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Failure is not an option Intermediaries urged to act now to prepare for new regulatory examinations

08 10 12 14 16 18 22

The regulatory landscape for brokers in 2011



PrOFILE Piet Viljoen | Executive Chairman, RE:CM Can a small company afford a broker? Maya Fisher-French Real changes to Regulation 28 Shaun Harris HEAD TO HEAD Sanlam | BoE Get more from fewer exchange controls Strong rand still offers a window of opportunity

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February 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 Lisa McCallum | 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.


here’s never a happy balance. The broad investment industry we cover, or certainly parts of it, are either over or under regulated. Views differ depending on who you are talking to. But regulation plays a big role, for investment houses and financial advisers, and needs to be monitored, protested against, or supported. It may seem like taking on a windmill but we can all have an effect on regulation that affects our business.

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

That’s the theme of our latest issue. We take a detailed look at the regulatory examinations that advisers, some with years of practical experience, have to write. Are the exams too hard, too easy, really necessary? Expert views are canvassed on the topic.

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.


With our new regular section on retirement investing, we ask the question of whether a small company, and its small retirement fund, can afford an adviser. The costs are onerous for members. Are they getting value for their money? Proposed changes to Regulation 28 of the Pension Funds Act also get attention. This seems to be one bit of proposed regulation where there is broad consensus between the private sector and government, a fairly rare

February 2011

occurrence. It has been described as the most significant change to retirement fund investing in the past decade and will introduce a higher percentage, if that’s what the trustees want, of so-called alternative investments, mainly hedge funds and private equity. Further relaxation of exchange control regulations is covered in a feature article. It opens up whole new vistas for offshore investment. But with that comes increased complexity for advisers. We profile Piet Viljoen, founder and owner of RE: Capital Management. His investment style has always been a bit off centre, making his company and the funds it runs fascinating case studies. We’ve also launched a new lifestyle section, which includes reviews of a new restaurant in Cape Town, a luxury hotel in Stellenbosch and two cars. Just to show that we don’t only help you and your clients to make money, but tell you where to spend it, too. Enjoy this issue while we’re getting the next ready.

Miles Donohoe

Failure is not an option

Intermediaries urged to act now to prepare for new regulatory examinations


onsumer protection has been a key focus for the FSB over the last few years, the result of which has seen a host of new legislative changes. While the majority of these have been warmly welcomed by the financial services industry, one development has received more of a lukewarm reaction – that of the new regulatory examinations, also known as RE level 1 and RE level 2. The FSB states that all sole proprietors, key individuals and representatives must write the examinations. RE level 1 focuses on the role and responsibilities of the representative and what you need to know about the FAIS and FICA Act to remain compliant. The RE level 2 relates to product-specific examinations focused on the technical knowledge and skill an individual should have when dealing with these financial products. Early exposure to the key individual’s and representative’s exams has resulted in a mixed response to the questions asked. Some exam candidates are of the view that the exams are too difficult, others are finding them easy. Some industry comment suggest that the exams will be time consuming and costly for an already overburdened industry, and could prompt a number of intermediaries to exit the industry. Joe Kotze, national manager of compliance at the Financial Intermediaries Association of Southern Africa (FIA) said that the controversy surrounding the exams was fuelled by a number of issues such as intermediaries with a lot of experience regarding the exams as unnecessary as well as concerns about the complexity and cost burden of the exams.


February 2011

He said the FIA addressed concerns raised by its members with the relevant authorities. “Review panels have led to the FSB and the examination body rewording certain questions from the key individual’s and representative’s exams in order to make them fair and understandable. Time available to complete these exams has also been lengthened by 30 minutes and the pass mark lowered to 65 per cent.” Kotze added that there is no reason for intermediaries and/or representatives to fear the exams. “If candidates are prepared sufficiently, the correct answer should jump right out because there will be no ambiguous answers, or more than one correct answer to a question. The idea behind the exams was never for candidates to memorise legislation by heart but merely to comprehend what affects them in their daily rendering of financial services. Warren Ingram, director at Galileo Capital, has also welcomed the regulatory exams saying they are long overdue for the industry. However, he is concerned that the more experienced members of the industry are not being treated fairly as they should be exempt from the first examination. “Making the CFP’s write the first regulatory exam is like making a medical doctor write the same exam as fitness trainer. It does not give recognition to the proper qualifications and experience that CFP’s have. CFP’s who spend more than R20 000 and many hours on their studies in order to reach an international standard of qualification should be exempt from these exams.” Similarly, Patrick Bracher, director at commercial law firm Deneys Reitz, also questioned why someone who has been considered a competent key individual for a number of years can now be considered incompetent without the exam. “Prior

experience and prior learning needs to be recognised. The roles of these individuals should not be confused with that of the compliance officer.” Despite such views, the FSB remains firm that everyone will be required to take the RE level 1 exam. Wendy Hattingh, head of FAIS Supervision at the FSB said it is vital that all intermediaries have this basic minimum industry knowledge. She noted some exemptions, including for CFPs, are permissible for the RE level 2 exams if the person concerned has already taken an equivalent examination that has tested their knowledge of a particular product. While the exams are increasingly being seen as a positive step forward – even if unnecessary in some quarters – there remains a degree of concern with regard to whether the industry will be able to cope with the sheer volume of applications and examinations that are required. Bracher said the cost and logistics are enormous as it will involve thousands of people. He added that the exams will have to be available at multiple venues on a permanent basis so as not to delay the examination process. Currently there are four examination bodies – Moonstone, Leselo, SAIFM and FPI – offering the regulatory examinations in centres across South Africa. Wendy Hattingh noted that an individual can write the examinations as many times as they want to. Likewise, Ingram doubted whether all representatives will be able to complete the exams on time. “I am concerned about the implementation of this idea. The number of people that need to write this course is astronomical, which means it is highly unlikely that everyone will get to write them before the deadline.”

However, the FSB is confident that the time issue should not be a problem if individuals manage their preparation and planning of their exam schedule well. “The FSB ... believes it is important that the exams are completed within the set timeframe. Provision has been made for people that might write in the last month of the time table allowed and then need to repeat exam,” said Hattingh. Hattingh puts the ball firmly in the court of those who need to take the exams, stating that it is up to people themselves to ensure that they register timeously. “We do not have any concerns there is enough time if people do enroll and write the exams. If they wait until the last minute, they might have a problem in getting a booking and allow for ample time to rewrite should they fail. We urge all FSPs to ensure that key individual and representatives start preparing for the exams.” The best scenario is clearly getting it right first time, however. While the FSB states that individuals can pass these exams through self study, training courses are being set up by various industry bodies to assist those who need to take these exams. Kotze said the FIA has already negotiated special packages with training providers to ensure people are successful from the start with discounted rates for members. “We have to be realistic and acknowledge the fact that the FAIS Act and other relevant legislation have been around for six years. Members should take heart – in a few months we will all be chuckling about the fuss we (unnecessarily) made about the exams,” said Kotze. To assist candidates with their preparation to write the RE 1 exam, the FSB has developed a study guide which can be accessed on the FSB website.

Timetable for regulatory examinations: Date the person was first appointed in the role of a key individual or representative at any FSP

Regulatory exam Level 1

Regulatory exam Level 2

30 September 2004 – 31 December 2007



1 January 2008 – 31 December 2009



1 January 2010 to 31 December 2010


Within six years of appointment date of the representatives

1 January 2011

Within two years of appointment date of the representatives

Within six years of appointment date of the representatives

Prior to approval of the key individuals or the authorization of an FSP licensed as a sole proprietor

February 2011


Derick Ferreira - regulatory

The regulatory landscape for brokers in 2011 (FSB) view is that financial benefits that may be seen to influence the rendering of any financial service should be regulated with particular vigour. To address this issue, the FSB introduced a set of regulations, commonly referred to as ‘conflict of interest’ to minimise intermediary conflict of interest and to ensure that clients receive unbiased financial advice. The new legislation was published in April last year. Certain of these provisions became effective during October 2010 and fundamentally changes the way in which financial service providers (such as Old Mutual) interact with independent financial advisers and their personal assistants.

Derick Ferreira | Head of Strategy and Marketing at Old Mutual Broker Distribution


s the financial industry becomes more regulated, financial advisers worldwide have had to adjust to many legislative changes over the past few years. Locally, changes to commission regulations, FICA, FAIS, retirement fund reform, the Consumer Protection Act, etc, all impacted financial advisers.

“We are committed to the spirit of the legislation and have adapted our processes to align to the new requirements,” noted Ferreira. “Old Mutual sees the new legislation as an opportunity rather than a threat. It gave us the chance to further enhance our business propositions to brokers and customers. It allows us to focus and invest more of our efforts in our people which, in turn, provide superior back-up and support to independent financial advisers.” Part of the legislation requires that brokers have to disclose to their clients actual or potential conflicts of interest, e.g. attending training, conferences, product workshops

Old Mutual’s head of broker distribution strategy and marketing’s, Derick Ferreira, said: “We welcome any legislation that ensures the fair treatment of customers who make use of financial services in general, and financial advice specifically. As a major role player in the financial services industry, we have a significant role to play in ensuring that customers are treated fairly.” Gifts and financial benefits have always been sensitive matters in the financial services environment. The Financial Services Board’s


February 2011

or seminars. “Brokers should view this as a positive step rather than an administrative burden,“ said Ferreira. “If you stay abreast of the latest product and legal/technical developments, your customers will benefit. It should reassure them that their personal financial adviser is up to date with the most relevant information in the industry.” What new legislation can be expected next? Other pending legislation which will impact financial advisers is the Protection of Personal Information Bill which is expected to come into effect this year. As a continuation of the FAIS regulations, the majority of brokers and independent financial advisers (who obtained their licenses before 2009) will also have to complete the first set of regulatory exams before the end of this year. As in the past, Old Mutual will back and support brokers in adapting to these changes and requirements.

Patrick Bracher - regulatory

FINANCIAL SERVICES BOARD, Patrick Bracher | Director Deneys Reitz



here is no doubt that the recent actions of the Financial Services Board to protect consumers will be good for the investment market. What has to be guarded against is regulations that are over broad. An example of over breadth is the recent amendments to the FAIS General Code limiting financial interests’ payable by financial services providers. Over breadth leads to enforced abstinence and the fear is that it will result in starvation. The latest amendments to the General Code require financial services providers to avoid, and where that is not possible to mitigate, any conflicts of interest and to limit the financial incentives they give or receive in a number of drastic ways. However, many relationships that may give rise to allegations of conflicting interests are in fact ordinary business interaction in the interests of the consumers. A close relationship between a financial services provider who is investing money on behalf of a consumer and the product supplier can be beneficial.

It is disappointing therefore to see the attempts in the General Code to close down any incentive in the form of the financial interest described as broadly as “any advantage, benefit or other incentive or valuable consideration”. Take the example of a training session. Product suppliers can (and should) provide training for investment advisers in regard to their latest products and general financial and industry information. They are now prevented from paying for the travel and accommodation associated with that training. It is, however, impossible to prevent someone getting a benefit or advantage. The financial advisers staying closest to the venue who can avoid travel and accommodation costs are at a considerable advantage over someone who has to travel some distance and stay overnight. This is a clear example of over breadth. The FSB is clearly and properly trying to stop a purported training session being used as a sham

Strong relationships between the investment adviser and the product supplier create efficiency and better understanding of existing needs and new products. The best financial services provider is the best because of the excellence of the service they provide to clients. To water down the incentives for the best to the level of those who are the worst is not necessarily productive. Why should an excellent investment manager, who concentrates on quality and not quantity of business, not be rewarded for providing superlative service? The common law deals with this by way of disclosure. If an agent received any personal benefit from a third party for bringing a client’s business, a full disclosure to the client and informed consent by the client to the receipt of the benefit is sufficient. Most clients like to see that their advisers are themselves financially successful. A client is given the choice and the financial adviser is still bound to give appropriate advice suitable to the client’s financial needs.


February 2011

to influence financial advisers by taking them to exotic venues under the false guise of a training session. But the Code should target the specific practices aimed at and not couch everything in the broadest possible language which will cut into normal business relationships. Product suppliers and investment advisers are scared to have dinner with each other in case they fall outside the permissible incentive of R1 000 per representative per year. There are very good reasons why people in business should get to know each other socially. It would be a great pity if the financial services industry, which has always revolved around strong personal relationships, were reduced to a bland and uninformed industry. Many excellent financial services providers live life to the full in connection with their business. Reducing them to lettuce leaves and soda water is not going to make the consumer any better off.

February 2011



Piet Viljoen | Executive Chairman | RE:CM

P i et V iljoen E x ecutive C hairman | R E : C M Piet Viljoen is one of the best known figures in South Africa’s investment industry, for speaking his own mind and setting his own agenda. Starting out as a lecturer at the University of Pretoria, he joined the Reserve Bank and two major asset managers before founding RE:CM in 2003. INVESTSA caught up with him to find out whether he is really as controversial as he is made out to be.


“Don’t ‘reach’ for yield, remain conservative; only invest your clients’ money in things that you can understand and that make sense.”

You are touted as being a cynical and outspoken voice in the industry. Is this true? One man’s cynicism is another man’s realism. It very much depends on your point of view. I think one of the keys to success in investing is to keep your emotions in check. Objectivity, humility and realism all help you do so. Also, you need to build checks and balances into your investment process that helps keep these things intact. This tends to have the benefit of producing contrarian investment activities, which is useful for generating superior returns. Unfortunately, it also has the side effect of marginalising you from the crowd, and therefore being viewed as a cynic. I am prepared to be seen as a loner or a cynic as long as it helps produce good returns for our clients. We prefer to keep to ourselves at RE:CM, but sometimes the greed and irrational actions by certain role players in the industry forces you to speak out. If that has helped only one person not to lose money in the market, it has been worth it. Again, if one fears being ostracized by your peers at times, in this industry, you will generally also fear making good investment decisions. What are the main gripes you have with the investment industry? I have no gripes about it; it has been very good to my firm and our clients. I would point out that the industry does tend to have too short term an investment horizon; but then again, without this, there would be less opportunity for firms such as RE:CM to arbitrage the time preference bias of the market. So, while I fully underwrite the market’s right to speculate, I just make sure that RE:CM and its clients don’t. What was your reason behind starting up your own asset management firm rather than heading an existing big player? The key problem with institutional investing is that investments are generally made by committees. A major disadvantage with this is that the quality of the decisions made tend to

devolve down to the level of the lowest common denominator. This is a type of environment you need to avoid in order to increase the odds of producing good returns for your clients. The other big problem is that size is the enemy of good investment returns. The bigger you are, the worse the odds are of you performing well over long periods of time. This is a mathematical certainty. Again, you need to avoid this type of environment to increase your chances of producing good returns for your clients. Does heading RE:CM provide opportunities you would otherwise have missed in a larger institution? In terms of investment opportunities; most definitely – being smaller means we have a much larger universe of companies that we can potentially invest in and we have now assembled a fantastic group of people who work here at RE:CM. Both of these things make it fun to come to work in the morning.

continuous bailouts and cheap money, it could lead to bubble-like conditions in emerging markets – including South Africa. Better let the zombies fail than contaminate the markets – this much we should learn from the Japanese. What advice do you have for financial planners in the current environment? Don’t ‘reach’ for yield, remain conservative; only invest your clients’ money in things that you can understand and that make sense. And accept that there are many more things that don’t make sense, than there are things that do. As Charlie Munger said, “The dawning of wisdom is when you realise that you don’t know anything.” What is your investment philosophy? RE:CM is a value investor. We like to buy predominantly good quality assets, at a significant discount to their underlying intrinsic value. Simpler is better.

The financial crisis instigated lots of talk on tighter global financial regulations but has anything really changed? There has no doubt been a huge increase in regulation – we see that every day in our business. But I am of the opinion that increased regulation will not change anything (except provide more employment for regulators, and costs for legitimate businesses). There is just as much fraud (if not more) being committed today than 10 years ago or 50 years ago. The incentives are just so large; it overwhelms any attempt by the regulator to stem the tide. The best defence against fraud is to be sensible. Tannenbaum and Madoff did not defraud sensible people. Do you expect the continuing bailouts and debt crises in Europe to have any impact on SA? To the extent that the capital providers to bankrupt institutions in the west are protected by

February 2011



can a small company


a broker?

by Maya Fisher-French As we enter into a world of lower returns, costs will dominate investment decisions. One of the debates that will arise is whether small companies can actually afford to provide retirement funding for their staff.


The costs of an umbrella fund for companies with less than 50 employees can run as high as 11 per cent of contribution. As these costs are usually displayed as a percentage of salary, it is not always obvious how much of the upfront contribution is going to fees.

Direct distribution of retirement funds for smaller companies is on the cards as many of the life houses recognise that they need to make retirement funding for smaller companies more affordable.

The following example is taken from a school which belongs to the umbrella fund of one of the large life companies:

So how should an advisory house position itself in order to stay relevant, in what will become a highly competitive and increasingly commoditised industry?

Provident fund contribution Approved risk benefits Management fee

Quite simply, through providing value through good advice and good service. Companies would be more inclined to pay for services which provide financial planning for their employees.

10.0% of salary 0.92% of salary 0.78% of salary

Once you do the calculation based on contributions, the management fee is significant. In this example, a member of this fund, earning a pensionable salary of R15 000 a month, would contribute R1 500 a month to the fund. The monthly management fee of 0.78 per cent would be R117 – this works out at eight per cent of the R1 500 monthly contribution. Over a year, that fee is equal to one month’s contribution.

Several years ago, a friend of mine joined a small company with eight employees and he automatically joined the provident fund. He never met the broker. When he received his benefit statement a year later, he was concerned that the entire fund was invested in a smooth bonus fund despite the fact that the average age of the office was under 40 years old. He tried in vain to get hold of the broker to come and meet with the company to discuss the portfolio.

This fee is made up of commissions (around five per cent) and charges by the life company and excludes the investment management fees on the underlying assets, which in the case of umbrella funds can be as high as one per cent per year. Costs as a percentage of contribution tend to be higher for companies with a lower average wage bill.

Understandably the broker was fired and they found a new broker. The new broker met with each member; carried out a need’s analysis, discussed the options and looked carefully at cost structures.

“Direct distribution of retirement funds for smaller companies is on the cards as many of the life houses recognise that

He met with the members once a year and, when my friend resigned, he transferred his funds to a unit trust preservation fund and charged him no commission. He believed that the financial advice was covered by the fee he was receiving from the company. Needless to say this broker has a client for life and was awarded the account of my friend’s new company. It is very likely that within the next two years, companies will have the option for DIY retirement funds which invest in tracker funds and thereby slashing costs. The advisory houses that survive will be those that add real, tangible value to members through education and service.

they need to make retirement funding for smaller companies more affordable. ” Although technically the employer carries the cost of the management fee, this is usually built into the employee’s cost to company, so ultimately the member is paying for those costs. For smaller retirement funds, commissions make up the bulk of the costs. According to the commission sales, a fund with an annual contribution of up to R142 000 will pay broker commission of 7.5 per cent. This amount reduces as the contribution size increases so larger funds pay, as a percentage, lower commissions. But here comes the dilemma. From a consumer’s point of view, a commission in the order of 7.5 per cent is enormous, equating to nearly one month’s contribution. From the broker’s point of view, the commission on a small fund with a R140 000 per annum contribution, would work out at R10 500 a year. Say this fund has ten members each contributing R1 160 a month; if a broker is doing their job correctly and meeting with the fund members once a year, servicing the account correctly and providing retirement advice, R1 000 a year per member seems a fair fee.

Retirement funding for low income earners The retirement industry has proposed a gap fund for lower income earners who do not benefit from the tax incentives of retirement savings as they earn too little to pay tax. The fund would be compulsory but would have contributions from the employee and employer as well as from government to incentive people to save. This is very much along the line of the Fundisa education savings fund. Rowan Burger of Liberty said that in order to be fair to lower income earners, government needs to provide them with a similar financial incentive to save for retirement. Currently that would work out at around 10 per cent of contributions but this could be even higher. The proposed gap fund would be a low-cost, unitised investment savings account administered in the name of the member and would cater for regular and ad hoc contributions. It would allow some limited access to savings regardless of age as well as a death benefit.

However, if the broker signs the deal and is never seen again and fails to service the members, then there is no reason for the company not to bypass the broker and go direct.

February 2011



Real changes TO

Regulation 28 Much wider scope for retirement fund investing


February 2011


etirement fund investing has always been a contentious issue. Some retirement fund trustees feel government regulation, contained in the Pension Funds Act, limits their investment options. Others feel that investment options are perhaps too open and need to be closely regulated. And many trustees, the so-called glass-eyed brigade at retirement fund investment presentations, unfortunately, just don’t care. But now we have proposed changes to Regulation 28 of the Pension Funds Act, the regulation that dominates retirement fund investing. Though still open for comment at the time of writing, it’s almost certain the draft proposals will shortly be passed. It has been a long time coming. Magda Wierzycka, CEO of Sygnia Asset Management, calls the changes a significant milestone in retirement fund regulation but points out that various drafts of Regulation 28 have been floating around since 1997. “In 2007, the Financial Services Board released PF Circular 130 which provided guidelines as to the governance required of trustees of retirement funds when making investment decisions. The new Regulation 28 goes further by specifically listing the principles which trustees need to address in what is now a compulsory investment policy statement,” she said. The draft or new Regulation 28 introduces a number of changes. Perhaps most important from an investing perspective is that hedge funds and private equity is not only recognised, but the limits on what both can now represent in a retirement fund’s investment portfolio has been increased. Previously both fell into the ‘other’ class which was limited to 2,5% of a retirement fund investment portfolio. Now each has an allowance limited to 10%, a significant change to the old regulation.

out funds to very conservative funds focused primarily on capital preservation. This is largely true of the hedge fund industry in South Africa, where the funds tend to be cautiously managed and are very much aimed at preserving capital before racking up returns. For years many retirement fund trustees have been calling out for increased investment limits in hedge funds for this reason. Until now there has been reluctance, perhaps nervousness, from National Treasury to get too involved with hedge funds. So the changes in the new Regulation 28 are indeed gratifying.

“Given that these investments have been a feature of many retirement fund strategies over the past seven years, it is gratifying to see that both are now acknowledged as acceptable building blocks in a comprehensive strategy,” Wierzycka also noted other significant changes under the new Regulation 28, one being the treatment of property as an investment. “Unlisted property has been given a lower aggregate investment limit of 15% than listed property,” she said. This could result in some significant changes in retirement fund investing. Physical property has always been strongly favoured by retirement funds. There was a time when the Durban Municipal Pension Fund allegedly owned half the property in Durban, and half the property in Johannesburg, too. Listed property now has an investment limit of 25%, which means it will probably fill a larger portion of retirement fund portfolios. It may be

a good thing. While no-one can predict how listed property funds will perform in the future, it has proved a solid and stable, and for some periods the highest performing, investment category in the past. Wierzycka also noted that the use of derivatives and securities lending have come under harsh treatment. “Both will be subject to requirements prescribed by the Registrar of Pension Funds. Drafts of both notices have been released and place very onerous responsibilities on the trustees of retirement funds which engage in either activity.” In a nutshell, that’s what draft Regulation 28 seems to be doing: raising the responsibility and investment awareness of trustees, but at the same time opening up retirement fund investment in a sensible way that, under the correct guidance, should increase fund returns. With an estimated 12% of retirement fund members being in a position on retirement similar to before retirement, better returns, at the very least higher than inflation returns, are important. “The new regulation is a vast improvement on the regulatory environment to date. It reinforces the requirement for retirement funds to have properly thought-through and documented investment strategies, and it increases the level of involvement that retirement fund trustees will have to have in the monitoring of their service providers. It means that all retirement funds will need to review their investment strategies,” said Wierzycka. It also opens up a potentially large new field for hedge funds, a two-way process of retirement fund and hedge fund investing. There must be a lot of happy hedge fund managers out there.

“Given that these investments have been a feature of many retirement fund strategies over the past seven years, it is gratifying to see that both are now acknowledged as acceptable building blocks in a comprehensive strategy,” said Wierzycka. This update of Regulation 28, widely welcomed by the investment industry, is really just South Africa’s retirement fund regulation catching up with the rest of the world. Private equity investments, and particularly hedge funds, play a large part in retirement fund investment in most Western countries. For instance, the huge Californian Calpers fund, one of the largest private retirement funds in the world, is largely invested in hedge funds. To some extent perceptions of hedge funds remain negative. But the term is as broad as any investment category can get, with hedge funds ranging from some high risk shoot-the-lights-

February 2011



Sanlam A ndrew

R u m b e l o w

Chief Investment Officer at Sanlam Multi Manager International | Andrew Rumbelow

There has been lots of talk about the new normal. What does the new normal actually mean? The ‘new normal’ is a term coined by PIMCO to describe their expectations of the future economic environment in the years ahead. We have entered a period of deleverage, re-regulation and a slow down, if not a reversal, in globalisation. PIMOCO’s argument that the reversal of these powerful tailwinds will materially impact the global economy over the next three to five years is one we support. Is the economy really in a new state of flux or is this just another market cycle? The characteristics of the new normal should not be confused with shorter term cyclical factors which also impact the global economy. The new normal should not be seen as a cyclical theme which will


have run its course within the new few quarters, but rather as a secular theme which will take a number of years to play out. The extent to which this theme is felt in the shorter term may well be muted as strong but short-lived factors impact the global economy. We do, however, believe that a few years from now we will be able to look back and see a materially different global economic picture. What does it mean for consumers and will it impact long term on consumer habits? Consumers as a whole are expected to reduce the extent to which they are leveraged as they reduce the extent to which they expand their debt and increase the proportion of their disposable income which they allocate to savings. This reduction in leverage will obviously have an impact on consumption growth (a slowdown in the increase in debt and

February 2011

more disposable income being allocated to savings translates into less disposable income being allocated to consumption); although it must be acknowledged that its impact will be off-set to an extent by income gains. What does it mean for South Africa’s asset management industry? From an asset manager’s perspective, the key will be to determine the impact of this secular theme on investment opportunities. One key impact that we expect is that the future distribution of returns will more than likely be flatter than that which has been experienced in the past and the tails fatter. For some, this may not be a particularly attractive prospect. In an environment where returns are less clustered around the average and extreme returns (both high and low) are experienced more often, being skillful at managing risk will be essential.



M adalet

S ess i ons

Investment Analyst at BoE Private Clients | Madalet Sessions

There has been lots of talk about the new normal. What does the new normal actually mean? ‘New normal’ is a PIMCO catchphrase, and the term was coined by them following Lehman’s collapse. The ‘old normal’, according to PIMCO’s Paul McCulley, was characterised by a shift of power from government to the market (with the benefits of the invisible hand) and this period was characterised by deregulation, globalisation and greater opportunity for leverage. The result was higher asset prices and economic growth. Following the Lehman collapse, McCulley argues, governments recognised that unregulated markets are flawed. Bankers cannot be trusted to regulate themselves and ‘adult supervision’ has to be introduced. The result is more regulation, deleveraging and undeniable headwinds to growth and asset returns. In the new

normal we are unlikely to see double digit returns as final demand remains muted and higher taxes erode corporate profit margins. Is the economy really in a new state of flux or is this just another market cycle? The developed market economies are facing unusual challenges. At some point, the US banking sector will start lending the excess reserves they hold. At that time, the Fed will be required to withdraw liquidity – not too much and not too little either – made available through quantitative easing. Withdrawing too much could tumble the US economy back into recession, and not withdrawing enough will see substantially higher inflation. In the Eurozone, governments need to encourage growth and reduce their deficits and debt levels. Without a flexible exchange rate and monetary autonomy, this is a tall order

February 2011

and, of course, the citizens will resist any policy initiative to reduce unaffordable and generous social benefits. What does it mean for consumers and will it impact long term on consumer habits? The new normal is a consequence of the wealth destruction that followed the housing market collapse. Slower growth during the new normal comes about because households have decided to increase precautionary savings, deleverage and repair balance sheets. As Adam Smith concluded famously in his Wealth of Nations’ “consumption is the sole end and purpose of all production”. The new normal rests firmly on the assumption that the developed market consumer remains the most important driver of growth. If emerging market consumers become a more dominant force, and developed market businesses take advantage of the




The last three years have seen a banking crisis turn into an economic crisis, turn into a government sovereign debt crisis. Are we over the crises? Given the nature of financial markets, the global economy will be faced with another crisis some time in the future. At present, the sovereign debt crisis unfolding in the Eurozone peripheral countries remains the single biggest threat to the global outlook in 2011. With the risk of contagion spreading to the core countries a distinct possibility, the banking sector is at risk given their large holdings of sovereign debt. The solution is simple but is there the political will? The ECB must buy up the toxic debt through aggressive quantitative easing. With deflation more of a risk than inflation, the additional money supply created will weaken the Euro reversing the need for tough fiscal austerity measures. In 2011, expect bank failures before policymakers step up to the plate. What should financial advisers be most wary of in this new environment? We think that the proverbial elephant in the room must be the fact that the majority of financial advisers continue to play quite an active role in the day-to-day management of their clients’ investments. While this business practice is appropriate for certain market segments, it is probably not appropriate for all. If financial advisers believe, as we do, that in the new normal greater attention will need to be spent on active risk management, portfolio management will more than likely require more active management on the part of the individuals making the day-to-day decisions.

opportunity, the future will look very different from the expected new normal. What does it mean for South Africa’s asset management industry? The new normal means slower final demand growth and reduced corporate profitability. Paul McCulley maintains that this means US 10-year rates between 3.5-4.5 per cent and single digit returns. The challenge for the industry will be to recognise the implications of slower growth on corporate profitability and inflation and therefore the appropriate value of the different asset classes. The last three years have seen a banking crisis turn into an economic crisis, turn into a government sovereign debt crisis. Are we over the crises? It is very difficult to tell. There is no doubt that the Eurozone troubles haven’t yet been resolved. Yields on peripheral countries’ debts have remained elevated, indicating that doubts about the viability of the austerity measures and the growth potential of these economies remain. There is the risk of asset price bubbles in emerging market economies that peg their exchange rates to the USD and, of course, the risk of significant inflation in the US. What should financial advisers be most wary of in this new environment?

Would it then not be appropriate for these same financial advisers to ask themselves honestly if they are appropriately positioned for this new environment?

Financial advisers have the important responsibility of educating investors about the risks facing the global economy and the risks and potential rewards of buying various assets. I would caution against using historic returns from the different asset classes as a guide to potential future returns.

Does the new normal affect the advice advisers should be providing to their clients?

Does the new normal affect the advice advisers should be providing to their clients?

We would suggest that it does, but perhaps not in the way that many would think. We believe that financial advisers should be looking to advise their clients to rather invest in actively managed solutions where the investment objectives of the solutions are closely aligned to the investment objectives of their clients. In essence they should be informing their clients that the outsourcing of the risk management and day-to-day investment management activity is in the client’s best interests.

No, I don’t think the advice should change. Investors should continue to buy diversified portfolios – across different asset classes as well as different geographies – to achieve their investment objectives. It is impossible to know what the future holds and so the best advice is to hold a portfolio of assets that will deliver acceptable returns no matter how the future turns out.


February 2011

Shaun Harris

Get more from fewer exchange controls Strong rand still offers a window of opportunity by Shaun Harris


February 2011


or most South Africans, even many at the top end of the high net worth bracket, exchange controls for individuals are effectively gone. Residents can now invest R4 million a year offshore. That should satisfy the foreign exposure requirements of even the most aggressive offshore investor with a war chest big enough to invest R4 million overseas per year on a regular basis. The further relaxation of foreign exchange control regulations, announced by Finance Minister Pravin Gordhan in the medium-term budget policy in October last year, greatly opens up the offshore investment options and strategies for South African resident investors. It also eases the complexity of the decisions to be taken, which will have investors and private clients drawing heavily on the knowledge and judgment of financial advisers. For many advisers, whole new fields of investment options will open up, forcing those not that familiar with these options to get up to speed quickly. Investment houses are already seeing increased interest and demand from clients, even in simple foreign unit trust funds. “In essence, exchange controls have been abolished because for the vast majority of people, the move from a lifetime allowance of R4 million to R4 million a year is more than they need and the removal of the exit tax on emigration takes care of the rest,” says Pieter Koekemoer, head of personal investments at Coronation Fund Managers. The ‘exit tax’ Koekemoer refers to is the 10 per cent levy tax on so-called blocked Rand in South Africa, estimated to be somewhere between R20 billion to R25 billion. Some of this money is held in banks but most is apparently in investment vehicles. The removal of the exit tax will probably see much of this money leave the country but it’s not expected to flow out in a rush. “I think the long run impact on the structure of the savings industry as a result of this further relaxation of exchange controls will be larger than the short-term impact of the exchange rate of the Rand,” Koekemoer added. One decision investors and their advisers face is whether to raise offshore exposure in Rand or foreign currencies. Under the old forex regime, investors often opted for Randdenominated investments, using the asset swap capacity of somebody else, typically an

asset manager. This allowed individuals to reserve their forex allowance. The downside was often diminished investment returns when brought back onshore and converted back to Rand. Candice Paine, head of Sanlam Investment Management Retail, believes offshore investment exposure needs to be a strategic decision. “In the past, sentiment has been a significant driver of offshore investment trends, with investors rushing offshore when the Rand was weak in the early nineties – only to experience negative returns for the following decade because in retrospect it was obvious the offshore market was expensive at the time. In contrast, local equities, which were more reasonably valued at the beginning of the decade, delivered almost 17 per cent return a year.”

The further relaxation of foreign exchange control regulations, announced by Finance Minister Pravin Gordhan in the mediumterm budget policy in October

from the strong foreign investment inflows seen over the past few years. These could suddenly dry up though, a possible early indication being foreign net South African bond buyers turning to sellers in the last few months of 2010. If these foreign investment inflows dry up and the Rand does suddenly weaken, it will close an investment window for local investors. Dave Christie, head of distribution for Ashburton, South Africa, said he is now seeing more interest from local investors and more investors committing money offshore. He thinks the relaxation of forex controls is helping this. “About nine months ago there were two schools of thought. One said the Rand was too strong and must weaken; the other said the Rand must remain strong. Against this background, we didn’t see strong offshore flows, investors were confused and nervous. But that seems behind us now and in the past few months we’ve seen foreign investment starting to rise in the retail market.” Ashburton is the foreign fund specialists, offering about 14 funds to the retail market. These vary from broad foreign funds to country or region specific funds.

last year, greatly opens up the offshore investment options and strategies for South African resident investors. She added that Sanlam Investment Management’s analysis of international and global equities indicates that offshore stock markets, particularly in Europe, offer better value than South African shares. “So from a valuation perspective, and the fact that the Rand is at its strongest since early 2008, conditions currently look favourable for investing offshore.” The Rand remains the big question for investors looking at increasing offshore exposure under the more benign forex conditions. The current strong Rand against major developed currencies like the US Dollar, Euro and Sterling make it a good time to invest offshore. But how should this be done? For instance, the best investment approach might be to steadily invest offshore on a regular basis, over time. The risk here is that the Rand suddenly weakens. That might seem unlikely and the strength of the Rand has fooled just about everyone for the past three years or longer. But it could happen, partly because the strength comes

February 2011

Asked what type of foreign investment vehicle local investors should be looking at, Christie said while it obviously depends on the investor’s profile and investment targets, there are two sensible options. “One is a balanced fund, where the investment manager will make the asset allocation calls. The other is a general equity fund. That becomes a bit trickier as the investor must decide on the type of manager and investment style. What remains crucial through all of this is diversification.” These are just some of the foreign investment considerations advisers will have to be looking at on behalf of clients. Foreign property now becomes a more meaningful investment as well. The strong Rand and relaxed forex controls might be a good time to buy that flat in London, or the stone cottage on the west coast of Ireland.



Generating income

in a low interest environment


or income dependent investors, low interest rate environments are very bad news. Annuities form a considerable component of monthly income offerings; and are frequently offered on a discretionary and compulsory basis. When looking at the discretionary annuity offerings there is very little in the way of choice. Almost all life companies offer backto-back fixed annuities. These traditionally offer 60 monthly instalments plus a return of capital at the end of a five-year period with the following features:

Benefits of Cadiz Property Income • Investors will enjoy annuity payments driven by the net income generation of a bespoke property portfolio. • Because of rental escalations, the income should grow at least in line with inflation thereby protecting investors against the ravages of inflation. • The investor’s capital is linked to the performance of the property portfolio thereby providing investors with material capital appreciation opportunity as property values increase. • While the minimum term is five years, the underlying product design is for an openended annuity investment. Investors will receive a reinvestment bonus for every five-year period that they commit to. • The annuity payments will be subject to the same favourable tax treatments that all purchased annuities enjoy.

• Offered by way of an endowment plus a purchased term certain annuity. • Payments are set at the outset and do not vary over time as the interest rate environment changes. • Very favourable income tax treatment of the annuity in that only a portion (generally around 20 per cent) is taxed. Cadiz is currently finalising its latest exciting offering in this market – Cadiz Property Income. This offering will harness all the traditional features of a purchased annuity with the significant inflation-beating benefits of a property portfolio. Over the past five years, one can see just how strongly property has performed. While we don’t believe that this level of outperformance will be repeated, the longer term performance leads us to believe that property should provide inflation-protected income and some level of capital growth.


Source: IPD Total Property Return and Stats. SA CPI data

February 2011

February 2011



Zimbabwe most attractive investment in Africa Zimbabwean equities have been named the most attractive investment option in Africa in 2011, according to investment firm Insparo Asset Management. The company recently visited the country and said it has been reassured by the political calm and economic growth, which is expected to top 10 per cent this year. South Africa invited to join BRIC group South Africa has received a formal invitation to join the influential Brazil, Russia, India and China (BRIC) group of large emerging economies. International Relations and Co-operation Minister Maite Nkoana-Mashabane said in future the group would be known as the BRICS. Absa Capital takes top honours in annual awards Absa Capital was named Best Bond House, Best Fixed Income House and Best Research House at the annual JSE Spire Awards. The investment bank claimed first place in 12 out of the 18 categories that it was eligible to enter.

t er a offic g n i . rat ear ope he y hief for t c t , n r ce Dye per hys n. R and five o i t a infl our en f with etwe line b n i y b st 1, ju preciate 201 p n a i d h l 1 t u 201 grow s wo th in modest se price w o r u g nly ho rate ve o hat ode o achie dicted t m e t e s pr hiev are set , ha s o ac es t ty price or ooba c i r Prominent businessman raided by FSB r at se p ope rigin o Hou ntial pr d Prominent South African businessman Simon Nash, who bon de Resi African stands accused of illegally using R10 million from the th Sou Cadac Pension Fund to pay his legal costs in another

criminal case, had a tough Christmas after the FSB raided the headquarters of Cadac and took possession of various computers, hard drives and documents just before the festive season. UK investment analyst fined for misleading information Christopher Gower, a former investment analyst in the UK, has been fined ÂŁ50 000 (R540 000) for sending misleading information via instant messages to clients. The information Gower provided was already in the public domain, yet he was accused of implying that he had obtained insider information. Swiss central bank loses billions The Swiss National Bank said it lost 21 billion Swiss Francs ($22 billion) in 2010 as the currency strengthened against the Dollar and the Euro, despite persistent interventions by the central bank of Switzerland to try and halt the Swiss Franc from rising in value.


February 2011


EXCHANGE TRADED FUNDS PERFORMANCE IN 2010 Mike Brown | Managing Director,


xchange traded funds are listed securities that provide investors with the ownership and performance of a basket of shares. A purchase of an ETF security enables the investor to benefit from a diversified portfolio of quality shares, which both enhances performance potential, but also reduces the investor’s volatility risk. In practice, ETFs track the main indices on the JSE, because the index component shares and their weightings are always known to the market, which enables the market to price the fair value and to trade ETFs, at all times. This technique of investing only in the index constituent shares is known as passive investment and, by delivering the average performance of the market (which is what an index measures) and doing this at low costs, passive investment products, such as ETFs, can realistically compete with actively managed investment products. In fact, actively managed products, which seek to outperform the benchmark index, are often at

a disadvantage to passive products as their higher costs and significantly increased risk often fail to compensate the investor, if they do not match the index performance. The attached survey performance table shows the best performing ETFs over three months to five years, indicating that such ETFs do tend to outperform the All Share Index, sometimes by significant amounts. The survey highlights the performance of many ETFs relative to the universal All Share benchmark. It indicates that a wide variety of ETFs, focussing on different sectors of the market, have provided better than average performance over different time periods. Accordingly, ETFs can not only deliver superior investment performance, but also at low costs, and with relatively low risk (risk is measured against the performance of the benchmark, ETFs are the benchmark), they also provide easy tradeability, transparency and guaranteed settlement, clearance, etc. as they are JSE-traded instruments.


The road ahead

memories of the dangers of staying on the market sidelines are fresh in the minds of investors. Value can still be found, though precise sector selection and astute stock-picking are increasingly important.

for investors in 2011


ith the start of a new decade, South African investors will be hoping to put the vagaries of the past few years behind them. However, with many economic concerns both unresolved and still relevant, there is still much to weigh on investors’ minds

According to Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI), the impact of the fiscal deficit of many First World economies; the unwinding of the US stimulus packages; the very sluggish recovery in the US labour market; and ongoing currency wars are all issues that are likely to impact investor sentiment and therefore the direction of share prices generally. He said that for South African investors, the trend in local equities remains crucial as it constitutes the bulk of the growth assets in their investment portfolios. “It is critical to understand the drivers of local equity performance. Many investors question the wisdom to remain invested in an asset class that many commentators brand as expensive.” “Since the market is currently expensive in terms of its own history, it is safe to say that it is likely to de-rate over the next three years. Based on this expected de-rating and simply applying the consensus earnings forecast twelve months out, the All Share is likely to record double digit returns over the next twelve months.” Van der Merwe added this expected out-performance over cash and local bonds is enough to justify an overweight position in this asset class despite the higher risk associated with equities.

“Our market is acutely sensitive to international inflows and outflows and a correction may well occur, but until then we believe most local investors will stay in the market, stay diversified and stay focused on the long term,” said Pheiffer.

Shrewd stock pickers will excel in emerging markets


he future direction of emerging economies continues to confound with debate over whether or when they will turn. Max King, strategist at Investec Asset Management, said that after massive fund in-flows in 2009, last year saw modest outperformance as a result of low valuations, with some exceptions.

The major markets are struggling, with China down and India the only BRIC country that is outperforming. “The best performances have come from south-east Asia, Chile and Colombia, while there have also been some outstanding performances from Sri Lanka, Ukraine and Mongolia, all of which have more than doubled. He said that while the performance of some emerging funds has been pedestrian, others have beaten their country, regional or global benchmarks by huge margins. “This trend is likely to continue, with emerging markets doing well but followers of the herd being trounced by careful stock-pickers, those prepared to be contrarian in their country selection and those committed to careful research rather than buying the obvious.”

Paul Stewart, managing director at Plexus Asset Management, is slightly less bullish, added that he expects equity volatility to increase from the low levels observed in 2010 and low single-digit positive real returns from equities but with some capital risk in the short run.

Emerging markets now account for 12.6 per cent of the MSCI Global Index; but despite this, King said few private or professional investors have weightings this high, which means there are likely to be buyers on any setback.

Stewart said equities at an overall index level, in almost all markets, are not cheap, as they have traded at above-average historical earnings multiples since the bottom of the credit crisis while the strong recovery in corporate earnings lifted prices, meaning valuations have also not improved perceptibly.

He noted that such a setback occurred in 2008 when emerging markets fell by 30 per cent relative to developed markets. “But, of course, most investors missed it and emerging markets made back the lost ground in 2009. Since 2001, emerging markets have more than trebled relative to developed markets and this shows no sign of reversing.”

“The 2010 run has left the market overbought after some strong momentum; not exactly compelling stuff if you are an equity investor. But that is not to say there aren’t some companies looking very well priced. Given very low cash yields and low to negative real cash yields, money will find its way into equities.”

King added that returns between sectors, countries and companies are likely to vary enormously so equity investors may want to consider seeking a broad spread via funds, mostly global or regional ones rather than single country ones.

Craig Pheiffer, general manager of investments at Absa Investments said the same global factors – and uncertainties – still apply. “But


“Investing in developed market stocks with high emerging market exposure has proved to be no substitute for the real thing and this is unlikely to change,” concluded King.

February 2011


Winning through a balanced approach Muitheri Wahome | Head of Technical Solutions at Investment Solutions.


xceptional stimulus by governments and buoyant emerging markets bolstered markets in 2010. Early on, investors adopted a cautious mindset, making defensive investments as they grappled with the global financial crisis and its aftermath. The big winners in 2010 were those who made bold asset allocation calls and correctly timed the rally in equity markets against a backdrop of conflicting economic data and wildly undulating responses from investment markets.

Thanks to the rebound in investment markets, local balanced funds, which invest in multiple asset classes, including equities, bonds, property and cash provided investors with strong inflation-beating returns. According to the Alexander Forbes Manager Watch SA Best Investment View survey of 18 balanced funds, Coronation was the top performing balanced fund in 2010, with a return of 22.4 per cent for the year – a stellar performance considering that equity markets were up 20.9 per cent. Investment Solutions’ flagship balanced portfolio, Performer, which had assets of R29.9 billion at the end of December, came sixth in the survey with a return of 19.5 per cent beating the average fund in the survey by 1.2 per cent. Absa Balanced was the top balanced fund over three years with a return of 12.7 per cent, and Stanlib brought up the rear with a return of 4.5 per cent. The range of returns between the top and bottom manager highlights the importance of manager selection in the overall investment strategy process. As a multi-manager, Investment Solutions offers packaged products where it appoints highly rated asset managers to manage the assets on its behalf. To ensure safe keeping, client assets are held by a custodian bank. The business also offers tailored products to match the specific needs of clients, where the client can take a more proactive approach in the selection and appointment of the relevant managers. Looking forward, market commentators are cautiously optimistic that the actions by governments globally will continue to support a slow recovery, but risks abound. Recent announcements regarding further relaxation of exchange controls as well as the release of the second draft amendment of Regulation 28 of the Pension Funds Act, which spells out prudential investment guidelines, widen the scope for diversification for asset allocation by funds. We expect to see pension funds and asset managers in the industry take advantage of this with the introduction of alternative asset classes in the near future. Pension fund trustees can look forward to engaging deliberations in the board room in the coming year.



gold set

for further gains


he price of gold is set to continue its rapid appreciation this year, despite posting a tenth consecutive year of gains last year – its longest winning streak in 90 years.

According to metals research consultancy GFMS, the gold price could soar to a new record high above $1 600 an ounce this year or in early 2012 on the back of possible sovereign debt defaults and low interest rates and metals. The precious yellow metal has been viewed as a safe haven for investors over the past few years particularly with the weakening of the US Dollar. “We have, obviously, safe-haven concerns regarding the valuation of the major currencies, and interest rates will likely remain low throughout this year,” said Philip Klapwijk, GFMS chairman, in an interview with Reuters. Klapwijk said the sovereign debt crisis that has originated in Europe could also spread to the United States, as the country has used loose monetary policy and massive budget deficits in order to stimulate the economic recovery.


eports that Goldman Sachs invested a massive $450 million into social networking phenomenon Facebook sent shockwaves through investment markets, with the investment putting a valuation of $50 billion on the company, more than aerospace giant Boeing.

The US investment house invested the whopping sum alongside Russian investment firm Digital Sky Technologies (which owns a stake in Naspers), is reported to have invested a further $50 million. The investment comes more than a decade after the last tech bubble burst in 2000, which sent valuations of once billion dollar companies spiralling downwards. Other tech firms have also been benefiting from investors desperate to cash in on the next Apple or Microsoft with Twitter Inc, the short messaging social networking service, raising $200 million at the end of 2010, valuing the group at about $3.7 billion.


Tech valuations signalling new bubble?

Though there have been some listed tech stars since then, including Google which listed in 2004 at $85 per share and is now standing at more than $600 a share (as of 17 January 2011), many of the investment stars currently emerging are raising much of their cash privately. If a new tech bubble is emerging then this is mainly going to affect those high net worth investors able to invest in the likes of Goldman’s round of funding. However, with Facebook and possibly other competitors expected to float in 2012, investors should be careful of rushing to invest when the opportunity does arise.

February 2011

February 2011




Clifford Sacks Renaissance Capital has announced Clifford Sacks as CEO for Africa as part of an expanded role for Sacks who joined the group in 2010. The company said he will be responsible for the day-to-day management of its pan-African strategy across all products and entities.

Ndabezinhle Mkhize

Renaissance Capital has also appointed Johan Snyman as a telecoms analyst in the Johannesburg office of Renaissance BJM. Snyman, rated as a top five analyst in the telecoms, technology and electronic sectors since 1994, joins the company from Nedgroup Securities.

STANLIB has beefed up its property team with the appointment of Ndabezinhle Mkhize, a new property fund manager. Mkhize has worked in the asset management industry for seven years, and for the last five years in the listed and unlisted property sector.

Debt remains the grim reaper for most South Africans


ew statistics released by Alexander Forbes have highlighted the shocking state of the nation’s savings and spending habits with most people only managing to pay off their debt each month.

Ryan Knipe, head of advisory services, Alexander Forbes Retail Holdings (Pty) Ltd, said eight years ago household debt as a percentage of disposable income was just 50 per cent. This has now soared to stand closer to 80 per cent. He added that if South Africans managed debt more effectively and started planning for retirement at a younger age they could easily afford to retire comfortably. “This means that each month the average salaryearning South African will spend nearly their whole pay packet paying off debt, leaving nothing for investment or retirement planning.”


February 2011

“Right now wealth is perceived as being seen to be spending on depreciating assets that enhance the image of a successful lifestyle, rather than spending on the savings and investments that break the debt cycle and build real wealth,” explained Knipe. He gave the example that if a 25-year old started putting just R500 a month (assuming an annual average return of 10 per cent, subject to inflation increase) into an investment-based product, by age 65 this would equate to a retirement lump sum in excess of R3 million – if invested in a retirement product such as a retirement annuity. Leaving this process to your late 30s or early 40s as most South African’s do now, “puts you at a great disadvantage as you have forfeited the multiplier effect of time and will need to contribute a larger portion of your income,” warned Knipe.

Absa opens academy for advisers Absa has announced the launch of the Absa Adviser Academy in order to train and develop high calibre financial advisers to help address the shortage of skilled financial advisers in the country. “There is a general shortage of skilled advisers in the country and the current adviser force is ageing. The academy is a strategic initiative that will enable us to close the skills gap and to serve our clients in the best way possible,” said chief executive officer of Absa Financial Services, Willie Lategan. The launch of the academy, which is based in Blackheath, Johannesburg, will be run by Absa Insurance and Financial Advisers (AIFA). “As the leading financial advisory business, we have taken a leading position in the attraction and retention of the necessary skills and we hope that this academy will help us launch the careers of future advisers,” said Peter Todd, managing executive at AIFA. Todd added that trainee advisers, which will include individuals with backgrounds in law, commerce and marketing, will receive a competitive remuneration package. The academy will also provide each trainee adviser with a tailor-made personal development and training path as well as a range of other opportunities within Absa.

PRODUCTS Element launches new Islamic fund Element Investment Managers has announced a new product offering to cater for the needs of its Muslim clients with the launch of the new Element Islamic Balanced Fund. The fund will hold a much smaller allocation to equities and a larger allocation to Islamic cash investments, when compared to an equityonly unit trust. Element said the fund is likely to experience lower

long-term returns due to a lower equity exposure, but also offers lower levels of risk. Element pioneered Islamic cash investment products in South Africa, having launched its first product for individual investors and within portfolios in 2005.

nedbank moves

back into life insurance


anking group Nedbank has re-entered the life insurance market as its life assurance division Nedgroup Life launched a new range of integrated products dubbed 360Life.

Nedgroup Life is set to provide a range of offerings, including death, disability, critical illness and income protection cover. An innovative wellness programme has also been launched, known as Become, which enables policyholders to earn premium discounts if they pursue certain activities such as running, cycling and swimming. Policyholders can earn points by completing self-assessments on areas such as fitness, nutrition, emotional balance, mental clarity, family, finances and environment. “We believe that we have created something truly different to redefine the life insurance industry in this country,” said Lance Blumeris, chief operating officer at Nedgroup Life. “Our aim is to get the right products to the right clients with the right prices.”

February 2011


Snippets | THE WORLD

Hungary issues pension ultimatum Eastern European state Hungary has announced an effective nationalisation of the country’s pension fund system by issuing citizens with an ultimatum: move your private pension fund assets to the state or lose your state pension. The move is part of an effort to plug holes in the country’s finances. UK offers choice on tax-free cash Britain’s treasury has issued a consultation paper that raises the idea of whether policyholders should be allowed to withdraw up to 25 per cent of the value of their pension funds as tax-free cash earlier than the current minimum age limit of 55. This is despite a recent government survey that revealed 70 per cent of people thought not being able to get their hands on the cash made pensions a good way to save for retirement.

Dutch to tax ladies of the night The Dutch Government has announced that it plans to send tax inspectors to pay a business-only visit to prostitutes working in the red light district. While prostitution is legal in Holland, authorities are only now looking to start taxing sex workers. Greece paralysed as strikes bring country to a standstill A massive strike in Greece – the seventh in 2010 – saw hundreds of thousands walking out of their jobs, bringing the country to a standstill and disrupting air, rail and maritime services, as people continued to protest against debt-slashing measures.

French President sees rating slump French President Nicolas Sarkozy’s rating fell close to a record low of just 34 per cent in January 2011, down from 36 per cent the month before following his controversial decision to raise the retirement age for French workers last year. He is yet to confirm if he will run for re-election in 2012.

Bolivian bucks trend to lower retirement age Contrary to European countries seeking to increase their retirement ages, South American state Bolivia announced plans to reduce the age at which its citizens become eligible for full pensions to 58. The previous retirement age was 60 for women and 65 for men. Australia flooding costs country billions Devastating floods that hit Australia in January saw at least 25 people confirmed dead and many others missing. Stephen Walters, chief economist for Australia at JPMorgan Chase, said the total damages could cost the nation A$13 billion, equivalent to one per cent of the country’s GDP.


Social networking site worth more than Boeing Social networking phenomenon Facebook is now worth more than Boeing after it was reported that Goldman Sachs, the respected US investment house, announced it was investing $500 million in the company, putting a valuation on the company at around $50 billion. Critics have voiced concern over whether this heralds the start of another dotcom bubble. Hong Kong rated the world’s freest economy Hong Kong has been rated the world’s freest economy for the 17th consecutive year, according to the annual ranking published by Washingtonbased Heritage Foundation. Close neighbour China ranks just 135th out of the 183 economies assessed. The US fell to 9 from 8 in 2010.

February 2011

Sri Lanka looks to tax to boost economy Sri Lanka said it aims to implement major tax reforms to boost its economy as it recovers from a civil war which ended in 2009. The announcement came as president and finance minister Mahinda Rajapaksa introduced the country’s annual budget and predicted the country’s deficit would fall in 2011.


The most expensive luxury yachts

in the world

Yachts are often seen as status symbols by the rich and famous, yet few can afford to join the super yacht club with prices starting at hundreds of millions. Here we look at the five most expensive yachts in the world, with one, astonishingly, being valued at more than a billion Dollars.

Octopus: $200 million Owned by Microsoft co-founder Paul Allen, Octopus is the world’s eleventh largest yacht. The 414-foot mega yacht was first launched in 2003 and sports two helicopters, a submarine with room for ten people and seven boats. For those who’d like to see the ocean floor, the yacht even includes a remote controlled vehicle to do so.

Eclipse – $1.2 billion Russian billionaire and Chelsea football club owner Roman Abramovich’s super-yacht is a 560-foot monster that reportedly cost a whopping $1.2 billion. Eclipse has two helicopter pads, 24 guest cabins, two swimming pools, several hot tubs and a disco hall. It also comes equipped with three launch boats, and a mini-submarine that is capable of submerging to 50 metres. Approximately 70 crew members are needed to operate the yacht. The yacht is also reportedly equipped with an anti-paparazzi shield that uses laser bursts to foil digital paparazzi photography when activated.

Rising Sun – $200 million Co-owned by Oracle’s Larry Ellison and media mogul David Geffen, Rising Sun is 453-feet and five stories of ocean-going luxury. It was built with one goal in mind—to exceed the size of Paul Allen’s Octopus, featured above. This pricey yacht has 8 000 feet of living space with onyx countertops and Jacuzzi baths, a spa and sauna, a gym and even a private movie theatre with an enormous plasma screen. Lady Moura: $210 million This 344-foot mega yacht is owned by Saudi Arabian businessman Nasser Al-Rashid, who has enjoyed her company for the past two decades. The yacht features a swimming pool with retractable roof, a 75-foot dining table crafted by Viscount Linley and a helicopter. Lady Moura’s most remarkable feature, however, is a beach resort that slides out from one side of the boat. The mini resort not only boasts sand and deck chairs, but includes palm trees for a truly authentic island experience. Dubai: $350 million This costly yacht has gone by three names since its conception. First it was Platinum 525, then Golden Star and, most recently, Dubai. The Platinum 525 was commissioned by Prince Jefri Bolkiah of Brunei in 1996, but a lack of funds caused the project to be abandoned less than two years later. In 2001, Sheikh Mohammed bin Rashid Al Maktoum, then Crown Prince and now ruler of Dubai, took over the project and renamed it the Golden Star and then Dubai. Dubai is as expansive as it is expensive. The 525-foot yacht features an owner’s suite, five VIP suites and a number of guest bedrooms. The bridge features the captain’s quarters, an office and a lounge. The foyer and atrium connects each deck while lighting them from above via skylight. The luxury yacht is powered by four diesel engines with over 9 000 horsepower altogether.

February 2011





nyone seeking a beautiful getaway destination would be hard pushed not to enjoy the landscape of Stellenbosch. Asara Wine Estate and Hotel may be one of the many hotels on offer in the region to lay claim to the environment, but as part of the exclusive and renowned Relais & Châteaux collection, it also offers luxurious five-star accommodation. The views, as one would expect in the wine region of South Africa, are breathtaking. Backed by mountains with a sweeping view of its own vines and the valley that lies below, Asara offers a tranquil environment in which to unwind whilst still being just a stone’s throw from the shops and restaurants of Stellenbosch. The hotel itself has 36 bedrooms, a grand ballroom, spa, delicatessen and tasting room, which should be enough to keep most guests occupied throughout their stay. In addition, Sansibar, the hotel’s cigar and whisky lounge, offers an old-fashioned feel with wooden finishes,

leather couches and an extensive menu of whiskies, imported cognacs and hand-rolled cigars. Raphael’s is the main restaurant at Asara and provides a taste of European-style cuisine as well as the full range of Asara’s wines, all of which can be paired with the courses. The décor is very welcoming, particularly with views of the dam and mountains beyond. I had an oyster starter followed by a leaf salad with deep fried haloumi and raspberry vinaigrette – all of which were beautifully presented, delicious, refreshing and light. Checking out the next morning, I was presented with a complimentary wine-tasting voucher, which I will make use of when next in the Cape. Wine tastings are conducted in The Wine Bar, which also provides a selection of cured meats, local cheeses and tapas for guests who like to keep a clear head whilst tasting the selection. Asara Wine Estate and Hotel: Tel +27 21 888 8000.

Audi R8 5.2 FSI Spyder


aking a great car and adding to its exotic status by removing the roof is guaranteed to garner plenty of attention – something the Audi R8 Spyder achieved when it was first featured on the set of Iron Man 2. In a way, the Iron Man (Tony Stark) and the R8 Spyder are a perfect match. While superhero Mr Stark flies around in a metal suit, so too does the R8. Built on Audi Space Frame (ASF) technology, coupled with a powerful V10 engine that will see you literally flying across the country’s landscape, the R8 Spyder makes you feel like a superhero. Well not quite, but at times you do feel like you have superior driving abilities. Although true to the original R8 V10 Coupé’s design, the Spyder does not have side blades behind the doors and instead features a pair of silver-coloured air vents over the engine cover that look more like shoulder blades. In front, the Spyder is distinguished by its brushed aluminium framed windscreen, but otherwise it’s pure R8, with gloss black accents front and rear, trademark LED day-time running lights in front, cannon-sized oval exhaust-pipes and 19-inch Y-spoke design alloy wheels. The electro-hydraulic fabric roof opens and closes in 19 seconds at speeds up to 50 km/h.

an angry growl on idle, but begins to roar with the enthusiasm of a volcanic eruption as the revs climb and the tacho needle snaps around its axis. It’s a sound track that when played against the backdrop of a mountain pass stirs the soul. The R8 Spyder is in its element on smooth winding roads and rewards with magnificent driving dynamics. The ASF chassis and quattro permanent all-wheel drive combine to impart bucket loads of confidence and ensure all the thrills without the spills. Priced from R2 126 420 for the 6-speed manual, the R8 V10 Spyder is a superbly competent supercar with the sex appeal and soundtrack to boot.

Sidle into the driver’s seat and you’ll find a welcoming interior. Leather clad, electronically adjustable seats hold driver and passenger comfortably and snugly in place. The switchgear and interior fit and finish are second to none, offering a premium sense of solidity. Behind the seats lies the 5.2-litre, 40-valve, V10 engine. Power remains unchanged from that of the Coupé, with 386 kW and torque of 530 N.m – enough to rocket the car from 0–100 km/h in 4.1 seconds and on to a 313 km/h top speed. The V10 resonates with


February 2011

February 2011



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

“In order to have more land available for reform and restitution, the government is looking at three forms of land holding. These are State land, which can only be leasehold; limited freehold on private land; and land leases for foreigners, though ownership will revert to South Africans.” President Jacob Zuma, speaking at the 99th anniversary of the founding of the ANC, raising the spectre of banning foreign property ownership despite a probe in 2006 finding that only five per cent of land was foreign-owned.

“We are satisfied that SA has weathered the financial crisis well and I think this has been due primarily to the regulatory oversight and support that has been quite protective.” Jose Vinals, financial counselor at the International Monetary Fund (IMF), who also warned SA against complacency that could expose its financial sector to damage from other economies.

“Acts of monstrous criminality stand on their own. Especially within hours of a tragedy, journalists and pundits should not manufacture a blood libel that serves only to incite the hatred and violence that they purport to condemn.” Former US presidential candidate Sarah Palin, responding to criticism that her political rhetoric may have played a part in the fatal shootings in Tucson, Arizona.

“Many excellent financial services providers live life to the full in connection with their business. Reducing them to lettuce leaves and soda water is not going to make the consumer any better off.” Patrick Bracher, director at Deneys Reitz, on the new rules limiting payments by financial services providers to other parties such as advisers.

“If we don’t pay enough attention, it will be like we ended one-and-a-half centuries of unequal trade, and we will enter another era of unequal trade, this time spearheaded by emerging countries.” Dominique Strauss-Kahn, International Monetary Fund, on the need to guard against a new form of colonialism as emerging powers increase their influence in Africa.

“The reality is that Spain is a huge bailout. Spain is bigger than the bailout fund, so we would get into an enormous situation if they have to bailout Spain and Portugal.” Stephen Matlin, managing director of Matlin Associates, an investment banking firm commenting on fears over further bailouts.

“There was a period of remorse and apology for banks – that period needs to be over. We need banks to be able to take risk, working with the private sector in the UK.” Bob Diamond, chief executive of Barclays, who told British MPs that large bonuses earned by some in the industry are necessary.

“It’s the single biggest thing that will happen in your lifetime. China’s gain is at the expense of the US and of the European Union. We are living in a profound global shift.” Niall Ferguson, Harvard University academic, who says the current rise of emerging nations is the biggest redistribution of wealth in 500 years.

“The market has got into its head that it is going to pick off one country at a time” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin after Ireland won approval for an €85 billion aid package.


“Investors are best equipped by reminding themselves that emotion is the greatest enemy of investing, with emotion presenting itself most dramatically in the forms of fear and greed. These evils will not go away during 2011.” Adrian Saville, CIO of Cannon Asset Managers.

February 2011

INVESTSA February 2011  
INVESTSA February 2011  

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