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Africa & The emerging markets

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RETIREMENT CHANGES What you need to know


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April 2011




Letter from the editor

letter from the

EDITORIAL Editor: Shaun Harris


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

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

Copyright COSA Communications Pty (Ltd) 2011, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.



ay you live in interesting times is a Chinese proverb that seems increasingly apt in the current climate. Interesting often means very tricky for a financial adviser. Where do you put clients’ money: onshore, offshore, equities, fixed interest or a combination of all? And the post-Budget retirement funding options are becoming increasingly complex. This month, Maya Fisher-French tackles what advisers need to know following Finance Minister Pravin Gordhan’s changes to retirement funding as well as proposals in the Budget. Many advisers will find that clients’ retirement strategies need to change and the feature provides a guide as to what the changes could be. It’s a hugely important topic, with retirement funding still tipping on the wrong side of the scale in South Africa. The round-up by Miles Donohoe on industry news and products has the often outspoken Leon Campher, CEO of ASISA, making a comparison, using the value of the Rand to invest offshore as “akin to gambling”. It also looks at offshore property as a viable investment. Speaking of gambling, I dip into exchange-traded funds (and notes) as a means for advisers to construct a well-diversified core investment portfolio for clients at reasonably low cost. The gambling odds are roughly three-to-one of a more expensive actively managed unit trust fund beating the market. I know which way I would tilt in a casino. But this isn’t a casino. Once again, advisers could face some difficult calls.

April 2011

Head-to-Head has Glenn Silverman, global chief investment officer of Investment Solutions, and Gail Daniel of Investec Asset Management, looking at the merits of investing in emerging or developed markets. Their arguments tend towards developed markets as offering more value and, while not writing off emerging markets, Daniel has concerns about the high rates of inflation in many of these countries. It’s a question that’s vexing the investment minds of asset managers in South Africa and around the world. Decisions now will have longer-term consequences for advisers deciding where the bulk of clients’ money should be. On a related note, I take a look at South Africa’s invitation to join BRIC, among the four fastest-growing economies in the world. It’s an honour but is it deserved? As part of the new BRICS, South African investors are offered many possible opportunities, but there are dangers as well; yet another decision to stretch the skills of advisers. In another new addition to the magazine, this month we have also launched a new Fund Profile section through which you, the adviser, can learn more about the funds available to your clients and how well they are performing. Here’s hoping you find the contents useful to get you through these interesting times. All the best till next time.

Africa & the emerging markets

Investing in Africa

Windall Bekker | Head: Investment Consulting, OMAC Actuaries AND Consultants management regimes that are applied in most of these countries.


ate in 2009, the Ministry of Finance relaxed some of its Exchange Controls pertaining to investing abroad, allowing retirement funds to increase their offshore exposure to 25% with an additional 5% of their assets to be invested in Africa (excluding SA) Not many, if any, institutional investors have exploited this new investment avenue since it came into effect. The reluctance to take up this opportunity is generally due to the following reasons;

market, which was bolstered by a stronger Rand. Local equities were relatively cheaper after the downward rerating of 2008, but a strong recovery in equity prices in 2009 saw local equities reaching their fair values in 2010.

1. Size counts Many retirement funds perceive 5% too little a quantum to make a difference in their investment portfolios hence they have not bothered to consider this option. While this argument is valid for some small funds such as those below R500 million, for any fund above this threshold size, the 5% is a significant quantum to make some valuable contribution to a portfolio.

1. Growth prospects Many African economies have enormous potential for growth driven by; i) Lower levels of debt on both fiscal and consumer levels ii) Growing middle class population making Africa a consumer rather than a resource story iii) Increased investments into education, health and public infrastructure

2. We are already in Africa Some South African institutional investors think that since the bulk of their investments is invested here in South Africa, there is no need to seek alpha in the rest of Africa. This is far from reality. Africa (excl. SA) –is a unique asset class with widely different opportunities from those found in South Africa. South Africa is classified among the emerging market countries and this is evidenced by a high correlation between the local market and emerging markets of 0.9. Africa ex-SA is largely a frontier market and its correlations with emerging and developed markets are below 0.5, making them a good diversifier away from these markets.

2. Flow of long-term capital Africa is currently a net recipient of capital as developed market companies are expanding their businesses into the lucrative African markets through green field investments, acquisitions and partnerships. A good example is the increasing number of SA companies moving into Africa. This will open up African markets, improving resource exploitation, which should translate into higher growth and attractive return on investments.

3. Local is lekker Many investors found the local market very attractive in 2010, justifiably so given the returns that we saw coming from local equity


Factors to look at when investing in Africa The following are identified as some of the key factors that investors need to look at when considering allocating a portion of their assets to Africa;

3. Currency stability Investing in Africa can mean exposure to a multi layer of currencies for a SA Based investor. Therefore, currency risk becomes one of the key factors in determining the suitability of this asset class. Most African currencies however, are relatively stable against both the Rand and the Dollar due to currency

April 2011

4. Liquidity Some African markets are still shallow and under strict controls –making them very difficult to exit once one has invested. Another related problem is the lower levels of free float in some stocks due to the closely-held nature of the businesses. This will make it difficult for investors to have large enough exposure to some preferred stocks that they may strongly desire. Due to liquidity constraints that one may come across, it is recommended that investors should have a private equity mindset when approaching Africa. Due to liquidity constraints, it may take relatively long periods of time to unlock value in some stocks. However, liquidity should not be a huge impediment for investors willing to invest in Africa for two main reasons; i) The maximum that could be invested in Africa is only 5% of the Fund and this should make liquidity management much easier. Funds can utilise other more liquid assets classes to meet their short term liquidity needs. ii) Managers managing money in Africa have factored liquidity as one of the key factors in their portfolio construction methodologies. In most cases, they play in the upper end of the liquidity spectrum in their universe construction. 5. Manager skill and capacity This is an essential consideration to make when going into Africa. One would want to invest through a manager who has considerable years of managing money in this space, has enough capacity in terms of research team and who is always on the ground to appreciate the realities and intricacies of these economies. Due to these additional requirements needed for managers who manage money in Africa, fees are also similar to other international funds, which range from 1% to 2% per annum. For this kind of fee, it becomes vital to have a manager who adds value to a portfolio rather than just pick up fees on assets that could earn better elsewhere.


In Search of alpha in emerging markets Lonwabo Dambuza | Fund Specialist Africa Funds, RMB Asset Management


nvesting in emerging markets and so-called frontier markets may seem to be the flavour of the moment as investors chase better returns than those expected in developed markets. Institutional investors are increasingly making strategic allocations to emerging markets rather than tactical views, and there is evidence that this appetite will continue as long as prospective returns in emerging markets exceed those in developed markets. Indeed investors have been rewarded as emerging markets continued to outperform developed markets in 2010, which saw the MSCI EM Index and the MSCI EFM Africa Index outperform the MSCI World Index by seven per cent and two per cent in US Dollar terms, respectively. The current political turmoil in Tunisia, Egypt and Libya brought to the fore the realities of investing in emerging markets, where liquidity can quickly dry up and emotional panic can easily overshoot on the downward. However, for those investors who have done their homework and understand the economic and political risks that emerging markets pose, current events could provide opportunities to pick up bargains in the market rather than justification for liquidating positions. While an investor may be aware of the risks inherent in emerging markets, undiversifiable risks exist and are higher than in developed markets. Investors that seek to participate in these markets should ask themselves three key questions: 1) What is their risk tolerance?; 2) What is their time horizon?; and importantly, 3) How do I access this growing market? RMB Asset Management Africa Funds are one of the ways in which investors can efficiently access potential growth opportunities in Africa. Although liquidity and investment opportunities can at times be sparse in emerging markets, a well-constructed stock selection process and an efficient investment vehicle should be able to minimise these shortfalls. It should, however, be remembered that prudent investment thinking is necessary to ensure alignment to long-term goals.

April 2011



Lessons and implications

of the Middle East usually the most attractive ‘benefits’ that the despot offers in exchange for denying the freedom of its citizens. The Achilles heel of this arrangement is food. Poverty and oppression are uncomfortable bedfellows. Add food inflation or food shortages and the situation destabilises. This is observed time and time again and it is no surprise that despots frequently resort to food price subsidies. Just last year, Mozambique experienced serious unrest over food inflation where the government had to restore subsidies before calm returned.

Chris Hart | Chief Strategist: Investment Solutions


he authoritarian regimes in the Middle East have sustained themselves through draconian measures for decades. No democratic traditions have been developed throughout the Arab world. Oppositions are not tolerated and, where elections have been held, credibility levels are low and in some case (such as Algeria), inconvenient results cancelled. However, leadership ranges from the benign to the truly despotic. In countries with abundant oil wealth, standards of living are generally high but this was not the case for Egypt or Tunisia, where there is a considerable degree of poverty. Poor people do not have significant personal resources and hence are relatively easy to oppress. The edifice of regime authority generally proves to be apparently impregnable. This is especially pertinent when resistance is only at an unco-ordinated individual level. There are also redeeming features about an authoritarian regime. It cannot survive if everything about is intolerable. Stability, order and security are


Food inflation has become a problem around the world, particularly in emerging markets, including China and India. South Africa managed to avoid the worst of global food inflation due to the strength of the Rand in 2009 and 2010. It is food inflation that was the foundation of the Middle East destabilisation. The middle class grumble over high food prices, the poor riot. The key difference for South Africa is that while there is much poverty, the contrast is that the country is a democracy. On a socio-political level there is minimal oppression. While poor communities are vulnerable to unrest (which has already been manifesting in service delivery protests), it is unlikely that the system will be destabilised. The political system is relatively secure. However, a distinction must be made between economic freedom and political freedom. It is quite instructive that the downfall of the strongmen in both Tunisia and Egypt was sparked by street hawker protests. Lack of economic freedom gave rise to increasing frustration and anger. The elite had restricted the economy with rules that favoured themselves. Opportunities were only really available to the rulers. Mubarak had amassed a great deal of wealth through vested interests and his family and the favoured few inner circle. The masses faced poor employment prospects and their own efforts were subjected to daily harassment by police. Ditto for Tunisia and too many other poor countries around the world. The same parallels in the Middle Ages, where a

April 2011

connected elite (the nobility) subjugated the masses (the serfs). The peasant revolt was also to establish greater economic freedom. The big concern is that in South Africa there are uncomfortable economic comparisons. While South Africans enjoy one of the highest degrees of political freedom in the world, economic oppression has been on the rise. Government obstruction in an economy that has a high degree of unemployment is on the rise. Business faces hostile labour and regulatory conditions. But at the same time, there is an elite gaining ground and setting rules favouring their own interests. Unemployment is blamed on the economy but is probably more a function of regulatory failure. Much of the regulatory initiatives of the past 10 years have been very well intentioned but have sub-optimal outcomes. The danger South Africa faces is not so much a widening rich-poor divide but rather the lack and obstruction of opportunity faced by the poor. Street hawkers are also harassed rather than protected. Poor people just do not enjoy the same economic rights as the rich and South Africa is at risk as a consequence.

April 2011


shaun Harris

than ore M just another l l a w e h t n i Bric The surprise

full of possibilities is invitation

There’s an incredible amount of esteem for South Africa in being formally invited to join Bric, the acronym comprising Brazil, Russia, India and China that will now become Brics, as we join four of the fastest-growing emerging countries in the world. Overall it should be positive for investment markets in South Africa. Already the recipient of significant foreign investment inflows, being part of the Brics club will attract more attention to the country. It’s a step in the right direction. For private retail investors and financial advisers, increased foreign interest in financial markets could be good, more buoyant trading tends to raise share prices, but there are dangers as well. That was at least partly the case last year as foreign investment drove the JSE to dangerously high levels, much higher than historical averages. There’s the ‘it’s different this time’ argument and perhaps it’s right. Maybe ratings on the JSE indices deserve to be permanently raised. The downside is


April 2011

a stock market, and bond yields, that could overheat. Advisers will face some difficult calls on when to get clients’ money in and out of the market. The fundamental question, though, is should South Africa be part of Bric? In terms of economic growth, actual and forecast, South Africa is way behind the other countries; also in manufacturing output. The only percentage where we score the highest is unemployment, which is not good. Then again, in recent years, the JSE has outperformed the major markets in the Bric countries, something underlined by Marcel Bradshaw, MD of Glacier International, that economic growth does not necessarily translate into stock market performance. South Africa’s population is also much smaller than the other Bric countries and so is the economy, less than a quarter the size of Russia, which has the smallest economy in the Bric club, according to the World Bank. So is

membership of Brics justified? Jim O’Neill, chairman of Goldman Sachs who coined the Bric acronym in 2001, thinks not and told the recent Reuters Investment Summit that he was surprised that South Africa had been officially invited to join the Brics. He reportedly added that South Africa’s economy was just too small to join the Bric ranks. The potential of the original Bric countries, seen as leading the swing of economic power from developed countries to emerging markets, is huge. At present, the four countries occupy more than a quarter of the world’s land mass and more than 40 per cent of the world’s population. Goldman Sachs believes that with the economies growing so rapidly, they will pass the combined economies of the present richest nations in the world by 2050.

Africa could “punch above its weight” in Brics because of its close connections to the continent. He went on to remind the audience that “the African continent is the next great economic story”.

in a country like Spain, where he feels stocks are underpriced and not factoring in the anticipated recovery. So should South African asset managers start launching new Brics funds? “I think it will make sense to start looking at it. It may be a bit late in the cycle for private investors, but over the longer term, South African asset managers should start launching Brics funds,” advised Bradshaw. This raises the question being debated in many investment houses at the moment. Is the strong run in emerging markets over and is better value being offered in developed markets? “It’s the biggest question on our minds now. After the run in emerging markets, what now?” Bradshaw asked.

According to the International Monetary Fund, the Bric countries will account for 61 per cent of global growth in 2014. That’s the rather exclusive club South Africa is joining, so it’s not surprising that its role in the new Brics is being questioned. “It’s a masquerade, there are many other countries that could be part of Bric, like Mexico and South Korea,” said Adrian Saville, chief investment officer of Cannon Asset Managers. He believes that South Africa has been invited only because of its place in Africa. And that could be precisely the reason. On the point of Mexico and South Korea, surely Bric contenders, both countries apparently had been considered but were excluded because it was felt their economies were already more developed. There’s little doubt, though, that South Africa’s invitation to Brics was because of its position as the gateway to the rest of Africa. There are the conspiracy theories. The formal invitation to join Brics came from China, currently the rotating chair of Bric. China’s hunger for Africa’s resources is well known. One cynical view is that China extended the invitation as part of its economic colonisation of Africa. “I think one’s initial response to South Africa being invited to form Brics is somewhat skeptical because it’s such a smaller member than the others,” said Bradshaw. “But looking into the bigger Africa, the growth rates in many of the countries, the South African companies operating throughout Africa, it starts to add up and make more sense. There are more possibilities.” This is similar to the view of Rob Davies, Minister of Trade and Industry, who told the audience at the recent Davos meeting that South Africa’s invitation was not “Africa tokenism” but allowed access to the hundreds of millions of consumers in Africa. That’s what you would expect the Minister of Trade and Industry to say, but he added that South

“When people make investment decisions, it will be, ‘Do I want exposure to the rest of Africa?’, which in turn will mean exposure to Brics,” said Bradshaw. “But private investors need to be aware that exposure to economic growth and stock markets are different things,” he cautioned.

Glacier International already has quite a few funds covering Bric countries, including Bric funds. It seems just a matter of time before more are launched. And for investors, the possible advantages of joining Brics far outweigh the potential downside.

“There’s an incredible amount of esteem for South Africa in being formally invited to join Bric, the acronym comprising Brazil, Russia, India and China that will now become Brics, as we join four of the fastestgrowing emerging countries in the world.” This was ably demonstrated in China last year when, despite GDP growth of around 10 per cent, the Shanghai Composite index declined. Saville said it’s simply because Chinese stocks are already priced for strong economic growth. He points to possible opportunities

April 2011



Investment Solutions G lenn

S i l ver m a n

Global Chief Investment Officer at Investment Solutions

1. Developed markets have easily outperformed emerging markets so far in 2011. Why is this? Emerging markets (EM) have outperformed developed markets (DM) for some 10 years now, so some profit taking and a reversal was ‘overdue’. DM equities are now arguably cheaper, with certain lower risks, than those in EMs. The events in North Africa and the Middle East have highlighted some of these risks. The reversal is thus not unexpected, but may not necessarily be maintained. 2. Do you think this is a trend that will continue this year and beyond? The economics within the EM countries typically look better than those in the DMs, especially the West, periphery of Europe and Japan – primarily into lower debt levels, both private (consumer) and public (government). Their economies suffered far less from the global financial crisis and recovered far quicker and more strongly. In terms of economics, one might see more upside to EM outperformance. Against that, valuations tend to support a case for


developed equities over emerging. A 10+ year outperformance is a long one and it’s hard to see EMs giving up, without a fight. Nevertheless, the level of EM outperformance should, at minimum, start reducing or maybe even turning. 3. Is it game over for emerging markets – at least for the foreseeable future – and if so, why? As above, it’s a hard call, with pros and cons supporting either argument. From a valuation and risk perspective, we feel that DMs are the safer route to take. Once events in the Middle East, along with the inflation issues, are behind us, it is possible that EMs could resume their ascent. In addition, the US ‘QE2’ ends in June this year, and the implication of such, part of which has been to drive money into EM, remains to be seen. We don’t feel that it’s necessarily game over for EMs, there may just be better ways to gain access to the EM consumer. 4. Has the South African equity market run its course for now, or is there still value to be had?

April 2011

On an historic basis, SA is expensive, both on price/earnings and dividend yield basis. This implies some vulnerability and less than average value in the local equity market. It thus implies that strong EPS growth is expected from our local companies, but that this is already priced in. If EPS were to disappoint, then downside is inevitable. Companies would need to deliver EPS at least in line with, but preferably ahead of expectations, to reduce this vulnerability. While the China story holds, and while floods of money continue to be created in the West and Japan, SA’s financial markets should attract some of this. But the storm clouds are gathering. 5. There is talk that Europe could see further strikes/riots as more austere measures are introduced. Do these developed markets potentially offer more risk than some emerging economies? All markets have risks. They alter through time and differ in terms of timing and quantum. Further austerity measures within the periphery of Europe could indeed lead to riots, but EMs, especially those in

HEAD TO HEAD | Investec Asset Management

Investec G ail

D a n i e l

Portfolio Manager at Investec Asset Management

1. Developed markets have easily outperformed emerging markets so far in 2011. Why is this? Emerging markets have been running negative real interest rates and are now perceived to be behind the curve in terms of controlling inflation. Inflation is above the target in China and Brazil and is running at nine per cent in Russia and more than eight per cent in India. Inflation has been influenced by global food prices, but capacity usage is also very high in emerging markets. In addition, earnings revisions are negative in emerging markets. The markets have performed well and they are coming off a high base, but companies are struggling to grow revenue in excess of costs. In developed markets, on the other hand, there is no inflation problem and earnings revisions are improving. 2. Do you think this is a trend that will continue this year and beyond? Yes, I think emerging markets will have to tighten interest rates a lot for that

perception to change, but in the face of high food prices and social instability, it is unlikely that monetary authorities will take draconian action. 3. Is it game over for emerging markets – at least for the foreseeable future – and if so, why? It’s not game over, but it’s certainly time out, although the developed world is also far from perfect. Until inflation is brought under control or the stock markets get substantially cheaper, emerging markets are unlikely to outperform. The one caveat is the oil price. Those markets that benefit substantially from a rising oil price (like Russia and Brazil) will fare much better than those markets that are net oil importers (like Turkey and South Africa). 4. Has the South African equity market run its course for now or is there still value to be had? Obviously, there are opportunities for good stock pickers, but the local South African shares are looking vulnerable. In

April 2011

the fixed investment sector, for example, there are very few new contracts being awarded and there is excess capacity after ten boom years and the World Cup. Retailers too are facing gross margin pressure due to rising cotton prices and operating prices (on the back of rising electricity and rental costs). For the first time in a very long time, retailers are in a situation where costs threaten to rise faster than revenues. However, we do see opportunity in oil shares, selected miners and companies that have offshore exposure like Richemont, SABMiller and BAT. 5. There is talk that Europe could see further strikes/riots as more austere measures are introduced. Do these developed markets potentially offer more risk than some emerging economies? Firstly, one shouldn’t read too much into strikes in Europe. It is a common occurrence that we see every year as they exert their democratic right to strike, mostly peacefully. Some of the best performing markets in the world so far this



Investec Asset Management

the Middle East, face their own risks. It largely comes down to valuations. The lower the valuation, the more protection – even in the face of negative events. This often comes down to stock specific, rather than regional calls, i.e. our preference would be for a regional position, which is a result of picking the most attractive stocks globally.

year have been European, such as Italy and Greece. Yes, they are risky, but it is a risk with which the market has had three years to come to terms and which is fairly well understood. The key difference is that European markets are perceived to be risky, while the risk in emerging economies is underplayed. A prime example is the recent unrest in Egypt, which saw the stock market closed for nearly two months.

6. How different is the investment case for the US and Europe? 6. How different is the investment case for the US and Europe? The responses adopted by each to the financial crisis and its aftermath, have differed materially. The US is trying to solve its debt problem by taking on more debt (stimulation, QE2), whereas the Europeans have favoured more austerity. It seems to us that the latter is the more sensible long-term solution, notwithstanding the obvious negative short-term implications. But again, this talks little to valuations and US corporates could easily be the most attractive globally, even if the US region is not. 7. Investors are still being told to diversify by going offshore. Is this right and if so, where should they be looking?

The US will keep interest rates lower for longer, while Europe may hike sooner given that the bulk of Europe is growing well. Germany, for example, is growing at the fastest rate since 1981. Given that Europe doesn’t have consolidated fiscal management, the tail risk of the emerging European economies will increase with rising interest rates. 7. Investors are still being told to diversify by going offshore. Is this right and if so, where should they be looking? At R7 to the Dollar, we do believe investors should go offshore, as the Rand is expensive on a purchasing power parity basis. However, investors should remember it’s a two-way trade and just because you’re taking your money offshore doesn’t mean you shouldn’t bring it back at some stage. Your money should work hard for you wherever it is invested.

We believe that both the Rand and the SA equity market are on the expensive side of fair value. As such, investors should indeed look to take advantage of both, by moving money out of SA (Rand and local equities) and into offshore, developed market equities. 8. South African investors have been badly burnt in the past by investing in developed markets? Is this time really different? Predicting the future is always tricky. The evidence of the past 10 years has unequivocally shown, with the obvious benefits of hindsight, that investors should have kept their money at home. However, the past does not predict the future and at some point this will change. That time is approaching and may be sooner than is thought. Our instincts are to be six month early, rather than “one week” late, in terms of this position.

It makes sense for South African investors to look at developed markets from a diversification perspective. Not only do they offer exposure to sectors that are not readily available in South Africa such as technology, pharmaceuticals and good consumer staples, but South Africa is also classified as an emerging market, and therefore vulnerable to the same vagaries as other emerging markets. 8. South African investors have been badly burnt in the past by investing in developed markets – is this time really different? In 2000, after ten years of good returns from US equities, everybody wanted US equities; conversely, after a poor decade, nobody wants US equities. However, with the Rand looking expensive, this is where the opportunity lies. Valuations are attractive and we expect the economy to surprise on the upside as corporate profitability will drive job growth.


April 2011

April 2011


Shaun Harris

ETFs the challenge for unit trust funds Buying beta at a better price


April 2011


ince the first exchange traded fund (ETF) was launched in South Africa a little more than ten years ago, it has proved to be a popular investment vehicle. Trade, both by volume and value, has been brisk. There are now 27 ETFs listed on the JSE as well as five exchange traded notes (ETN). The real question though is why ETFs have not been even more popular with retail investors. In most cases, total costs are lower than unit trust funds, especially actively managed unit trusts, and with the variety of ETFs and ETNs now available on the market, a well diversified portfolio can be built up just using these funds. There are a few possible answers to this question. But first as background to the growing appeal of ETFs, consider these global trends, which in general, apply to South Africa. More than one third of the daily trade on some stock markets around the world is listed ETFs. This marks the main distinction between unit trusts and ETFs. A unit trust investor is buying units or parts of a fund produced by an asset management company and run by an asset manager. An ETF is a basket of shares, which is why the funds are listed on the JSE. This makes the funds very liquid, allowing investors to easily get in and out of ETFs. Globally, at least two thirds of actively managed equity funds underperform the overall market. Much the same is true in South Africa. So unless an investor can consistently choose one of the top third of actively managed funds, he or she can buy the market as represented by shares that make up an index at far lower cost. The investor is ensured of getting the market beta, or even more if it’s a fundamental indexation ETF, instead of paying more for alpha that may not be delivered. That makes the case for ETFs making up a large proportion, perhaps even the core, of a retail investment portfolio. But here’s where one potential problem with ETFs comes in. The funds are bought without any advice or ongoing management reports. The investor has to be sure which index he wants tracked and understand the ETF that is being bought. Here’s where the financial adviser should enter the picture, being able to tell the client, based on risk profile and investment targets, which ETFs would be best. But that doesn’t seem to be happening much and one reason, believes Mike Brown, MD of ETF trading platform, is because many advisers don’t fully understand the products. “We’re trying to do a lot to improve education on ETFs. We have IFAs registered on our platform, but I think many IFAs are still trying

to understand ETFs. We’re trying to teach the market that a core portfolio should be beta,” said Brown. Another reason he feels that advisers might not be putting clients into ETFs is because they tend to use the products of people they have a relationship with, typically one of the large asset managers. That, in turn, raises the question of commissions earned by advisers. They will earn a lot more from an actively managed unit trust fund than from an ETF.

“Globally, at least two thirds of actively managed equity funds underperform the overall market … That makes the case for ETFs making up a large proportion, perhaps even the core, of a retail investment portfolio.” Brown said pays a maximum commission of one per cent to advisers. Typically it’s lower, in the region of 0,8 per cent. And while asset management fees have been forced down through the financial crises, often at around one to two per cent, the adviser can still earn up to five per cent commission from an actively managed fund. It’s therefore not hard to see why many advisers favour actively managed unit trust funds. To overcome this, shouldn’t the ETF product providers – mainly large banks like Absa Capital, Nedbank Capital, Investec and Deutsche Bank – pay a higher commission to advisers? “The problem with that is it’s the client who pays the commission in the end. Paying more for an ETF erodes the main attraction of the funds, the low-cost structure. And if the client is going to have to pay more, he might just question the thinking behind using an adviser as opposed to buying an ETF directly through a stockbroker.”

exposure to a number of equity indices at reasonable cost, but questions the market capitalisation structure of these indices. Kulcsar added that passive index investing doesn’t necessary reduce risk, as the most important investment decision, asset allocation, is made by an active manager. Market capitalisation indices do present some problems, mainly that the index will be weighted towards the large stocks and rising share prices (and therefore more expensive shares), while underweighting smaller cap companies and lower share prices (often the value stocks). But many ETFs have overcome this by using fundamental indexation, the Research Affiliates fundamental index (Rafi) that ignores market capitalisation and rather ranks shares in an index based on fundamental metrics like turnover, earnings, cash flow and dividends. These are almost like actively managed ETFs and under certain market conditions will perform better than the index. ETNs are a welcome addition to the investment set, though retail investors should be wary of investing directly in commodity funds unless they have a specialist view. Once again, this is the knowledge a good adviser should acquire to be able to properly advise clients. Standard Bank has launched four commoditylinked ETNs, respectively tracking the price of gold, silver, platinum and palladium. More recently, RMB launched an oil ETN that directly tracks the price of oil. The range of ETFs and ETNs is wide enough to allow an investor or adviser to construct a fully diversified, low cost portfolio. Offshore exposure is also catered for through Deutsche Bank’s funds that cover the major indices globally, as was well as in Europe, the UK, Japan and the US. ETF sales are likely to be boosted through a new concept Brown is working on for retirement fund portfolios. These will incorporate ETFs in a retirement fund wrapper. Brown said the new product will be launched shortly.

But while buying an index might be the most sensible route for many investors, having the ‘right’ active fund manager will create more wealth. “Odds are that investing in a passive index fund is unlikely to get you as financially healthy as proponents of the strategy would have you believe. For investors to gain and maintain true financial health – that’s wealth – an investment portfolio needs to be actively managed,” said Tamás Kulcsár, an investment analyst at Sanlam’s Glacier. He acknowledged the Satrix ETFs provide

April 2011



Exchange traded funds and mining companies operating in Africa A powerful combination to reverse some of the impact of colonialism

that equities as an aggregate asset class, over

you have to look much further afield to the stock

the long term and on average, will outperform

markets of London, Toronto and Australia to find

all other major asset classes such as bonds,

listings of the companies that are involved in

property and cash. Contrary to popular belief,

mining operations on the African continent.

this is not because of compensation for risk taken on, but rather because of the ability of

The reason for this is quite simple – the

equity investments to generate wealth, or growth

complexity and capital intensity of mining

in assets. One of the surest ways for investors to

and exploration activities limit the range of

share in this is through direct participation in the

financing partners available to these companies.

growth in wealth through ownership of equities.

They have to turn to the capital markets that understand mining and know how to value and

Nerina Visser | Head of Beta and ETFs at Nedbank Capital


“Mining and exploration is

assess it. The markets of London, Toronto and

a capital intensive industry

provide both the skill and financial depth that

Australia, in addition to that of South Africa,

and one that requires highly

these operations require from investors. But

skilled resources, including

form of colonisation of the continent, again to

unfortunately, this has resulted in a secondary

financial and investment

the detriment of its residents.

skills. The JSE Securities

Investors in Africa do not have ready access

Exchange has a long history

to investments in a large part of its own GDP

associated with mining.”

the opportunity to participate in this aspect

basket. As a result, they largely miss out on of wealth creation. It is extremely difficult to

houghts of Africa conjure many

Mining and exploration is a capital intensive

roll back this process by convincing individual

images in one’s mind, not all of

industry and one that requires highly skilled

companies with mining operations on the

them necessarily positive. But

resources, including financial and investment

African continent to come and list their equity

mention the continent in the same

skills. The JSE Securities Exchange has a long

on African stock exchanges. However, one

breath as gold, platinum, diamonds

history associated with mining, as it was in fact

key to unlocking the access to these wealth-

and even oil, and a very different association

founded on gold mining companies, and traces

generating assets lies in Exchange Traded Funds

is created. For centuries, the ‘dark continent’

its roots back to Barberton and the early days

(ETF). Nedbank Capital has compiled a series

has represented a destination for those seeking

of the gold rush. To this day, the equity market

of indices of mining and commodity stocks

their fortunes, some doing so using less than

in South Africa continues to be dominated by a

engaged on the African continent, irrespective

honourable methods. The colonisation of Africa

few mining giants, such as Anglo American and

of the stock market on which it is listed. By

is an emotive topic, and to this day causes strife

BHP Billiton.

creating ETFs on these African mining stocks

between some of the former colonies and their

and making them directly available to investors

erstwhile masters. To add insult to injury, there

However, when one takes a further look north

across the continent’s stock exchanges, it will

is a modern-day version of plundering that

and scrutinises the listed companies on the stock

provide the opportunity for the entire spectrum

continues, albeit in a less obvious form.

exchanges of the rest of the African continent, it

of investors – from pension funds to retail

is with surprise that very few metals and mining,

investors – to participate in the benefits and

There are but few ways to grow wealth, and if

resources or commodities companies are listed.

wealth created by its natural resources.

you aren’t born with a silver spoon in the mouth,

This is despite the fact that Africa is recognised

you need to accumulate ownership of wealth-

as one of the richest sources of minerals,

generating assets. It is a well documented fact

precious metals and gems in the world. In fact,


April 2011


FUND PROFILES Ashburton Chindia Equity Fund

Please outline your investment strategy and philosophy for the fund.

fantastic growth opportunities in the world’s most dynamic region.

To state our key message: “We don’t blindly follow benchmarks. We don’t follow the crowd. We take a common sense approach and invest in the best companies run by the best people.”

Please provide some information around the team responsible for managing the fund?

This is a fund investing in the emerging giants of China and India, with a benchmark that is 50 per cent MSCI Golden Dragon Index (Greater China) and 50 per cent MSCI India. It is important to note that we have no market-cap bias, and happily invest in the largest to smallest companies as long as they meet our investment selection criteria. Who is the fund appropriate for? Coronation Africa Frontiers Fund is an institutional fund. It is suitable for investors who are genuinely long term and are willing to accept investment risk. These are volatile markets offering


The Asia team consists of three people whose sole focus is on the equity markets of Asia. Jonathan Schiessl is head of Asian equities and has been at Ashburton in this role for nearly 12 years. Prior to Ashburton, Jonathan worked in London for a number of years and is one of a few Asian Investment managers with experience of these markets prior to the Asian crash of 1997. The team also consists of Craig Farley, investment manager, who has been working with the team for over five years and more recently Simon Finch, who joined the team a couple of years ago.

Please provide performance of the fund over one and three years.

The fund’s benchmark is the MSCI World TR and the fund is USD denominated. Name

01/12/06 31/12/10 (Since Launch)

One year

Three years

Ashburton Chindia Equity








Why would investors choose this fund above others? The fund is a unique offering in South Africa, catering to investors who want exposure to the re-emerging giants of China and India. Having both countries in one fund is advantageous as they are remarkably complementary markets and economies. Investors can get the best of both markets, while at the same time reducing risks associated with overly high sector and individual stock exposures that are inherent in single country indices in these markets.

April 2011

“We don’t blindly follow benchmarks. We don’t follow the crowd. We take a common sense approach and invest in the best companies run by the best people.”

Coronation Africa Frontiers Fund (Institutional)

Please outline your investment strategy and philosophy for the fund.

we are for the most part invested in the same companies now as we were two years ago.

The Coronation Africa Frontiers Fund is an institutional fund which follows a valuation-driven investment philosophy, with a strong focus on potential downside risk for each investment made. The portfolio is constructed from the bottom up, with a focus on holding those shares which offer the most attractive fair value relative to current market prices. In calculating fair values through our proprietary research, we place the emphasis on normalised earnings and/ or free cash flows rather than current earnings, using a long-term time horizon rather than focusing on current news flow and price momentum.

Please provide some information around the individual/team responsible for managing the fund.

Who is the fund appropriate for?

Launched in October 2008, the fund’s benchmark is USD Libor + 3% and it is USD denominated.

The fund is suitable for: • Investors seeking exposure to growth and expansion in Africa. • Investors looking to increase capital over a three to five-year period • Investors who are able to withstand short-term market fluctuations in pursuit of maximum total returns over the long term. Have you made any major portfolio changes recently? No. Since inception, the fund has had a significant weighting in consumer companies. By and large, our positions in this sector have delivered very good returns for investors. Brewing companies, for example, constituted 17 per cent of the fund as at the end of 2010 and while the position sizes have evolved,

870-1_INVEST_SA_hlf_pg_final_artwork.indd 2

The fund is managed by portfolio managers Peter Leger and Peter Townshend who tap into the collective insights of the 49-member investment team. Please provide performance of the fund over one, three and five years.

Coronation Africa Frontiers Fund*

FTSE/JSE Africa Top 30 Ex SA Index*

USD Libor + 3%*

One-year return




Two-years return (annualised)




Since Inception return (annualised)




*Returns are quoted as at 31 January 2011

April 2011

04/03/2011 16:03


“The fund is built on a bottom-up basis with each individual holding being selected on its own investment merits.

Coronation Global Emerging Markets [USD]

Generally speaking, the fund has large Please outline your investment strategy and philosophy for the fund. The Coronation Global Emerging Markets (USD) fund follows the same long-term focused, valuation-driven investment philosophy that we employ across the entire Coronation fund range. The fund predominantly invests in our top stock picks from companies providing exposure to emerging markets and will remain fully invested in equities at all times. Who is the fund appropriate for? The fund is suitable for investors: • Looking for exposure to emerging markets equities who are in their wealth build-up phase and require little income yield in the short term. • Seeking a diversification of returns within a total investment solution. • Able to withstand shortterm market fluctuations in pursuit of maximum total returns over the long term.


Have you made any major portfolio changes recently? We have been adding to the fund’s Indian holdings, notably the Indian state banks which now trade on six to seven times this year’s earnings. The banks have been declining due to fears over inflation (and hence interest rate increases). At the same time, we have been reducing the fund’s holdings in Chinese Internet companies, which have appreciated by 30-40 per cent over the past few months and as such make valuations less attractive. How have you positioned the fund for 2011? The fund is built on a bottomup basis with each individual holding being selected on its own investment merits. Generally speaking, the fund has large exposure to consumer businesses in emerging markets and very little exposure to commodity companies (which we think are expensive or fairly valued at best). Within commodities, the fund does have exposure to a number of oil and gas stocks where we can still find good value.

Please provide some information around the individual/team responsible for managing the fund. The fund is jointly managed by portfolio manager Gavin Joubert (head of the Coronation Global Emerging Markets unit) who has 14 years' investment experience as an analyst; portfolio manager, Mark Butler; and Suhail Suleman.

exposure to consumer businesses in emerging markets and very little exposure to commodity companies (which we think are expensive or fairly valued at best).”

Please provide performance of the fund over one, three and five years. Launched in July 2008, the fund’s benchmark is the MSCI Emerging Markets Index and it is USD denominated. Coronation GEM (USD)*

MSCI Emerging Markets Index*


Since inception (annualised)




Two-year return (annualised)




One-year return




*Returns to end February 2011

April 2011

Investec Africa Fund

Please outline your investment strategy and philosophy for the fund. The Investec Africa Fund offers access to investment opportunities in African markets, excluding South Africa. In recent years, far-reaching and pervasive changes in sovereign governance on the African continent have changed the way many of these economies operate. The continent now offers a growing range of highquality and attractively valued companies. With the rapid growth in demand for goods and services,

companies often gain considerable pricing power and volume growth, which can lead to investment opportunities with robust earnings growth and high margins. Have you made any major portfolio changes recently? We have a high level of cash in the portfolio, because we believe there could be very good buying opportunities should there be sharp drops in markets as a result of the political events in North Africa. In particular, we believe that Egypt may very

soon offer excellent buying opportunities. Please provide some information around the individual/team responsible for managing the fund. The Investec Africa Fund is managed by Roelof Horne, supported by a team of investment analysts based in South Africa, Namibia, Botswana and London. Roelof joined Investec Asset Management in February 1996 and was previously head of life products at Investec Asset Management from 2002 to 2007.

Please provide performance of the fund over one, three and five years. The benchmark is one month USD LIBOR +4% One year %

Three years (ann %)

Since launch (ann%)

Investec Africa Fund




One month USD LIBOR







Please outline fee structure of the fund. The fund has an annual management fee of one per cent per annum and a performance fee, which is charged annually as 20 per cent of performance in excess of one month USD LIBOR plus four per cent on a two-year rolling basis. Why would investors choose this fund above others? We view the African continent as a compelling long-term investment destination, and have committed substantial resources to facilitating international portfolio flows into Africa over a long period. Investec Asset Management was one of the pioneers of frontier market investment, growing assets in Africa excluding SA to about $4 billion in listed and private equity investments today (excluding SA).

+4% Relative Performance

* Performance in USD

ALTERNATIVE ASSET MANAGERS CONTACT MURRAY WINCKLER or GAVIN VORWERG +27 11 263 7700 WWW.LAURIUMCAPITAL.COM Laurium Capital (Pty) Ltd is an authorized financial services provider

April 2011


Fund Profile - Murray Winckler

Laurium Capital

alternative asset manager Laurium Capital (Pty) Ltd is an authorized financial services provider

SA All Share Index in 2011. The long/short fund has a net equity exposure of around 50 per cent. The preferred sectors are banks and mining. We have implemented some derivative overlays to protect the downside. The market-neutral fund does not take directional views and currently has about 10 intra sector pair trades. Please provide some information around the individual/team responsible for managing the fund.

Murray Winckler | former CEO of Deutsche Bank in SA

Laurium Capital was formed three years ago by Gavin Vorwerg and Murray Winckler, two former investment bankers. Winckler was CEO of Deutsche Bank in SA and Vorwerg spent his last three years with Deutsche Bank in London having responsibility for equity structuring in the Middle East and Africa. Please provide performance of the fund.

Please outline your investment strategy and philosophy for the fund. Laurium Capital is an alternative asset manager that manages or advises on a long/ short fund, a market-neutral fund and a long only Zimbabwe fund. The long/short fund’s objective is to deliver at least a seven per cent per annum return above inflation on a rolling three-year basis with low volatility and a low risk of capital loss. What are your top five holdings at present? The long/short fund’s top holdings are Billiton, First Rand, Steinhoff, Nedcor and Naspers. A couple of the larger shorts are Bidvest and Vodacom. Have you made any major portfolio changes recently?



Return p.a.

Benchmark – Cash p.a.

Laurium Capital Long /Short

1 Aug 2008




Market Neutral

1 Jan 2009






Return p.a.

ZSE p.a.

1 Dec 2009




Zambezi Fund

Please outline fee structure of the fund. The hedge funds charge a one per cent management fee and a 20 per cent performance fee subject to the investor at least receiving a cash return annually. The Zimbabwe fund charges a 1.5 per cent management fee and 15 per cent performance fee.

We have increased our exposure to the banks sector and reduced holdings in general industrials, particularly retailers. How have you positioned the fund for 2011? We expect a 15 per cent return from the


April 2011

Nedbank Ltd Reg No 1951/000009/06, 135 Rivonia Road, Sandown, Sandton, 2196, South Africa. We subscribe to the Code of Banking Practice of The Banking Association South Africa and, for unresolved disputes, support resolution through the Ombudsman for Banking Services. We are an authorised financial services provider. We are a registered credit provider in terms of the National Credit Act (NCR Reg No NCRCP16).


BettaBeta Equally Weighted Top 40 ETF – introduce balance to your portfolio The best performing Top 40-based exchange-traded fund on the market* If you’d like to add some balance to your investment portfolio while getting similar returns with less risk, why not consider investing in the Nedbank Capital BettaBeta Equally Weighted Top 40 Exchange-Traded Fund (BBET40)? By balancing all of the top 40 stocks on JSE Limited into proportions of 2,5%, the BBET40 outperformed similar exchange-traded fund (ETF) options available on the market* and offers you greater stability. So, choose a cost-effective and balanced ETF by contacting your stockbroker, calling etfSA on 0861 383 721 or visiting today. For more information visit or email For contracts for difference and derivative trading call 011 535 4043. * Based on the comparative performance of the risk-adjusted net asset values of all the top 40-based ETFs since the inception of the BBET40 on 25 March 2010.

jean pierre verster

How well has your fund manager performed?

Jean Pierre Verster | Analyst at 36ONE Asset Management


he sharp sell-off in equities experienced during March 2011 is a timely reminder that investors (and their advisers) need to be careful in selecting which unit trusts to invest in. According to the Association for Savings and Investment SA (ASISA), there were 943 unit trusts registered as at the end of 2010. The challenge for investors is to pick the future winners out of this overwhelming universe. Short-term outperformance is not the best indicator of future returns. A longer performance period, over a full market-cycle, is a more appropriate timeframe to use in comparing performance and assessing the risks taken by a fund manager. With the FTSE/JSE All-Share Index recently having touched its pre-crisis highs, investors should be looking to see how their fund manager


has fared during the turbulence of the last five years. It is interesting to note that the top performing unit trusts over the past five years include a number of funds managed by smaller, independent fund managers.

flexible in our positioning. Our research function is integrated with the trading function, which allows us to get immediate feedback from market moves, and see the impact of important events as they occur.”

Jean Pierre Verster, an analyst at 36ONE Asset Management, said that independent fund managers have taken market share away from the investment management divisions of the life assurers over the past decade. “Independent fund managers do not employ a large agency sales force, and therefore can compete effectively with the life assurers only on the basis of performance. Since the independent fund managers have returned better returns, on average, than the life assurers, they have attracted the lion’s share of the flows in the market.”

He said constant monitoring is not the same as short-termism, however, which is an increasing problem in the fund management industry. The socalled ‘beauty parade’ of quarterly fund manager performance league tables puts pressure on fund managers to perform well over a rolling three-month period, which could lead to investing decisions that are at odds with the long-term objective of outperformance.

Investors might question whether the smaller, independent fund managers have the required risk management processes in place to mitigate against their perceived higher risk. “Successful firms need to put risk management at the centre of managing funds,” according to Verster. The incentive structures of independent fund managers (most are substantial coinvestors in their own funds) should also give investors comfort in the way that the funds are managed, since the manager has his own skin in the game. “At 36ONE, we actively monitor our fund positions intra-day and remain

“A company’s share price does not efficiently reflect the operating and financial characteristics of the underlying business at all times, and this could lead to a disconnect between the business performance and the share price performance over the short term,” said Verster. However, Verster added that investors should not be overly concerned by this phenomenon: “It is this disconnect that creates the opportunity for an astute fund manager to buy shares below intrinsic value or sell shares above intrinsic value.”


Best Performing Index Tracker Funds – February 2011

The latest Performance Survey highlights the following:

(Total Return %)* Fund Name


5 Years (per annum)

Satrix INDI 25



Prudential Property Enhanced

Unit Trust


Satrix Top 40


13,60 3 Years (per annum)

Satrix DIVI Plus



Satix INDI 25



Prudential Property Enhanced

Unit Trust


Satrix INDI 25



Satrix RESI 20



NewFunds eRAFI INDI 25



1 Year

3 Months DBX Tracker EuroStoxx 50



NewFund eRafi Resources 20



Satrix RESI 20



• In the short-term, one to three months, resource-based tracker funds – such as the Satrix RESI 20, the eRAFI Resources 20 and the NewFunds Shari’ah Top 40 (which has a strong weighting in resources) – feature strongly, indicating that sector rotation towards commodities and the recent weakening of the Rand are paramount issues in the current investment market. • The BIPS Inflation-X ETF, which holds a portfolio of inflation-linked bonds has, for the first time in the survey, outperformed the Investec zGOVI ETF, which holds a portfolio of normal government bonds. This suggests that in an environment where interest rates are rising, inflation-linked bonds, where the capital value rises with inflation, might be more attractive than traditional bonds, whose capital value falls as interest rates rise.

1 Month Satrix RESI 20



NewFund eRafi Resources 20



NewFunds Shari’ah Top 40



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

• The total return performance of ETF funds continues to exceed that of unit trusts, tracking similar indices, which signifies that the lower total expense ratios (TER) of ETF funds have a positive impact on performance.

One-year returns The Satrix INDI 25 ETF was the best performer over one year, with the NewFunds eRAFI Industrial 25 ETF not far behind. Industrial portfolios have performed well over the past 12 months in response to the recovery in the local economy. The Satrix RESI 20 ETF has crept into the top three, reflecting the upsurge in the resource sector in late-2010. Three- to five-year returns The Satrix INDI 25 ETF has the best five-year performance and second best three-year total return performance of all the index tracker funds. The relative lack of awareness of this fund is puzzling given its consistently good performance and its exposure to a blue chip portfolio of South Africa’s leading domestic shares.

PROFILE | CIO: PPS Investments

D a v i d G reen

DG C hief I nvestment O fficer : P P S I nvestments

David Green has been the chief investment officer of PPS Investments since its launch four years ago. Before that he spent several years consulting to, and directing the research and investment management efforts of other prominent asset management businesses. INVESTSA caught up with him to find out his views for the year ahead.


April 2011

“One of the biggest challenges for investors in the year ahead is having to stick to their long-term financial plan in a world dominated by one dramatic incident after another. We need to remember that the world,


politically and economically, always has and will continue to be, turbulent.”

What do you think are the biggest challenges facing investors in the year ahead? One of the biggest challenges for investors in the year ahead is having to stick to their longterm financial plan in a world dominated by one dramatic incident after another. We need to remember that the world, politically and economically, always has and will continue to be, turbulent. When it comes to investing, you need to ignore these events and stick to what you have set out to achieve. Fluctuations in the gold and oil prices, an earthquake in Japan or the insurgence in Libya, should not sway an investor. It is important to note there are currently not a host of attractively priced asset classes in the market, with the possible exception of global developed market equities. Yet there is a challenge in gaining access to this offshore asset class as exposure is limited in terms of regulation. What can financial intermediaries do to assist their clients through this period? Intermediaries have the responsibility of focusing their clients back to the long-term goal and plan they have developed together. Keep in mind that markets are always uncertain; periods of uncertainty are not unique, so sticking to the plan and ensuring that clients have a suitably diversified portfolio is a good safety net. No-one should try to time the market; this is a risky bet to place with your clients’ hard-won retirement savings and it hardly ever pays out. Many asset managers are advocating investors should look offshore. Do you agree? Yes, I do. It must be noted, however, that investing offshore has caused some pain in recent years, as the Rand has strengthened, so there may be a disinclination by many clients. In principle, investors should always look across all asset classes and markets. An

investor should not wake up one day and think about investing offshore simply because they have heard that this is a good idea. However, if suitable for the individual and in accordance with their long-term plan, we do believe there is a real investment case in favour of investing offshore. PPS Investments uses the multi-manager model. Do you think this is the appropriate approach in the current environment? A multi-manager approach is always appropriate. As already mentioned, the current environment is one of uncertainty and this is a perpetual state for markets. We cannot precisely predict the returns that asset managers and/ or the markets will deliver. Only real diversification ensures that a balance of returns is achieved. This is what multimanagement does. An intermediary who wonders whether they should use a multi-manager approach for their clients’ portfolios should ask themselves: - Am I able to correctly allocate assets across various asset classes to help my clients achieve their goals? - Do I have the qualitative insight to adequately differentiate between the asset managers, their funds and the markets? - Can I successfully choose the most appropriate mix of funds and asset classes to achieve my clients’ goals? If there is any doubt about any of these answers, outsourcing to a skilled multi-manager may be worthwhile. What do you think are the biggest contributors to being a successful fund manager? - You need emotional fortitude. A fund manager must be the master of his own emotions; otherwise he may drive decisions to the detriment of clients. - You need to have a long-term view and a

April 2011

patient disposition. Markets produce uncertain and unpredictable results in the short term. - You need to be widely read but not necessarily frequently read. You don’t need to read the daily newspapers every morning, it is more important to be able to sift out what adds value and what doesn’t. - You need to be good at managing stress in order to avoid burn out. The long-term survivors are those who keep their balance. How do you wind down from the pressures of your position? I read voraciously, both fiction and non-fiction. I’ve just finished the non-fiction titles: Enough: True measures of money, business and life by John Bogle and Simple but not easy, an autobiographical and heavily biased book about investing by Richard Oldfield. As a break from these intense choices, I’ve started reading Night Train to Lisbon by Pascal Mercier. My greatest passion is mountaineering and I try to indulge this as often as I can. Most weekends and every vacation opportunity I get. How do you define success? I would quote Kathy Kolbe – a theorist and strategist – who has a very apt view on this: “Success is the freedom to be yourself.” Finally, if you had R100 000 to invest, where would you put it? If I had to choose a single place to invest R100 000, it would be a well-diversified portfolio with a strong bias towards global developed market equities. My advice to consumers, in this environment, would be to also pay down debt. This makes particular sense if interest rates are likely to start increasing during the year as has been predicted. While debt servicing costs might seem manageable now, once rates start rising, the cost can strangle consumers.


retirement changes - Maya Fisher-French

What you need to know by Maya Fisher-French

In this year’s budget, Finance Minister Pravin Gordhan announced changes to retirement funding as well as proposals that will have an impact on your clients’ retirement strategies.


hanges to tax-free deductions

From March 2012, all employees will be allowed to deduct up to 22.5 per cent of their taxable income for contribution to retirement funds up to a maximum of R200 000. At the same time employer’s contribution will now be treated as a fringe benefit encouraging the move to employee contributions which will simplify the structure of salary packages. The tax deduction will be levied against taxable income as opposed to pensionable income, which will further simplify the calculation and


effectively increase the portion of one’s salary that you can use for the tax calculation as it would include bonuses and fringe benefits such as car allowance. Clients can also include capital gains in the taxable income calculation. What this means: The reality is that most people will not take advantage of this as most salaried employees try to get as much cash at the end of the month as possible. However, those clients who want to improve their retirement funding, can now do so with before-tax income. Retirement annuities have always been sold as a top-up for non-

April 2011

pensionable income (bonus and fringe benefits) to ensure that the client is saving 15 per cent of their total income. Theoretically the move to taxable income would remove the need for a retirement annuity. Rowan Burger, head of retirement reform at Liberty, says most companies are unlikely to increase their pension contributions due to the increase in their payroll and the variability in some components of remuneration such as commissions. Therefore, individuals would still need to use an RA to maximise the benefit. “People will use their company fund for regular ongoing contributions and their RA for top-ups to save for bonuses for example,” said Burger. The future of provident funds This tax change also makes it more effective for the tax deduction to be in the hands of the employee and matches the provident fund contributions allowed by companies. This is part of the government’s strategy to bring provident funds in line with pension funds and retirement annuities.

mandatory preservation is therefore critical and National Treasury plans to extensively consult all relevant stakeholders”. It is likely that proposals will make preservation a default when changing jobs, with the individual needing to demonstrate hardship in order to access their funds. Burger says Liberty would like to see a situation where the retirement benefits are paid out over a protracted period, say 60 months, so that the member is not tempted to buy a car or go on holiday with the funds. Once the person has found a new position, they can transfer the remaining balance into the new fund. What this means: There will initially be concerns by clients that they cannot access their money and it may result in individuals wanting to cash in their retirement savings. Advisers will need to work with them to demonstrate the importance of preservation and to ensure that they have additional discretionary savings which are accessible.

“There will initially be concerns by clients that they cannot

As part of this move, National Treasury is considering applying the one-third lump sum limit applicable to pension and retirement annuity funds to provident funds.

access their money and it may

What this means: National Treasury has made it clear that it will not apply retrospectively to employees in existing provident fund structures, so it should not affect clients who are already invested in provident funds.

Advisers will need to work

result in individuals wanting to cash in their retirement savings. with them to demonstrate the importance of preservation.” Review of annuities

However, it will affect financial planning for people entering new funds. If the client requires a large lump sum on retirement to start a business for example, they would now need to supplement this with discretionary funds. These discretionary savings will become even more important if government implements mandatory preservation when changing jobs. Mandatory preservation National Treasury is concerned that people who are not going through financial hardship can easily withdraw their savings because the current system does not compel preservation of retirement savings. In the National Treasury document A safer financial sector to serve South Africa better, it states that “taxation clearly does not serve as a strong disincentive since people are willing to pay it and withdraw their savings and that the introduction of

As we enter a low-return environment, costs will continue to come under the spotlight. National Treasury would like to see increased competition for living annuities by reviewing the need for a collective investment scheme (CIS) to obtain a long-term insurance license. According to National Treasury, “enabling collective investment scheme companies to offer living annuities without the need for a long-term insurance license could open the market and foster competition”. At the same time there will be review of fees and commissions on annuities as there are concerns that CIS companies are not subject to commission regulations and are permitted to charge an additional trail fee for ongoing advice to clients. Currently the fee structure creates a perverse incentive to invest clients’ funds into unit trust living annuities rather than life insurance living

April 2011

annuities even if they are more cost efficient. What this means: In terms of CIS living annuities, Burger said there is a concern in the industry that if living annuities are perceived to be ‘less expensive’ we may see inappropriate use of these vehicles which do not protect pensioners from living longer than their money lasts. Advisers who rely on trailer fees from living annuities will need to start rethinking their business models. Review of pension fund costs National Treasury will also be looking into the fees charged by pension funds and will work with the industry to draft a code of ethics and address concerns over high fees. Treasury believes pension funds need to improve their level of disclosure to clients and a lack of transparency prevents customers from being able to compare products across funds which results in excessive charges. Members will take an active interest in costs as these will be deducted from their contributions before being invested for their retirement. What this means: There will need to be a review of the legislation by government. Currently, the contribution reconciliation and death benefit distribution provisions for example contribute to the cost of running retirement schemes. There may be the establishment of a central contribution collection agency to streamline administration for example. Distribution costs will also come under the spotlight with possibly a move to DIY pension funds for smaller companies. Regulation 28 Treasury has confirmed that changes to Regulation 28, which will see prudential guidelines implemented at member level, will not affect existing policies. There is also recognition of new asset classes such as hedge funds and private equity. What this means: This creates an advantage for clients with existing retirement annuities who may have non-prudential portfolios such as high overseas exposure or 100 per cent equities as they will be allowed to continue to hold these portfolios. Pension funds and retirement annuities now have access to more exotic investments that unit trusts do not.


Retirement Investing - Roger Birt

Life-stage investing

should take individual member needs into account

Roger Birt | Head: Guaranteed Investment, Old Mutual Corporate Funds


ver the last few years, an increasing number of retirement funds have elected to offer their members a life-stage investment option, whereby each individual’s savings are invested in a portfolio according to their age and time to retirement. Roger Birt, head of guaranteed investment portfolios at Old Mutual Corporate believes that a well-designed life-staging model should take into account the risk appetite of members during different phases of their working life, as well as the financial needs of members after they have retired. “A proper life-staging model will appropriately cater for both young and old members by providing suitable portfolios for both accumulation in the years before retirement and preservation after-retirement, and ensuring a smooth transition between these phases,” he said. Before retirement, younger retirement fund members will tend to look for higher returns from riskier investments, and most life-stage models cater for this. Most life-stage models also cater for members nearing retirement by shifting their focus towards maintaining their investment in lower risk assets to ensure a comfortable monthly income in retirement. What tends to be given little focus is what risk profile a member is likely to be comfortable with after retirement, determined based on their choice of postretirement vehicle.


Birt further explained that people who desire cash at retirement are likely to be best suited to avoiding losses on capital from risky investments, like the stock market, as retirement approaches. In this case, cash may be a good option. Alternatively, people who opt for a life annuity will want protection from interest rate movements as retirement approaches. “A life annuity pays a

Birt believes that life-staging should be a priority for defined contribution funds. “In contrast to a defined benefit fund, where the employer carries the risk; under a defined contribution structure, the member carries the full investment risk. Members of defined contribution funds therefore need to place significant importance on investment management and ensure that their

guaranteed income until death, and the price paid for a life annuity depends heavily on interest rates. As such, any drastic interest rate changes close to retirement could significantly impact on the level of income secured for life,” said Birt.

trustees provide them with a range of solutions to cater for a wide spectrum of needs.”

“A well-designed life-staging model should take into account the risk appetite of members during different phases of their working life, as well as the financial needs of members after they have retired.” At the other extreme, there are those members who opt for a living annuity at retirement. “With a living annuity, the individual decides on the level of income they need to draw down every year from an investment fund chosen based on their risk appetite. In contrast to life annuities, these members take on the risk of potentially running out of their savings pool before death. As such, taking on some investment risk to increase the likelihood of favourable returns on those investments is a consideration. As a result, these members will probably place less value on completely avoiding stock market losses, as recoveries in losses after retirement are fairly likely for them. Riskier investments are likely to be considered, although these members are still likely to desire their return each year to at least meet the minimum living annuity drawdown rate of 2.5 per cent,” he added.

April 2011

According to Birt, a good example of a portfolio that caters for individual risk appetites is the Old Mutual Absolute Growth Portfolio, which invests a significant proportion (80 per cent) of its underlying portfolio in ‘growth’ assets, including equities, direct property and private equity. However, the portfolio gradually distributes returns to members over time, thereby removing 80 per cent of the volatility in returns associated with such a risky underlying portfolio. In addition, the portfolio is flexible in terms of whether a guarantee is provided, and at what level, depending on a member’s risk appetite. With such a portfolio design, younger members benefit from an aggressive underlying portfolio with low volatility risk, but would probably opt for a very low guarantee while it is not required. Members closer to retirement can simply ratchet up the guarantee to as much as 100 per cent of capital and returns to fully protect accumulated savings, while retaining the same growth focus of the underlying portfolio. This should promote savings at return levels above cash when equity markets perform.

Regulatory Developments - Patrick Bracher


Patrick Bracher | director: Deneys Reitz


he Consumer Protection Act does not apply to advice that is subject to regulation in terms of the FAIS Act. While this will be a relief to financial services providers who are already heavily regulated under the FAIS Act, the limitations of this exemption must be appreciated because FSPs do not escape the attention of the Consumer Protection Act entirely.

consumer. Every ad and all promotional material will have to be examined for fairness, honesty and accuracy. No potential clients may be discriminated against unfairly and irrational redlining or unfair selectivity of clients will not be allowed.

Two fundamental things must be borne in mind. The CPA protects only individuals (all individuals) and small businesses with assets or annual turnover of less than R3 million and applies only to a transaction occurring within South Africa for a consideration (virtually any quid pro quo) in the course of a business continually carried on. Secondly, limitations will be narrowly construed and the consumer gets the greatest possible protection.

services will find that if they

There are many things that FSPs do that is not exempted advice subject to the FAIS Act. Advice is just one of the services provided by FSPs. In addition to advice, FSPs provide intermediary services that relate to entering into policies, dealing in financial products, collecting or accounting for premiums and dealing with claims. The binder obligations under the new binder regulations will relate to entering into policies, determining policy limits and conditions, and settling claims. There will also be administrative services performed which do not fall within the concept of advice under the FAIS Act.

There are major limitations on direct marketing. Initially these will be limited to a prohibition on junk mail or electronic, voice or other communications to consumers at their homes after hours in the week and for most of the weekend. Eventually there will be a register where consumers can register their wish not to be bothered by specified direct marketing and that direct marketing cannot be made to those consumers. If there is a direct marketing approach to a consumer that results in a sale, the consumer will have a five-day cooling-off period to cancel the transaction.

All these services will be subject to the Consumer Protection Act. Protection is given to the consumer from the first promotion of any transaction (for example advertising, or promoting a product or services on a website) down to the finalisation of the transaction. Services may be marketed in a way which is not misleading, unfair or deceptive to the

“Suppliers of goods and carry out their business carefully and with integrity, they will not fall into the jaws of non-compliance and end up before the commissioner.”

Negative option marketing where a transaction comes into being if the consumer does not say no will be prohibited. Promotional competitions will be severely limited so that they cannot be profit-making schemes. When the regulations are finalised there will be a list of over 30 contractual terms that may not be in a consumer contract. Some of these are familiar terms regarding pre-contractual

April 2011

representations, shifting of risk or responsibility, and rights of assignment. All contracts with individual consumers and small businesses will have to be checked to see that there are no void provisions in the documents. A contract may not be unfair to the consumer and even the price of a service is subject to the ultimate testing in a court as to its reasonableness. The consumer is entitled to demand quality service. This means that the services must be performed on time unless notice is given of any unavoidable delay. Services must be performed in a manner and quality that persons are “generally entitled to expect”. This is not a stringent test but it does mean that below par services may have to be performed aagain or the consumer may have to be refunded where there is poor performance by the FSP. Intermediary and administrative services will be subject to consumer protection in this regard. There are many other ways in which the CPA affects all of us. If you arrange an end-of-year party and the people are expected to pay, the act will govern the event. Goods include information, data and software which will therefore be distributed with implied warranties of quality. The simplest disclaimer in your parking lot (Enter at your own risk) will be subject to the CPA. All disclaimers have to be clear, in plain language and with details of the nature and effect of the risk being assumed. The Consumer Protection Act has many provisions that affect every one of us on a daily basis as suppliers and consumers. Everyone needs to take the legislation seriously and to ensure that their business practices are compliant. In many respects, suppliers of goods and services will find that if they carry out their business carefully and with integrity, they will not fall into the jaws of non-compliance and end up before the commissioner.



a gamble for investors?


April 2011


ecent months have seen both investors and investment publications advocating the benefits of investing offshore.

According to Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), the reason most often mentioned for wanting to invest offshore is the Rand/Dollar exchange rate. “When the Rand is strong, there is usually a lot of noise about offshore diversification and when the Rand is weak, the appetite for offshore investing wanes.” “On 1 March this year, one Dollar was worth around R6.69. On 14 February, one Dollar was worth R7.31. And back in 2001, one Dollar was worth a whopping R13.84. My point is that it is impossible to call the exchange rate. Therefore, taking a far-reaching investment decision based on future views of the value of the Rand is akin to gambling,” said Campher. He advised that if clients decide to invest offshore, it needs to be done for the right reasons, not only because the Rand is strong. “You need to make sure that it is part of a long-term diversification strategy and that you are likely to benefit from this investment even if the currency does not weaken.” “Equally, the appropriate level of offshore exposure, as well as the markets that you pick, should be guided by your long-term investment objectives ... you need to consider your investment goals and all the risks involved when compiling your offshore portfolio. But most importantly, you need to commit to the chosen strategy irrespective of short-term market and currency fluctuations.” Campher said that in 2010, many investors felt compelled to invest offshore simply because the Rand was strong, not taking into consideration that most of the offshore markets took exceptional strain. This year developing markets experienced increased volatility, and combined with the strong Rand, many investors saw this as their cue to go offshore. He believes that for the majority of South African investors, the domestic market continues to offer plenty of opportunities. “I maintain that for most investors going offshore has not made sense for the past five years. This has not changed. South Africa continues to offers investors a stable and well-regulated investment environment with plenty of opportunity for good capital returns over the long term.” “When picking a destination for your money, you should consider a wellregulated market that is drawing interest from beyond its own borders. This is certainly true for South Africa,” said Campher. One company that does believe it is a good idea to take advantage of the Rand strength is Stonehage Property Partners, which says the currency level, combined with historically low international property prices and relaxed exchange controls, make this a good time for South African investors to look overseas to diversify their property portfolios.

That is the view of Eric Fisher, director of Stonehage Property Partners in London, who said that there are good opportunities to invest in various classes of property abroad. “With prices significantly down from their highs and property markets in many countries at an inflection point, foreign property purchases continue to be an effective hedge against currency risks.” According to Stonehage, South African residents are permitted to invest in a holiday home or farm in any country that is part of the SADC, or to acquire any other investment property abroad without having to make sure of their foreign investment allowance. Since Finance Minister Pravin Gordhan announced a relaxation in foreign exchange controls to allow investors to invest up to R4 million a year offshore, however, this allowance is perhaps no longer as attractive as it once was.

“South African residents are permitted to invest in a holiday home or farm in any country that is part of the SADC, or to acquire any other investment property abroad without having to make sure of their foreign investment allowance.” Herberg noted, however, that certain of the SADC countries like Mauritius and Seychelles have an added attraction for South African investors as residence is offered where property is acquired through certain approved projects. Jamie Boyes, analyst at listed property fund manager, Catalyst Fund Managers, said investing in physical offshore property can be difficult for South Africans to do unless they can get some scale behind them as they will often not be first in the queue when the good deals come up. “In fact, there is a risk, especially in the current environment that an investor could end up buying assets that no-one else wants. Offshore listed property is still a reasonable investment; however, the easy money has already been made.” Boyes added that the important thing for South African investors wanting to diversify into property to remember is that listed property is highly liquid. “People are now beginning to understand the importance of liquidity in an investment class. Historically, they haven’t done this; but when investors couldn’t get cash out during the recent crisis, people finally understood the importance of liquidity. “Offshore listed property can also provide a great way to bring diversification into a portfolio. You can gain exposure to the US, Europe, Asia, as well as all sectors (industrial, office, retail, etc). It also provides a hedge against currency fluctuations.”

April 2011



Rand weakens but focus remains on unrest in EMEA region

Adenaan Hardien | Chief Economist: Cadiz Asset Management


he strength of the Rand, and the successive cuts in the repo rate that followed in consequence, were the key features on the local economic front in 2010. The Rand gained 12.0 per cent on a trade-weighted basis, 11.3 per cent against the Dollar, 20.2 per cent against the Euro and 16.0 per cent against the Pound. The local currency started 2011 on the back foot however, losing more than nine per cent on a trade-weighted basis by the first week of February. The weakness was driven by a number of factors, including some flight to quality, certain local financial institutions increasing their offshore exposure and Reserve Bank accumulation of reserves. The initial flight to quality was driven by geopolitical events in the Middle East. By the end of February, the Rand had made up some of its earlier losses, closing down 6.3 per cent on a trade weighted basis compared with its level at the end of 2010. The gains over the latter part of February were driven by Euro strength following political uncertainty in the US, and a flight out of the Turkish Lira into the Rand. The Turkish currency was traditionally seen as relatively safe, but its proximity to the Middle East has made some investors nervous. On the policy front, things started off on a quiet note, with the Reserve Bank Monetary Policy Committee leaving the repo rate unchanged at 5.5 per cent at the end of its first meeting of the year on 20 January. The decision was expected.


The Reserve Bank has cut the repo rate by a cumulative 6.5 per cent since the rate cutting cycle started in December 2008. While the bank expects inflation to remain within its target band, it highlighted a number of upside risks including higher commodity prices more generally, and oil and food prices specifically, sticky administered prices and high wage settlements. The bank forecasts consumer inflation averaging 4.6 per cent in 2011 (revised from 4.3 per cent) and 5.3 per cent in 2012 (revised from 4.8 per cent). A higher oil price was the key reason for the upward adjustment. The Rand’s weakness (compared with the end of last year) and increased volatility and record global commodity prices have sparked renewed inflation fears, despite low published inflation figures.

“The Rand’s weakness (compared with the end of last year) and increased volatility and record global commodity prices have sparked renewed inflation fears, despite low published inflation figures.” We expect consumer inflation to average above five per cent from the third quarter. This forecast does not incorporate the most recent spikes in oil prices. If sustained, recent increases in the oil price may be enough to push consumer inflation above the three to six per cent target range by year-end. Other data releases over the first two months of 2011 generally showed production and sales stronger in the final quarter of 2010 and the first month of 2011. Stats SA’s publication of supplyside GDP figures for the fourth quarter showed that economic activity picked up pace over the fourth quarter, as the dampening impact of strike activity in the third quarter dissipated and tertiary

April 2011

sectors continued to benefit from recovering demand. Real GDP expanded at an annualised rate of 4.4 per cent over the quarter, following growth of 2.7 per cent over the third quarter. While all sectors posted positive performances over the final quarter of 2010, the swing in manufacturing output and stronger performances from tertiary sectors lay behind the improvement in overall growth. Given increasing concerns about the inflationary impact of high commodity prices and some signs of overheating in certain emerging economies, we maintain that their central banks will continue to lead the process of monetary policy normalisation. From a global perspective, we expect businesses to gradually expand their payrolls during 2011, reducing unemployment and boosting household incomes, which will encourage consumer spending. Even though authorities in some advanced economies will implement additional reflationary measures to boost growth, their impact will be limited. First, policymakers have largely exhausted their reflationary ammunition. Second, financial markets are sceptical about the value of further measures. Nevertheless, the global economy’s recent difficulties are temporary and are unlikely to derail the expansion. Unfolding events in the Middle East and North Africa (MENA) region do, however, complicate the outlook. These events represent nothing short of a reshaping of the region, with major mediumto long-term consequences. Over the short term, these events pose significant risks to global inflation and growth, with oil prices already some 20 per cent up on their levels at the end of 2010. How monetary policy responds to these conflicting challenges is not immediately clear but will be a key factor to watch in the months ahead.


Hedge funds

outperform in the long term


espite perceptions that hedge funds are a risky investment, the latest Blue Ink All South African Hedge Fund Composite (BIC) published by the hedge fund of fund manager, has shown that in fact hedge funds outperformed the All Share Index (ALSI) by almost 10 per cent over a three-year period between 1 January 2008 and 31 December 2010.

The composite, which tracks the performance of around 100 hedge funds in South Africa, found that investors who stuck with hedge funds earned total returns of 30.28 per cent versus 20.60 per cent from equities. “The three-year total return from hedge funds illustrates the protection these funds offer during periods of stock market turmoil,” said Eben Karsten, portfolio manager at Blue Ink Investments. “This is largely because hedge fund managers have more room to manoeuvre than their long-only peers.” The ALSI three-year return was weighed down by a 23.23 per cent decline in local equities in 2008. “It’s exactly this kind of downside risk investors avoid by going the hedge fund route,” he said. Returns from hedge funds, JSE All Share Index and cash to 31 December 2010 Hedge funds

JSE All Share Index


Three months total return to 31 December 2010




One year total return to 31 December 2010

9.79% (1.86%)

18.98% (17.66%)

6.92% (0.12%)

Three year total return to 31 December 2010

30.28% (3.44%)

20.69 (22.30%)

30.34% (0.59%)

* Volatility in brackets

The fixed income category topped the 2010 hedge fund performance tables, with an average per-fund return of 21.10 per cent (with volatility of just 3.20 per cent) for the year. “Fixed interest strategies benefited from monetary accommodation – particularly the second round of quantitative easing – through 2010,” added Karsten. He said managers in the fixed income space took full advantage of the fragile global economic recovery and low interest rates in the US. Karsten explained: “The large differential between interest rates in G10 countries versus those in emerging markets triggered a flood of foreign capital inflows to South Africa’s bond market – benefiting funds with fixed interest strategies.” The BIC showed that local hedge funds returned 9.79 per cent for 2010, compared to the 18.98 per cent produced by the All Share Index (ALSI). The ALSI return was achieved with a volatility of 17.66 per cent versus the 1.86 per cent hedge fund average.

Private equity firm upbeat on Africa


frica has plenty of growth ahead, according to one international private equity firm. In an interview with Reuters, Washington-based Emerging Capital Partners (ECP) said the continent offers plenty of scope for private equity investments.

The group said it expects at least another decade of strong growth expected from consumer goods, broadband Internet and financial services. “I can assure you there’s no bubble in Africa at the moment. Every guy in the elevator’s not pitching a deal here yet,” said ECP co-chief executive Hurley Doddy. Doddy also noted that the return of rising food prices has turned attention back to Africa’s agriculture industry with a big uptake in people looking at the investment potential of agri-businesses on the continent.

This was backed up late last year by Agri-Vie, the private equity fund focused on food and agribusiness investments in sub-Saharan Africa, which announced the final close of its first fund after attracting investments of $110 million (approximately R770 million), 10 per cent higher than originally anticipated. Herman Marais, chief executive at Agri-Vie, said the oversubscription in the current economic climate demonstrates the appetite for such investments, resulting in the group already planning a follow-up fund in the future. “We anticipate launching a followon private equity fund with the same mandate to invest in food and agribusiness in Africa. Given the success we have seen, we would expect this fund to be larger in size and to venture into central parts of Africa, as well as South and Eastern Africa.” The fund was initiated by SP-aktif and Sanlam Private Equity, to capitalise on the growing markets for processed food in the major cities of Africa as well as export opportunities.

April 2011



Blue Ink Investments honoured at hedge fund


industry awards

eading South African manager of fund of hedge funds, Blue Ink Investments (Blue Ink) – part of Sanlam Investments’ hedge fund cluster – walked away with the only two awards for Hedge Fund of Funds at this year’s annual HedgeNews Africa Awards. The awards are based on the best risk-adjusted returns generated during 2010 by signature role-players in the South African and African-based hedge fund industry across 10 distinct categories. The company was awarded in the categories Best Fund of Funds Award for the Blue Ink Fixed Income Arbitrage Fund and Long-term Performance Fund of Funds Award for the Blue Ink-ubator Diversified Fund. This is second consecutive year that the Blue Ink-ubator Diversified Fund has been honoured at the awards. “The Blue Ink Fixed Income Arbitrage Fund consists of the top fixed income hedge fund managers in South Africa. The award is testament to our belief that fixed income hedge fund managers can achieve success in either an interest rate hiking or cutting period, as they have proved in the past,” said Thomas Schlebusch, CEO of Blue Ink Investments. The Blue Ink Fixed Income Arbitrage Fund, which is aimed at high-net worth individuals or institutions with a risk appetite in the region of cash plus three per cent, posted a total gain of 24.23 per cent (after all fees). Schlebusch said that the fund is most suitable for investors that have an allocation to fixed income as an asset class and need to add some diversification to their portfolio. “According to our research, the average South African single strategy hedge fund posted gains of 9.79 per cent last year.” Schlebusch added that the Blue Ink-


Eben Karsten, Portfolio Manager and Thomas Schlebusch, CEO at Blue Ink Investments ubator Diversified Fund, which is aimed at investing in high-calibre early stage managers with varying strategies, posted a total gain of 13.74 per cent (after all fees) in 2010. “The fund was launched in September 2007, just as the financial crisis began to impact on equity markets. The award recognises the successful investment strategies employed by the early stage fund managers in which we invested.” He explained that the Blue Ink-ubator Diversified Fund aimed to pioneer a new investment strategy in the South African hedge fund space by identifying new fund manager talent, particularly those pursuing alternative strategies. “Research has shown that most funds typically have the best returns in the early years, while the ideas are still new and the capital being managed is small. This fund is proving to

April 2011

be increasingly popular among investors, particularly institutional investors.” Schlebusch expects another strong year for the hedge fund industry in 2011, “We are particularly positive with regard to the proposed new Regulation 28. The draft release of the regulation states that hedge funds will be allowed an allocation from pension funds up to ten per cent. This is a vast improvement on the 2.5 per cent allowed previously. “We believe that if the final regulation is this favourable, we will see a great deal more appetite from institutions. The history of the hedge fund industry in South Africa shows that the product is well suited for long-term stable investment with decent growth.”


PRODUCTS Standard Bank flexes muscle with commodity ETNs Standard Bank has said that its Commodity Linked Exchange Traded Notes, which the company launched in August last year, have shown strong growth with its precious metals suite of platinum, palladium, gold and silver linkers delivering growth rates of between 12 per cent and 72 per cent since the launch in August. The company says the new commodity linkers have provided an excellent vehicle for customers to diversify their portfolios and grow their capital wealth, by providing investors with access to an investable form of direct commodity exposure in a liquid and cost-effective manner.

“Commodities have the highest positive correlation with inflation when compared with that of equities and bonds. In order to take advantage of the benefits that commodities offer, investors need an investment vehicle that is cost-effective, liquid and transparent. Standard Bank Commodity-Linkers fill this gap,” said the company. Glacier by Sanlam launches new structured product Glacier has launched a new structured product, the Secure Equity Note (SEN) sinking fund policy, underwritten by Channel Life Limited. The SEN offers the investor capital preservation, together with participation in the growth of the index.

The minimum investment amount is R500 000 Standard Bank’s palladium linkers have given and the product has a minimum term of five investor returns of just over 70 per cent in the years. last six months, with its silver linkers returning more than 60 per cent in the last six months. Duane Littler, a product manager at Glacier, Platinum linkers yielded returns of just over 18 said that the product is targeted at the slightly per cent and gold just over 12 per cent since more conservative equity investor requiring August 2010. capital preservation. A5 Ad.FH11 Tue Mar 01 11:50:28 2011 Page 3 C

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Renaissance Capital moves into iSpace Emerging market investment bank Renaissance Capital has launched RenCapApp, the company’s research application, which gives Apple’s iPad and iPhone users full access to Renaissance’s research. Developed with worldflow Research, the RenCapApp makes Renaissance’s entire research library available through the iPad and iPhone and delivers daily updates from Renaissance’s analysts and economists. “As an emerging market research leader, we are proud to lead in technology as well,” said David Nangle, head of equity research at Renaissance Capital. “The delivery of our award-winning research to our clients and other subscribers on the iPad and iPhone will make it easier to access our in-depth, on-the-ground research practically anywhere.”





Novare, the specialist emerging markets financial services company, has announced the appointment of Marius Kilian as chief executive of Novare Investments with effect from 1 March 2011. Kilian succeeds Derrick Roper, who has been appointed chief executive of Novare Equity Partners, focusing on the group’s businesses outside of South Africa.

Maitland, the wealth manager and fund administrator, has appointed Thomas Linklater as a wealth manager from 1 March 2011. Linklater has 25 years’ experience within portfolio and wealth management and joins the company’s Johannesburg team offering legal, fiduciary, wealth management and fund services to private and corporate clients.

Standard Bank’s stockbroking division, SBG Securities, is concentrating on growing its research and sales arms with several key appointments including Ross Elliot, who has joined from JP Morgan to head up equity sales and assume responsibility for marketing local products to a broader European investor base.

Two BEE property funds to launch in 2011 South Africa’s investment fraternity will soon have two new BEE property funds to choose from with the launch of two new property funds run by black-owned management companies in 2011, both of which will be backed by Old Mutual Investment Group Property Investments (OMIGPI). Firstly, Neo Africa Properties (Pty) Ltd is developing a fund of commercial properties leased to the government that will meet the Department of Public Works’ broad-based black economic empowerment (BBBEE) policy for ownership.


Secondly, the Urban Growth Fund will comprise property investments that incorporate the core principles of responsible investment. Fund investments will include urban regeneration, township developments, investments in health and education facilities and green buildings. According to managing director Ben Kodisang, OMIGPI, which is rated as a level 2 BBBEE contributor, will have a minority interest in both management companies.

April 2011

“OMIGPI views this as the ideal way to transfer skills to the property industry in line with the requirements of the Property Charter,” said Kodisang. “By collaborating with these select partners to set up these initiatives, we are pioneers in promoting the expansion of asset management capability that will ultimately benefit the broader industry.”

actis wins top African award again Actis, a leading private equity investor in emerging markets, was named African Private Equity Firm of the Year for the fourth consecutive year by Private Equity International (PEI) magazine. The award is voted for by investors, advisers, investee companies and other stakeholders. During 2010, Actis consolidated its leading position on the African continent: Actis’s pan-

African payments processing platform EMPH invested in Egyptian company MSCC; and Actis made an US$151 million investment in the Vlisco Group, a producer of designer wax fashion fabrics for the West African market.

role in Actis’s emerging market story, and the fact that our work has been publicly recognised by investors, advisers and portfolio company management teams is deeply humbling.”

“To receive this award for the fourth consecutive year is an immense honour for the whole Africa team,” said Peter Schmid, Actis’s head of Africa. “Africa plays a crucial

Actis was also awarded Latin American Private Equity Firm of the Year 2010 by PEI, reflecting a trio of deals executed in Brazil last year.

PSG elbows into corporate market with new division PSG Konsult, the financial services company that has been busy pushing into new markets over the last year with the launch of PSG Online and other ventures, has announced another new initiative, this time with the aim of marching into the corporate market. The company, PSG Konsult Corporate, specialises in the employee health insurance and employee benefits space and also has an institutional stockbroking desk, with plans for a commercial short-term insurance business also currently in a development phase. Willem Theron, CEO at PSG Konsult, said the shaping of PSG Konsult Corporate began just over two years ago. “Since then, membership in our comprehensive range of employee benefits and healthcare benefits has increased significantly from around 14 000 to 100 000 families.”

Winner of FLPI Competition announced At the end of 2010, INVESTSA ran a competition for one reader to win a year’s free subscription (worth R15 000) to the South African Financial Life Planning Institute (FLPI). The South African FLPI was launched as part of an initiative to assist financial planners and advisers, many of whose practices have been hard hit by the recession and tighter legislation governing the industry. Kim Potgieter, Managing Director of the FLPI, says the purpose of Financial Life Planning is the belief that advisers should first discover a client’s core life goals before devising a financial plan so that the plan is created to support these goals. “The best financial advisers have always looked at the bigger picture when it comes to developing financial plans for their clients by delving into a client’s relationships, life stage, health and anticipated life transitions.” We are pleased to announce that Lisa Griffiths of En Avant Financial Services in Cape Town won the draw. She wins full access to all of the institute’s computer programmes, tools and support.

Kim Potgieter | Managing Director of the FLPI

The SA FLPI offers various tools for an unlimited number of clients. Financial advisors can customise and brand all the tools with their practice name and details, providing advisers with the tools they need to develop stronger client relationships. For more information on the FLPI contact Kim Potgieter at or visit

April 2011


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April 2011


South Africa rating upgraded While many developed countries struggle with their sovereign debt crises, Roland Cooper, Africa director of ratings agency Fitch, said South Africa’s sovereign rating, which was revised upwards to stable from negative in January, could improve even further over the long term. “South Africa is currently on a positive outlook and we’re very happy with it.” FNB Wealth is rated top class The 2011 Euromoney Private Banking Survey ranked FNB Wealth as the best private banking services provider overall for South Africa and Africa. The survey is conducted annually and provides a qualitative and quantitative review of the best services in private banking for Africa by region and by areas of service. R20-billion pension win for Numsa The National Union of Metalworkers of SA has won a 10-year struggle with the Steel and Engineering Industry Federation of SA to receive up to R20 billion in pension surplus funds for workers and retired workers in the metal and engineering sector. The Financial Services Board stated this is believed to be the largest pension fund surplus ever distributed.

set cord h e r s ort iou prev ion in N the s n g e n t i of ass ack surp he b 11, t 0 n 2 o y ruar cked f Feb backtra o 4 x he 1 e inde pe. on t h Euro nd t ints a o n i , p r s isi long 334.55 howeve bt cr for 33 ng, n de not f g o i l t o e t u r b high idn’t las sove high ord the d out cord ed a rec timent b e r a s n hits e se cern each hare Index r 008. Th ing con S l l FirstRand latest to fall foul of JSE rules o e ar sA n2 ng JSE’ E All Sh rs ago i nd o a After a similar bungle by Absa last year, fellow n S a J pa e ye The in Ja thre e banking stock FirstRand also fell foul of the JSE’s k y l a r qu nea , the rules when its interim financial results appeared a c i r Af on its website a day earlier than planned. Reuters, who published a summary of the results, said the information was accessed via a circular sent out by FirstRand.

South Africa set to blow up like Libya UK hedge fund Toscafund has warned that South Africa is flawed and set to “blow up” within the next 15 years with more serious consequences than Libya. The group’s chief economist and partner, Savvas Savouri, cited emigration of professional workers, and a lack of centralised leadership when dealing with problems such as the Aids epidemic. Shaik returned to prison after alleged assaults Convicted fraudster Schabir Shaik was briefly returned to prison after he made the headlines twice following two alleged assaults. The first, involving a Sunday Tribune journalist, occurred on a Durban golf course, and two weeks later, Shaik was reported to have attacked a man at a Durban mosque.

April 2011


Snippets | THE WORLD

US urges banks to defer bonuses Top executives at financial companies with $50 billion or more in assets, including Bank of America, JPMorgan Chase, Goldman Sachs Group and Morgan Stanley, have been asked to defer half their bonuses for the next three years. The request, intended to curb risk, comes from the Federal Deposit Insurance Corporation. a US Government agency that ensures the safety of deposits in members’ banks. UN Security Council bans Gaddafi United Nations Security Council voted 15-0 to freeze Libyan leader Muammar Gaddafi’s assets and ban travel in an effort to stop his attacks on protesters. An arms embargo has also been placed on Libya and an investigation into crimes against humanity has been opened.

International Monetary Fund before Europe’s debt crisis is agreed at a summit. Pension fund changes afoot in EU The European Court of Justice is set to rule on whether pension schemes may be exempted from paying VAT on some fund manager fees after a case was brought by the National Association of Pension Funds (NAPF). A favourable decision could see costs cut by as much as £100 million a year for pension funds.

UK financial services job vacancies jump by 11 per cent Job vacancies in financial services in the UK have increased by 11 per cent after employees left their previous roles to seek positions at alternate companies after this year’s bonus round, according to UK recruitment agency Astbury Marsden. This follows the European Union’s approval of new laws to restrict guaranteed bonuses and up-front cash payments for bank’s propriety traders. Credit Suisse banker refuses to co-operate Emanuel Agustoni, one of four bankers from Credit Suisse who is accused of conspiracy to help American tax cheats, has said he will not assist US authorities. He has refused to name any of his clients involved in hiding up to $3 billion (R21 billion) from the International Revenue Service. Barclays bonuses down seven per cent; CEO gets £10 million The UK’s third largest bank, Barclays, owner of Absa, reduced the bonuses of staff by seven per cent compared with 2009 following a government-brokered deal to clamp down on excessive pay. However, the bank gave its CEO Robert Diamond as much as £10.1 million in salary, bonuses and stock, making him the highest paid bank CEO in the UK.


Japanese earthquake shifts Earth on its axis Japan was devastated by a massive earthquake measuring 9 on the Richter Scale in March, causing a tsunami that resulted in devastation for the country. As many as 10 000 people were feared dead in the days following the quake and a risk analysis firm estimated the economic impact could be as much as $35 billion. Earthquake has not broken New Zealand spirit New Zealand was devastated by a massive tremor in Christchurch in February that was said to be the worst tragedy to hit the country in 80 years. Over 160 victims have so far been identified with more than 100 people still listed as missing. New leaders to save Ireland from debt Ireland’s recently appointed leader Enda Kenny is faced with the challenge of renegotiating the terms of the country’s €85 billion bail-out with European partners or risk the collapse of the Irish economy. Kenny has just four weeks from his instatement to resolve the issue with the European Union and

April 2011

Canadians forced to carry on working Most Canadians now expect to retire much later than originally planned as a result of the recent recession and a fragile recovering economy. A study by the Canadian Association of Retired Persons has shown that most Canadians expect to retire at 68. A year ago, the same study showed that most Canadians expected to retire at 65.


How did the recession affect

pro sports teams globally? Many sporting teams have suffered downturns in revenue and valuation in the past couple of years. In the wake of the financial crisis, however, for the richest franchises life still appears to be good. We take you through the list of some of the most valuable sports teams in the world. Manchester United Football Club – $1.87 billion Manchester United, the English Premier League soccer powerhouse, which boasts a worldwide fan base, is the most valuable football club in the world. This is probably due to the team’s 18 league titles, four Football League Cups and 11 Football Association Challenge Cups, as well as the skills of legendary players like Sir Bobby Charlton, Cristiano Ronaldo and Wayne Rooney. Man-U’s valuation grew four per cent to $1.87 billion between April 2008 and April 2009 on a nine per cent increase in revenue. Dallas Cowboys – $1.8 billion American football’s most expensive team, and the most valuable team in American sports history, has a record number of Super Bowl appearances and, beginning in 1990, sold out more consecutive home games than any other NFL team. Cowboys who took their place in the pro football hall of fame include Super Bowl Most Valuable Player Awards (MVP) Chuck Howley, Troy Aikman and Emmitt Smith. Washington Redskins – $1.55 billion According to Forbes, the Redskins have lost 55 per cent of their games and made the playoffs only three times since Dan Snyder bought the team in 1999. But this hasn’t stopped fans from flocking to FedEx Field and making the Redskins the NFL’s most profitable team in recent years. Two-time Super Bowl winner, Mike Shanahan, is the seventh Redskins coach since Snyder bought the team. He signed a five-year deal worth $7 million annually in January 2010. New York Yankees – $1.6 billion In baseball, only the New York Yankees reside in the billionaire’s club.The team has a long and storied history as a team that produces legendary players. According to the first Annual Review of Global Sports Salaries, written for, the average Yankees player made £89 897 a week in 2009, or £4.7 million annually. The Yankees were paid so much that they had to pay $23 million luxury tax to Major League Baseball.

April 2011



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

“All my people love me.” Muammar Gaddafi, Libyan leader on the state of the Libyan nation during the anti-Gaddafi uprising which began on 15 February 2011.

“Taking a far-reaching investment decision based on future views of the value of the Rand is akin to gambling.” Leon Campher, CEO at the Association for Savings and Investment South Africa (ASISA).

“If the matric results are bad, this is taken as proof that this government of darkies is incapable. If the pass rate goes up, it means the results have been manipulated by these darkies.” Blade Nzimande, Higher Education and Training Minister during the debate of the State of the Nation address in the National Assembly which prompted the Democratic Alliance to insist on his resignation.

“We’ve had two years of the best inflows ever. The odds are stacked against it from here ... [it] could depreciate a lot further.” John Biccard, portfolio manager at Investec Asset Management warns against the effect of the reversal of foreign inflows as developing economies lose their price advantage over US and European markets.


“Short memories are very dangerous. Have we forgotten that two years ago we were in a crisis?” Finance Minister Pravin Gordhan, speaking in Johannesburg on why South Africans need to take a longer-term view of economic policy that focuses on growth rather than a short-term view of markets.

“After a poor decade, nobody wants US equities. However, with the Rand looking expensive, this is where the opportunity lies. Valuations are attractive and we expect the economy to surprise on the upside as corporate profitability will drive job growth,” said Gail Daniel, portfolio manager at Investec Asset Management.

“What Anglo does with the other 40 per cent is their business.” ANC Youth League president Julius Malema at a gala dinner in Nelspruit, after announcing he wants 60 per cent of Anglo American to be nationalised. He also predicted that the nationalisation of mines would “happen in my lifetime”.

“We have an older generation of political leaders who don’t have the tools to deal with what is going on. There is no new generation of leaders.” William Gumede, associate professor of the Graduate School of Public Development at Wits University, who said many political initiatives on the continent are in disarray.

‘Following recent declines, we do not view emerging market equity markets as expensive. But given the large sums of money that has chased the asset class in the past year, coupled with lofty returns expectations ... now is not the time to be aggressively overweight emerging markets.” Tristan Hanson, head of Asset Allocation at Ashburton.

Japanese Prime Minister Nauto Kan described the country’s earthquake, tsunami and nuclear situation as the ”biggest crisis Japan has encountered in the 65 years since the end of World War II.”

1 5 0 2 / LI FT/ B PF


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Coronation Top 20, Balanced Plus, Capital Plus and Strategic Income Funds 1st Quartile over 3 years, 5 years and since launch in their respective ASISA fund categories to 28 February 2011. Source: Morningstar. Coronation Asset Management (Pty) Ltd is an authorised financial services provider. Unit trusts are generally medium to long-term investments. The value of units may go up as well as down. Past performance is not necessarily an indication of the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Fund valuations take place at approximately 15H00 each business day and forward pricing is used. Performance is measured on NAV prices with income distribution reinvested & quoted after deduction of all costs incurred within the fund. Coronation is a full member of the Association of Savings & Investments SA.

INVESTSA April 2011  

INVESTSA is an independent publication that aims to address the challenges faced by financial planners in an increasingly complex and regula...

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