year. This is the largest reduction households suffered since the recession, when 15.6% of their real net wealth disappeared between Q1 2008 and Q1 2009.
During February 2019, and after the annual general meeting of the Fiduciary Institute of Southern Africa (FISA) on 19 March 2019, changes were made to the FISA Council as follows: Ronel Williams was re-elected unopposed for a further three-year term as nationally elected councillor; Rynoe Smith was elected as councillor for the Central Region, replacing Colin Hickling who had served on the Council for six years; Penny du Plessis was elected as councillor for the Gauteng Region, replacing Cheryl Howard who had served on the Council for seven years; and Shayne Ramdhani was re-elected as councillor for the KwaZulu-Natal region. Ronel Williams
The Hollard Group has welcomed the announcement of the acquisition of a controlling equity stake in global financial services group, Prescient Holdings, by investment management company Sithega. The stake was acquired through Sithega’s newly-formed financial services fund, to which Hollard and its majority shareholder, Yellowwoods, have committed R250m, and in which they are anchor investors. Hollard CEO Saks Ntombela says, “We are excited about this transaction, as it represents an important step in realising Sithega’s vision of creating a significant black-owned and black-run, non-banking financial services investment company focusing on life and short-term insurance, as well as asset management.” He added that Hollard and Yellowwoods’ involvement with Sithega forms part of both groups’ strategies to empower black entrepreneurs in the financial services sector.
Amidst growing demand for Shari’ahcompliant import finance from business customers, FNB has launched trade finance as part of its broad-range Islamic banking product suite. The FNB Islamic Trade Finance offering is modelled on the Murabaha arrangement, which entails the bank entering into an agreement to purchase and assume legal possession of items being imported and selling them to the customer upon delivery. As part of the agreement, the customer is required to facilitate logistics relating to the purchasing and receipt of goods from the supplier/exporter. The offering further includes access to various trade finance products, such as import letters of credit, foreign bills for collection, forward exchange contracts, guarantees and open account payments. “The launch of a trade finance offering cements our commercial Islamic banking value proposition, and serves as a major milestone in our continuous journey to create a holistic Islamic financial services platform that caters for our customers’ specific Shari’ah-compliant banking requirements,” Amman Muhammad, FNB Islamic Banking CEO, says.
Ashburton Fund Managers (Proprietary) Limited (Reg. No 2002/013187/07) is an authorised financial services provider (FSP number 40169) in terms of the FAIS Act, 2002. Ashburton Management Company RF (Pty) Ltd is an approved CIS manager in terms of the Collective Investment Schemes Control Act, 45 of 2002. The Global Leaders Equity Fund is a sub-fund of the Ashburton Investments SICAV; a Luxembourg-registered collective investment scheme approved by the Commission de Surveillance du Secteur Financier (CSSF) and which has been approved for distribution in South Africa in terms of section 65 of the Collective Investment Schemes Control Act, 2002. Issued by Ashburton (Jersey) Limited. Registered office IFC 1, The Esplanade, St Helier, Jersey JE4 8SJ. Regulated by the Jersey Financial Services Commission.
FULLY INVESTED IN BRINGING THE WORLD’S BEST, TO YOU In a volatile and uncertain world, where investment returns are unpredictable, wouldn’t you like the opportunity to access up to 25 of the world’s leading mega cap stocks? Wouldn’t it be even better if they came to you? The Ashburton Global Leaders Equity Fund is a concentrated portfolio of the world’s most prominent companies as measured by market cap, with the aim of delivering sustainable superior returns over the long term through geographic and sector diversification. The fund is available in US dollars as a direct offshore offering, or via the rand-based feeder fund without having to utilise your offshore allowance. From R500 per month or a lump sum of R5,000 via the rand feeder fund, you can put your money to work with the world’s best. Visit www.ashburtoninvestments.com to find out more.
FULLY INVESTED /
A part of the FirstRand Group
DISCRETIONARY FUND MANAGERS FEATURE
NEWS & OPINION
GERRY GRISPOS Senior Compliance Officer, Compli-Serve SA
RDR and investmentrelated matters No one in financial services is a stranger to the Retail Distribution Review (RDR), but the answers to some questions remain unclear, with the eventual result of how RDR will affect the investment world, equally opaque. A concern among these is clarity on demarcating roles and customer value propositions, particularly when a financial services provider (FSP) offers both financial advice and discretionary investment management services to the same clients. The Financial Services Conduct Authority (FSCA) recognises the potential risks and conflicts of interest, with the following proposals set out in a discussion document, distributed for comment: 1. Category II FSPs will be assessed against a list of four activities to ascertain whether the FSP is involved in Cat II activities or not (e.g. Portfolio construction, management of CIS/Wrap Funds/ Internal Portfolios). 2. Cat IIs will have to adhere to the new ‘Fit & Proper’ Standards, depending on their classification – and will perhaps have to earn more CPD points. 3. Authorised Representatives within these FSPs will either be classified as Product Supplier Agents (PSAs) or Registered Financial Advisers (RFAs). The above appears simple enough but let me illustrate, by way of an example, the potential problem with these proposals. An FSP that has a co-branded Collective Investment Scheme with a local Manco will, under the proposals, have its authorised representatives classified as PSAs, as it has its own funds. This means that the representatives will only be allowed to advise on the FSP’s funds and not on any other outside funds. These representatives cannot be both PSAs and RFAs, and so the scope of the advice given is severely
restricted. The question that begs to be asked is whether these proposals are in line with Treating Customers Fairly (TCF)? Another area of great confusion is whether or not an FSP can be both a Cat I and Cat II (i.e. able to provide advisory, intermediary and discretionary services from one license). The Regulator is keen to separate such functions (i.e. have a separate license for Cat I and for Cat II), perhaps restricting the fees earned by the same person fulfilling all three functions.
THESE CHANGES COULD REQUIRE RESTRUCTURING FOR SOME FSPS TO BE COMPLIANT With 21 measures to consider in the review process in determining how an FSP may be classified – coupled with much feedback from the industry on RDR proposals already (of which many of the 55 original proposals are being taken forward) – the FSCA has some challenges ahead in deciding how best to implement new regulations that are clear and not open to misinterpretation. While potentially positive elements may come out of the RDR proposals – such as providing total disclosure to clients on costs benefitting them best – it’s going to be interesting to see the final outcome. Some further clarity is anticipated once all comments to the discussion document have been assessed by the FSCA, and passed into law. These changes could require restructuring for some FSPs to be compliant, but as things are still murky in the proposal stage, it would be prudent to keep an ear to the ground, and to consult with a compliance officer as to how adaptable an FSP might need to become.
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31 May 2019
Making a distinction between financial planning and managing assets
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orningstar Investment Management South Africa (Pty) Ltd is part of Morningstar’s Investment Management group, a global investment advisory business that services a variety of clients around the world. As a leading provider of independent investment research, Morningstar Investment Management has established a discretionary investment business in South Africa to provide research-driven, innovative investment consulting services and managed portfolios to the local market, including asset managers, wealth managers, family offices and advisers. Morningstar differentiation What sets Morningstar apart is that we offer independent investment management services (DFM), portfolio construction, governance and operational support. In addition, advisers have access to our proprietary financial tools and a truly global research business to support their practices. With average industry experience of more than 10 years, the South African-based investment professionals use their knowledge of local markets to help design and manage investment portfolios on behalf of clients. The global research team consists of more than 100 analysts and their proven track record has resulted in global assets under management exceeding $209bn (as at 31 December 2018). Drawing from our global resources, Morningstar Investment Management South Africa has developed Morningstar Managed Portfolios. Our risk-profiled range of local and global (US$ denominated) portfolios provide advisers with actively managed, diversified and cost-effective solutions for both pre- and post-retirement clients. The Managed Portfolios are available on most platforms in South Africa, with no minimum investment criteria. In addition to the above, Morningstar also offers bespoke investment consulting services for advisers that look to create unique partnerships to assist with local and global fund research, award-winning asset allocation methodology and proprietary portfolio construction. Combining these with operational,
trade and risk management oversight provides advisers with a reliable outsourced solution to assist in helping their clients achieve their financial goals. Benefits to advisory practices: By partnering with Morningstar you can: 1. Get access to independent indepth investment expertise and resources. Financial markets are increasingly complex and the range of investment opportunities continues to grow. It’s a huge challenge to evaluate all of these and assess their suitability for your clients. 2. Focus on what you do best. You can make a distinction between financial planning and managing assets. Your clients will find it easier to understand exactly which services you provide for them – and they will be less likely to use cash returns or the JSE as a benchmark for the value you are delivering. 3. Free up time to serve clients better. Reducing the time you spend on investment decisions and portfolio construction will give you more time to spend elsewhere. This can mean opportunities to work on other aspects of a client’s financial plan, the possibility to deliver more personalised service, or simply the capacity to take on more clients. 4. Solve your capacity issues. Instead of employing in-house specialists, discretionary investment management allows you to overcome these capacity constraints and development expenses. You can concentrate on growing your business, knowing you can lean on your investment management provider to adapt to new or changing demands. Cell: +27 (0)72 268 8791 adam.benzimra@morningstar.com
Adam Benzimra, Head: Business Development, Morningstar Investment Management
DISCRETIONARY FUND MANAGERS FEATURE
31 May 2019
DAVID POTGIETER Delegated Investment Services, RisCura
STEPHEN BACKHOUSE Key Account Manager: Strategic Relationships, INN8
Institutional DFMs – an excellent solution for retirement funds
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ith the aim of ensuring fair outcomes managers is delegated to the institutional DFM, which for financial customers, South African implements the investment strategy by investing the regulators are advocating for a greater retirement fund’s assets into a managed portfolio of separation of financial advisory and investment investment products. management activities. Consequently, financial Ongoing portfolio management decisions can be advisers are increasingly partnering with made by the institutional DFM on a discretionary Discretionary Fund Managers (DFMs). basis and executed promptly to optimise DFM services are not only useful to advisers for performance and manage risk effectively. The daily their retail clients – they’re also an excellent solution monitoring and management of a client’s portfolio for advisers with institutional clients like retirement by a co-ordinated team of multi-disciplinary funds. Every retirement fund is unique, with a distinct professionals provides the adviser and their member profile and benefit regime that often requires retirement fund clients with peace of mind that their a customised investment strategy. Institutional DFM assets are invested with care. services focusing on retirement funds allow advisers The institutional DFM supplies advisers with to provide appropriate advice to their clients, leading a comprehensive toolkit that enables them to to better outcomes for retirement engage productively with fund members. their clients. The toolkit WITH AN An institutional DFM offers a includes market insights and single, integrated service tailored INSTITUTIONAL DFM, portfolio positioning, and risk to advisers with retirement fund and performance reporting. THE PROCESS BEGINS Additionally, retirement fund clients that includes strategic and active investment management, clients are provided with a suite WITH A THOROUGH while removing the routine hassles of reporting services, including ANALYSIS OF THE of administration, reporting investment accounting and RETIREMENT FUND’S regulatory reporting, to cater and governance. It provides the investment expertise ordinarily for their auditing and statutory NEEDS AND GOALS only available to large retirement compliance needs. funds, and requires a different skillset than that of a With an institutional DFM, economies of scale retail DFM providing the same service to individuals. apply, such as being able to negotiate better fees with With an institutional DFM, the process begins investment managers. This enables the institutional with a thorough analysis of the retirement fund’s DFM to charge for all the above services, inclusive of needs and goals. In conjunction with the adviser, an asset manager fees, at a highly competitive rate. investment strategy for the client is developed and By partnering with an institutional DFM, advisers an Investment Policy Statement formulated. are empowered to service their institutional clients Advisers can provide clients with a solution professionally, offering expert solutions that benefit whereby the often difficult and time-consuming advisers, retirement funds, and ultimately retirement task of choosing, managing and monitoring asset members. Money_Marketing_Quater_Page_No_Early_Bird_220x80mm.pdf 1 fund 2019/03/26 09:23:20 AM
The increasing importance of DFMs in the wealth manager’s business
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n November 2014, the FSCA (then known as the FSB) tabled its first iteration of the much talked about Retail Distribution Review (RDR). A bit more than four years on and RDR is yet to be implemented, but its impact on the financial services and investment industry has been profound. One of the more significant influences is the way in which financial advisers pick funds. Rather than building a portfolio using the industry’s top balanced funds, they have taken to outsourcing investment portfolio decisions to a Discretionary Fund Manager (DFM) who, for a small fee, builds investment solutions on their behalf. A question I often ask myself is, what has been the real impact of DFMs on the industry? On the face of it, their service is fairly straightforward: they have systems and skilled people who analyse portfolios and build solutions that best suit the needs of the adviser’s clients, delivering consistent performance with the hope of beating their benchmark. But if you delve a little deeper, you quickly realise that DFMs are, in fact, disrupting the industry. DFMs don’t just offer a service, they offer a partnership to Continued
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2019 marks the 30th FPI Professionals Convention, themed “Adding Value” which takes place in Johannesburg on the 17th and 18th July 2019 at the Sandton Convention Centre. Our line-up this year offers some of the best local and International thought leaders and speakers.
Why you need to attend this year’s FPI Professionals Convention? • Access tools and practical insights to build business and promote your self-development. • Learn industry trends and how they are implemented. • Meets experts and influencers face-to-face. • Input to questions posed panellists. • Network with like-minded professionals and top speakers at the FPI Awards Ceremony Gala Dinner.
WHO TO CONTACT? Adele Whyte / Bhavisha John
Email: adele.whyte@fpi.co.za / bhavisha@fpi.co.za Telephone: 011 470 6000
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DISCRETIONARY FUND MANAGERS FEATURE
Continued
their clients, and are currently replacing the asset manager and investment consultant as the adviser’s first point of contact or trusted adviser. DFMs’ partnership models are not like the traditional service model; they are a part of the advisers’ business even though they are on the outside looking in.
IT WILL BE INTERESTING TO SEE HOW DFMs ADAPT AS THEIR ROLE GROWS Small but flexible, DFMs have managed to build an environment that allows them to understand and adjust according to industry changes or adviser needs a lot quicker than a large corporate. Now, they are at a point where their influence has grown to the extent that they are driving down the costs of retail asset management funds. To add to the above, DFMs have also made advisers more efficient and more profitable – as advisers can now focus on advising their clients instead of worrying about how the market or a particular fund is performing. It will be interesting to see how DFMs adapt as their role grows; will they be able to keep up their partnership model or be as flexible as they are now? Only time will tell, but one thing is for certain: they have had a significant influence and are here to stay.
To DFM or not to DFM? There is no question! BY MITONOPTIMAL
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n this rapidly changing needs, and make all the complex environment, independent financial investment decisions based on planners face numerous challenges clients’ tolerance to risk, return – from the looming 2nd Phase of RDR profile needs and time horizon to ‘Treating Customers Fairly’ (TCF), • Assist in meeting regulatory and the ongoing regulatory and compliance compliance obligations. burden on advisers is high. Other prominent daily challenges include the All the above must be backed by a macroeconomic forces always at play, proven due diligence process, extensive a complex, complicated and cluttered asset manager and product research, investment universe, and the incumbent analysis systems to interpret results and Information Age that has led to a proven track record. Thus, advisers consumerism at its best. markedly reduce their risk in respect ‘Choosing funds’ is simply no longer of investment advice, implementation an option for advisers unless they and reporting. can meet the onerous requirements Ultimately DFMs will save advisers to manage their own Centralised time – allowing them to focus on Investment Proposition (CIP). To say their core areas of expertise while the least, the enormous disparity in leaving the investment decisions to a asset allocation across dedicated team of managers within professionals with the ULTIMATELY the same sector is infrastructure and DFMs WILL SAVE dramatic! Just how experience to satisfy can an adviser make their clients’ needs ADVISERS TIME asset management and the continuous decisions without the structure to regulator’s initiatives. support a well-defined CIP and the However, advisers must bear in necessary resources required to manage mind that not all DFMs are equal. the risk process? The levels of independence, skill set, Along comes the Discretionary Fund depth and experience differ vastly, and Manager (DFM) who emerged some an adviser could end up promoting years back in various forms and guises. the services of product houses who Recently there has been a proliferation own their own competitive tied sales of these service providers, but here’s channels! How then does an adviser what they actually do: select a suitable DFM? Advisers must • Assist in creating a CIP and conduct a thorough Due Diligence designing a suite of investment (DD) on at least three DFMs and ensure solutions for an adviser’s clients they have the records for scrutiny by • Offer a professional investment their compliance officer and for any service by providing expertise in FSCA audits. Also needed are copies the selection and monitoring of of the DFM value proposition, a list specifically designed portfolios and of questions and answers that were their performance provided on their services, as well • Work with advisers to understand as a non-marketing brochure on the their book of clients’ personal DFM business (auditors, staff skills, circumstances and investment remuneration policies, fidelity and
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professional indemnity insurance, etc). Once the DFM partner has been selected and appointed, the adviser should create and retain its own written justification note on why that particular DFM has been chosen, highlighting the benefits to their clients. Advisers should consider asking the following questions in their DD process: • Financial strength and resources – just how established is the DFM? • Quality of people, track record and experience? • Client on-boarding – can the DFM assist with managing client coaching? • Performance is important, but is consistency even more so? • Ease of doing business – is the DFM easy to sell to your clients? • Tailoring capabilities – do you get a ‘plug-and-play’ solution that’s branded for everyone, or do you get true tailored and/or bespoke solutions? • Investment expertise and flexibility – does the DFM have local and offshore expertise, do they offer ‘my-way-or-the-highway’ type solutions, or will they meet the needs of your client? • Research capabilities – does your DFM have depth in their research capabilities and CIP? • Fees – how competitive are the fees and what services do you get for the value propositions? MitonOptimal provides advisers with all the benefits of outsourcing to a DFM. Backed by over 18 years’ experience, our investment philosophy is unashamedly simple – diversification through unconstrained global asset allocation within an absolute return mindset. We work closely with our clients to become their trusted investment partner and will tailor our offering to meet the needs of our adviser partners and their clients.
Your Investment Partner MitonOptimal’s expertise lies in building longstanding partnerships with independent financial planners – tailoring our investment solutions to reflect your clients’ specific individual requirements. George Dell
Head of DFM Business Development E: george@mitonoptimal.com T: 082 809 4220
Issued by MitonOptimal Group (MitonOptimal). MitonOptimal South Africa (Pty) Ltd, registration no 2005/032750/07, an authorized Financial Services Provider (“FSP”) with License No. 28160. MitonOptimal South Africa (Pty) Ltd complies with all the requirements of the Financial Advisory and Intermediary Services (FAIS) Act (Act 37 Of 2002).
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DISCRETIONARY FUND MANAGERS FEATURE
ROLAND GRÄBE Head: Tailored Fund Portfolios, Old Mutual Wealth
Selecting the right discretionary fund manager for your clients
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ecent legislation, and specifically the Retail Distribution Review (RDR), has led to financial advisers now having a greater responsibility to make more informed investment decisions on behalf of their clients. Consequently, more advisers are using the services of discretionary fund managers (DFMs). With the DFM responsible for the portfolio management selection of a client’s assets and for what to buy or sell, the adviser is left to focus on their core competency of providing financial advice to customers. Over the last decade, regulatory scrutiny on how client investments are constructed has increased drastically, and the demand from advisers to properly research and justify these decisions has necessitated a different approach. As a result of this increasingly complex market and challenging regulatory environment, most of South Africa’s smaller independent financial advisers will eventually partner with DFMs, or end up in consolidation with larger groups. However, with this same legislation leading to an increase in the number of DFMs in the market, what should financial advisers be looking for in an ideal DFM partner?
When advisers partner with a DFM, the DFM is responsible for tracking the markets, managing the investment portfolio and making the correct strategic decisions. This does, however, mean that it is essential that the adviser partner with a DFM they trust. The adviser should also agree with the DFM’s investment philosophy.
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Backing of a strong investment team As the DFM will be managing the investment portfolios based on the client’s investment goals as well as the risk and return objectives, it is also worthwhile for advisers to partner with a DFM that has the backing of a strong investment team or is linked to a reputable financial institution with a proven track record. It is vital that the DFM and the adviser are on the same page and understand how investment risk will be measured and managed on behalf of clients. When the DFM is focussed on meeting the clients’ investment objectives, it will contribute positively to the sustainability and attractiveness of the adviser’s business.
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Sustainability With research showing that most wealthy families lose their wealth in three generations or less, but also that they rank leaving a legacy above all else, it’s important that the DFM advisers choose has the capability of offering clients solutions that are sustainable. It is important when sustainability is not only a product but part of the investment philosophy.
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Trust and a like-minded philosophy In recent years we’ve seen how fast-moving financial markets are, which makes it very difficult and time consuming for advisers to keep up with the events that impact their clients’ portfolios.
JB SMITH MD, Portfolio Manager, Sequoia Capital Management
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he term ‘Discretionary Fund Manager’ or DFM is probably well known by independent financial advisors (IFAs). The incoming Retail Distribution Review (RDR) legislation has in some measure provided a marketing tool for DFMs to convince IFAs of the need to use them. It is difficult to argue that an IFA practice will not be better off with a DFM in place. It is a misperception that every investment manager labelled as a DFM will be the same. The truth is very far from this. Within the DFM grouping, there are various types of discretionary fund managers. However, irrespective of the various types of DFMs available, there are a couple of generic advantages of using a DFM: 1. It forces IFAs to rethink the platform or Linked Investment Service Provider (LISP) deployment in order to improve efficiency and gain more scale. Many unit trust funds still have old share classes that are more expensive. One tends
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Incorporating non-financial indicators such as environmental, social and governance (ESG) factors into investment decisions should play an increasingly important role in a financial adviser’s fiduciary duty to mitigate risks, while maximising investment performance on behalf of their clients.
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Commitment to fiduciary care The financial services sector has been under scrutiny in recent years and customers are increasingly questioning the decisions made by asset managers. This has led to a high demand for increased transparency and due diligence when making investment decisions. It is crucial that DFMs recognise the responsibility that fiduciary care places on investment decisions. Old Mutual Wealth’s Tailored Funds Portfolio capability underwent a detailed auditing process to receive certification for fiduciary excellence from the Centre for Fiduciary Excellence (CEFEX), becoming the first South African investment manager to receive this certification. As responsible investing and fiduciary care are becoming essential in driving sustainable business practices in the financial services industry, investment managers and DFMs need to showcase a commitment to complete transparency. By having an accreditation for standardisation for financial services providers, we are moving in the right direction, giving clients peace of mind that their money is being managed in the best possible way to benefit them.
The colour of DFM
to find that older clients on book will still be invested in old legacy fee classes. DFMs are positioned and able to rectify this. 2. The number of unit trust funds used within an advice practice is usually large. It is normally the case that client investments are concentrated into a couple of funds with a long tail. The DFM can assist to avoid long lists of funds, which in turn should improve feedback to clients. 3. The DFM will improve implementation consistency across the IFA’s clients. Before you approach or appoint a DFM, it might be in the IFA’s interest to understand the ways DFMs differ. Some discretionary fund managers have their specific target market. This can be in the form of minimum assets under advice or the amount of clients on book. Better understanding of the DFM will improve your DFM selection and appointment criteria. Being a DFM is not only about development and management
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of solutions or portfolios for an advice practice. This should be complemented by structured feedback, accessibility and a value add service model. The traditional investment landscape in South Africa is dominated by a couple of large investment managers. Naturally, one would think the ‘larger is better perception’ would also be true with DFMs. However, UK-based Tacit Investment Management found there is no direct correlation between the size of assets under management and the effectiveness in providing the relevant outcomes for the IFA’s underlying client needs. One might argue that the boutique DFM might be better aligned with the IFA as both of them are business owners. Decision making, which includes business ownership, can offer more efficiencies and flexibility in developing a DFM model for the adviser and his clients. The level of independence of various DFMs differ. Some discretionary fund managers are attached to LISP platforms, collective
investment scheme managers and insurers – while others are independent businesses. Even the independence of the IFA’s practice can be affected by the choice of DFM. In some DFM business models, the adviser shifts in under the FSP license of the DFM, while others prefer not to impede on the independence of the adviser. In the end there is no right or wrong in terms of selecting a DFM. It is more a case of finding the DFM that will fit your advice practice. The advice practice will have to assess and understand its needs to determine what it requires in terms of portfolio management capabilities and mandates and the additional service proposition needed for clients. This will provide the advice practice with a solid base to implement a suitable DFM strategy. In our view, the nature of the relationship between the adviser and the discretionary fund manager is that of a true long-term business partnership.
DISCRETIONARY FUND MANAGERS FEATURE
31 May 2019
DANIEL SCHOEMAN CFA, CIO, Portfolio Analytics
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Points to ponder in selecting a DFM
t Portfolio Analytics, we believe that discretionary fund managers (DFMs) should be able to add demonstrable value to any financial adviser’s business in an age of ever-increasing investment and regulatory complexity. However, not all advisers need a discretionary fund manager (DFM). If your advisory practice ticks the following boxes, then you wouldn’t need a DFM: • You already have a FAIS Category II licence and have been managing your own model portfolios on different LISP platforms for several years. • You are satisfied that your investment process is disciplined and robust: -- Access to timely economic research to inform strategic and tactical asset allocation decisions -- Fund manager research is informed by both qualitative and quantitative characteristics -- Portfolio construction incorporates the latest methodologies and ensures optimal blending of uncorrelated fund managers -- Regular reviews take place to evaluate portfolio performance relative to the initial portfolio design objectives -- Access to world-class decision-support systems such as Bloomberg, FactSet and Morningstar Direct. • You are comfortable with your operational process:
-- Portfolios are FAIS compliant -- Dedicated team of operational staff who works closely with the LISP platforms -- Trades and switches are performed accurately and efficiently -- Monthly fund fact sheets are produced in a timely manner. • You have enough time to focus on creating and building client relationships, understanding clients’ needs and sourcing the most appropriate solutions. • You have access to cost-effective institutional investor products. • You provide different investment options to different tiers of clients. • You follow an optimal practice management process. If, however, your advisory practice does not tick most of the above-mentioned boxes, consider this when selecting a DFM: • Ownership structure: Corporate or independent? Is the culture of the DFM compatible with that of your advisory practice and could you form a good relationship with the firm and the team supporting your clients’ specific requirements? • Size of the DFM: Assets under management (minimum of R10bn) and track record of at least
10-15 years through different market cycles? Optimal number of clients to provide a continued bespoke service offering? • Investment process: What is the portfolio construction philosophy of the DFM and are they able to utilise different investment instruments, styles and strategies? • Investment and Operational Team: Size, experience, qualifications, quality and accessibility of investment and operational staff members? • Performance of portfolios: Consistency of longerterm returns relative to appropriate benchmarks? • Fee structures of DFM and underlying funds in portfolios: Does the DFM proposition promise value for money in terms of the level of service you will receive on an ongoing basis? • Value-added services offered: Any other valueadded services you may expect from the DFM, i.e. support services in investment simulations, servicing clients and practice management? These considerations should aid advisers in making the decision on which DFM would provide the best partnership and business fit with their practice. For more information call us on 011-463 9600 or email dfm@analytics.co.za
ARCHITECTURAL SCIENCE IS WHERE FUNCTION MEETS FORM. While we believe in function, we also believe there is space for creativity and innovation. This is why we do not subscribe to a one-size-fits-all approach. Analytics is an independent multi-manager business, structured to offer specialist, risk-profiled solutions for wealth management and branded model portfolios as a Discretionary Fund Manager (DFM) to growing independent advisory businesses. We believe that each and every challenge deserves its own unique, custom-made solution. It deserves its own time and space. Above all, it shows growth, the ability to put plans into action and solutions that will stand the test of time.
For more information call us on 011-463 9600 or email dfm@analytics.co.za
THE ART AND SCIENCE OF PORTFOLIO DESIGN
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UNIT TRUSTS FEATURE
31 May 2019
PIETER KOEKEMOER Head: Personal Investments, Coronation
SHAUN DUDDY Manager, Product Development, Allan Gray
A sound multi-asset solution for discretionary long-term savings
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arch marked the 20th anniversary of the Coronation Optimum Growth Fund. A pioneer in the worldwide flexible fund category when it launched in 1999, Optimum Growth is an unconstrained fund that truly celebrates active investing, as it can invest in any listed asset from anywhere in the world. Optimum Growth is benchmarked against a combination of shares and bonds (70% shares and 30% bonds) as well as local and global assets (50% SA assets and 50% global assets). Its broad mandate benefits from the breadth and depth of our 54 investment professionals covering equities, bonds and property across the domestic, frontier, emerging and developed markets. In our view, it is a sound multi-asset class solution for long-term investors not subject to retirement fund investment restrictions, and who are looking for a larger exposure to offshore assets (within a rand-denominated vehicle) but still require their fund manager to decide on the allocation between domestic and foreign assets. The graph below represents a risk-return snail-trail plot that shows how the return and associated risk of the fund and the indices used for comparison, changed over time. As investors prefer higher returns and lower risk, an investment that shows a skew in favour of a top-left position on the chart can be deemed to be superior to investments with a bottom-right skew.
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The A-class of the fund returned 14.3% p.a. (or 8.2% p.a. after inflation) since launch, which is in line with the local equity market but nearly 1.5 times the return produced by global shares. Over two decades this translates into an increase in purchasing power of 4.25 times and 2.4 times the end capital of an equivalent investment in the developed market MSCI World Index. The benefit of wider diversification is reflected in the outcome that this return was achieved at significantly less downside risk than both the local and global equity markets, as illustrated in the chart below. Over the past five years, the fund has generated a return of 10.7% p.a. and over the past 10 years, 16.0% p.a. As at the end of March 2019, 75% of the fund’s portfolio was allocated to equities. This was up from AS AT THE 66% at the start of the END OF year, largely due to MARCH market moves. Of this, 2019, 75% OF approximately 55% is invested in developed THE FUND’S market shares, 5% in PORTFOLIO South African shares and 40% in other WAS emerging markets. ALLOCATED Large holdings include TO EQUITIES 58.com, Alphabet, Blackstone Group, Diageo, JD.com, Heineken and Charter Communications amongst others. Our negative view on global bonds remains largely unchanged, although we did buy short-dated US Treasuries (around 3% of the fund) late last year when US government 10-year bond yields were north of 3%. The fund’s position in L Brands (owner of Victoria’s Secret) corporate bonds remains (1.7% of fund) and is now yielding 6.8% compared to our initial purchase yield of 7.3%. In total, bonds make up 4.7% of the fund. The fund also has around 4% invested in global property: largely in Unibail (European and US Retail property) and Vonovia (German residential). Lastly, the fund has a physical gold position of 2.5%. The balance of the fund is invested in cash, largely offshore.
Taking a balanced approach to volatile markets
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he recent market volatility has caused investors to feel uncertain about where it could be best to invest their money for the long term. According to Shaun Duddy of Allan Gray, this is a great time to remind ourselves of the benefits of balanced funds, which have the flexibility to vary asset allocation. “In a constantly changing investment environment, rather than trying to time the bottom of the market, investors should rely on tried and tested investment philosophies and go back to basics,” says Duddy. The best bet for most investors wishing to invest in a range of asset classes may be to invest in a balanced fund, according to Duddy. Balanced funds are an ideal wealth-creation vehicle for investors with a medium- to long-term investment horizon. Balanced funds can invest in a spread of asset classes, including equities, bonds, property and cash, an opportunity that, if used well by an experience BALANCED investment manager, can also result in substantial FUNDS ARE ALLOWED TO returns while reducing the risk of loss. INVEST UP “Investing in a spread of assets also reduces the TO 75% IN variability of upward and EQUITIES downward movement in returns, also known as volatility,” Duddy adds. Most balanced funds also comply with the retirement fund regulations, specifically Regulation 28 of the Pension Funds Act, which limits the amount that can be invested in riskier assets, such as equity, property and offshore investments. Balanced funds are allowed to invest up to 75% in equities. “The high levels of equity exposure give balanced funds the opportunity to generate significant returns,” says Duddy, “but the beauty of asset allocation means you can get reasonable returns even when news about a specific asset class is bad. The ability to invest in a broader range of assets allows the investment manager to reduce the volatility of the portfolio over the medium to long term.” Pure equity mandates, on the other hand, are significantly more volatile. They have historically produced higher returns over the long term, but with considerably more risk of losses over the short term. For the average investor saving for his or her retirement, investing in a balanced fund can also create wealth, but with a little more peace of mind.
We couldn’t grow your trust without first growing your money. Since 1993, we’ve grown the long-term savings of millions of South Africans by doing one thing and one thing only, investing with a long time horizon. Never losing focus and never giving up on our goal, we grow our clients’ money into real long-term wealth.
48871/E
To invest your money today, speak to your Financial Adviser or visit coronation.com Coronation is an authorised financial services provider. Trust is Earned™
INVESTING
31 May 2019
SAUL MILLER Senior Portfolio Manager, Truffle Asset Management
Managing portfolio risk in an uncertain world
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hen we think of portfolio risk, we are primarily considering two risks: volatility, and the permanent loss of capital. Permanent capital loss arises when the initial assessment of value is incorrect due to one’s assumptions not playing out as expected. Volatility is not the same as capital loss. Although we would not want our long-term returns to be volatile, we are not overly concerned with short-term volatility. In fact, as an active manger we welcome it, as it provides opportunities to purchase investments below intrinsic value. Volatility is a function of the underlying investments and importantly, the correlations between them. The less correlated the individual investments, the lower the volatility of the portfolio. At Truffle, we employ the following four strategies to manage and reduce risk:
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Diversification The well-known way to reduce capital loss and portfolio volatility is most easily done through diversification, by investing in a range of assets that ideally have low correlations.
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High equity exposure Since 1900, equity has outperformed bonds and cash, and more importantly inflation, by a comfortable margin in most countries. From 1900 to 2018, in real terms, global equity delivered 5%, bonds delivered 1.9% and cash produced 0.8% (Dimson, Marsh and Staunton 2018). The problem with equity is its high level of volatility even over relatively long periods of time: the global stock market produced a cumulative negative real return for the 22 years between 1910 and 1931, and
DAVE CHRISTIE Offshore Product Specialist, Ashburton Investments
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any investors wish to get exposure to global equity markets, but some are unable to invest in offshore funds. Consequently, investors lose out on potential returns from top performing offshore opportunities. We are now making investing offshore more accessible through feeder funds. Investing in a feeder fund, such as the recently launched Ashburton Global Leaders ZAR Equity Feeder Fund, means investors get to participate in the offshore markets and get exposure hassle free. Why our fund? The Ashburton Global Leaders ZAR Equity Feeder Fund is the randbased feeder of our highly successful Luxembourg-domiciled, US dollarbased Ashburton Global Leaders Equity Fund (the principal fund).
countries like France, Germany and Japan had negative streaks in excess of 50 years!
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Rigorous valuation process The valuation process is best separated into two sections: the overall market value, and relative valuation of individual shares within the market. Targeting high equity exposure when overall markets are cheap should help raise the odds of improved returns, but it’s not as straightforward as one would hope. Finding a reliable valuation metric for the overall market with reasonable predictive power is problematic. The Shiller PE, which is based on a midcycle earnings estimate, does seem to have some predictability of returns over long periods of time. However, this metric would have kept you out of the market for a significant part of the last 20 years. Valuation on an individual share basis is critical to our process at Truffle. We break up the future returns of shares into three key components: dividend yield, earnings growth and a change in the rating. The sustainable dividend yield is the easiest component to determine as it’s based on the current performance of the company adjusted for any temporary excess or depressed profitability. The most difficult component to determine is future earnings and dividend growth. Ideally, we look for companies with high barriers to entry and good returns on capital. This ensures inflation-beating earnings growth over time. We avoid companies on overly high PEs unless we have conviction regarding significant earnings growth going forward. High PE shares often have overly optimistic growth expectations baked into their valuations. When these expectations are not
delivered, significant capital losses result. It is not easy to determine the extent of sustainable high growth in fast-growing companies or the level of sustainable poor earnings growth in cheap companies. Although we acknowledge our limited ability to forecast, we at least try to avoid the traps many investors fall into when investing in deep value due to their deceptively low PEs or avoiding growth shares that are trading on overly high PEs.
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Portfolio hedging We use derivatives to provide insurance at a portfolio and stock level. The cost of this insurance must be reasonable. We currently have protection on 15% of our balanced portfolio covering the overall market and some individual shares like Naspers. We own Naspers due to its investment in Tencent, a fast-growing diversified technology company, which is the key driver of its value. Tencent is likely to grow its share price in the high teens, a bit below its expected earnings growth of over 20% p.a. However, it currently trades on a forward PE of 32X. Should its growth slow down in the next few years, its high PE ratio could fall significantly and as a result we have purchased protection on a significant portion of our holdings. The world of investing fits more in the world of social science than physical science. While mathematical models and statistics provide some level of rigour to the investment process, these should not be taken at face value. An appreciation of risk requires a qualitative assessment of an investment that cannot be distilled down to a single metric. It requires many years of collective investment experience and a rigorous yet openminded investment process.
Ashburton Global Leaders ZAR Equity Feeder Fund launched
Through this fund, South African spreads, relatively high predictability of investors can access a high-quality, earnings and management and balance concentrated portfolio of up to sheet criteria. Through the careful 25 of the world’s most prominent selection of market-leading stocks international mega cap stocks, such in attractive industries, the principal as Alphabet, Visa, Microsoft and fund aims to deliver sustainably Nestlé. Each stock compounding total returns has a market over the long term. A WELLcapitalisation of Since its inception in DIVERSIFIED over $200bn, a September 2013, the dollarglobal presence based principal fund has PORTFOLIO and is typically a delivered a 7% annualised WITH SOME constituent of a return (to December 2018) OFFSHORE major index such and 11.48% year-to-date (31 as the FTSE or the EXPOSURE CAN March 2019). Considering Dow Jones. the biggest sector exposures, HELP TO PUT Unconstrained the top three are Consumer by traditional AN INVESTOR’S Staples at 28%, followed by benchmarks, the Information Technology at MIND AT EASE principal fund 25% and Healthcare at 14%. invests in industry-leading companies While sector diversification within that are characterised by quality the portfolio is important, the fund also attributes – improving cash return benefits from geographic diversification.
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Of the major geographic holdings, the US makes up the largest portion at 56%, followed by the UK at 14%, Benelux countries (Belgium, the Netherlands and Luxembourg) at 11% and Switzerland at 10%. One of the most appealing features of the feeder fund is that South Africans can access offshore investments without having to utilise their offshore allowance. And it can also be invested in through Tax Free Savings Accounts (TFSA). The fund has a minimum lumpsum investment of R5 000, or R500 by monthly debit order. Although there is no riskfree investment vehicle, a welldiversified portfolio with some offshore exposure can help to put an investor’s mind at ease, knowing they have hedged against domestic market volatility.
SHORT-TERM INSURANCE SPECIAL SUPPLEMENT
HOW TODAY’S UMA MEETS MODERN-DAY INSURANCE NEEDS PAGE 17
CYCLONE IDAI AND THE IMPORTANCE OF RESILIENCE PAGE 16
BL O C KC H A I N T R A N SF OR M I NG HOW I NSU R A NC E WOR K S PAGE 18
SHORT-TERM INSURANCE SUPPLEMENT
VANESSA OTTO-MENTZ Head: Group Strategy Unit, Santam
31 May 2019
CYCLONE IDAI AND THE IMPORTANCE OF RESILIENCE
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he vulnerability of developing African nations came under the spotlight again during the humanitarian tragedy caused by Cyclone Idai. At the time of writing, the cyclone and flooding had displaced 134 645 across Mozambique, Zimbabwe and Malawi, affected a total of 1 118 896 people, with a death toll of 820. Science is clear that climate change is causing more frequent – and more devastating – natural disasters like these. In the Southern African context, we know society faces several challenges: Increasing local risk levels due to climate change, lack of protection in terms of limited physical and institutional infrastructure, as well as a very low penetration of insurance cover. All of these taken together increases vulnerability and loss exposure for individuals, business and government. We’ve seen the impact of this over the last few years where South Africa was hit by a series of extreme weather events, for example the prolonged drought – the worst to hit in 100 years. It affected the country in numerous ways – some predictable, others less so. For example, we could predict farmers’ harvests would be at risk. A less obvious effect was the hardening ground causing walls and floors to crack. Another impact was rising tensions and small incidents of social unrest which, if the drought was prolonged, would most likely have exponentially worsened. It is vital that the global insurance industry takes its role as risk manager, risk carrier and investor seriously, given the uncertainty we face globally due to rising environmental, social and governance (ESG) risk. First and foremost as an industry, we must make our contribution to narrow the risk
protection gap by shifting our role to be more organisations should strive to do. We also need to influential in our advice and covers that protect give people the platforms to proactively innovate. our customers and society at large. That’s why, as a The Santam Safety Ideas Challenges does just that, group, Santam has chosen to play an integral part encouraging Insurtech and FinTech start-ups to in creating the ESG guide for the global insurance find sustainable solutions to the challenges South industry, which was launched at the 2019 PSI Africa collectively faces. (Principles for Sustainable Insurance) Allianz Event. Finally, working with decision-makers is vital. We know that the time to begin building the Supervisors and regulators are under pressure foundations for a sustainable future is now, in a to improve societal resilience, reduce disaster time of unpredictability, in reflecting on what and risk, reduce unemployment and improve poverty how we underwrite the transactions in our global statistics. We need to partner with them on this economy. We encourage all journey. By helping them to better participants in the general understand climate risk and the insurance sector to engage IT IS VITAL THAT THE sustainable ESG solutions required, with the guide, which is open be able to set national-level GLOBAL INSURANCE they’ll for public comment until 30 targets and incentivise the activity INDUSTRY TAKES June 2019. The ESG guide is necessary to reach these goals. We an opportunity to streamline are therefore delighted that South ITS ROLE AS RISK information requests and Africa’s Prudential Authority is MANAGER, RISK build knowledge within the engaging with the industry on the CARRIER AND insurance industry, making it Task Force for Climate-related easier for business partners to INVESTOR SERIOUSLY Financial Disclosures in relation carry out ESG due diligence on to the physical and transition risks clients and transactions. a changing climate implies for South Africa and the Through our role as partner, adviser and broader financial sector. community rebuilder, the insurance sector is Idai has shown, once again, that the world well positioned to play a role in helping society is changing, extreme weather events are become more resilient. Community partnerships increasing, and, as a global society, we’re woefully are also vital. We’ve seen the power of these underprepared for all their implications. As through Santam’s Partnership for Risk and insurers, we have the responsibility to protect Resilience (P4RR) Initiative, which equips some people’s lives. This means also protecting their of the country’s most vulnerable communities homes, businesses and other assets. Ultimately, our through disaster management training and role is to help people prepare for the worst and then resources. Partnering for sustainable development rebuild once it’s over. This means joining hands and is one of the global SDGs and something all building resilience in every way we can.
TAKING THE REINS AT IING
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ewly-appointed president Commenting on the industry, of the Insurance Institute of Graham notes that it’s a time of huge Northern Gauteng (IING), change. “New technology, a tough Natalie Graham, says the South economy and stringent regulatory African insurance industry must requirements are combining to create focus on training, transformation a highly challenging market right and service if it’s to now. The only weather the changes way we’re going to IING IS ABOUT buffeting the sector. move forward as an Graham, partner industry is to make GETTING of the broker channel sure that we evolve LIKE-MINDED at King Price – or, as our skills, offerings INSURANCE she’s known at King and service levels to Price, the queen of stay relevant to our PROFESSIONALS broker business – clients and society TOGETHER TO GO succeeds Santam’s at large. BEYOND SIMPLY Anton Coertzen at “IING is about IING. “My passion is getting likePUTTING IN THE service,” says Graham. minded insurance HOURS NEEDED TO “Anton’s tenure was professionals firmly focused on together to go EARN CPD POINTS training, and I’d like beyond simply to combine his legacy with my expertise putting in the hours needed to earn to create an organisation that’s relevant CPD points,” says Graham. “It’s to our members going forward.” about finding presenters who make
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our members think, and providing training on aspects we might not touch on very often – because you don’t know what you don’t know, until you do. And it’s also about sharing new experiences and insights that fundamentally change the way we think about insurance, and building a community within the industry.” Graham says she’s well-supported by a “vibrant and diverse” IING committee, which includes national brokers, smaller independent brokers, industry suppliers, and various insurers, with a combined total of more than 100 years’ experience in the industry. Some committee members, she notes, have been involved for years, and that’s experience she’s grateful to have on her side. But she’s also excited about the ‘newbies’ who were voted in this year. “Younger people bring a fresh perspective and teach us to look at
things differently. One person can’t manage everything, but collectively we’re a strong and confident team.” While most of Graham’s 21 years in the insurance industry have been in the broker space, she believes her experience across a range of disciplines – including claims, service, training, and even a brief stint as a motor accident loss adjuster – will stand her in good stead as she prepares to lead IING into the next two years.
Natalie Graham, President: Insurance Institute of Northern Gauteng
SHORT-TERM INSURANCE SUPPLEMENT
31 May 2019
MARTIN LE ROUX Managing Executive, Outsourced Business Solutions, Centriq Insurance
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f there ever was an industry that has recently been the subject of much change and dynamic fluidity, it’s the South African insurance industry. From Solvency Assessment and Management (SAM) right through to the changes in binder regulations and premium collection considerations, the industry has and will continue to be a hub of constant regulatory transformation. It is only human to wonder from time to time whether the Underwriting Management Agency (UMA) model is still a viable option for brokers wanting to provide the best possible insurance outcome for their clients. And while my answer may be perceived by some as biased, given Centriq Insurance’s current involvement and ongoing commitment to the UMA, it has always been and will continue to be an unequivocal ‘yes’ – the UMA is a favourable solution that meets the needs of modern-day insurance buyers for the following reasons:
HOW TODAY’S UMA MEETS MODERN-DAY INSURANCE NEEDS
Unequivocal expertise and business support Many, though not all, UMAs operate in niche or specialised areas of insurance and often represent the best of breed in their markets due to their specialised skills and expertise in focused classes of insurance business. This provides brokerages with the ability, assurance, assistance and support they need to provide their clients countrywide with expertise in fields that they (the brokers) may not necessarily specialise in. Well-positioned to service complex needs The fact that most UMAs are entrepreneurially-based, smaller operating, owner-managed businesses usually make them more agile and able to respond to some of the more complex or specialised broker requirements (i.e. bespoke policy wordings, etc.) in a quick and efficient manner. This agility and
manoeuvrability of UMAs typically manifests in superior service delivery across policy administrative (i.e. policy issuance) and claims issues, benefiting the broker and its clients in various ways. In many instances, the typically smaller nature of most UMAs means that it’s usually easier for the broker to get a decision made on complex claims, for example, which has a positive impact on all subsequent processes and procedures that need to be adhered to.
a unique selling proposition in the market place, and remains as relevant for brokers as it has ever been. Flexible service and product delivery, quality skills and an unprecedented hands-on approach to doing business in a modern yet traditional market are all key components of most of the UMA models we see in the South African insurance industry today.
Ability to provide out-of-the-box solutions The UMAs’ ability to operate with a reasonable degree of autonomy allows them to be more flexible and efficient than some of the larger, more typical corporate insurers when it comes to providing brokers and their clients with out-of-the-box insurance solutions in a time-efficient manner. As such, our sense is that the UMA has managed to carve out for itself
In an uncertain financial climate, our client-centric approach of developing strong relationships with partners and clients, while boasting a deep understanding of their business, helps us to create unique solutions. With expertise in Alternative Risk Finance, UMA’s and Alternative Distribution / Affinity Solutions, it’s little wonder why so many companies are using us for their insurance solutions.
PARTNER WITH AN INSURER YOU CAN TRUST.
011 268 6490 | www.centriq.co.za Centriq’s insurance subsidiaries are authorised financial services providers
WWW.MONEYMARKETING.CO.ZA 17
SHORT-TERM INSURANCE SUPPLEMENT
THOMAS KIECK Business Development Director, Tial Technologies
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echnology is rapidly transforming the insurance industry, but there’s one technology that is standing out more than any other. Blockchain technology is overturning the industry, from better risk visibility and faster claims processing to collectively fighting fraud – blockchain can provide comprehensive benefits across the insurance value chain. Insurers that leverage blockchain have the potential to dramatically reduce operating costs by automating the manual tasks involved in requesting, exchanging and entering data in areas such as underwriting, claims and reinsurance. By automating these manual tasks, it will also speed processing, improve data quality, reduce fraud and provide real-time transparency into the status of transactions for all parties. Obstacles to overcome Insurances companies face a number of challenges related to complex
31 May 2019
BLOCKCHAIN TRANSFORMING HOW INSURANCE WORKS
compliance issues, limited growth in mature markets, fraudulent claims, third-party payment transactions and handling of data. With the arrival of connected devices and increasing growth of data generated by the Internet of Things (IoT), insurers have to sift through the data that matters in order to deliver tailored solutions of services and products. The move to digital transactions has left many insurers wondering how to streamline processes and secure sensitive information. Stepping into action There are many opportunities surrounding blockchain and, while it might not be the answer to all obstacles faced by the industry, it does provide foundational technology that promotes trust, transparency and stability. Blockchain is in the early stages of adoption, however there are already a number of ways that insurers are leveraging the technology to mitigate obstacles:
• Automatic verification of the authenticity of identity, medical or police records, ownership and location history, the supply chain of a product, etc. The administrative costs associated with verifying policyholders’ identities, claims and third-party data can be reduced by automating the operation. • Automated claims handling using blockchain-based smart contracts can automatically pay out based on the conditions set in the smart contract. Claims don’t require assessment, as they are publicly verified. • Smart contracts that automatically update tariffs based on the policyholder’s verified data. • Improved insurance fraud detection by automatically checking the data required by the insurer to ensure the customer is properly covered. This can also prevent customers from accidently filling in quote forms incorrectly, and paying for inadequate cover or more cover than they actually need. By minimising the potential for fraudulent activity, customers can
benefit from lower premiums. • Preventing multiple claims with various insurers from being made for a single event, as data is shared cross-industry. • Connecting the IoT with smart contracts, which will automatically trigger a pay-out should a connected device detect the occurrence of an insured event. Summing it up Insurers need to get into the blockchain game – familiarise themselves with the technology, identify promising use cases, and gain experience of collaboration within emerging ecosystems – so that they are not left behind as blockchain networks take shape and form across the industry. Blockchain has the ability to help insurers save time and money, as well as improve customer satisfaction. And, as higher levels of trust are established between the insurer and the insured, stronger relationships will be built, ensuring loyalty and future success.
SASRIA CONFIDENT OF MEETING CLAIMS DESPITE RISING PROTESTS
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asria is confident it is more than adequately community upliftment projects spanning from capitalised to meet rising service-deliveryeducation, and building houses for elderly and other related and all other claims. The business is vulnerable members of society, to contributing a state-owned insurer established 40 years ago to towards community self-sustainability projects. protect organisations, businesses, municipalities Sasria – like all financial institutions – is and individuals from losses related to riots, strikes, accountable primarily to two regulatory bodies, the terrorism, civil commotion and Prudential Authority as well as public disorder. the Financial Services Conduct “Though we have THE ORGANISATION’S Authority (FSCA). Together with experienced a considerable rise Sasria’s own robust governance FINANCIAL POSITION framework, these two institutions in the number and severity of REMAINS EXTREMELY ensure that the business stays claims in the recent past, the organisation’s financial position a considerable distance from HEALTHY remains extremely healthy,” harm’s way. says Cedric Masondo, Managing Director. “We have also benefited in recent times from “Since the initial modest capital injection to set up growth in premium income, which grew on Sasria’s operations, the business has been self-reliant average by an inflation-beating 9% per annum,” and continues to maintain a solid balance sheet.” adds Masondo. He adds that Sasria’s solvency ratio is more than double the ratio required by the regulator of shortterm insurance businesses in South Africa – and since the business was established in 1979, Sasria has never asked for capital injection from the state or, more specifically, South African taxpayers. “Instead, we have contributed over R1bn in dividend payouts to the fiscus over the past seven years,” he states. Masondo believes it is this continued financial stability that has allowed Sasria to gradually take on a more expanded role in society, including
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“Sasria is a pillar of the community in many ways, as we ensure business continuity – we restore individuals, organisations and municipalities back to their financial position following a disruptive incident.” Masondo says that what is less acknowledged is the fact that Sasria also gives comfort to the international investor community in that should they lose their property or assets during a period of social instability, their assets will be protected at a reasonably affordable rate. “Sasria premiums (cost of risk cover) have remained largely unchanged for 10 years,” he points out. He urged all individuals, businesses and municipalities to ensure they have adequate cover for special risks on key assets, as the country is expected to continue to experience an increase in incidents of social instability resulting from service delivery protests.
Cedric Masondo, Managing Director, Sasria
Developing and delivering software solutions for the insurance industry
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For more information about our product and service offerings, contact us today to schedule a meeting. +27 (0)11 807 1030
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INVESTING
31 May 2019
PETER ARMITAGE CEO, Anchor
Wills, deceased estates and the process that follows
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f a person dies without a will, he/she dies intestate, making proceedings more complicated. It is thus important for your clients to have a will in order for them to bequeath their assets to whom they see fit. When writing a will, it is key to consider who will inherit from the estate, who the executor/s will be, whether a trust will be established (if so, note the trustees), the estate’s total assets, and whether the person wants to leave anything in particular to a specific heir or to several. An estate is all of a person’s assets less liabilities, so everything that a person possesses in their own name less their debt. What is not part of the estate? Assets accumulated, which are not in the person’s name, e.g. in a trust. As soon as someone dies, a funeral home is called in to prepare the deceased and, most importantly, to obtain a death certificate from Home Affairs. The process of winding up an estate can only start once a death certificate is issued. power of attorney (POA) to wrap up the estate. In this article, we refer to the person responsible An estate’s assets are frozen from death until the for making sure an estate is wound up (often a close Master issues a Letter of Executorship. Once a family member/friend of the deceased) as ‘you’. letter is issued, an Administrator ‘gathers’ all assets, The Executor is also named in the will as being liabilities, etc. and interim distributions may be responsible for winding up an estate and must be permitted by the Executor. The Administrator deals older than 18. You and the Executor may or may not with the Master (applying for the issue of Letters of be the same person and a professional institution Executorship, which currently takes four months), such as a bank, financial adviser, etc. can also be and draws up a Liquidation and Distribution (L&D) named Executor. If a deceased account, which is submitted has nominated an individual to the Master. Once there are then, on death, that person can no objections, and the Master SEVERAL ESSENTIAL make use of a third party to approves the L&D account, an DOCUMENTS ARE assist with Executor duties. estate is wound up and assets REQUIRED FOR Often the Executor will are distributed to the deceased’s appoint an Administrator, who heirs. The Master reverts to the THE PROCESS OF is a professional at winding Administrator, who reports FINALISING AN ESTATE back to the Executor, who then up estates (because it’s a complicated process, this is reverts to you (unless you are the preferable to doing it yourself). The Administrator Executor). deals with the Master of the High Court (Master), Several essential documents are required for the who is pivotal in approving the winding up of an process of finalising an estate including: A valid and estate. An estate cannot be wrapped up (except for original will, a death certificate and the deceased’s very small estates), without the Master’s consent. records, as well as a letter of executorship from the You deal with the Executor; the Executor Master. The SA Revenue Service (SARS) provides a outsources the administration of winding up an tax-clearance certificate after tax returns have been estate to the Administrator, giving the Administrator submitted and the Executor lodges an L&D account,
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drawn up by the Administrator, with the Master. An estate has to pay several costs, including Executors’ fees (a statutory fee of 3.5% of the estate’s value is charged by the Administrator), a final tax amount to SARS, and estate duty. The first R3.5m is exempt from estate duty, but from R3.5m to R30m it is taxed at a rate of 20%. R30m-plus is taxed at 25%. If a spouse inherits, then no estate duty is payable until he/she dies and the R3.5m rolls over to the surviving spouse. We can run this complicated process to its completion, which entails dealing with you being the Executor, and/or dealing with the Executor/ Administrator, and ensuring progress is made in winding up an estate as quickly as possible. We can negotiate Administrator’s fees and try to reduce this cost. We also create a legacy file to hold all relevant information related to the estate. We understand the people involved in a deceased estate and the process but, most importantly, we know how money works when winding up an estate. Every person’s situation is unique, and it’s important to understand how all the above applies to individual circumstances. We have only scratched the surface of a complex subject and we suggest contacting Anchor directly to discuss any of these processes in more detail.
INVESTING
31 May 2019
MARTIN HAMMOND Analyst, Prescient Investment Management (Pty) Ltd
Currency allocation in balanced portfolios
Hollard welcomes Sithega’s investment in Prescient Holdings
CHART 1: ROLLING 12 MONTH RETURNS
CHART 2: ASSET CLASS RISK RETURN PLOT
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Sculpture by Beth Diane Armstrong
t Prescient Investment Management, one of our aims is to reduce overall variability in the performance of our balanced funds. Question is, why should we care about portfolio volatility given that buy and hold investors generally don’t? After all, once the investment destination has been reached, the capital amount received is the offshore investing thus does not arise from the same, regardless of the journey. devaluation of the exchange rate over time (as that However, consider a retirement investor drawing is in line with or slightly ahead of local cash), it down 4% - 6% of their investment year. Being arises from accessing equity or fixed interest asset invested in a high-volatility portfolio means there classes offshore that the investor believes offer a is an increased likelihood that capital will be better chance of outperformance compared to the withdrawn after severe market declines, leaving the local market equivalent. portfolio with a smaller capital base upon which to Chart 2 plots the risk of the different portfolios compound in future. against their return since June 2004. What this shows In a balanced portfolio, Prescient’s preference is that the currency does not add returns significantly is to limit the allocation to specific assets that above local cash, but does add risk to the portfolio. contribute unnecessary risk to the portfolio. The The major benefit that a hard currency position more concentrated the portfolio towards specific provides is that it is partially negatively correlated assets or asset classes, the higher the likelihood to the performance of equity. Therefore, in times that at some point the portfolio will experience of stress the rand is likely to devalue, and holding negative performance. offshore assets in this instance will mitigate the Chart 1 shows the rolling 12-month return of the poorer performance of local assets. This is clearly Top40 Index, the Short-term Fixed Interest Index seen in the rolling return chart post the 2008-9 (STeFI) and the 12-month change in US dollar cash. financial crisis, or Nenegate in 2015. However, this We have then constructed a high equity composite benefit is not so pronounced that one would want (70% equity) with 20% offshore exposure and 10% 30% of a balanced portfolio exposed to currency local cash. volatility at all times. Over time, the main driver of portfolio returns Prescient’s point of view is that a full offshore will be equity, and this asset class should be the allocation is desirable but the currency risk and the major allocation of a balanced portfolio. US dollar volatility that this adds to a balanced portfolio is not. cash (in rand) can underperform local cash for The preferred starting point should be a moderate significant periods and can lead to sizable gains currency allocation of 10% to 20%, which can then or drawdowns similar to Mktg equity. benefit of be increased Prescient Money 1-4The Goose Ad_r3.pdf 7/19/17 10:27:12 or AM decreased when warranted.
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The Hollard Insurance Group has welcomed the announcement of the acquisition of a controlling equity stake in global financial services group, Prescient Holdings, by investment management company, Sithega. The stake was acquired through Sithega’s newly-formed financial services fund, to which Hollard and its majority shareholder, Yellowwoods, have committed R250m, and in which they are anchor investors. “We are excited about this transaction as it represents an important step in realising Sithega’s vision of creating a significant black-owned and black-run, non-banking financial services investment company focusing on life and shortterm insurance, as well as asset management,” says Hollard CEO Saks Ntombela. “Hollard and Yellowwoods’ involvement with Sithega forms part of both groups’ strategies to empower black entrepreneurs in the financial services sector. We are excited both by the team and its vision that managing director, Thabo Dloti, has assembled,” he adds. “The investment in Prescient signals the start of a journey that will see Sithega drive the development of simple, holistic solutions that leverage technology to improve the accessibility of non-banking financial services for all South Africans.” Dloti says Sithega is pleased to partner with Hollard and Yellowwoods and values their support of its vision to make financial freedom accessible to all. “Sithega has chosen to invest in and partner with Prescient because we fully subscribe to Prescient’s investment philosophy, which is anchored on consistency and predictability of returns for investors,” Dloti adds. “We believe that our shared industry knowledge and experience will support Prescient’s growth and unlock value while the business strengthens its capabilities and continues to focus on client delivery.”
Thabo Dloti, Managing Director, Sithega
WHILE OTHERS ZIG AND ZAG, WE STAY IN FORMATION.
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INVESTMENT MANAGEment
PRESCIENT GROUP OFFERING: LOCAL AND OFFSHORE INVESTMENT MANAGEMENT / UNIT TRUSTS STOCKBROKING / RETIREMENT PRODUCTS / UMBRELLA FUNDS / ADMINISTRATION / PLATFORM SERVICES AUTHORISED FINANCIAL SERVICES PROVIDER (FSP 612)
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INVESTING
31 May 2019
JAMES FORMBY Chief Executive, Rand Merchant Bank
All eyes on the ‘I’ in BRICS Jim O’Neill coined the terms ‘BRICs’ in 2001 but, as he recently reiterated, it has become more about the ‘ICs’ in the past decade. Global growth averaging 3.4% per annum in the current decade has in a large part been driven by China, where growth has averaged 8%. Less talked about, but also a significant driver of global economic activity, has been India, which has grown by close to 7.5% per annum. In the decade 2020 to 2030, India has the potential to expand faster than China, increasing its global influence even further. And if India can grow while also improving productivity, Mr O’Neill suggests that India could have the same impact on the global economy in the next 15 years as China has had over the last 25 to 30 years. Given our shared history and strong political relations, I believe South African businesses should factor India into their strategies. With India’s economy growing, so too have the trade and investment flows between India and Africa. India’s annual bilateral trade with Africa reached a peak of about $73bn in 2014, according to the International Trade Centre. Subsequent steep declines in commodity prices saw this plunge to about $48bn in 2016, before rising to around $53bn today. Close to 50% of total exports from India to Africa comprise processed petroleum products, pharmaceuticals and vehicles, while close to 50% of total imports represent crude petroleum and gas, with mineral resources and coal making up a significant portion of the balance. Industry experts expect the trade between India and Africa to soar to $150bn by 2023. Unsurprisingly against this backdrop, a significant portion of the foreign direct investment from India into Africa has been towards oil & gas and mining. Significant gas discoveries in Tanzania and Mozambique are likely to gain traction in the coming years and India will be an obvious beneficiary. Indian investments in other sectors in Africa are focused mainly on vehicles, fast-moving consumer goods (FMCG), pharmaceuticals and telecoms. Interest in other sectors has been sporadic. Projects backed by sovereign guarantees and financed by development finance institutions have also been gaining traction, with several Indian engineering, procurement and construction companies offering their services. Corporate activity has been dominated by a handful of companies in the past few years. From the Indian investors’ perspective, there is active interest in the pharmaceuticals and FMCG sectors, and there are a number of Indian corporates with existing investments in Africa. Indian automotive group Mahindra and the Tata Group, which straddles the steel, automotive, energy, chemicals, consumer products, services and information technology sectors, have a material presence in Africa. So does major pharmaceuticals producer Cipla and mineral resources conglomerate Vedanta. Bharti Airtel, whose Airtel Africa division provides telecommunication services in about 15 African countries, is competing with South Africa’s MTN in Nigeria and elsewhere. Bharti is looking to list its Africa operations on both the London and Johannesburg Stock Exchange. It’s financial institutions that have led corporate activity from the African continent into India. FirstRand is the only South African bank with a branch licence in India and we will celebrate ten years of successful operations in India early next year. India is likely to become the fifth largest economy in the world in 2019. With its proximity to Africa, history as a trading nation and huge Indian diaspora living across Africa, trade flows in this corridor are expected to balloon. To ensure this is a long-term, sustainable partnership driving Africa’s growth, it is important that the continent benefits from jobs and technology transfer, in addition to financial investments. The political will to support an ongoing partnership is clear. South Africa’s President Ramaphosa and India‘s Prime Minister Modi jointly addressed the IndiaSouth Africa Business Forum in January – with a focus to grow business ties between the two countries. A Three-Year Strategic Programme of Cooperation (2019-2021) was signed by the two countries, aimed at further enhancing their strategic partnership.
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MEL MELTZER AND CHAROLYN PEDLAR Co-owners, Platinum Portfolios
The importance of diversification
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iversification is the only free return by December 2003 in the US. lunch available to investors. A well-constructed diversified The history of the stock portfolio provides no guarantee exchange has proven that holding an that investors will stay invested and undiversified portfolio carries with it true to their strategy when markets a high risk to investors. behave irrationally. Investors too The Wall Street crash of 1929 often let the irrational behaviour of provides the most dramatic example others influence them and ultimately of holding an undiversified portfolio. cause them to make senseless From the peak of small company decisions. Investors need to treat stock prices in November 1928 big declines in their stock prices to the low in 1932, small stock with equanimity to yield excellent investors suffered a 90% collapse investment results over time. Should in value. The depression-induced investors not stay the course, they deflation slightly mitigated the will eventually get the mediocre purchasing power loss, bringing returns they deserve. the price-level adjusted decline to Short dated South African 88 cents on the dollar. treasury bonds have been a great Like the US market, the JSE has asset to diversify clients’ portfolios many examples where undiversified and have provided real returns over investors paid the price for having the past ten years in a low yield too many eggs in one basket. The environment worldwide. They also JSE All Share Index provided provide an effective shock absorber investors with a return of 5.8% in volatile markets and will offer per annum over easy access to the past five years cash in times of BY DIVERSIFYING, economic distress. ending December 2018. Investors who INVESTORS GAIN The last five years simply diversified on the JSE have RISK REDUCTION shown this. by investing in a top WITHOUT RETURN quartile balanced An investor’s fund received a asset allocation REDUCTION return of over 7.5% strategy that has the per annum over the same period. resolve to ride out market storms It has also been proven that will ultimately determine its success. diversification improves a portfolio’s When investors behave as markets performance by allowing investors sometimes do, they will destroy to achieve higher returns for value. Lastly, diversification must be risks taken. Nobel laureate Harry implemented within a disciplined Markowitz called diversification one framework. As Dave Foord notes, of the economic world’s ‘rare free “Use diversification as often as lunches’. By diversifying, investors possible, but not as much as possible, gain risk reduction without return as too much diversification reduces reduction. The behavioural benefits returns. Less confident investors of diversification are more important use more diversification while more than the financial benefits. Investors confident investors use less.” Market with all their eggs in one basket conditions, values, economic cycles face tremendous pressures when and circumstances can often play a market conditions become volatile role in the amount of diversification and their basket starts losing value. used at a certain point in time. In this environment, those investors As Jesse Livemore said, “The Big who do not have the character to Money is not in the buying and stay invested normally sell out at the selling but in the waiting.” bottom of the market, and move to Sources: Unconventional success: cash; accordingly confirming their A fundamental approach to personal losses. Small cap investors who Investment by David F Swensen; stayed the course during the crash of Poor Charlie’s Almanack by Charles T. Munger 1929 would have had a 100 000-fold
With over eighteen years of discipline, focus and a commitment to long term performance behind us, our clients believe in the consistency of our investment process and performance.
Platinum BCI Worldwide Flexible fund wins Best Flexible Allocation fund. Platinum Portfolios was also nominated as a finalist for the best fund house – small fund range. The annual awards recognise funds and fund houses that added the most value for investors within the context of their relevant peer group in 2018 and over longer time periods. Morningstar selects the finalists using a quantitative methodology with a qualitative overlay that considers the one-, three-, and five-year performance history of all eligible funds, and adjusts returns for risk using Morningstar Risk, a measure that imposes a higher penalty for downside variation in a fund’s return than it does for upside volatility.
T. 011 262-4820 | Block F, Pinmill Farm, 164 Katherine Street, Strathavon, 2031 PO Box 782755, Sandton, 2146 | www.platinumportfolios.com
Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002. Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. A schedule of fees, charges and maximum commissions is available on request. Full details and basis of the award is available from the manager.
Platinum Portfolios (Pty) Ltd is an authorised Discretionary Financial Services Provider (FSP No. 641).
INVESTING
31 May 2019
JACO VAN TONDER Adviser Services Director, Investec Asset Management
All retirement income portfolios require offshore equity exposure
PART This is the last article in our five-part series on how to manage a living annuity to provide an inflation-proof income 5/5
over a period of 30 years. In the four previous articles, we introduced some of the key conclusions from our living annuity research, and we expanded on how significant volatility is to the long-term success of an income portfolio. We also took a close look at how to manage the income withdrawal strategy for a living annuity investor. Last month, we studied what growth assets mean for living annuity investors and in this, our final article, we focus on offshore equity exposure.
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nother interesting observation from our modelling has been the extent to which our asset allocation optimiser model includes offshore equity for all annuity portfolios, irrespective of the level of their starting incomes. The chart highlights the split between South African equities and offshore equities within the optimised annuity. The model proposes an offshore equity exposure in the region of 20-40% of the total portfolio across all starting incomes. Even for low starting incomes of 3%, the model suggests an offshore equity holding of around 25% of the total portfolio. For many people this result will appear odd at first – why should an investment tasked with delivering income in South African rand be required to hold at least 25% in offshore equities? Does the additional currency volatility not negate the benefits of the offshore equity returns? And why does the model allocate mostly to offshore equities for lower initial incomes, but increases the allocation to domestic equities as income levels go over 6%? These are all valid questions. Unique diversification benefits of offshore equities The answer to these questions lies in the unique diversification benefits of offshore equities when combined with a South African portfolio of bonds and equities: • Offshore equities have the advantage of a lower correlation with South African bonds • But domestic equities have a higher real return than offshore equities. What we see in the chart is the interplay between real return and portfolio volatility. In our first article on the challenges of living annuities (MoneyMarketing, January 2019), we showed how annuities are sensitive to portfolio volatility. (Higher portfolio volatility in an income-producing portfolio acts as a drain on portfolio performance.
PORTFOLIO INCLUSION OF DOMESTIC AND OFFSHORE EQUITIES
Source: Investec Asset Management.
Conversely, lower volatility seems to ‘create’ additional returns for an income-producing portfolio because it helps the portfolio manage sequence-of-return risk more effectively.) Therefore, our optimiser model adds offshore equities at lower incomes because they simultaneously: • Increase the real return potential of the portfolio, and • Improve the risk profile of the overall investment portfolio. However, as incomes increase, the stronger real return from domestic equities becomes more important than the lower volatility of the offshore equities, and the model starts allocating more and more to domestic equities. Conclusion A lack of retirement savings remains a serious problem in South Africa. No living annuity is going to be the solution for an investor who hasn’t saved enough for their retirement. Furthermore, unpredictable markets require careful attention due to the challenges they pose to pensioners. Our investigation into optimised living annuity investment portfolios highlights a number of key principles: • Living annuities require meaningful
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equity exposures to enable the annuity’s income levels to keep pace with inflation • Fixed income portfolios are unable, on their own, to produce the returns required to keep pace with inflation • Because annuities are sensitive to portfolio volatility, the diversification benefits of offshore equities are particularly beneficial to annuity portfolios.
OFFSHORE EQUITIES HAVE THE ADVANTAGE OF A LOWER CORRELATION WITH SOUTH AFRICAN BONDS
LIVING ANNUITIES
Is your retirement inflation-proof? One of the biggest risks pensioners face, is running out of money. To address this age-old problem, our in-house research has created a few important guidelines. They range from how you should invest your capital to what level of income you can afford to draw, what exposure to offshore equities you should consider and the significance of volatility on ensuring a comfortable retirement. To make the most of your retirement, visit www.investecassetmanagement.com/livingannuities
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Investec Asset Management and Investec Investment Management Services are authorised financial services providers.
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INVESTING
31 May 2019
PPS Investments broadens the diversification spectrum
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nvestors may be seeking additional opportunities for diversification within their portfolio to benefit during different market environments. As such, PPS Investments augmented its range with three new single-manager funds, namely: • PPS Defensive Fund, managed by Sasfin Asset Managers’ Errol Shear • PPS Stable Growth Fund, managed by Tantalum Capital’s Rob Oellermann and Melanie Stockigt • PPS Managed Fund, managed by 36ONE Asset Management’s Cy Jacobs and Evan Walker. These funds are suitable for retirement investments and comply with Regulation 28 (under the Pension Fund Act) that sets out limits that retirement funds may invest in particular assets and asset classes. “Through our multi-manager investment process, we have access to asset managers ranging from large institutions to smaller owner-managed houses with expertise and experience across the different asset classes,” explains Andriette Theron, Head of Manager Research at PPS Investments. In a bid to find asset managers to partner with for this range, PPS Investments focussed on boutique asset managers with well-established, proven investment philosophies and processes coupled with solid, longterm track records. The managers were identified through a rigorous manager research
process, which encompasses both a qualitative and quantitative assessment, according to Theron. A risk-conscious approach to investing for the PPS Defensive Fund PPS Investments selected Sasfin Asset Managers to manage the PPS Defensive Fund, which aims to outperform the ASISA SA multi-asset low category average over a rolling three-year period. Key in achieving this objective is the manager’s risk-conscious approach to investing and a focus on capital preservation. Shear has managed to deliver a positive return over every rolling 12-month period since the inception of him managing multi-asset low-equity strategies (including the global financial crisis in 2008/9). “This is a well-diversified fund that is managed around a strategic asset allocation as an initial step to risk mitigation while high-quality, lowvolatility securities are preferred within each asset class,” explains Theron. A real-return mindset for the PPS Stable Growth Fund For the PPS Stable Growth Fund that targets a return in excess of the ASISA multi-asset medium category average over a rolling five-year period, PPS Investments partnered with Tantalum Capital. This manager has successfully managed multi-asset high-equity mandates for PPS Investments’ funds for some time. Given their real return
mindset, individual securities are assessed and included in the portfolio based on its potential for real capital growth over the medium to long term. Tantalum is one of the few boutique asset managers in South Africa with both specialist equity and fixed income capabilities. “The PPS Stable Growth Fund is therefore well placed to deliver moderate returns while preserving capital over the medium to long term in order to meet its investment objective over time,” says Theron. PPS Managed Fund is more aggressively managed than the traditional balanced fund For the PPS Managed Fund, PPS Investments partnered with 36ONE Asset Management. The fund’s primary objective is to achieve capital growth of at least CPI +5% per annum over a rolling six-year period. It is intended to be more aggressively managed than the traditional balanced funds within the ASISA multi-asset high-equity space. 36ONE Asset Management, known for managing equity-centric mandates, is expected to run the fund with a relatively high allocation to growth assets with the balance of the portfolio invested in cash and cashlike instruments. Key to the manager’s investment approach is its strong stock-picking ability by successfully combining in-depth bottom-up company research with top-down macro analysis. “This high conviction manager is willing to take advantage of
SOE debt: Avoid or invest?
opportunities presented by changing market environments in a very short period of time,” explains Theron. “The PPS Partnership Fund Range is managed by experienced, skilled professionals backed by their respective specialist teams. The range offers an opportunity for added diversification to portfolios by gaining access to top quality managers in mandates typically not available in the market,” she adds. DISCLAIMER: The information, opinions and any communication from PPS Investments, whether written, oral or implied are expressed in good faith and not intended as investment or financial advice, neither does it constitute an offer or solicitation in any manner. Furthermore, all information provided is of a general nature with no regard to the specific investment objectives, financial situation or particular needs of any person. It is recommended that investors first obtain appropriate legal, tax, investment, financial or other professional advice prior to acting upon such information. Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the PPS Investments. Commission and incentives may be paid and if so, would be included in the overall costs. Professional Provident Society Investments Proprietary Limited (39270) and Professional Provident Society Multi-Managers Proprietary Limited (28733) are both licensed financial services providers
Andriette Theron, Head: Manager Research, PPS Investments
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of the standalone risk of the relevant SOE, and then debt. The debt is explicitly guaranteed, so there is no determine what level of support might be inferred additional credit risk assumed. Eskom’s unguaranteed from the government. This risk assessment drives debt, meanwhile, at 7.3%, offers extra compensation the compensation (yield) we require over and above over and above this as investors are assuming some government debt. This additional return is made up of additional risk of default – they need to make an GARETH BERN two components: extra compensation for the lack of assessment as to this risk, as well as the compensation Head of Fixed Income, Prudential Investment Managers liquidity (liquidity risk); and the additional default risk they are willing to receive for assuming it. Higher Eskom bond yields reflect higher investor risk (or credit risk) one assumes. For those SOEs which we consider to have not 10 Given the steady stream of bad news regarding This difference is best illustrated by observing the adequately addressed prevalent governance concerns 9 the financial state of South Africa’s state-owned returns available on Eskom US$ debt. The graph shows – be that as a result of State Capture allegations or enterprises (SOEs), it’s understandable that investors the additional compensation for investing in both8 other factors – we have chosen not to invest in any might be inclined to consider SOE debt as simply guaranteed and non-guaranteed Eskom instruments new issues. These issuers would include Transnet, 7 uninvestable. But our analysis of SOE debt shows as of mid-April 2019. For an investor in the guaranteed Denel, ACSA, Umgeni Water and SANRAL. The latter 6 that while there are risks, there are also some debt, the additional return above that of the SA remains in an uncertain state as the E-Tolling saga 5 opportunities to earn attractive risk-adjusted returns. government (approximately 0.7%, or 5.8% vs 5.1%) is remains unresolved. We do think there have been 4 Can you actually avoid exposure to SOEs? It isn’t easy. compensation for the lack of liquidity – it is more difficult significant changes implemented at Eskom and are 3 SOE debt represents 7% of the All Bond Index (ALBI), and therefore more costly trade than government prepared to11/7/2018 consider further investments – but only in Higher Eskom bondto yields reflect higher investor risk 8/7/2018 9/7/2018 10/7/2018 12/7/2018 1/7/2019 2/7/2019 3/7/2019 4/7/2019 and you will have indirect exposure if you hold its government-guaranteed instruments. 10 Eskom govt-guaranteed 10-yr US$ bond Eskom non-guaranteed 10-yr US$ bond SA govt 10-yr US$ bond Higher Eskom bond yields reflect higher investor risk HIGHER ESKOM BOND YIELDS REFLECT HIGHER INVESTOR RISK government bonds or bank shares, among We prefer to hold a diversified portfolio of 9 Source: Bloomberg as at 12 April 2019 10 others. The government explicitly guarantees exposures, and as such Prudential funds have 8 9 almost half of the nearly R300bn in outstanding holdings in a number of names within the sector. 7 SOE debt, while at the end of 2018 banks had These would include: the Industrial Development 8 6 10% of their equity exposed to SOEs on average. Corporation, the Development Bank of Southern 7 5 Banks also package SOE exposure within debt Africa, Eskom (government-guaranteed only), 6 4 instruments (credit linked motes) which they Land Bank, the Trans-Caledon Tunnel Authority 5 3 issue, giving investors exposure to both the risk and Transnet, among others. This reflects our 8/7/2018 9/7/2018 10/7/2018 11/7/2018 12/7/2018 1/7/2019 2/7/2019 3/7/2019 4/7/2019 4 of the bank and the underlying SOE. view that the SOE sector, despite the recent Eskom govt-guaranteed 10-yr US$ bond Eskom non-guaranteed 10-yr US$ bond SA govt 10-yr US$ bond How can you identify the opportunities? Our headlines, can offer investors some attractive risk3 8/7/2018 9/7/2018 10/7/2018 11/7/2018 12/7/2018 1/7/2019 2/7/2019 3/7/2019 4/7/2019 credit analysts make a detailed assessment adjusted returns with the use of careful analysis. Source: Bloomberg as at 12 April 2019
SA govt 10-yr US$ bond
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Source: Bloomberg as at 12 April 2019
Eskom govt-guaranteed 10-yr US$ bond
Eskom non-guaranteed 10-yr US$ bond
INVESTING
31 May 2019
KIM HUBNER Head: Business Development and Marketing, Laurium Capital
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Risky assets: Are they worth It?
aunched on 27 March 2014, with world-class brands like Naspers, the Laurium Equity Prescient Richemont, British American Tobacco, Fund (the Equity Fund) was AB InBev, BHP Billiton etc. Investors the second addition to the long-only in these companies have been well range of Laurium Capital, following rewarded over the long term. the success of the Laurium Flexible Prescient Fund (the Flexible Fund), Country Exposure (Earnings) which since its inception on 1 February 2013 is the number-one JSE ALL SHARE EQUITY INDEX ranked fund in the SA Multi-Asset Flexible Sector, with a return of 12.7% GBP per annum (4% ahead of the ALSI 3% per year). While the Flexible Fund invests across a broad range of asset classes, EM ex SA local and foreign, the Laurium Equity Other 23% Fund invests only in South African DM 35% equities and is fully invested at all times (minimum 95% in equities), and designed for investors SA 34% (discretionary fund managers, multimanagers, pension funds, etc) to Africa be used as a building block in their ex SA 5% portfolio solution offerings to their clients. The Equity Fund celebrated its fifth anniversary on the 28th of March this year. Since its inception on 27 March 2014 to 31 March 2019, the JSE CAPPED SWIX EQUITY INDEX Equity Fund has an annualised return GBP of 6.7% versus the peer group median 4% of 4.7%, and is ranked number 15 out of 104 funds in the South African General Equity category. EM ex SA Although the Equity Fund invests Other 14% only in South African equities, it is DM 29% important to remember what you are buying when investing in the JSE. We are fortunate that the South SA 47% African equity market offers numerous Africa diversification opportunities beyond ex SA the borders and growth drivers of 6% the South African economy. By our assessment of value, roughly a third Source: Laurium of the JSE All Share index value is driven by what we refer to internally as ‘SA Inc’. In other words, a third of the broad SA market is a function of South JSE CAPPED SWIX EQUITY Africa’s heartbeat and the remainder INDEX TOP 10 HOLDINGS is driven by the ‘heartbeat’ of other international markets, the majority of Naspers 10.7% which have superior growth prospects Sasol 5.1% at this point in time. Standard Bank 4.7% We believe that the Capped SWIX All Share index is a more appropriate Anglo American 4.0% equity index than the All Share index FirstRand 4.0% against which equity performance MTN 3.4% should be evaluated, given the investable construct of this index and British American Tobacco 3.0% the lower weight of Naspers in the Sanlam 2.6% index. The SA Inc driver is higher at BHP Billiton 2.3% 47% of the index. Even at 47% index Absa 2.2% weight for SA Inc in the Capped SWIX there are significant diversification Total 41.9% opportunities outside of South Africa, Source: Bloomberg to invest in world-class companies,
JSE ALL SHARE INDEX 10 YEAR ANNUALISED RETURNS (ZAR) VS. MSCI WORLD
Source: Bloomberg, Laurium
The temptation in volatile markets is to try and time them, by switching into less risky assets. This has proven over time to be a destroyer of value. Time in the market is key – the longer you stay invested, the greater your chance of earnings positive inflation beating returns. Investors in the South African market have been rewarded for their patience. Over the last 20 years, the All Share Index has delivered positive real returns over five-year rolling periods 100% of the time.
BY OUR ASSESSMENT OF VALUE, ROUGHLY A THIRD OF THE JSE ALL SHARE INDEX VALUE IS DRIVEN BY WHAT WE REFER TO INTERNALLY AS ‘SA INC’
Disclaimer: Annualised performance shows longer term performance rescaled to a 1-year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up as well as down as past performance is not necessarily a guide to future performance. CISs are traded at a ruling price and can engage in script lending and borrowing. Performance has been calculated on the C1 class using net NAV to NAV numbers with income reinvested. The performance for each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and dividend withholding tax. A schedule of fees, charges, and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Limited, Registration number: 2007/026029/07 is an authorised Financial Services Provider (FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochures and application forms please go to www.lauriumcapital.com
WWW.MONEYMARKETING.CO.ZA 27
INVESTING
RISK
Meet the Managers now in third year of existence
T
he Collaborative Exchange and powerful sessions, and generally will be running a series of no longer than 18 minutes.” ‘masterclass’ conferences Marc du Plooy, Managing throughout South Africa in July 2019 Director of Wealth Associates where 29 local and international fund and Chairperson of the Financial managers will be present. Intermediaries Association, says, The format is an impactful way “You know what I like about Meet for financial advisers to see eight of the Managers? It is that you actually their chosen fund meet the managers! managers within the better way THE FORMAT IS AN What space of one day and to round out IMPACTFUL WAY earn CPD points for your perspective doing so. Meet the of economics, FOR FINANCIAL Managers is now in its volatility, ADVISERS TO third year of existence asset classes SEE EIGHT OF and was attended and portfolio by about 1 300 construction than THEIR CHOSEN financial advisers last by listening to and FUND MANAGERS engaging with a year at sessions in Johannesburg, Cape WITHIN THE SPACE number of topTown and Durban. class managers OF ONE DAY Kevin Hinton, in a series of the Director of The Collaborative intensive personal interactions. It Exchange, says, “Meet the Managers allows you to really test your own provides an insightful platform for understanding of the construction financial advisers who want to keep of your portfolios for your clients. abreast of financial markets and the Even if you are not currently using funds in which they have invested all those managers, it is incredibly their clients’ assets.” valuable and insightful to listen to Both large and emerging the views of other top-class industry investment managers participate, as professionals. It can only make you a well as domestic and international better investment professional.” fund managers – so advisers can Financial advisers that want to ensure they also get the opportunity attend Meet the Managers should to see new firms that are emerging. email info@meetthemanagers.co.za Hinton says, “We do this in an impactful way in ensuring that the sessions are small and intimate, and the adviser can get ‘up close and personal’ with fund managers. It is Kevin Hinton, Director, The widely accepted that the TED Talk Collaborative format is impactful – short, concise Exchange
Life cover in the age of legal cannabis It is not uncommon for life insurers to outright refuse cover if the use of cannabis is disclosed during the application process, as is policy for illegal drug usage. However, with South Africa’s recent decriminalisation of the private use and cultivation of cannabis, many industries will need to reassess existing business practices that may be impacted by the changing legislation. Jonathan Elcock, the founder and CEO of CompariSure, warns that the new legal position doesn’t mean the use of cannabis won’t impact potential life insurance claims or the ability to get cover in the first place. “The reality is that South African life insurers by and large have yet to adapt the way they underwrite marijuana use. While private cannabis usage may now be legal, the known health risks associated with its use have not changed,” says Elcock. Dr Andrew Hutchison, an associate professor at the University of Cape Town’s Department of Commercial Law, says that insurers’ hesitance to adapt their policies is an actuarial standpoint, rather than a legal one. “Since the risks are largely health and lifestyle related, this has little to do with legality. The use of cannabis is therefore comparable to how the legal practice of other ‘risky’ activities, such as skydiving, also affect the general underwriting of risk.” Considering that the known short-term effects of marijuana use can include distorted perception and loss of coordination, while proven long-term effects include respiratory illnesses, Elcock says it is understandable why an insurer would be more likely to approve life cover than critical illness or disability cover in cases where the use of cannabis is disclosed. That being said, he does point out that cultural norms often dictate insurer policy. “Take the consumption of alcohol, for example, which is currently considered to be more socially acceptable. While heavy alcohol usage can impact eligibility for cover, moderate usage generally has no impact on eligibility or price – despite alcohol being linked to an estimated one in 10 deaths in South Africa. “It is therefore not unreasonable to expect that cultural influences may impact insurer policies towards marijuana usage in the longer term, should usage become more accepted in mainstream society,” he adds. While there is no doubt that perceptions of cannabis are shifting across the country, Elcock advises that policyholders do their homework. “Since nondisclosure of usage can lead to a claim being rejected, you should consult an expert who understands the terms and conditions of different insurers, and who can assist in choosing the right cover for you.
Gain leading industry insights from 29 local and international investment managers.
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ADVERTORIAL
31 May 2019
Introducing the Liberty Wellness Bonus Engage in a healthy lifestyle and get up to 40% of your premiums back in cash
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iberty has designed a unique way to reward clients who actively engage in a positive and healthy lifestyle and can demonstrate this through wellness programmes that Liberty recognises. Clients can potentially earn back, in cash, up to 40% of the qualifying Lifestyle Protector premiums, after the policy anniversary, five years from when the Wellness Bonus benefit commenced. Liberty’s Divisional Executive: Retail Solutions, Shared Value, Nalen Naidoo answers pertinent questions about Liberty’s Wellness Bonus. Question: How is the Liberty Wellness Bonus different to other rewards programmes in the market? The Liberty Wellness Bonus is a major innovation in the way longterm insurers reward their clients for living a healthy lifestyle. We use clients’ wellness measurements from recognised Wellness Programmes, create a Liberty Wellness Score for clients and integrate this into our long-term insurance solutions. Our clients can continue to enjoy the benefits of their preferred wellness programme and enjoy the benefits of their selected cover from Liberty. Businesses like Uber and Airbnb have taught us that we don’t need to physically own all the assets within the ecosystem to be able to make them work for our clients in the form of innovative and improved propositions.
THERE ARE VARIOUS WELLNESS BONUS DETAILS THAT THE FINANCIAL ADVISER CAN ASSIST THE CLIENT WITH Question: What issues with traditional wellness programmes are being solved through the Wellness Bonus? The Wellness Bonus is a result of Liberty’s continuous efforts towards becoming more client-centric. We put the client at the centre of everything we do. Traditional solutions that bring together wellness programmes and insurance products
give clients potential rewards upside, but also usually have significant downside risks in the form of higher future premium increases or reductions in cover, relative to original quote illustrations. This impacts most people who, despite good intentions, are not able to manage their wellness status into the top tiers, sometimes for reasons out of their control. These traditional solutions sometimes introduce a risk to intermediaries advising clients, too.
the most value out of the Wellness Bonus, a client should engage in healthy behaviour, have it measured through a wellness programme, and look to improve or maintain their Liberty Wellness Score.
Question: How does the Wellness Bonus help Liberty to become a risk partner to its clients? Having listened to the needs of financial advisers and clients, we designed the Wellness Bonus to give clients the opportunity to benefit from significant rewards upside when they manage their health in such programmes, but with no downside. The charge paid is returned as a minimum bonus, and they continue to enjoy their selected cover from Liberty. We believe our clients can enjoy a ‘best of both’ worlds scenario.
Question: How does Liberty know how a client manages their health? Once a year, Liberty must be updated with the latest Recognised Wellness Programme tier status information. Bonuses are banked each year and after the policy anniversary five years from when the Wellness Bonus benefit commenced, clients receive a portion of their annual premiums paid back in cash, depending on how their statuses have changed over time. With Liberty’s Wellness Bonus, a client’s monthly premiums and cover amounts will not change in an unexpected, opaque manner; only the cash back bonus will be impacted by engagement with a client’s Recognised Wellness Programme. However it is important that clients speak to a financial adviser to ensure that the right decisions are made.
Question: How exactly does Liberty’s Wellness Bonus work? A client must have a Liberty Lifestyle Protector policy with qualifying benefits and be a member of a wellness programme that Liberty recognises. When a Wellness Bonus feature is added to a Lifestyle Protector policy, he/she will contribute an additional 5% of qualifying monthly premiums. To get
Question: Why is financial advice essential to reap the benefits of the Wellness Bonus? The value of financial advice in making any important decision cannot be underestimated. As one of the most comprehensive long-term insurance solutions available, Lifestyle Protector offers clients a wide range of risk benefits. An experienced financial adviser should help the
client select the right combinations suited to their individual lifestyles. There are various Wellness Bonus details that the financial adviser can assist the client with. For example, Lifestyle Protector also has the ADDLIB bonus which is a cashback feature that rewards qualifying clients for trusting Liberty to meet their protection, investment and retirement needs. The Wellness Bonus aims to complement the ADDLIB bonus, with clients having the potential to get up to 50% of their Lifestyle Protector premiums back in cash. This depends on their Wellness Score, and the other Liberty protection, investment and retirement products owned. Financial advisers have all the knowledge and expertise required to ensure clients’ protection and investment needs are covered effectively. Based on how clients choose to engage in a positive and healthy lifestyle, they can now also help clients get the best value out of their Wellness Bonus. For more information on Liberty’s Wellness Bonus, speak to an accredited Liberty financial adviser.
Nalen Naidoo, Divisional Executive: Retail Solutions, Shared Value, Liberty
WWW.MONEYMARKETING.CO.ZA 29
RISK
31 May 2019
Providing for the needs of the Mid-lifer
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or financial advisers, it’s important to understand what we at FMI called the ‘Mid-lifer’ stage of life. With their children grown, leaving high school or pursuing university, staying abreast of these goal-posts can be challenging to say the least. Whether self-employed or salaried, this Mid-lifer group is likely more established, with a cosy lifestyle and stable income. But for almost any adult, it’s the most financially demanding phase too. Additional expenses (such as school or university fees) are tightening their grip and for most, these various needs are in fact likely to exceed their available funds, making debt an everpresent shadow alongside them. With a real appreciation for the benefits of life insurance, most Midlifers believe they are sufficiently protected with a combination of disability and life lump sum cover in place. Their biggest concern is the support and comfort of their loved ones should they pass away – a need reflected in the market with almost twice more life cover sold than disability cover.1 As their trusted financial expert, it’s
up to you to change this perception by helping your clients to understand the reality of the risks they face, and the consequence of the choices they make – or don’t make – today. A 50-year old, for example, has an 81% chance of experiencing a temporary injury or illness that will stop them from working for more than two weeks during their working career. By comparison, they have a 14% chance of a permanent disability, a 34% chance of a critical illness and only a 11% chance of death during their working career.2 Their greatest risk is a temporary injury or illness, and if they don’t have income protection, how will they continue to meet their monthly financial obligations? First and foremost, life insurance benefits should protect your clients’ ability to earn an income. That’s why we allow your clients to protect 100% of their income against the short- and long-term risk of a disability, and our critical illness income benefit allows them to protect 130% of their income for 12 months. They then need a lot less lump sum cover, enough to pay for any additional once-off expenses they
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may be faced with in adapting to a permanent disability or critical illness. Our philosophy of protecting monthly income through a combination of income and lump sum benefits is the same when it comes to life cover. Make sure your clients have enough lump sum cover to settle any debt and estate duty in the event of their death, and life income benefits to cater for the specific needs each of their dependents may have. This means they’ll be able to support their spouse with an income for as long as they need it. And beneficiaries never have to risk the complicated task of investing a lump sum to produce a sufficient income. Here are two easy tactics to help you assist your clients in making the best choice for their needs in the Mid-lifer stage:
1
Give them the choice of an income or a lump sum Many people intend to use their disability lump benefit to pay off debt and then only protect 75% of their income on EIP (Extended Income Protector). However, 45% of FMI’s EIP claims have been for non-
permanent disabilities. In this case, a lump sum benefit would not pay out, and 75% would not be sufficient to cover all their costs. Of course, realising that many of your clients want to settle their debts immediately in the event of a permanent disability is important. To do this, FMI offers an EIP commutation option where claimants can convert up to a third of their income benefit to a lump sum should they become permanently disabled. Make sure their children are protected: FMI’s Income Protection for Students covers them against the risk of a temporary or permanent illness or injury, and will pay an income of up to R12 000 a month.
2
Increase their retirement savings Decrease disability and life lump sum benefits to cover once-off expenses and use these savings in decreasing premium patterns to top up investment contributions. FMI Disability Cover Study 2016 FMI Risk Stats 2019. Probability based on temporary disability lasting longer than 2 weeks during working career up to retirement age of 70. 1 2
EDITOR’S BOOKSHELF
31 May 2019
BOOKS ETCETERA
REBELS AND RAGE REFLECTING ON #FEESMUSTFALL BY ADAM HABIB
INNOVATION FOR THE FATIGUED HOW TO BUILD A CULTURE OF DEEP CREATIVITY BY ALF REHN
In this new book, Adam Habib, the most prominent and outspoken university official through the recent student protests, takes a characteristically frank view of the past three years on South Africa’s campuses. He charts the progress of the student protests that erupted on Wits University campus in late 2015 and raged for the better part of three years, drawing on his own intimate involvement and negotiation with the students, and also records university management and government responses to the events. He critically examines the student movement and individual student leaders who emerged under the banners of #feesmustfall and #Rhodesmustfall, and debates how to achieve truly progressive social change in South Africa, on our campuses and off. Rebels and Rage is both an attempt at a historical account and a thoughtful reflection on the issues the protests kicked up – from the perspective not only of a high-ranking member of university management, but also Habib as political scientist with a background as an activist during the struggle against apartheid. The author moves between reflecting on the events of the last three years on university campuses, and reimagining the future of South African higher education.
How many presentations on innovation have there been recently? Thousands? Millions? The world is experiencing ‘innovation fatigue’: We feel cheated by the endless rounds of consultants who come into our organisations, deliver conceptual models that don’t stick with the realities of business and then leave again. Companies and teams are left feeling more deflated than ever, and with not one idea that’s impacted the bottom line. Innovation for the Fatigued argues that it’s worth fighting for the concept and study of innovation in organisations. Business leaders are always looking over their shoulders for the next ‘Uber moment’ to overtake them, and they recognise that innovation needs to be a top priority. But how does one innovate? This book is the antidote to the empty promises that flow through the innovation industry. By designing a company culture that nurtures ideas but also defends against fads, the powerful basics of imagination, empathy, play and courage can be rediscovered. The book details where companies have got innovation wrong, while celebrating and studying the ones that lead the way. With unique, relatable and varied examples, Alf Rehn provides a practical model for getting innovation back on track, and instilling change at speed with real concern for market demands.
GANGSTER STATE UNRAVELLING ACE MAGASHULE’S WEB OF CAPTURE BY PIETER-LOUIS MYBURGH
SUDOKU ENTER NUMBERS INTO THE BLANK SPACES SO THAT EACH ROW, COLUMN AND 3X3 BOX CONTAINS THE NUMBERS 1 TO 9.
In spite of Cyril Ramaphosa’s ‘new dawn’, there are powerful forces in the ruling party that risk losing everything if corruption and state capture finally do come to an end. At the centre of the old guard’s fightback efforts is Ace Magashule, a man viewed by some as South Africa’s most dangerous politician. In this book, investigative journalist PieterLouis Myburgh ventures deeper than ever before into Magashule’s murky dealings – from his time as a struggle activist in the 1980s, to his powerful rule as premier of the Free State province for nearly a decade, and his rise to one of the ANC’s most influential positions. Sifting through heaps of records, documents and exclusive source interviews, Myburgh explores Magashule’s relationship with the notorious Gupta family and other tender moguls; investigates government projects costing billions that enriched his friends and family but failed the poor; reveals how he was about to be arrested by the Scorpions before their disbandment in the late 2000s; and exposes the methods used to keep him in power in the Free State and to secure him the post of ANC secretary-general. Most tellingly, Myburgh pieces together a pack of leaked emails and documents to reveal shocking new details on a massive Free State government contract and Magashule’s dealings with a businessman who was gunned down in Sandton in 2017. Gangster State should lead readers to a disconcerting conclusion: When it comes to the forces of capture, South Africa is still far from safe.
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THE 2018 PPS INTEGRATED REPORT TOTAL ASSETS*
R34.9 billion
PROFITS ALLOCATED TO MEMBERS
BENEFITS PAID
R3.2
R634.6 million
billion
IT ADDS UP For over 77 years, we at PPS have been providing bespoke financial services to graduate professionals and, since 2009, have cumulatively shared more than R25 billion with our members. This exclusive benefit continues this year with PPS, adding even more to what we share between our member doctors, engineers, lawyers, accountants, financial advisers, academics, scientists, architects, and all other eligible professionals. DOWNLOAD THE 2018 PPS INTEGRATED REPORT AT
PPS is an authorised FSP. *Excluding unit trusts for third parties.
PPS.CO.ZA
