Page 1


Contents

CONTENTS

06 08

GET-RICH-QUICK SChEMES For a smooth ride, get to understand the engine driver

10

THE MULTI CHOICE FOR ADVISERS Are the additional fees worth it for the client?

12

SPECIAL FOCUS: Multi-managers

16

Profile Sonja Saunderson, CIO Advantage Asset Managers

18

HEAD TO HEAD Cannon Asset Managers / Investment Solutions

22

getting in on the activism But do institutional shareholders do enough?

26

FUND PROFILES

30

SECTOR REPORT: Mining

SUBSCRIPTIONS

ILLIQUID, UNREGULATED AND RISKy The dangers of property syndications

12 months for only R450

06 Alternatively send this completed form together with proof of payment to: COSA Communications (Pty) Ltd Subscription Department PO Box 60320, Table View, 7439 or fax to 021 555 3569.

08

For any queries, contact Bonnie on 0861 555 267 or e-mail subscriptions@comms.co.za. VAT and postage included addresses only

|

standard postage FREE to RSA

company: VAT no: title: initial: surname:

22

postal address: code: tel: fax: e-mail: signature:

gift subscription

INVESTSA

yes

no

3


Letter from the editor

letter from the

EDITORIAL Editor: Shaun Harris investsa@comms.co.za

editor

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 www.comms.co.za Magazine subscriptions Bonnie den Otter | bonnie@comms.co.za Advertising & sales Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Miles Donohoe | miles@comms.co.za

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

Copyright COSA Communications Pty (Ltd) 2011, All rights reserved.

W

e’re heading for a stock market crash. Well, maybe crash is too strong a word; but a sharp correction on the JSE. My personal financial adviser, whose more lucrative daytime job is being a Sangoma, tells me it’s going to happen in November. He can’t pinpoint the day but says it will probably be the second half of November. Financial advisers who believe this should perhaps just keep a wary eye on the market, and how their clients’ investment portfolios are positioned. With what looks like another dot.com bubble building up overseas, it’s probably a good time to be cautious.

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.

Caution is the name of the game in our feature articles by Miles Donohoe and Maya Fisher-French. Miles looks at property syndications; Maya takes a peek at those infamous get rich quick schemes; and I question shareholder activism by institutional shareholders and debate whether it’s worth putting your client into a higher cost multimanagement investment strategy. The topic is explored further in our Head-to-Head section, by Andrew Newell of Cannon Asset Managers and Michele Ongley from Investment Solutions.

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

Hope you all made it to our event, sponsored by Investment Solutions, on 22 June. The topic

any information contained in this publication.

4

INVESTSA

was Challenging the Status Quo. It needs to be challenged. A new feature this month, which will become a permanent part of the magazine, is an investment look at a sector. First is mining and resources, a sector where clients are no doubt keen to invest in. Our profile is on Sonja Saunderson, CIO at Advantage Asset Managers. She takes an interesting look at the sovereign debt crises in Europe and challenges facing local asset managers. I’m sure there’s a lot in this issue of INVESTSA that you, the adviser, can use for the benefit of your clients. But as always, please let us know if there are investment issues you feel we should be looking at. My end of year holiday is already planned. My financial adviser has invited me to his remote rural farm in November. He says it’s the best place to weather the market correction. As always, he’s probably right. Hope you find the contents useful and all the best.


1 5 0 2 / L I FT/B P F

MEET THE FUTURE YOU. HE SAYS, “SMART MOvE FOR INvESTING YOUR MONEY WITH CORONATION.�

Top Top Top Top

Performing Performing Performing Performing

Equity Fund. Balanced Fund. Retirement Income Fund. Immediate Income Fund.

Over 3 years, 5 years and since launch.

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 31 May 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.


Maya Fisher French

get-richquick schemes S

ome financial advisers may have received an e-mail recently about a ‘risk-free’ investment programme called Sharelord that can provide a monthly income of between three and nine per cent. Advisers are encouraged to tell their clients about how they can make money out of the market irrespective of market direction. This programme will reveal how you too can become a market maker, rather than just a speculator playing a game of chance. While many of you will already think: hold on, there is something dodgy about an investment that purports to be risk-free and offer a return ten times above cash, apparently the obvious slipped the mind of the registered financial adviser who sent out the e-mail and used, in the very first line, her accreditation to give the investment credibility. She was quickly censored by the financial institution she represents and an apology followed. Perhaps even more concerning was the fact that the FSB felt that the adviser had not contravened any FAIS regulations as she had merely informed people about the investment and was not necessarily selling the product.

Further investigation by INVESTSA revealed that a family member of the adviser has the license to sell this programme in South Africa. Even if an adviser does not make money directly from an investment, there is an inherent fiduciary responsibility to ensure that they fully understand any investment they recommend to clients. It is particularly worrying when financial advisers recommend these get-rich-quick schemes because clients assume that their adviser has a better understanding of these investments than themselves and they lend it credibility. If you are going to put your name behind a tested investment scheme, best you do your homework first. You would also think that business channels like CNBC Africa would have done its homework before interviewing the man behind the scheme, Nik Halik. Judging by the questions he was asked, no homework was done at all and the model was not even vaguely challenged. Unfortunately, this gives further credibility without proper investigation.

It seems the FSB has splitting hairs down to a fine art and it is a reminder that no matter what legislation is introduced; there will always be ways around it.

6

INVESTSA

If it walks like a duck, quacks like a duck, it is a duck – so why do people still want to invest in getquick-rich schemes? by Maya Fisher-French

Get-rich-quick schemes all have one thing in common; they tap into our desire to make big money quickly. We live in a society that demands instant gratification and which does not equate hard work with equal reward – it is this greed and need for instant gratification that led to the biggest banking crisis in history. While we like to point figures at the bankers who sold us the idea of high rewards with no risk, they were merely pandering to the demands of their customers and they fell for their own marketing hype. And remember even the brightest minds did not see through that getrich-quick scheme.


“One would have hoped that we had learned our lessons in 2008 – but alas people still believe that there is a secret investment strategy that will make us millionaires overnight.” One would have hoped that we had learned our lessons in 2008 – but alas people still believe that there is a secret investment strategy that will make us millionaires overnight. The reality is that people who have made significant amounts of money have either done so over time or have taken big risks. We only hear about the success stories, not the thousands of people who lose money in high risk adventures.

If our shares have been exercised at the $10 guaranteed selling price, we receive $10 per share and our return for the month skyrockets to 21 per cent (rental of $0,65 + capital gain of $1,20 = $1,85 return on $8,80 investment per share.) If the shares are not exercised/bought at the end of the month, we simply rent them out the next month.

Next time your client asks you how to become a millionaire, relate the anecdote about a man with an ordinary job who was a millionaire by the age of 30. From his very first pay cheque at the age of 23, he had saved a significant portion of his money and invested it in unit trusts. He lived with his parents for as long as possible, he did not buy a fancy car to go with his new job and he never lost money in get-rich-quick schemes.

“Get-rich-quick schemes all

Wealth is determined not by how much you earn, but by how much you spend. How Sharelord works As with many of these types of investments, there is usually some truth behind it, something that kind of makes sense to people who are not dealing in these markets on a daily basis. Sharelord is based on the premise that you can ‘rent’ out your shares. The idea is that you underwrite options and charge a fee to the speculator for the option to buy the shares from you at a set price. This is how the marketing goes: Let’s assume you bought shares that were valued at $20 each. If you received six per cent rental for the month per share, that would equate to $1,20 in rental premium per share. Now if we calculated the real cost of the share incorporating the rental premium, you would now have the share wholesale rate of $18,80. This means the real purchase cost of acquiring the share was $18,80, meaning you have an automatic downside buffer protecting you if the share was to drop by $1,20 in price. We give the tenant, who is the speculator, the right but not the obligation to purchase our shares. For that right, the option buyer, who is the tenant of our shares, is allocated a selling price for our shares. We get to set the guaranteed selling price of our shares, if the tenant wishes to exercise their right to buy our shares. In the event of being exercised, we simply surrender our shares over. Assuming we purchase the shares at $8,80 and rent them out at $10 during the month, while receiving $0,65 in premium, this would equate to a seven per cent rental premium.

have one thing in common; they tap into our desire to make big money quickly. We live in a society that demands instant gratification and which does not equate hard work with equal reward – it is this greed and need for instant gratification that led to the biggest banking crisis in history.” All this sort of makes sense. We know about options and that an entire industry revolves around the underwriting of options. This also involves script lending, something asset managers and exchange traded funds do to generate additional income – so why not the individual? Matthew Twomey, managing director of WorldSpreads SA said share borrowing or lending is not unusual in the spread trading environment as its possible for clients to go short on a particular stock. Twomey added that the fundamental flaw, however, is that if the shares rise in value the Sharelord’s upside is limited at the exercise price and if the share price falls his rental premium is reduced in the following month (as it is a percentage of the share price). Hence, by definition the optimal situation for the Sharelord is that the share price only moves within a limited range which is clearly not a feasible situation. While the marketing material states that you can make money no matter the direction of the market, what it neglects to mention is that it only works for a very small trading range. Twomey said in essence it’s really just a way to write options on your own shares and while it all looks very simple and glib, some serious questions need to be asked:

INVESTSA

• What are the admin costs associated with the borrowing transaction? (The promoter of the product in South Africa says that the scheme is run out of the USA because brokerage costs are far lower.) • Which party is liable for those costs? • Which party is entitled to any dividends declared during the rental period? • Is a buyer (potential sharelord) of the shares, which are recommended by Sharelord, guaranteed to have a tenant every month? You may find that during a trial period you receive the lion’s share but this dwindles once you have fully signed up • The system costs AUD$6 000 (R45 000), so what should a buyer’s portfolio be worth in order to earn that cost back and to then turn a profit and how long would that typically take to do? • Does Sharelord offer any guarantees that the buyer will be given sufficient opportunities to do so? • If the system is as reliable as is indicated rather than charging R45 000 up front, Sharelord could give it away and take a percentage of monthly profits? A key question is whether the figures mentioned in the marketing material are at all realistic. You may notice that in the marketing material it talks about “if you received six per cent”. To give you an idea, the fee for script lending in South Africa is 1% per annum. Simon Brown, head of online investment university JustOneLap (www.justonelap.com) said you have to hold a large number of shares to make this profitable hence script lenders tend to be large fund managers or exchange traded funds. Brown added even for fund managers this generates very modest returns. Just think about it logically, if a fund manager could make the three to nine per cent return a month as suggested by Sharelord, they would deliver a 36 to 108 per cent return a year. If they could why wouldn’t they? The comments from investor chat groups vary, some say they have lost a lot of money, and others claim success, although this seems to be in the short term. One investor said he spent around $5 000 on courses and lost $20 000 in the process. But one comment says it all: “Save your time and money, buy a couple of good books and put the money you would have wasted on the course into your trading account.” It may be that Sharelord has found the one quick way to make fast buck, but if you think about it, how feasible does it really sound?

7


Miles Donohoe

ILLIQUID, Why property syndications are just as dangerous for advisers and clients

Property syndications are sold, not bought. That seems to be the consensus view on an investment vehicle that has come in for some serious criticism recently; and for good reason. Billions of Rands have been invested – and billions have been lost – over the last few years. Property syndication really took off in the 1980s in South Africa but a series of scandals, which culminated with the collapse of Masterbond, left

8

and risky

thousands of investors out of pocket. However, like most investment scandals, the experience of past investors was soon forgotten and syndications made a resurgence in the last 10 years on the back of booming property prices. “In recent years, the property syndication industry has received a significant amount of negative publicity and for a number of very good reasons, said Ian Anderson, chief investment officer at

INVESTSA

By Miles Donohoe

Grindrod Asset Management, the property fund management company. “Property syndications are generally unregulated investment vehicles, where the underlying ‘portfolio’ comprises a single asset. In order to attract investors, financial intermediaries are paid above-average commissions to direct client funds to the property syndication,” said Anderson.


“If a client invests in property syndication on a recommendation from their adviser, it is essential that the risks are properly explained. If this is not done, the client has recourse to complain to the FAIS Ombud to get the money back that has been lost.” This certainly seems to be the case with most property syndications. Many of the advisers who have ‘sold’ these investments to clients do so with a very healthy commission of between six and 10 per cent of the investment fee. So, if your client invests R1 million of their retirement savings into a property syndication scheme, you bank between R60 000 – R100 000 on that recommendation. Warren Ingram, director of Galileo Capital, said that investors are often ‘guaranteed’ interest of 10 or 12 per cent a year with a promise that the whole investment is underpinned by a great property that will be sold at a massive profit. “Honest advisers question how it is possible that they could be paid a commission of up to 11 per cent upfront, while their clients would get 10 per cent a year guaranteed when the best listed property companies could only deliver half that return.” It’s easy to see why these schemes attracted so much interest. Commonly those who tend to find themselves exposed to these kinds of investments are older clients, often retirees who have not saved enough for their retirement and are searching for high returns to make up for years of not saving adequately. There are many recent examples of property syndication schemes that have gone wrong. Sharemax, PIC Syndications and Realcor, are just three that are currently battling to stay afloat in the face of lawsuits, a lack of capital and angry investors. Dawie Roodt, executive director of Efficient Group and spokesman for the new Sharemax board, who was one of three new directors brought in last November after the resignation of members of the former board, said the layers of costs involved in property syndications puts them on the back foot from the start. “Investors who participate in these schemes are already operating in a deficit of six per cent just on the basis of the adviser commission. “In principle, there is nothing wrong with property syndications. They allow individuals to participate in large syndications that they would otherwise not be able to access,” said Roodt. “However, the one disadvantage for investors is that property syndication, by its nature, is a fairly illiquid investment so it is difficult for investors to exit the investment easily. It is also difficult to determine the value of the investment on a day-to-day basis.” In the case of Sharemax, Roodt said that there was a highly complicated structure with a public company collecting money and lending this to a private company, which then acquired a property, all of which now has to be untangled. This has been further complicated by a number

of claims and counter-claims between the syndicated companies. “That is why we are proposing a scheme of arrangement which will enable Sharemax to get rid of all the claims and obligations.” Since speaking to INVESTSA, Roodt has said the new board of Sharemax is looking at alternatives to its planned scheme of arrangement that may prove more attractive to the investors.

“Technically property syndications are not regulated by the FSB but fall under the ambit of the registrar of companies. The dilemma and danger for financial advisers is that the syndications are promoted by offering units in the investment which is both misleading and incorrectly marketed.” The issue of the structure is one of the biggest problems with these investments. One source told INVESTSA that there have been instances where the inflow of money from new investors into these schemes has been used to pay a return to the original investors before the company generated an income. In effect, this makes it a Ponzi scheme, as investors are paid back not from profit earned, but from capital paid in by subsequent investors. If property prices continue to go up, however, then everyone seems to be winning; but when prices halt or even fall, the scheme begins to unravel. Ingram said he started questioning the business model of property syndications back in 2005 as he could not understand how such investments were paying a guaranteed income far higher than their listed counterparts. “I could not understand how advisers could be paid such massive upfront fees on property developments which are, by definition, only bare pieces of land. I am not sure whether these syndications can be classified as scams but I certainly feel that no ethical adviser could recommend them. For example, you have to wonder how a piece of land could be bought by a group of developers for R100 million and then immediately sold on to a syndication for R300 million.” Marius Fenwick, chief operating officer at Mazars Financial Services, said property syndications are not regulated by the FSB and therefore should not

INVESTSA

be promoted by financial advisers. “Technically property syndications are not regulated by the FSB but fall under the ambit of the registrar of companies. The dilemma and danger for financial advisers is that the syndications are promoted by offering units in the investment which is both misleading and incorrectly marketed.” However, Fenwick added that the FSB has taken a very stern view on promoting property syndicated investments. “Advising clients to invest in property syndication is seen as financial advice which falls squarely under the ambit of the FSB, irrespective of the fact that property syndications fall under the Companies Act and not the FSB. Therefore, advisers will be held accountable if such syndication fails.” There is a key point here for financial advisers. If a client invests in property syndication on a recommendation from their adviser, it is essential that the risks are properly explained. If this is not done, the client has recourse to complain to the FAIS Ombud to get the money back that has been lost. An important distinction for advisers to understand is that if the client loses the money they invested, they can claim back the entire amount, up to R800 000. So an adviser may be forced to pay back not just their own commission, but also the full amount that has been lost. Justus van Pletzen, COO of the Financial Intermediaries Association of Southern Africa (FIA), said it is vital that intermediaries follow the correct protocol and do not give the client any reason to find blame. “The intermediary should always make sure that there is a record of advice. The value of record keeping cannot be emphasised enough and this needs to include a risk analysis as well as the pros and cons of the solution.” Of course, someone does need to be held accountable for the collapse of these schemes but Ingram said that this cannot be laid squarely on the shoulders of the adviser. “Sadly, the advisers will probably be the easiest targets as they don’t have the deep pockets to fight these claims in court and will therefore suffer the most. The promoters and founders of these schemes are the parties that should be targeted by the press, regulators and investors.” Whether the fault is the adviser’s for banging clients into risky investments without properly explaining the risks; the client’s for not saving for retirement early enough; or the founders of syndication schemes for profiting from desperate consumers willing to gamble with their savings; it is clear that property syndications are not for the faint hearted.

9


SHAUN HARRIS

The multi choice for advisers client? Are the additional fees worth it for the

By Shaun Harris

10

INVESTSA


“The tough call for advisers is whether individual clients, even those at the top of the HNW scale, should be in a multi-managed business. It’s an easy cop-out for lazy advisers but a real challenge for committed advisers.”

M

ulti-management, like so many investment strategies, became increasingly popular in the bull market running up to the 2008 financial crisis. Investors and financial advisers liked the idea. Let a professional management company select the best fund managers for your investment portfolio, and make the allimportant asset allocation decision. It seemed a recipe for above average returns over the longer term, and indeed in many cases that’s what it proved to be. Multi-management is still popular today. But the strategy is coming under increasing investor focus as the market becomes more volatile. Investors pay for multi-management. That extra layer of fees above what the client is paying for the underlying fund managers comes off the final total return. In the current market, the multi-management fees can make a big difference to the total return. The tough call for advisers is whether individual clients, even those at the top of the HNW scale, should be in a multi-managed business. It’s an easy cop-out for lazy advisers but a real challenge for committed advisers. The real test is whether the client’s investment profile, which the adviser should know well, is suited to multi-management. In many cases a thorough appraisal of the client’s investment needs will find it’s not. It’s different for institutional investors. Smaller pension funds say that multi-management is a preferred investment strategy, especially with the multi-manager making the asset allocation call. And it makes sense. Trustees don’t want all the investments going through a few single managers. Advantage Asset Managers regards itself, seemingly with some justification, as the pioneers and architects of the specialist multi-management methodology in South Africa. What’s important about the Advantage approach is that it stays with the investor throughout the multi-management process. Setting a client up with a multimanager would at least require vigorous due diligence of the underlying managers. But Advantage says it goes beyond this traditional approach. “We go beyond traditional asset management by providing the ongoing implementation of this solution in the most cost-effective and transparent process possible. As such, we provide a solution that is designed to add value at each level in the investment process.”

Of course that could just be good PR-talk, but the number of institutional clients using the Advantage multi-management approach suggests it is an effective investment strategy.

different managers have different skills, no single manager can hope to be the best in all areas through all market cycles, and there are benefits in diversifying.

Symmetry Multi-Managers acknowledges that the extra level of fees for multi-management will impact on the return the client receives. “Multimanagers can, however, reduce the extra layer of costs by negotiating lower bulk fees with the underlying managers,” it said.

What’s very important for the adviser to establish is whether the chosen multi-manager is truly independent in making multi-management investment decisions. Multi-managers are often part of a larger financial services group, often the life insurance companies. The adviser must make sure that underlying investment managers are chosen on merit and not because they are one of the funds in the broader group stable.

A group as large as Symmetry should be able to do that to the benefit of clients. It says that to justify extra fees, a multi-manager has to reduce the risk, defined as volatility, of an investment portfolio and deliver consistent long-term returns. If a multi-manager actually achieves this, it’s worth the extra fees.

“For the additional fees of multi-management an investment professional can do the important due diligence on the fund managers. And they should monitor the ongoing performance of the chosen asset managers. The adviser needs to make sure they are doing this.”

But beyond this why use a multi-manager? “The reason why a multi-manager company chooses different fund managers is because of their skill in a particular investment type,” said Sanlam Multi-Management International. “Multi-managers therefore aim to pick the best funds by investing clients’ money with those investment houses most likely to achieve investment goals, thereby taking the fund-picking dilemma out of the clients’ hands.” This is a dilemma advisers face. It’s probably not too difficult to choose a few single manager asset managers for a client with a relatively simple investment profile and investment plan. But a more complex plan might warrant considering a multi-manager, despite the additional fees. Sanlam Multi-Management International goes on to say that a good multi-manager will try to lower risk by choosing managers whose styles and investment processes complement each other. This is because

INVESTSA

A refined version of multi-management is the best-of-breed approach. One of the major group’s to use this strategy is Nedgroup Investments. “Our innovative best-of-breed investment management strategy sees us partner with select fund managers – individuals and teams who we believe will deliver exceptional investment performance over the long term.” So far Nedgroup Investments has been teaming with exceptional fund managers, like Tim Allsop who runs the Rainmaker Fund. Surely though, a good adviser should be able to blend the asset managers that a client requires according to their investment plan? Well, they should, but this is not necessarily a skill all advisers have. For the additional fees of multi-management an investment professional can do the important due diligence on the fund managers. And they should monitor the ongoing performance of the chosen asset managers. The adviser needs to make sure they are doing this. Then there are also compliance issues under the FAIS Act. This may make it easier for advisers to go the multi-manager route, as long as the additional fees can be justified to clients. But why not just choose a few single investment fund managers? “The advantage to the investor, if done correctly, is a reduced exposure to the performance of a single asset manager. Doing so adds more diversification depth to a portfolio,” added Symmetry. Then again, in the best interests of the client the adviser could choose to avoid investment managers completely, and construct a portfolio for the client out of index tracker funds or exchange traded funds. This would be a cost-effective solution, but only if it matches the clients’ long-term investment plan. It’s the adviser who constructs the investment plan and a call he or she must make to get the best value for the client.

11


MULTI-MANAGER

The evolution of multi-management Eugene Botha | Portfolio Manager: Advantage Asset Managers

Long gone are the days of multi-managers only offering the distinct advantage of diversification of risk and style-neutral portfolios to investors. That still is an important contribution multi-manager investing brings to the table, but is definitely not the only role multi-managers play within the investment sphere.

W

ith markets evolving over time, so too does the method of investment thinking. Changes in the method of investment thinking brings along exciting opportunities for alpha generation (outperformance of a benchmark), portfolio construction, risk-andreturn diversification, as well as cost saving. Multi-managers use a combination of the best of the best of these ideas and concepts and combine them in an intelligent way to offer a robust and targeted solution to investors. Why would this be the case? From a portfolioconstruction perspective, multi-managers have the ability to combine asset classes, strategies and investment managers to ultimately form that one solution specifically targeted to an investor, which would yield the robustness to all phases of the market or asset-class cycle. You may feel this has always been a selling point for multimanagement, so how has that changed through the so-called evolution?

12

The risk diversification through a multimanager portfolio-construction process still stands and is theoretically and practically proven to be true. But it is the alpha-generating strategies used in the portfolio-construction process that have evolved most and have led to the quest for optimal diversification from a risk-and-return perspective. A lot of research and time is spent weighing the benefits of traditional and non-traditional alternative-investment strategies in portfolio construction. Alternative-investment strategies not only relate to the traditional hedge funds or private equity funds as per definition, but also refer to flexibility within a specific asset class or asset classes. For example, the fixedinterest space has during the last couple of years evolved with several specialist investment managers demonstrating the ability to add value by allowing fewer constraints on their alpha-generating process. This may introduce benchmark risk over the short term to some degree as the actual benchmark of such a strategy becomes difficult to pinpoint. The idea in the flexible fixed-interest space is to deliver the best of bonds and cash through an interest-rate cycle and therefore actually reduce opportunity risk or that regret factor for an end investor for not

INVESTSA

being in the highest-performing asset class during a certain period. By doing this the multi-manager way, the risk of a single manager getting it all wrong is diversified and the return of the overall strategy or solution is increased. This is not only prevalent in the fixed-interest space. By identifying certain strategies or style exposures which offer a higher risk premium over the longer term, it is possible for a multimanager to tap into these strategies directly and use these in portfolio construction. With the birth of smart beta strategies, more and more emphasis is placed on ways of extracting these higher risk premia strategies on a passive basis at a lower cost relative to investing in a single investment manager that would only represent a flavour of the required strategy, and could result in something very different to what an investor expects. By using smart beta strategies like priceindifferent indexing, momentum and value-style beta strategies, the opportunities become that much more interesting. Therefore, the resulting effect is a solution not only looking at risk, but also looking at maximising return and alpha through different strategies without necessarily compensating anything on the risk side. The crux of the evolution of multi-management is that multi-managers are not only looking to diversify risk, but doing that in the most optimal way possible not to compensate too much on return and therefore be competitive with the best-performing single investment managers in the market. Multi-managers are doing this by perhaps looking at the world of investing slightly differently – shifting slightly from multiple specialised portfolios to multiple diversified strategies, allowing flexibility and alpha-generation ideas that are different to the traditional portfolio theory.


MULTI-MANAGER

True Diversification is key in portfolio construction

D

iversifying across renowned asset managers should not be confused with true diversification. Too often a portfolio is constructed by selecting a number of fund managers who are currently performing well, combining them into a model portfolio and expecting attractive risk-adjusted returns based on presumed diversification benefits. Unfortunately, this approach may lead to the fund managers underperforming at the same time in future with unintended consequences for the client and the adviser. True diversification is not a new phenomenon. Harry Markowitz wrote a ground-breaking article in 1952 in the Journal of Finance and was awarded a Nobel Prize for this pioneering work in 1990. Prior to Markowitz’s theories, emphasis was placed on selecting single stocks without any regard to their effects on portfolios as a whole.

Daniel Schoeman | Portfolio Manager: Analytics Markowitz’s theories emphasised the importance of portfolios, risk, correlations between securities and diversification. His work fundamentally changed the way that investors invested in the past and will invest in the future. Rigorous portfolio construction techniques can be utilised to ensure diversification across managers are based on true differences across various dimensions. One of the dimensions is a thorough manager research process. Managers should be required to complete detailed questionnaires to gain insight into their organisation structures, investment teams, investment philosophies, investment processes and operational procedures. Regular due diligence visits should be undertaken to interview investment managers at their work environment and to evaluate their current investment ideas. This process can be used

to distinguish between different managers on qualitative considerations. Another key dimension is the use of a scientific quantitative process – extensive quantitative analysis should be performed not only on performance, but also on consistency, volatility and other technical measures. Profiling managers according to how their returns correlated over various time periods, and how their portfolio holdings change in terms of market capitalisation and sector positioning, all contribute to a better understanding of the differences in manager behaviour and whether these differences will contribute to the portfolio as a whole in the future. It is believed that by following a robust and scientific portfolio construction process, with the emphasis on true diversification in the spirit of Markowitz, we can provide portfolio solutions for clients that should generate attractive risk-adjusted future returns.

The portfolio construction specialists

www.analytics.co.za Analytics is an authorised financial services provider


MULTI-MANAGER

multi-management: Why it makes sense

David Crosoer | Head of Research at PPS Investments

One of the hallmarks of a bull market is the opportunity for most fund managers to deliver a good return for their clients. Yet, as events over the last three years have demonstrated, trying to construct portfolios is fraught with difficulty.

Y

ou can easily find yourself overexposed to the wrong asset class or wrong asset manager at the wrong time. According to the most recent PlexCrown survey, the best performing unit trust subcategory in the three months to 31 March 2011 was Foreign Equity General, returning 6.34 per cent. However, on a 12-month basis, this was the second worst performing

subcategory, returning just 2.49 per cent and over three years was also among the worst performers returning an average of - 7.67 per cent per year. The reality is that the best asset class or manager at one point in time is not the best asset class or manager all of the time. There are certain environments where one asset class or manager will flourish, and others that favour a manager with a different investment style. And who the best manager will be depends on a number of factors that can be very difficult to determine beforehand. The same argument can be made with asset classes. The best asset class depends on a number of factors that are very difficult to determine beforehand. One way to avoid this situation is to invest with a multi-manager – which simply stated is an asset manager that invests in other asset managers. This sounds easy; however, for multi-managers the critical question is how to construct solid diversified portfolios with as much independent sources of returns as possible. If you try to time the market you are possibly building undiversified portfolios that take big bets on one outcome materialising. Unfortunately, you will invariably take on inappropriate levels of risk: either too much at the top of a bull market when you’re too optimistic or too little near the bottom of a bear market when you’re too pessimistic. The same applies to asset

14

INVESTSA

manager selection. It is very difficult to know which investment environment will apply in the next 12 months, and consequently which manager will outperform. Investors invariably assume the previous 12-month environment will apply going forward by basing their decision on past performance and invariably invest in the wrong manager. Until 2009, investors were handsomely rewarded for taking on almost any kind of risk as global growth continued to surprise on the upside. Many investors took on more risk and constructed portfolios that were overtly exposed to equities or a single fund manager. These investors would have outperformed a multi-managed, sensibly diversified approach in such a favourable environment. However, during the recent global crisis, investors with riskier portfolios experienced disproportionately large losses and underperformed a multi-managed approach with its diversified set of returns. This is because multi-managers do not try to time the market or try to select the manager who will perform best in the next 12 months. Instead, they build portfolios that will be fine in most market conditions. They spend considerable time understanding the sources of their managers’ returns, how they differ from each other, and how to combine them in diversified portfolios. Multi-managed portfolios are not just constructed for the good (or bad) times or for what multi-managers think the next 12 months will be like. Instead, they look to find as many uncorrelated sources of returns as possible in the belief that there is a much greater chance of success in getting this right than in trying to accurately forecast what will happen next week or next month or next year.


MULTI-MANAGER

The nature and necessity of the global foreign exchange market “There is no sphere of human thought in which it is easier to show superficial cleverness and the appearance of superior wisdom than discussing questions of currency and exchange.� Sir Winston Churchill

Figure 1: The implication of PPP is that a country with high inflation and rising prices of domestic goods should expect a weakening of its currency relative to its trading partners, in order to maintain an equilibrium exchange.

Andrew Rumbelow | CIO of SMMI The global foreign exchange market is generally complex which often leads to misunderstanding and avoiding the topic. SMMI believes that when taking assets offshore, there is a tendency among South African investors of considering only the behaviour and movement of the US Dollar. Global foreign exchange markets are vast in terms of size and scope, and they continue to evolve in line with the increased globalisation of the international economy and the development of ever-faster and more efficient technological processes. In the modern era, characterised by the international mobility of investment capital; the release of new information to the market is unpredictable and speculation about the nature and impact of such news can materially impact the exchange rate causing volatility which is independent to actual flows derived from international trade. Economists have long sought to provide credible theories to explain both the absolute level of exchange rates and their relative movements. The most famous of these is the theory of purchasing power parity (PPP), which is derived from the law of one price. The theory asserts that exchange rates should adjust to compensate for price differentials across countries, when converted at the prevailing exchange rate.

Relative PPP refers to rates of change of price levels, i.e. inflation rates. The proposition states that the rate of appreciation of a currency is equal to the difference in inflation rates between the foreign and the home country. That is, if the theory were not to hold via the prevailing exchange rate between countries, an arbitrage opportunity would exist to import goods and services from a country where they are cheap and sell them in a country where they are more expensive. The figure above shows the actual spot exchange rate and the PPP of Rand relative to the US Dollar. The crux of the graph is that over the long term, PPP generally holds; that is, the spot exchange rate mean reverts around PPP. However, in the short term, there is fluctuation of the exchange rate and consequently the theory does not hold and the currency over- or undershoots PPP. In reality, investing internationally, South African investors are not only exposed to the US Dollar. By way of example; the current exposure within the MSCI World Index has exposure to a host of currencies. In conclusion, understanding the dynamics of the relative attractiveness across multiple currencies is vital as foreign investing is influenced by more than one currency exposure.

INVESTSA

15


PROFILE | CIO: Advantage Asset Managers

S on j a S aunderson

S

C I O : A dvantage A sset M anagers Sonja Saunderson is chief investment officer at Advantage Asset Managers, the original pioneer of the multi-manager approach in South Africa. INVESTSA caught up with Sonja to find out her thoughts on the sovereign debt crisis and the current challenges facing asset managers.

16

INVESTSA


“Do not overreact to every piece of bad news since chopping and changing strategies destroys more value in the longer term than most other decisions in the industry. Follow the first principles of prudent investing and use well-diversified solutions.”

The sovereign debt crisis in Europe does not appear to be abating. What significance do you think this has for investors in South Africa? There is a greater emphasis on understanding what returns can be expected and what the associated risks are. The crisis undoubtedly could lead to subdued global returns. Investors are, as a result, much more risk conscious and asking questions about the sustainability of real yields per asset class and region. The debt crisis not only creates uncertainty for investors, but also makes them more selective in their investment choices. What do you think are the biggest challenges that asset managers face right now? The biggest challenge is to remain innovative and for managers to differentiate themselves in an ever-increasing world of choice and flexibility. Asset management globally needs to redeem itself as investors are feeling a level of distrust and disappointment towards service providers as a result of the global meltdown. This is putting pressure on asset managers. Combine that with a changing legislative environment, and asset managers are more and more pressured to come up with alternative/ new ways to overcome these challenges. There has been much controversy over white label broker funds. What is your view? The FSB has always been quoted as seeing white labelling as something beneficial for the industry if applied correctly, but also has the responsibility to ensure that clients know what they get and comply with collective investment scheme regulations. You need to understand the controls and oversight that providers of white labelled solutions have in place since these are often more than adequately resourced and managed to not warrant significant concerns and can even add additional benefit to clients.

Given the uncertain environment, do you think multi-managed funds are most appropriate for investors currently? I know very few investors who do not believe in the principles of investing their assets in a welldiversified solution, usually utilising multiple fund managers. Whether via a multi-managed fund or created by an adviser, this is an ageold, tried and tested and sound investment concept with intuitive appeal. So yes, I think it is often a very appropriate solution for investors. What is your response to the argument that the multi-manager approach is too fee-heavy? While there may have been instances where this was true in the past, this is largely a fallacy. At Advantage we are transparent and disclose total expense ratios of our multi-manager solutions to clients to ensure they understand all levels of fees, including the Advantage fee so they can ascertain the value-add in relation to this number. Multi-manager fees are often very competitive to single manager counterparts with a more risk-targeted outcome. Do you think multi-managed funds are more appropriate for financial advisers to recommend to clients than other vehicles? It is risky to assume one solution or approach necessarily suits all clients. The most appropriate solution is a function of clients’ needs and risk appetite and one that can be catered for in various fund constructs. Multi-management offers a wide range of choice and therefore can provide clients with the most robust solution to cater for their specific requirement.

their investments, especially due to South Africa having a largely commodity-based/ resource heavy emerging market economy. What complicates this even further is that markets are becoming more defragmented which leads to more and more investment opportunities and strategies to invest in. Combine that with changing regulation and the need for transparency and the task can become daunting. Clients need good research combined with proper advice to help them choose the right solutions. What advice do you have for financial planners in the current environment? Given an environment of uncertainty and change, the biggest challenge for financial planners is to keep clients invested. Do not overreact to every piece of bad news since chopping and changing strategies destroys more value in the longer term than most other decisions in the industry. Follow the first principles of prudent investing and use welldiversified solutions for the appropriate time frame and advise clients to remain invested. How do you wind down from the pressures of your position? I wish I had a magical answer to this one. I like spending time in nature, watching movies, hanging out with friends and family who keep me sane and I like to sleep as much as possible – anything that takes my mind away from everyday pressures.

What do you think is the biggest concern for South African investors at the moment? Uncertainty remains, in terms of the global markets, and where to invest. South African investors are also seeking to diversify

INVESTSA

17


HEAD TO HEAD | Cannon Asset Managers

Single versus multi-manager is an age-old debate in the investment fraternity: do the extra fees justify the stability multi-managers offer and does the (sometimes) superior performance of single managed funds justify the extra risk? INVESTSA caught up with two asset managers to hear both sides of the argument.

Cannon Asset Managers A ndrew

N ewell

Head of Business Development at Cannon Asset Managers

1. What are the benefits of the single manager approach? Single managers will offer investors a specific investment philosophy or style. While different philosophies carry different characteristics, the investor is able to select one to which they can relate and with whom they are comfortable. Many single managers have developed a reputation for having a skill in a specific area of investment management, such as stock selection, asset allocation, or a combination.  The investor is then able to choose a fund with clear insight regarding what they are buying.    It should be noted that, in a sense, any investor who uses more than one asset manager is a multi-manager, whether a private investor buying two unit trusts to a large pension fund that is split funded.   2. And the disadvantages?   Most single managers have built their investment businesses and track records on a specific approach to managing assets. These could include being value or growth equity

18

managers. In practice however, it is evident that through time and economic cycles, investment approaches enjoy success that is cyclical, and exposure to a single manager means that the investor is exposed to this cyclicality. This can, however, be beneficial if you are able to stay the course and adhere to a proven philosophy.   A further disadvantage of multi-management is that such management tends to result in more style-neutral portfolios. Deep value investing has been shown to reward patient investors. Over time, value investing offers significant outperformance which clients would lose in a style-neutral portfolio.   3. One of the complaints is that singlemanaged funds are too risky. What is your view?   We do not share this view. An appropriatelymanaged single manager will offer investors a diversified portfolio of assets, whether they are in one asset class or multiple asset classes. Combining a number of single managers to form a multi-manager fund does not necessarily make that fund less risky, as there will be some overlap in

INVESTSA

investment holdings, and the reduced risk is likely to be modest at best. However, it is clear that multi-managed funds offer manager diversification, a feature that one may argue provides an element of de-risking a portfolio. Certainly, a sectorspecific single manager fund will be more risky than a more broadly diversified single manager fund. For example, a resources fund will likely be more volatile than a general equity fund.    Multi-managers can be criticised for excessive risk diversification. Some risk is important in managing funds as this gives rise to the style premium. Long-term investors can, and should, tolerate this style risk. If one seeks to outperform the benchmark over time, the portfolio needs to be different to it, although the nature of the variance is important and not merely there to ensure difference. Long-term investors would be doing themselves a disservice by not taking on this risk.  


HEAD TO HEAD | Investment Solutions

Investment Solutions M ichele

O ngle y

Head of New Business at Investment Solutions

1. What are the benefits of the multimanager approach? Diversifying Single Manager Risk: The concept of multi-management is to enhance the manager selection process by diversifying the risk of using a single manager. It is impossible for any single manager to be the number one performing manager consistently over all periods. A multi-manager’s core focus should be to research the single-manager universe and to identify the skilful managers, to combine these manager’s portfolios to deliver consistent performance over time (three-five years). Multi-managers can also achieve style cognisant objectives by picking a suite of style-orientated managers, i.e. a suite of value managers. The benefits of the multi-manager approach include: • Multi-managers can take an objective and unbiased view on asset managers. We can critically assess the strengths and weaknesses of each manager. On the other hand, if all of your assets are with a single manager, then in the

interactions that you have with them they will naturally emphasise their positive attributes and avoid any areas that may detract from them. • Compliance and reporting. If you employ the services of a number of single managers using different portfolios and having different objectives, you will then assume a heavy reporting and compliance obligation. Using a multimanager will simplify matters greatly in that the multi-manager will take on all the compliance obligations and simplify reporting by consolidating all the required fund and portfolio information in one single report. • Economies of scale. Negotiating manager fees on behalf of clients. Multi-managers can take advantage of significant economies of scale in view of the large holdings that they have with their asset managers. These cost reductions can be passed on to clients. • Switching between portfolios. With assets being on a multi-managers’ own balance sheet it is easy and cost effective to switch between managers. There is no need to disinvest from one manager before transferring assets to another.

INVESTSA

2. And the disadvantages? Multi-manager portfolios are focused on delivering consistent performance over time and therefore by nature will never be the top performing manager over any given time period. 3. One of the complaints is that multimanaged funds are too fee-heavy. What is your view? Multi-manager solutions are most appropriate for retirement funds with asset values that range between R5 million – R500 million. For example, ABC Provident Fund has R100 million and wishes to appoint three managers as it believes in diversifying single manger risk. This avoids having the base cost fee scales of each of those managers being applied to your fund. In addition, it is a misconception that multi-managers add an additional layer of costs to a client. In fact, because of the economies of scale that we enjoy by placing large amounts of assets with the managers we use, we can achieve significant cost reductions which we in turn can pass on to our clients.

19


Cannon Asset Managers

Investment Solutions

4. Should one even compare single and multi-managed funds? Single and multi-managed funds can be compared by investors, but they should recognise that, largely speaking, they are trying to achieve different objectives. The single manager is generally applying one investment approach in the belief that over time, this approach will deliver attractive investment results to investors. It is acknowledged that investment approaches are cyclical in the short term, and sometimes even in the medium term. The multi-managed fund approach recognises that investment styles work cyclically, and by putting managers with different approaches in one multi-managed portfolio, some of the cyclicality will be removed. Consequently, it is expected that multi-managed funds will have a return profile that is smoother over time than single manager funds, but they will seldom be the best performing portfolios, given that they have exposure to various managers.    5. What should an adviser look for when choosing a singlemanaged fund?   Investors in single-manager funds need to find a fund that consistently applies the investment strategy or approach that it sets out to achieve. Just as much as timing the market is a treacherous task, so is trying to chop and change between investment philosophies. Investors too often are caught up in looking at a fund’s performance track record and, while this is important and interesting, it is more important to understand how a fund manager invests and why. Armed with this knowledge, the investor will understand why a fund performs well, and why a fund performs poorly, which all single manager funds are prone to do. This then equips an investor to make informed decisions about their investments.    6. What risk profile would someone have to choose a single-managed fund?   Single-managed funds cover a range of investment strategies and risk profiles, ranging from aggressive sector-specific equity funds, to asset allocation funds, and the more conservative money market funds. These strategies are also available domestically and globally and, as a result, single-managed and multi-managed funds are suitable for investors with varying risk profiles. The question is not just about selecting a single- or multi-managed fund, but rather, which investment philosophy makes sense to you.

20

4. Should one even compare single and multi-managed funds? Comparing single and multi-manager portfolios is appropriate depending on the mandate and benchmarks of the portfolios, for example balanced funds. It is possible for a multi-manager balanced portfolio to be in the top quartile when compared to single-manager balanced funds as per the industry surveys. 5. What should an adviser look for when choosing a multimanaged fund? There are a few factors an adviser should consider and they are, in no particular order of importance: • Consistent performance. • Manager universe research capabilities. • Sound investment philosophy and delivery. • Systems and compliance. • Reporting. 6. What risk profile would someone have to choose a multimanaged fund? Moderate to conservative. Any fund looking to assume a fairly high level of risk/volatility would be better served by employing the services of an aggressive single manager. However, with this potential reward obviously comes significant risk. Multimanagement ensures adequate diversifications is achieved by reducing single manager risk and volatility.

INVESTSA


ASSET MANAGEMENT

The emerging market debate: Worth the risk?

Paul Stewart, MD of Plexus Asset Management, believes that valuation is the key issue with regard to emerging market equities.

E

merging markets have regularly been cited as the place to be for investors who want to capture stellar growth in the long term. However, having already achieved high returns in recent years, a number of asset managers have begun to question how much value remains to be unlocked. According to Daniel Malan, investment director at RE:CM, the asset manager’s analysis shows that the price of most emerging market assets is currently above estimated fair values. As a result, the RE:CM Global Fund has virtually zero exposure to assets domiciled in these markets. He said that commodity stocks are also expensive at current levels. “By comparing direct commodity prices to the marginal cost of production, we draw the conclusion that the current prices are trading at substantial premiums and that investment in direct commodities do not afford attractive odds to long-term investors. Furthermore, the stocks of businesses that operate primarily in commodities markets are trading above our estimated fair values.”

“While we are very positive about the ability of emerging markets to outperform developed markets over the long run, the issue of current valuation is a complicating factor, as many target countries and companies are expensive,” he said. Stewart explained that while certain emerging markets have seen valuations improving in the last few months (China, India and Russia), others are less attractive in the short term. He advised investors to apply a very careful stock selection programme in these areas to ensure the stocks they purchase are not trading at premium valuations. “Of course, if your investment view is 10 years and beyond, then current valuation is not that relevant and you could perhaps rather use diversification to spread risk,” he added.

While there are certainly emerging markets and frontier markets that are likely to become the powerful growth engines to the global economy over the next 50 years, there will be others that will lag significantly behind. “The emerging markets we would generally be excited about are those that have a few important characteristics including improving or stable demographics, highly flexible and productive labour market, good endowment of primary factors of production and good education systems. Of course, we also look very closely at fiscal discipline, stability of politics and the strength of net foreign exchange reserves,” he said. Some examples of emerging market countries that demonstrate these characteristics are India, Brazil, Mexico, Turkey, South Africa, Thailand, Philippines, Indonesia, Vietnam and China.

“Evidence suggests that investors who allocate capital to overvalued assets underperform, while those who allocate capital to cheap assets outperform in the long term.”

Malan added that while it is difficult to tell whether the recent sell-off in emerging markets and commodity stocks is the start of a cyclical downward correction, evidence suggests that investors who allocate capital to overvalued assets underperform, while those who allocate capital to cheap assets outperform in the long term. As a result, investors should focus on allocating fund capital to the best quality businesses anywhere in the world when they are cheaply priced relative to their fair value.

INVESTSA

21


SHAUN HARRIS

Getting in on the

activism But do institutional Shareholders do enough? We invest in listed companies to try and make money. But while we are invested in the company, and INVESTSA always advocates taking a reasonably long-term investment view, we are shareholders.

By Shaun Harris

22

INVESTSA


“One gets the impression with some companies that they really don’t want shareholders, especially the bothersome sort who might ask some questions. Some directors seem to forget that capital in the company – the shareholders’ equity funds – are provided by individual and institutional shareholders.”

S

hareholders have the right to ask questions about the company. The most appropriate occasion is the annual general meeting (AGM), when the board of directors should be present to answer any questions shareholders might have.

money to a charity he designated. Shortly after the Anglo AGM, I phoned Botha in London. He told me about his plight. “I was kicked in the teeth. I was entitled to attend the AGM and ask questions. But while the AGM was going on I was sitting in Hyde Park looking at my shoes.”

That’s not always the case. One gets the impression with some companies that they really don’t want shareholders, especially the bothersome sort who might ask some questions. Some directors seem to forget that capital in the company – the shareholders’ equity funds – are provided by individual and institutional shareholders.

Botha is a well-known figure at AGMs and a very good source of information as the questions he asks are always well researched and pertinent. That, it seems, is what some companies don’t like. Intelligent questions at what is effectively a public forum like an AGM, puts the directors on the spot.

It’s fairly easy for cranky companies to shrug off individual shareholders; but not so much institutional shareholders. They tend to have fairly large holdings in the company, often enough to move the share price if they take up an issue or start selling shares in the company. But are institutional shareholders, typically asset management companies, doing enough to get the low-down on the companies they are invested in? What’s the state of shareholder activism in the country? What raised the issue was the behaviour of Anglo American at their AGM in London on 21 April. Anglo has its head office in London and its primary listing is on the London Stock Exchange. But its secondary listing is on the JSE (as well as some other Southern African countries) and South Africa is where the group started, where it still has valuable mines and a large number of shareholders. Because of its size and large market capitalisation, just about every fund, especially general equity unit trust funds, have to hold Anglo. Anyway, in a sad tale that financial advisers probably all know about, Anglo American decided to bar an individual shareholder from their AGM. It was wellknown shareholder activist Theo Botha and he wasn’t just there as an individual shareholder, but as nominee for some companies in South Africa. Anglo said there was a problem with Botha’s forms of proxy and on those grounds would not let him attend the AGM. They later admitted they, or rather they claimed the share registrars, had made a mistake and Botha should have been allowed to attend. Anglo offered to reimburse Botha’s costs, chiefly his flight to London. Botha told Anglo to send the

“Without any shadow of a doubt the days of those warm and cosy relations between institutional shareholders and directors are gone. Shareholder activism will continue to grow.”

But where were the South African institutional shareholders at Anglo’s AGM? Silent; and often at many other AGMs as well, though there has been a growing trend of institutional shareholders becoming more actively involved. But it has to be asked how important shareholder activism is in South Africa, and whether the asset managers, as shareholders, are doing enough? “Looking at the asset management industry, I think there’s a lot of stuff that goes on behind the scenes. Asset managers like to discuss the issues in private with the company. This is where they engage the company,” says Paul Stewart, MD of Plexus Asset Management. “Institutional shareholders don’t always like to show their hands, for instance in respect of strategic company issues. They don’t want to risk destroying shareholder value if the issue becomes public and gets into the mainstream press.”

shareholder, is there to represent the people invested in their funds. “We are probably a bad example as a lot of the funds we run are fund of funds or in the index fund environment,” said Stewart. “However, we have a proxy voting document. Typically, we abstain from voting. Questions at AGMs are probably a bit different for single managers.” Adrian Saville, chief investment officer at Cannon Asset Managers, believes the asset management industry is not doing enough in terms of shareholder activism. “But as a collective, we are definitely doing far more than a few years ago. The industry is far more active than historically but there’s more to be done.” He said the first prize for Cannon is to find a company that is well-run and well-managed. “Those companies often don’t demand shareholder activism. We look at the companies that have fallen out of favour. But it would be fanciful to think that all these companies might not have company issues.” He said that Cannon participates in all the voting in all the companies it owns. “We have a clear set of policies that guide our voting, which we apply vigorously.” After voting, if there’s a company issue it first lets the company know why it voted the way it did, and then seeks a meeting with the company. “If I can’t get satisfactory answers through my activism, it means I have capital sitting in the company against my terms. In those circumstances we exit the investment.” Stewart added that there’s a fine balance between behind-the-scenes activism and making that activism public, but agrees that more questions should be asked at AGMs. “Instead we get a deep silence. But without any shadow of a doubt the days of those warm and cosy relations between institutional shareholders and directors are gone. Shareholder activism will continue to grow.” It’s a prospect financial advisers should welcome. More shareholder activism will, if necessary, force more open disclosure from companies. And AGMs could be the scene of more questions. The days of those rubber stamping, 10-minute AGMs followed by a cup of tea or jolly good lunch, seem gone.

A number of asset managers say they deal with company issues behind the scenes, at private meetings. That’s all very well, but is the outcome of the meeting fed back to investors? The asset manager, as a

INVESTSA

23


ECONOMICS

THE SOUTH AFRICAN ECONOMY An upswing without sparkle Nicky Weimar | Senior Economist: Nedbank

T

he South African economy is recovering from the short but sharp recession of late 2008 and much of 2009, though the economy managed to grow at a reasonable pace throughout 2010. Exports picked up, supported by higher commodity prices and stronger global demand, especially from China and other rapidly growing emerging markets. As both export and local sales improved, producers increased output not only to match the recovery in demand, but also to rebuild badly rundown stocks. The need for vicious cost cutting faded. Capital expenditure bottomed out and turned up marginally by the end of 2010, while the rate of retrenchment slowed noticeably. As employment levels stabilised, asset prices improved slightly and interest rates dropped to an over 35-year low, consumers returned to the stores, providing most of the upward momentum to the economy in 2010 and early 2011. However, despite six quarters of expansion, the recovery lacks upward momentum and underlying confidence still appears fragile. The economy is still not firing on all engines. Companies remain very conservative, holding on to cash reserves while remaining reluctant to expand capacity. The slow and uneven nature of the global recovery is partly to blame, creating doubts about the sustainability of the current upswing.

expect the world economy to expand further in 2011 and 2012, the recovery is generally anticipated to be uneven and moderate. The risk of ugly surprises also remains relatively high. Household debt and tight credit continues to constrain the pace of the recovery in most developed economies, while severe fiscal austerity measures and the persistent threat of sovereign default continues to undermine confidence and constrain the rate of recovery in Europe. In contrast, most emerging markets are in better shape and their economies are generally expected to remain relatively robust. However, mounting inflationary pressures have already translated into much tighter monetary policies in most major emerging markets, including China. Recent indicators suggest that economic activity is slowing down moderately in China and some other developing countries, but fortunately there is no real evidence that emerging markets are heading for a hard landing. Apart from an uncertain global recovery, local producers’ ability to

Although most international forecasters

24

INVESTSA

accelerate capital expenditure also remains constrained by insufficient power supply, inadequate and inefficient transport and logistical infrastructure and slow roll-out of new infrastructure projects by the public sector. Local business and investment confidence have also been undermined by the irregularities surrounding the granting of


mineral rights, perceptions of rising corruption and the continued calls for the nationalisation of mines from some quarters within the ruling ANC party. Consequently, the recovery in fixed investment activity is likely to remain slow and moderate in this upswing, capping the upside to economic growth in the years ahead.

“The National Credit Act and tighter financial regulation in general have resulted in stricter lending criteria, restraining access to credit. Still, high household debt burdens make matters worse, undermining creditworthiness while elevating households’ vulnerability to adverse changes in inflation and interest rates.”

870-1_INVEST_SA_hlf_pg_final_artwork.indd 2

Consumer spending will probably be the main driver of economic growth over the next two years, but households also face significant constraints. The National Credit Act and tighter financial regulation in general have resulted in stricter lending criteria, restraining access to credit. Still, high household debt burdens make matters worse, undermining creditworthiness while elevating households’ vulnerability to adverse changes in inflation and interest rates. Although inflation will edge up and interest rates move higher over the next 18 months, the rate of increase will be moderate and contained mainly due to hesitant nature of this economic recovery. All these constraints will contain economic growth to more moderate levels over the next three years. The economy is expected to grow by around 3,5 and 4,1 per cent in 2011 and 2012 respectively, with the recovery in capital expenditure and job creation likely to remain slow throughout the cycle.

04/03/2011 16:03


FUND PROFILES

FUND PROFILES Symmetry Balanced Fund of Funds should also be the natural choice for investors who understand the benefit of investing with more than one manager. Officially, the fund aims to achieve a return of CPI+ seven per cent over the long term while, at the same time, protecting capital over any 18-month period. Have you made any major portfolio changes recently? No. How have you positioned the fund for 2011? Symmetry is responsible for choosing the managers in the fund and has selected managers with different strategies that will perform best under different market conditions. The positioning of the fund is determined by how these managers position each of their portfolios. The current preferred asset class in the fund is offshore developed market equities, which should benefit from either a weakening of the Rand or increased profitability from large multi-national companies as the world economy recovers. The fund also holds a healthy portion of inflation-linked bonds which should act as a hedge against expected higher inflation. Please provide some information around the individual/team responsible for managing the fund. Fred Liebenberg, who has 10 years’ industry experience, is the portfolio manager of the fund. Together with the dynamic Symmetry investment team, he is responsible for selecting and monitoring the managers in the fund. Please provide performance of the fund over one, three and five years. The Balanced Fund of Funds achieved its 10-year track record in June 2011 and has delivered exceptional returns over this period. It has also won a Raging Bull award for risk-adjusted performance. Please outline your investment strategy and philosophy for the fund. Our investment philosophy is simple: to thoroughly research and select the best managers to manage our clients’ investments; make sure these managers understand clients’ investment objectives; and allow them the freedom and time to convert their expertise into strong longterm performance. The Symmetry Balanced Fund of Funds is a multi-managed flexible assetallocation fund. The fund has an explicit risk target which we believe is essential, not only to protect capital, but paradoxically also to achieve strong long-term returns. What are your top five holdings at present? The fund is managed by four of the best asset managers in the country, each following a unique investment philosophy. The fund’s holdings are simply the aggregate of the underlying managers’ holdings. The four managers in the fund are: Coronation, Investec, Prudential and RE:CM. Who is the fund appropriate for? This fund is best suited to investors who require significant capital growth above inflation, but still want to manage the risk of losing capital. It

26

The fund returned 16.1 per cent over seven years and 15.5 per cent since inception, to end May 2011. This compares favourably to its performance target (CPI+ seven per cent) of 13.0 per cent and 13.3 per cent respectively over those periods. Please outline fee structure of the fund. The fund has a fixed management fee of 1.5 per cent (excl VAT). Performance-based fees may also be payable to some underlying managers. Why would investors choose this fund above others? Our investment team undertakes over 10 000 hours of research annually to ensure that we know exactly who the top managers are. The fund thus provides investors with exposure to some of the best managers in the industry, selected and monitored by one of the leading multi-managers in the industry. It has delivered very strong performance over its history at a level of risk that is well below that of other balanced funds. It is backed by Old Mutual, the largest financial services company in South Africa.

INVESTSA


Sanlam Multi Manager Absolute Return Have you made any major portfolio changes recently? Yes. At SMMI we firmly believe active tactical strategy allocation within the portfolio can be a positive contributor to performance. A case in point, currently the portfolio has taken an underweight fixed interest position as we are entering a raising interest rate environment along with an uptick in inflation which will detract from performance. Further, we have overweighed our value equity strategy which offers a better payoff profile in current market conditions. How have you positioned the fund for 2011? The fund is currently well diversified utilising a variety of financial instruments including equities, bonds, inflation linked bonds, cash, listed property, derivatives and foreign assets with a value equity bias relative to other absolute return strategies. We believe value bias managers such as Coronation and RE:CM will provide not only provide a positive real return, but the necessary downside protection in these volatile market conditions.

Please outline your investment strategy and philosophy for the fund. The absolute return philosophy is one of compounding positive returns in all market cycles, i.e. no negative returns over a rolling 12-month period. Additionally, the investment strategy aims to provide a return of five per cent above CPI on a rolling three to fiveyear period.

Please provide some information around the individual/team responsible for managing the fund. At SMMI we follow a team approach with each member contributing to the rigorous and disciplined investment process incorporating manager research and portfolio construction based on in-house views derived through fundamental analysis. Andrew Rumbelow is the lead portfolio manager for the Absolute Return +5% Fund. Please provide performance of the fund.

In order to achieve these positive returns, the SMMI Absolute Return +5% strategy achieves this objective by proactively deploying the risk budget across all available asset classes and instruments. Importantly, a rigorous manager research, portfolio construction and investment process underpins this absolute return strategy. Who is the fund appropriate for? The recent financial crisis is still fresh in many investors minds; the negative returns experienced in October 2008 has taught us the loss of capital can be hard to bear and some investors would prefer to forego some ‘upside participation’ in a bull market for a positive return in a bear market. With this in mind, the Absolute Return +5% Fund is appropriate for an investor who has a moderate risk profile that provides a positive return on a rolling 12-month basis, as a key objective is protecting investors wealth in down markets with lower risk than your typical balanced fund.

1 Year

2 Years

3 Years

Sanlam Multi-Manager Absolute Return +5%

10.93%

16.64%

11.77%

Benchmark

8.82%

9.47%

11.26%

“The fund is currently well diversified utilising a variety of financial instruments including equities, bonds, inflation linked bonds, cash, listed property, derivatives and foreign assets with a value equity bias relative to other absolute return strategies.”

28

INVESTSA


SATRIX DIVI ETF index was created by FTSE/JSE to allow investors to capture the longterm effect of higher compounding returns and to benefit from the lower correlations to traditional market cap weighted indices. The inclusion of the Satrix Divi in the Satrix ETF range accordingly allows investors to diversify their passive holdings. What are your top five holdings at present? Coronation Fund Managers, Brait SA, PPC, MMI Holdings and Liberty Holdings. Who is the fund appropriate for? The fund is appropriate for both retail and institutional investors looking for equity exposure. A dividend-based fund is attractive to investors because cash dividends are an objective measure of a company’s value and profitability. Because of the cash dividends paid by the stocks included in the fund they are typically lower volatility and are considered defensive in nature. Investing in the fund gives investors exposure to a diversified basket of shares in both company and sector terms. Please provide some information around the individual/team responsible for managing the fund. All Satrix portfolios are managed by sim.smartcore (Sanlam Investment Management’s smart beta and index tracking team). The five-member team has assets under management of R20 billion and has successfully been managing index tracking portfolios for more than a decade. Please provide performance of the fund over one, three and five years (include benchmark).

Please outline your investment strategy and philosophy for the fund. The Satrix Divi ETF is a passively managed index tracking fund established over the FTSE/JSE Dividend Plus Index. Its investment objective is to replicate the price and yield performance of the FTSE/JSE Dividend Plus Index as closely as possible. To achieve this objective, the fund holds the actual shares that comprise the index in the same weighting as they appear in the index. The FTSE/JSE Dividend Plus index measures the performance of the 30 higher yielding stocks within the universe of the FTSE/JSE Top 40 Index and FTSE/JSE Mid Cap Index (excluding real estate companies). Stocks in the index are weighted by one-year forecast dividends as opposed to market capitalisation. The

PERFORMANCE DATA ** March to March (per annum)

1 year

2 years

3 years

STXDIV Fund

12.91%

32.44%

17.69%

Dividend Plus Index Performance (total return)

13.60%

32.46%

18.15%

** Fund established Aug 2007. Returns calculated for lump sum investments. All dividends reinvested.

Please outline fee structure of the fund. The fund has a management fee of 0.40 per cent (excl. VAT) per annum. Why would investors choose this fund above others? The Satrix Divi offers investors low-cost exposure to a diversified portfolio of blue chip shares with defensive qualities. Because the methodology of the index is based on one-year forecast dividends, investors may benefit from further diversification due to lower correlations in performance compared to market capitalisation weighted funds.

“Because the methodology of the index is based on one-year forecast dividends, investors may benefit from further diversification due to lower correlations in performance compared to market capitalisation weighted funds.”

INVESTSA

29


MINING AND RESOURCES SECTOR

sector report: MINING AND RESOURCES SECTOR

Mark Rule | Equity Analyst: BoE Private Clients

30

INVESTSA


“Resources are generally in greater demand in times of economic growth, which is the reason that the resources sector has performed so well over the last 10 years. ”

T

he resources sector of the Johannesburg Stock Exchange (JSE) has a market capitalisation of R2.1 trillion, which makes up 41 per cent of its total market capitalisation of R5.1 trillion. Resources are generally in greater demand in times of economic growth, which is the reason that the resources sector has performed so well over the last 10 years. One of the primary features of this period has been the rapid industrialisation of China, as well as significant urbanisation of its population. This has resulted in a surge in demand for hard commodities such as iron ore, copper, aluminium, coking coal and thermal coal, which are raw materials needed for infrastructural development, power generation and in the manufacture of steel. This development includes construction of roads, railways, ports and buildings. Chinese demand has accounted for a high portion of global demand during the last decade. It is not unreasonable to expect this process to continue for the next decade or longer, as the infrastructural development and urbanisation of China continues, particularly in the western parts, which have lagged the development of the coastal eastern region. A moot point is whether the non-Chinese emerging market players such as India will replace Chinese demand for commodities as Chinese growth rates slow down in the next few years. The extent of demand replacement is uncertain but it is likely that a significant amount will be taken up, with refurbishment of developed market infrastructure likely to pick up as well. Other BRIC nations, namely Brazil, Russia and India are following the Chinese development trend, with nations such as Malaysia, Indonesia and Vietnam likely to develop further in the longer term. JSElisted companies that are positioned to benefit from this emerging market growth are Anglo American, BHP Billiton, Kumba Iron Ore, Exxaro, African Rainbow Minerals and others with exposure to commodities. These companies are leveraged to supply

emerging market (EM) countries that are not well endowed in specific commodities and have to pay up to import them. Supply of certain commodities is likely to remain challenged during the industrialisation process, due to high demand pressure and a lack of new supply in the short term. In the medium to long term, EM countries will evolve and become consumer-driven as their people become wealthier and demand more expensive food products, housing, motor vehicles and luxury goods. Burgeoning consumer markets underpin demand for

“The resources sector of the Johannesburg Stock Exchange (JSE) has a market capitalisation of R2.1 trillion, which makes up 41 per cent of its total market capitalisation of R5.1 trillion.” luxury goods and motor vehicles, in turn, supporting potential sales of precious metals and diamonds in jewellery. Growth in the vehicle population in these emerging markets will create additional demand for the platinum group metals used in vehicle catalytic converters that convert harmful exhaust emissions into more environmentally-friendly gases.

materials sector has performed in line with the All Share since November 2008, when the basic materials sector bottomed out. Since then, several resource shares have outperformed the All Share index, including Aquarius Platinum, AECI and African Rainbow Minerals. Anglo American has been a marginal underperformer since then. Therefore, wise investing within the sector can result in outperformance. There are numerous global issues and risks to consider before making an investment in the basic materials sector. The USA has not yet committed to another quantitative easing programme and it is possible that the debt-ridden European countries may require further bailouts by their more wealthy neighbours. We have seen extraordinary growth in the Chinese economy, coupled with judicious management by that government to largely avert domestic overheating during the past few years. Globally relevant events also occur, such as the Japanese tsunami and the Icelandic volcanic cloud, which are entirely unpredictable risks. Although it is likely that the Chinese and EM growth phenomenon will continue, it is almost certain that this progress will be volatile. Figures to be used as guide only, correct at time of publication.

Resource investments in the FTSE/JSE can be accessed directly by investing in listed companies. Another route is to invest in mutual funds which comprise of portfolios of listed shares. Alternatively, investments may be made directly into exchange traded funds (ETF) which give the investor direct exposure to individual commodities such as gold or platinum. Since the mid-1990s, the basic materials sector of the FTSE/JSE has recorded a similar investment performance to the All Share Index, but since mid-2008 (the global financial crisis), its performance has not kept up with the All Share. However, the basic

INVESTSA

31


MINING & RESOURCES SECTOR: TOP COMPANIES AECI Limited Company information: Share price: R85.00 | Market capitalisation: R10.1bn | Share code: AFE | Financial year end: December Company business overview AECI Limited is a listed South African company. It has a number of business units including: • AEL Mining Services which develops, produces and markets commercial explosives, initiating systems and blasting services for the mining, quarrying and construction sectors in Africa and further a field, particularly Indonesia. • A cluster of 18 specialty chemicals businesses which supply specialty chemical raw materials and related services for industrial use across a broad spectrum of customers in the manufacturing and mining sectors in South Africa and Southern Africa. • SANS Technical Fibers, in the USA, which manufactures and markets a range of high performance, specialty nylon industrial fibres for niche market applications in the USA, Asia and Europe. • Heartland, a company that is in the process of realising (converting into cash) surplus land and property assets of AECI. Blue: Share Price

Green: 200 Day Moving Average

AECI revenue split for FY2010 Specialty fibres 2%

Property 3%

Manufacturing 37%

Mining services 51%

Agriculture 7% Source: AECI Annual Report 2010

Orange: 40 Day Moving Average

Dividend yield

2.8%

Turnover growth

8.0% (FY11)

Profit growth

45.4% (FY11)

CENTS

Share price performance

1 year

3 year

5 year

29.8%

24.4%

57.4%

*Figures correct at time of print

Company outlook AECI’s results at the end of the financial year ended December 2010 indicated that volumes grew by 11 per cent. Overall earnings growth was good, driven by higher commodity prices, but somewhat offset by the stronger Rand during the period. The main contributors to operating profit were mining services and chemicals, almost two thirds and one third respectively. The positive environment also allowed AECI to improve its operating margin.

YEAR

Price graph supplied by

AFE has significant property holdings but due to a broad lack of credit availability, no major transactions were recorded. The outlook for its property business for the current year remains unexciting and the major activity continues to be preparing land for release when market conditions improve. There is potentially significant value to be unlocked from this holding, by selling the developed or undeveloped land. The land has been held by AECI for many decades and was originally acquired for industrial purposes. Financially, AECI is in a good position, with a healthy balance sheet, 40 per cent geared at last year end compared to gearing of 78 per cent two years ago. Management’s focus for this financial year is to complete the ramp up of AFE’s two major projects (explosives and chemicals) and to focus on costs and customer-service delivery as well as integrating its recent specialty chemicals acquisitions.

32

INVESTSA

by Mark Rule


The Red Phone | Brand Campaigners 011 467 2264

We make the link

To save water, we have to manage the resources that are available to us. Failure to do so has serious consequences for businesses, communities and individuals. At AECI, we provide the scientific expertise, chemistry solutions and world-class purification processes that link this gift of nature with the gift of life. As the link between two ends, we create physical bonds that shape new beginnings. From the production line at a manufacturing plant to the waste stream to the drinking tap, we are true partners in progress, a catalyst for success that drives economic growth and opportunity.

This is the ‘good chemistry’ of AECI. AECI is Africa’s leading Specialty Chemicals and Explosives Company. We provide solutions to a wide range of sectors, including mining, construction and primary manufacturing. We have been in business since 1896.

www.aeci.co.za INVESTSA

33


MINING & RESOURCES SECTOR: TOP COMPANIES

HEAD TO HEAD | OMIGSA Macro Strategy Investments

ANGLO AMERICAN Company information: Share price: R319.00 | Market capitalisation: R422.0bn | Share code: AGL | Financial year end: December Company business overview Anglo American plc is a global diversified mining company. Anglo American has a range of mining assets which include platinum group metals, diamonds, copper, iron ore, metallurgical and thermal coal, nickel and manganese. Anglo American’s operations are in Africa, South and North America, Europe, Asia and Australia. It also has a portfolio of non-core assets in other mining and industrial businesses from which it intends to divest. Last year, Anglo American announced the sale of Tarmac’s French and Belgian building materials business, as part of its divestment programme. Anglo American’s platinum business unit is a subsidiary that mines, processes and refines platinum group metals. Anglo American has a 45 per cent interest in De Beers which is a diamond exploration, mining and marketing company. Anglo American’s nickel business comprises two ferronickel operations and a project in Latin America. Copper interests comprise six Chilean operations. Anglo American has interests in Kumba Iron Ore and manganese operations in South Africa and iron ore operations in Brazil and in coal operations in South Africa, Columbia and Australia.

AGL revenue split for FY2010

Manganese 3%

Other 17%

Diamonds 8%

Iron ore 17%

Thermal coal 9%

Platinum 20%

Copper 15%

Met coal 10%

Nickel 1%

Source: Anglo American

Dividend yield

1.6%

Turnover growth

34.0% (FY11)

Profit growth

178.8% (FY11)

Share price performance

1 year

3 year

5 year

14.4%

-11.4%

40.3%

*Figures correct at time of print

Company outlook Anglo American’s strength resides in its operational diversity, this gives it exposure to a range of commodities that are all driven by global market demand which, in turn, have differing lead and lag times to the global business cycle. It is evident, and recognised by numerous commentators, that the commodity cycle which has been intact since early last decade, has been underpinned by the population urbanisation trend in emerging markets. Chinese demand has been a particular factor and is expected to continue to drive commodity demand for the next two to three years. Price graph supplied by

By ramping up projects in iron ore, thermal coal, metallurgical coal, platinum group metals, copper and nickel, management plans to increase Anglo American’s overall production by 50 per cent by 2015, with further growth planned beyond that. It is important for investors to be positioned in diversified companies such as Anglo American that have operations mainly on the lower end of the cost curve, which then allows them to weather cyclical slowdowns while competitors may have to close high-cost operations in the face of declining prices. Share price performance depends largely on global market growth expectations, especially Chinese and emerging markets, which looks promising in the medium term. However, investors should be aware of the risks inherent in forecasting multiple variables, all of which have an effect on company performance.

“Anglo American’s strength resides in its operational diversity, this gives it exposure to a range of commodities that are all driven by global market demand which, in turn, have differing lead and lag times to the global business cycle. ” 34

INVESTSA

by Mark Rule


SIZWE MDIKANE New Vaal Colliery

Real Mining. Real People. Real Difference.


MINING & RESOURCES SECTOR: TOP COMPANIES African Rainbow Minerals Limited Company information: Share price: R185.00 | Market Capitalisation R39.2bn | Share code: ARI | Financial year end: June Company business overview African Rainbow Minerals Limited (ARM) is a diversified mining company with low-cost long-life assets spread across a number of commodity types. ARM has numerous mining industry interests, including exploration, development, operations and investments. ARM’s main operating divisions are: • ARM Platinum, which encompasses platinum group metals (PGM) and nickel, its main partners being Anglo Platinum, Impala Platinum and Norilsk Nickel. • ARM Ferrous, which owns 50 per cent of Assmang, an iron ore, chrome and manganese mining and processing company. Assore is the partner on Assmang. • ARM Coal, which is in a partnership with Xstrata Coal in mining and supplying coal to Eskom and for export. • ARM Copper, which has a joint venture with VALE in Zambia. • ARM Exploration, which pursues exploration opportunities in base metals, ferrous metals, PGMs and coal in sub-Saharan Africa. ARM has an investment in Harmony Gold (15 per cent holding), giving it indirect exposure to gold, resulting in a dividend inflow from Harmony. Blue: Share Price

Green: 200 Day Moving Average

ARM revenue split for 1H2011 Coal 4%

Platinum 24%

Ferrous Metals 61%

Source: African Rainbow Minerals Interim Report February 2011

Dividend yield

Orange: 40 Day Moving Average

CENTS

Price graph supplied by

“ARM maintains that it has the advantage of operating lowcost mines, which all produce in the lower half of their respective cost curves.”

36

2.5%

Turnover growth

57.8%(1HFY11)

Profit growth

209.5%(1HFY11)

Share price performance

YEAR

Nickel 11%

1 year

3 year

5 year

23.1%

-33.2%

340.6%

*Figures correct at time of print

Company outlook ARM is exposed to commodities likely to be stimulated by the Chinese and emerging market growth trend that is currently evident. ARM’s expectation is that Chinese growth is set to continue strongly for the balance of calendar 2011. Beyond 2011, the company is confident that the global supply side constraints relating to almost all of the commodities in its portfolio (as well as continued demand), are expected to underpin these commodity prices going forward. ARM is concerned that Rand strength could temper the advantage of potentially higher commodity prices. Clearly, ARM’s positive outlook on commodity markets has driven its decisions to go ahead with various expansion projects. The Goedgevonden coal mine, the Khumani iron ore expansion and the Nkomati nickel expansion will ramp up to deliver into markets coincident with ARM’s positive outlook. The Konkola North copper project is expected by ARM to deliver into strong copper markets in 2013 and beyond. These projects place ARM in a good position to benefit from the upswing in commodity demand that it expects. ARM maintains that it has the advantage of operating low-cost mines, which all produce in the lower half of their respective cost curves. Most of the capital expenditure relating to these projects has already been spent, which points to low capital risk. ARM’s balance sheet reflects a strong cash position, and low gearing. Further growth or acquisition opportunities can therefore be considered by the company should they arise.

by Mark Rule


Plant at Khumani Iron Ore Mine

In the 2010 financial year ARM achieved a significant milestone by successfully completing its 2 X 2010 growth strategy to double production volumes in its diversified portfolio of commodities. This strategy culminated in the delivery of seven high quality, long-life, low-cost mines. ARM continues to pursue an aggressive growth strategy, which combined with an uncompromising pursuit of operational efficiencies and growth opportunities through partnerships and acquisitions, should allow ARM to continue to create value for its shareholders.

INVESTSA

37


ALTERNATIVE INVESTMENTS

Is Web 2.0 the latest investment choice?

S

hares of social networking site LinkedIn almost doubled on their first day of public trading in May, pushing the total value of the company to about US$8 billion. The IPO was one of the first tests of the appetite for social networking sites amongst the public. No doubt, this hunger has been fuelled by the everinflating values of privately held companies such as Facebook and Twitter which have seen their valuations increase hugely on secondary markets. Most recently, reports have suggested that Facebook’s value is heading towards the $100 billion mark. The question, however, is whether this indicates a new playing field in the investment arena or whether, in fact, investors are in danger of being hit by the bursting of another dot.com bubble. Paul Whitburn, analyst at RE:CM, said he believes the hype will be short lived. “Social networking has no

barrier to entry and there is always a new technology and trend to displace existing networks. Much like Yahoo dominated the early years of search and has been surpassed by Google.” Furthermore he believes that social networking sites have not yet demonstrated their ability to leverage their networks in order to generate decent enough returns for investors.

“Social networking sites have not yet demonstrated their ability to leverage their networks in order to generate decent enough returns for investors.” He added that some of the large capital raisings that have been made by social networking businesses around the world – and the valuations placed on these IPOs – are excessive. “Many of the developers of these businesses are selling their stakes to the market at inflated valuations and large amounts of capital continue to enter the market, much like the technology bubble of 2000.” “These businesses should not need to raise capital as the

38

INVESTSA

business models are generally capital light but the people whom you would think understand the business models are selling to less informed investors. Some of these businesses may become successful but I think as investors the odds of making a good return over the long term are very low. “Just think back to when MySpace was the next big thing and Rupert Murdoch’s News Corp bought the business in 2005 for $580 million from venture capital partners that valued the business at $44 million a year earlier. In 2005, MySpace had 66 million users and Facebook was a small college start-up with 12 million users and was not considered a threat to the growth of MySpace. In 2009, News Corp had to write-down the asset by $204 million stating a lack of profitability and slowing growth due to Facebook.” The valuations placed on social networking businesses are excessive and more than likely a bubble that will end eventually. “There is no margin of safety in owning these expensive assets currently,” concluded Whitburn.


Global vs local:

private equity funds

I

nternationally private-equity funds are reported to be shedding their investments at a record pace, all of which seems to indicate that the market has now become far more attractive for the sale of assets than for buying them.

A report from London-based research firm Preqin Ltd shows that the value of private-equity-backed exits from investments topped US$85 billion worldwide from the beginning of April to mid-May. This is the biggest quarterly exit total on record, despite it not even being a full three-month period. “Exit values are at record levels as fund managers take advantage of current market conditions to exit investments made both during the buyout-boom era (2006-2007) and post-financial crisis,” Manuel Carvalho, Preqin’s manager of private equity deals, said in the report. “While buyout deal flow as a whole has rebounded from the lows seen in 2009, entry deal flow is still a long way from the highs seen in 2006 and 2007.”

Scared to get wet ... or simply testing the water

Locally, JP Fourie, executive officer at the South African Venture Capital and Private Equity Association (SAVCA), said that while there has been some exit activity in the South African private equity fund space recently, there have not been a massive amount of exits.

Every winter, Mikhail Petrov* joins dozens of other bathers for a weekly swim in the icy waters of Lake Bezdonnoye near Moscow. With temperatures plummeting to minus 30 degrees Celsius, many think this is foolish. But these bathers believe that the icy water builds resistance to illness and enhances wellbeing.

However, he said that despite the trend noted in the Prequin report, you cannot read too much into the exits of private equity firms, as there are a variety of factors that come into play. “You need to bear in mind that, broadly, private equity funds work to a 10-year commitment period – five years to make investments and then five years to harvest and exit investments – so there may be some push to exit because of buying opportunities seen by other financial or strategic buyers.”

Prudential understands that not everyone has the same appetite for risk. Which is why we have a range of funds that are designed to suit every type of investor need – from “toe-in-the-water” to “dive-right-in”.

“Ultimately private equity funds are measured on their financial performance. So exits are important but the return on those exits is even more important than the volume,” concluded Fourie.

For more information on investment, please ask your financial adviser, or visit www.prudential.co.za *Mikhail Petrov is a fictitious person

3041/PRU/DF4/E

All things considered.

INVESTSA

Prudential Portfolio Managers (Pty) Ltd is an authorised financial service provider.

39


Retirement Investing - DANIE VAN ZYL

Retirees urged to protect savings with more volatility expected

“After a severe downturn, investors normally vow ’never again‘; after a period of healthy returns this eventually becomes ’this time it is different‘ which sets the stage for the next downturn.” during both their years in active service and retirement. However, Van Zyl said that since 1995, the market has fallen five per cent or more on 12 separate occasions. “The biggest losses normally come after a steep increase in equity prices. It is a repeating story of market booms followed by downturns.”

Danie van Zyl | Head of guaranteed investments at Sanlam Structured Solutions

C

lients who are heading towards retirement have been issued a stark warning to prepare for further volatility within their investment portfolios. This is despite South African equity markets having almost returned to pre-crash levels. The warning comes from Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions, who said that local equity markets could prove to be a rocky ride for investors for some time to come. Van Zyl said the first half of 2011 has been one of the most eventful in recent times, but that this has often been for the wrong reasons. “Just as the world economy started showing strong signs of recovery, natural disasters and turmoil in North Africa and the Middle East rattled global markets.” “The issue at hand is the uncertainty in the markets at the moment, not only in South Africa, but globally. Just look at developed markets, like those in Europe and the US, where the debt to GDP ratio remains very high.” Fund members are often unaware of how often there will be a market downturn

40

“After a severe downturn, investors normally vow ’never again‘; after a period of healthy returns this eventually becomes ’this time it is different‘ which sets the stage for the next downturn. In the case of the boom prior to the 2007 and 2008 credit crisis, the ’this time is different’ logic was that expert rating agencies could use securitisation to diversify and distribute risk globally and prevent excessive concentrations of risk. However, as we have since discovered, this was not the case. There is still no free lunch.”

“The most important thing is to start planning for retirement as soon as possible, and take into account that markets will always encounter volatile periods. You could be hit by a downturn just before you retire, so your retirement plan must be sufficiently robust to allow for that.” He said that given the current environment of increased volatility, this kind of

INVESTSA

uncertainty is likely to continue. “Anyone who has a retirement portfolio should prepare themselves for regular downturns in the market. Do you want to be the


member who retires at the bottom of the cycle and loses a significant chunk of his savings?” Van Zyl suggested that one way of protecting one’s life savings against this turbulence is to place retirement savings in a smoothed bonus portfolio. “These portfolios pay members investment returns through regular bonus declarations. During strong growth, some returns may be set aside, to be paid out during weaker markets. So portfolio returns are smoothed by releasing investment returns, or by holding them back, depending on market conditions.” Smoothed bonus portfolios are generally chosen by pension fund members nearing retirement age, or more risk-averse investors. Van Zyl believes that people need to understand how market movements affect their retirement nest egg. “Many people simply don’t see that until the day they retire, and you need to protect your savings prior to retirement.” With inflation set to rise in the near-term, experts are expecting interest rates to be hiked before year-end. Van Zyl warned that inflation is likely to hit those saving for retirement. “Pensioners face a particularly tough challenge, finding a suitable retirement product that can at least keep pace with inflation.”

A head for heights ... or just a leap of faith

According to Van Zyl, there are ways to counter the effects of inflation, and market volatility. “The most important thing is to start planning for retirement as soon as possible, and take into account that markets will always encounter volatile periods. You could be hit by a downturn just before you retire, so your retirement plan must be sufficiently robust to allow for that.”

Every summer, for weeks on end, Sofia Sanguine* climbs to a height of more than 50ft, where she proceeds to swing by her arms, legs, chin and feet; performing death defying aerial acrobatics. For Sofia this is just another day at the office.

Prudential understands that not everyone has the same appetite for risk. Which is why we have a range of funds that are designed to suit every type of investor need – even those who get vertigo on the kitchen steps.

For more information on investment, please ask your financial adviser, or visit www.prudential.co.za *Sofia Sanguine is a fictitious person

3041/PRU/DF1/E

All things considered.

INVESTSA

Prudential Portfolio Managers (Pty) Ltd is an authorised financial service provider.

41


Retirement Investing - Roy Stephenson

Inflation worries

put spotlight back on pensioner

Roy Stephenson | Annuities actuary with Investment Services (Corporate) at Old Mutual South Africa When it comes to annual pension increases on their annuities, local pensioners are locked in an ongoing battle against the ravages of inflation in order to ensure that the ‘real’ purchasing power does not decline.

W

ith the local inflation rate creeping again towards the upper end of the three to six per cent target band, the need for at least an inflation-linked annual pension increase has once again come under the spotlight. Roy Stephenson, annuities actuary with Investment Services (Corporate) at Old Mutual South Africa said that two options for pensioners in this regard are an inflation-linked annuity, which escalates by the annual rate of inflation each year and a with-profit annuity. Old Mutual’s CPI linked-annuity provides the pensioner with protection against high inflation and maintains the purchasing power of their monthly income payments. “Pensioners are provided with an income until death, which means the term of the policy payment can be as long as 40 years. The annual pension payment increase is based on a 12-month average for the South African Consumer Price Index (SACPI), set four months before the policy anniversary date.

per pensioner upfront, so the trustees’ only consideration is that the CPI annuity may be slightly more expensive than other options in the with-profit annuity space.” He said that the increased cost should be weighed against the peace of mind afforded the end-consumer. “An inflation-linked annuity offers a win-win outcome for both the pensioner and pension fund. The risk to the pensioner is mitigated because the pension income increases by CPI each year, and the pension fund carries only the counterparty risk (that of the guarantor of the annuities not meeting its promise). Pensioners and pension fund trustees needn’t worry about investment returns either, because the CPI annuity’s initial payments and subsequent increases are defined up front .” On the other hand with-profit annuity enables pensioners to share in the profits made on the underlying annuity portfolio by way of annual increases to their pensions. The increases

He said that to achieve this, the product is invested in assets which pay an income stream that increases in line with the SACPI to ensure it can meet its payment obligations as they fall due. “The most readily available financial instruments to achieve this return are government inflation-linked bonds. We ensure that the 40-year life of their CPI annuity is adequately covered by a variety of instruments which typically mature over 24 years. We have to formulate the mix of government bonds carefully to ensure we maintain a sufficient amount of assets to meet our annuity obligations,” added Stephenson. The CPI annuity can alleviate some of the pressure experienced by pension fund trustees and their intermediaries. “We define the individual pension

42

INVESTSA

declared for the current period are based on investment returns during 2010 as well as the level of the bonus-smoothing reserve. “The aim of these products is to provide annual increases to help combat the negative effects of inflation.” Stephenson advised that if pensioners are to maintain confidence in their fund trustees, those trustees need to ensure that they understand what is happening to inflation and the impact it has on pension funds. They, in turn, will need to help employers make informed decisions that are in the best interests of employees and pensioners. “In nominal terms, recent increases have typically been lower than those paid in the 1990s. Twenty years ago, any reduction in increases would have been masked by rampant inflation, exceptionally good investment returns and double digit increases. Unfortunately, market conditions and inflation levels no longer have this effect on pension increases, with the result that lower increases are likely to remain a focus of attention and pensioner activism for the foreseeable future.”


REGULATORY DEVELOPMENTS

Professionalism

T

here has been much debate over the validity and effectiveness of regulatory developments in South Africa regarding the financial services industry of late, particularly with regard to the introduction of RE Level 1 and 2 exams.

of advisers

is a global trend “As much as we might like to think we operate separately, the reality is that financial services industry is a global one, as is the advice that goes with it.”

This shift towards a greater sense of professionalism among financial advisers is certainly not a local trend. Seamus Casserly, president at the Financial Intermediaries Association of Southern Africa (FIA), said that the FAIS Act and the introduction of regulatory examinations are indicative of a worldwide trend that aims to better govern the provision of financial advice, as well as recognising the need to establish the industry as a profession. He said that while the introduction of reforms may vary between countries, there is a common theme throughout various regions. “Financial advisers provide a valuable service and this is recognised around the world. However, it is also recognised that to offer this service, it is necessary to show that one has a thorough knowledge of the industry in which one operates, hence a number of reforms that are currently taking place both here and internationally.” “Changes being mooted in South Africa mirror those happening elsewhere. For example, the regulatory examinations being introduced by the FSB are indicative of the training that counterparts in the UK and US are already required to undertake, and which is increasingly being seen in other regions as well.” In Australia, the Securities and Investments Commission recently published a set of proposals to lift the standard of advice provided by advisers by establishing a new Financial Services Competency Certification exam. According to the proposals, financial advisers would also have to take a ‘knowledge update review’ every three years. Casserly said the financial advice industry in South Africa is at a similar crossroads. “FAIS was introduced in 2004 and for the majority of advisers who comply, it has proven to be an important piece of legislation that properly governs the industry. The new regulatory examinations will ensure that all advisers are not only heeding this act but are also operating with the same level of knowledge and competence.” In the UK, there has been a similar tide of change which culminated in the decision by the Financial Services Authority (FSA) to ban financial advisers from receiving commission for selling investment policies from 2012. The move, which only applies to investments such as pensions and unit trusts not mortgages and insurance policies, means advisers will have to charge clients directly for their services. “The South African market is in many ways unique given our demographics and, while we are not seeking to follow the path of other countries by banning commission on products, it is important that we align our industry with what is happening

around the world. As much as we might like to think we operate separately, the reality is that financial services industry is a global one, as is the advice that goes with it.” “The provision of financial advice to consumers is a hugely important and often underestimated role. It is through the effort and knowledge of those professionals operating in our industry that makes the difference between whether or not someone is able to retire comfortably, is able to afford medical treatment or has the correct insurance in place for both the short and long term,” said Casserly.

INVESTSA

43


CHRIS HART

getting the

wires crossed Chris Hart | Chief Strategist | Investment Solutions

F

inancial markets are once again on edge, as a significant and widespread slowdown of the global economy becomes more evident. The slowdown is so far dismissed as another ‘soft patch’ similar to last year.

of credibility. National debt levels have started to threaten sovereign solvency and households are also struggling at the edge of creditworthiness.

In 2010, the global economy eventually shrugged off that soft patch and financial markets enjoyed a correspondent strong period where optimism returned. The question is whether this time is more of the same or is the soft patch a harbinger for a much more challenging period for the global economy.

The economic soft patch has unfolded quite suddenly and despite the efforts of monetary and fiscal policy. If excessive budget deficits, zero interest rates and massive excess liquidity were a good antidote to recessionary conditions, then the global economy should be experiencing acceleration in its growth momentum at this point. Yet the soft patch is evident across both the developed world and also emerging markets. In many cases, the consequences of monetary and fiscal ammunition already exhausted are forcing a number of countries to start with austerity measures to rectify imbalances.

Circumstances have shifted in important aspects since mid-2010. The global economy was in part energised by the introduction of another bout of QE (quantitative easing) euphemistically dubbed QE2. Inflation was still subdued and there were heightened fears of a deflationary spiral at the time. The US 10-year yield fell below 2.5 per cent reflecting those slowdown and deflationary fears.

The problem may not necessarily be solvable. At the root of the problem are promises made to electorates that are well beyond the tax base to ever deliver on. Yet electorates are holding their governments to their promises. The kneejerk strategy is to kick the can down the road. The solvency crisis just becomes worse. We are now facing the era where the financial market risk wires get crossed.

However, in 2011, deflation is no longer a fear. A number of key emerging markets such as India, China and Brazil has seen inflation surge to uncomfortable levels requiring tighter monetary policy. Commodity demand has recovered and this has tightened the supply-demand balance with higher prices as a consequence. In 2010, the US was able to deal with the soft patch through additional monetary measures. However, with both monetary policy and fiscal policy already at unprecedented extremes it is difficult to envisage any additional measures that could be put on the table with any degree

Normally, the investor refuge in a soft patch or recession is bonds. However, in the wake of a massive ramp up in debt, a slowing economy now increases the insolvency risk as already stretched debt ratios balloon further out of control. Due to policy path commitments already made, governments are trapped by being unable to cut expenditure but the spectre of tax hikes will also just strangle growth.

44

INVESTSA

Electorates are simply unwilling to give up their access to the public teat. The end point will eventually be the demise of the welfare state … or a descent into the Third World.

“At the root of the problem are promises made to electorates that are well beyond the tax base to ever deliver on. Yet electorates are holding their governments to their promises. The kneejerk strategy is to kick the can down the road.”


etfSA.co.za

etfSA MONTHLY SOUTH AFRICAN ETF/INDEX TRACKING UNIT TRUST PERFORMANCE SURVEY end-May 2011 Mike Brown | Managing Director | etfSA.co.za

Best Performing Index Tracker Funds – May 2011 (Total Return %)* Fund Name

Type

5 Years (per annum)

Satrix INDI 25

ETF

17,63%

Prudential Property Enhanced

Unit Trust

15,02%

Stanlib Index Fund

Unit Trust

12,53% 3 Years (per annum)

Prudential Property Enhanced

Unit Trust

22,53%

Proptrax ETF

ETF

20,93%

Satrix DIVI Plus

ETF

19,79% 1 Year

Satrix INDI 25

ETF

32,66%

NewFund eRafi INDI 25

ETF

27,75%

Satrix RAFI 40

ETF

24,31% 3 Months

Satrix INDI 25

ETF

7,88%

Unit Trust

7,51%

NewFund eRAFI INDI 25

ETF

6,75%

DBX Tracker MSCI USA

ETF

Prudential Property Enhanced

1 Month 3,05%

DBX Tracker MSCI World

ETF

2,55%

BIPS Inflation-X

ETF

1,92%

Source: Profile Media FundsData (31/05/2011) * Includes reinvestment of dividends.

The etfSA Performance Survey is updated monthly and looks at total return performance over the period one month to five years for index tracking unit trusts and ETFs available to the retail investor in South Africa. Funds that track the FTSE/JSE Industrial Sector continue to provide paramount performance. The Satrix INDI 25 ETF holds a clear head over any other tracker funds with a return of 17,63 per cent per year over the past five years, 32,66 per cent return over the last 12 months and 7,88 per cent over the past three months. The NewFunds eRAFI INDI 25 ETF, which tracks a basket of 25 local industrial shares using the fundamental indexation method, has also produced above average total returns (27,75 per cent over one year and 6,75 per cent over the past three months), confirming the good performance by industrial shares in recent times. The property sector also stands out as a prime performing area of the equity market. The Prudential Enhanced SA Property Tracker Fund, which is a unit trust that looks to achieve above-market performance, by index enhancing methods, is in the top three funds for both the five-year and three-year periods. The Proptrax ETF, which uses purely beta methods of exactly tracking the SAPY index, has closely mirrored or exceeded the performance of the other property unit trusts, which use more active portfolio selection methods and remains a good option for investors seeking exposure to this asset class. The full Performance Survey can be accessed on www.etfsa.co.za


BETTER BUSINESS

How to instil a culture of compliance in your practice With the South African regulatory environment becoming increasingly complex, the importance of compliance has never been greater. Not only do financial advisers have specific compliance responsibilities concerning FAIS, they are also expected to have a working knowledge of a range of other current legislation, such as the Consumer Protection Act, the Pensions Fund Act, the Financial Intelligence Centre Act and Conflict of Interest. In addition, they need to be familiar with imminent legislation, such as the Protection of Personal Information Act and the Treating Customers Fairly regime that is being developed by the Financial Services Board (FSB).

An integral part of risk management

“A succession plan is fundamentally a long-term business continuity plan.”

Many financial advisers complain that they lack the proper knowledge and resources to ensure effective compliance and that it puts a heavy administrative burden on them. However, compliance is an integral aspect of risk management and corporate governance, as failure to comply puts your practice at risk both operationally and in terms of your reputation. It is important, therefore, to move away from thinking about compliance as a set of regulatory tasks to be performed, and to move towards instilling a culture

of compliance into your practice. This entails encouraging a set of appropriate values, beliefs, assumptions and behaviours. According to the Compliance Institute of South Africa, compliance is most effective in a corporate culture that emphasises honesty and integrity and in which top management consistently leads by example. The Institute’s Generally Accepted Compliance Best Practice Framework sets out principles, standards and guidelines in this regard, and about all other major aspects of compliance practice.

Consider outsourcing If your practice lacks the resources to handle its compliance requirements internally, a number of compliance tasks can be outsourced to suitably qualified and experienced practitioners. As outsourcing the compliance function can affect your organisation’s regulatory and operational risk, it is important to set up key risk indicators in advance and define performance measurements. This can prove challenging as sometimes the company providing a compliance outsourcing service has more knowledge about FAIS and other compliance than you do. With the FSB becoming increasingly stringent in enforcing compliance, you need to ensure that your own levels of knowledge and experience are sufficient to enable you to judge whether the outsourced compliance provider is operating to appropriate standards. The Generally Accepted Compliance Best Practice framework is available from The Compliance Institute of South Africa at www.compliancesa.com

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal being to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services short lists third party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the short list of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.

46

INVESTSA


BAROMETER

HOT sideways

Confidence returns to investors and advisers The latest South African Investor Confidence Index by the Institute of Behavioural Finance has revealed that institutional investors and financial advisers are both increasingly confident in the local equity market, expecting a collective return of 5.2 per cent over the next 12 months.

New richest man in South Africa With an estimated worth of R63 million, the low-profile Ivan Glasenberg has overtaken Nicky Oppenheimer as the richest man in South Africa and one of the 100 richest people in the world. The chief executive of the privately owned international commodities trading company, Glencore, recently announced the company’s listing on the London and Hong Kong stock exchanges. Hedge funds rediscover their mojo Man Group, the world’s second largest hedge fund manager, reported stronger than expected profits on the back of a solid performance across its range of funds. The company’s latest assets under management stand at around $71 billion and underlying profits rose to $599 million from $560 million in the previous fiscal year.

NOT

Risks abound despite pockets of value South African stocks are fairly valued, according to Plexus Asset Management, with pockets of value in commodityrelated stocks since the sell-off in February. Chairman Dr Prieur du Plessis said the risks to equity investments remain high, though, especially while black swans abound.

Electricity load shedding rumours switch off investors With winter having arrived, rumours of Eskom’s electricity load-shedding plans refuse to go away, which has reportedly contributed to nervous global investors avoiding South Africa. Compounding the issue, Eskom revealed that electricity used during peak times has risen to levels higher than at the same time in 2010. Goldman to face credit crisis rap The New York prosecutor has subpoenaed Goldman Sachs over its role in the global credit crisis following an allegation in a sub-committee report that the US bank misled buyers of mortgage-linked investments as one of the reasons behind the collapse of the financial markets. Deadline issued to Ireland Ireland has been given two years to convince financial markets that it is different from Greece, or it will face the prospect of a new ratings downgrade. Ratings agency Standard & Poor’s said it was not yet ready to put Ireland in the same category as Greece and the Irish Government has said it hopes to tap investors in 2012 – the challenge is now to convince markets of the Emerald Isle’s financial stability.

47


INDUSTRY NEWS

Appointments

Vanessa Hofmeyr Private client wealth management company Citadel has appointed Vanessa Hofmeyr to manage its South African balanced fund and also intends to hand its global equity fund into her capable hands in a few months’ time. Hofmeyr has previously worked at Coronation and later joined Investec.

Shanay Narsi

Trurman Zuma

Nedgroup Investmens has appointed Shanay Narsi as an institutional investment consultant. Narsi will be offering and implementing services to pension funds and investment solutions for institutions.

Absa Wealth, the high net worth wealth management offering from Absa Bank and affiliated to Barclays Wealth, has appointed Trurman Zuma as head of the central investment and product office (I&PO). Zuma will be responsible for driving the strategic agenda of the I&PO, focusing on product due diligence and research, advisory standards as well as product and distribution support.

New bourse set to shake up derivatives market Reports of a rival exchange to compete with the JSE seem to resurface every few years in investment circles. The same rumour has once again begun doing the rounds, though this time it seems there’s some meat to the story. An application for a new exchange known as SAFE – or the South Africa Financial Exchange – has already been lodged with the registrar at the Financial Services Board (FSB) and the people behind it are hoping for confirmation of the success of this in the near future. A source close to the project said there has already been a lot of interest from other parties, particularly with a view to the new exchange being able to reduce the cost of trading. However, it is believed that the new exchange, at least initially, is not planned as a direct competitor to the JSE but instead will seek to tap into the unregulated side of the investment

market such as securities lending and derivatives including contacts for difference (CFD). “The aim is to capture a lot of the products that are not currently traded on the JSE and, while there will always be overlap, we believe that there is room for a new player specialising in a niche market.” He said the global financial crisis, which has been largely attributed to the derivatives market, brought to the fore the issue of whether all derivatives need to be regulated. Currently exchange traded derivatives, as the name suggests, are traded via an exchange while over the counter (OTC) derivatives are not. “We felt there was a gap in the market and that it was important for investors to have an official exchange through which these

instruments can be traded.” Those close to the project continue to stress that they are waiting to hear from the regulator as to whether their application is successful so this project still appears in its early days. Some people may recall a Cape Town-based company, Capital Commitments, which also applied to the FSB for a licence to operate a stock exchange back in 2006 known as Saasdaq (SA Association of Securities Dealers Automated Quote System). This application ended fruitlessly but there certainly seems to be growing interest in the potential for a new exchange and any associated reduction in trading costs, so INVESTSA will keep you updated on any developments.

PSG buys online platform Equinox PSG shows no signs of slowing down on its acquisition trail as its financial planning and stockbroking arm, PSG Konsult, announced it had bought Equinox, the online unit trust trading platform. PSG Konsult CEO, Willem Theron, said the

48

acquisition would add assets worth R1.9 billion to PSG’s current unit trust assets under management of R25 billion and bolster its client base by a further 9 000. Equinox will become part of PSG Asset Management, which falls under PSG Konsult.

INVESTSA

Theron said the acquisition was part of PSG Konsult’s expansion strategy through acquisitions and organic growth, adding that the group has an appetite for more acquisitions but would only invest where such transactions made business and strategic sense.


JSE offers Momentum’s

Managed Account Platform The Johannesburg Stock Exchange (JSE) has acquired Momentum’s Managed Account Platform (MAP) after receiving approval for the transaction from the Competition Commission.

hedge fund manager, was developed to monitor hedge funds’ trading activity, thereby ensuring that they remain within agreed investment mandates.

This risk management tool, which offers hedge fund investors greater protection by segregating investors’ assets from the

Rand Merchant Bank and Momentum developed MAP in 2007 as a way to create a robust framework for institutional participation

in the South African hedge fund industry. JSE head of derivatives trading, Allan Thomson said the acquisition makes the JSE the first exchange worldwide to endorse a managed account platform which would provide more transparency to hedge fund trading.

Renaissance Capital takes home 10 awards Renaissance Capital, the leading emerging markets investment bank, was awarded a total of 10 awards for its research coverage in Africa at the recent Financial Mail’s annual Analyst of the Year awards.

Following the acquisition of leading South African broker BJM in July 2010, Renaissance has more than doubled its research team globally, with over 35 people dedicated to Africa coverage.

The awards follow a year of expansion for Renaissance’s global research team.

“Renaissance Capital’s strong performance in the Financial Mail’s rankings further

underscores our firm’s success in building the leading emerging markets research team in Africa and other key geographies, including Russia, CIS, emerging Europe and Asia,” said David Nangle, head of equity research.

Imara has doubts over pension equity limit Investment company, Imara Asset Management, said recent changes to pension fund legislation intended to protect savers might have the opposite effect on workers under the age of 30. The company warns that the provision of regulation 28 of the Pension Funds Act that limits equity exposure to 75 per cent, property exposure to 25 per cent and foreign exposure to 25 per cent, could prove damaging for younger workers.

allocation into cash and bonds for fund members over 45. But why would a 28-year-old with a 35-year investment horizon want to make a big commitment into bonds?” she asked.

annuities (RA). “The danger is that young people may ‘raid’ their supplementary saving plans to buy lifestyle assets rather than commit to longterm saving. The net effect would be diametrically opposed to the regulator’s intentions.”

She suggested the authorities monitor the long-term effect of the change; specifically on products such as retirement

According to Lara Warburton, managing director at Imara, in the long term, equities had the best record of inflation-beating returns and a proven capacity to build personal wealth – so much so that some young clients saving for retirement had been advised to make a 100 per cent commitment to equities. “Perhaps no significant underperformance will result from a 25 per cent portfolio

INVESTSA

49


INDUSTRY NEWS

fia awards top product providers The Financial Intermediaries Association of Southern Africa (FIA) honoured some of the top product providers in the investment and insurance space at its annual 2011 Awards gala ceremony held at the Sandton Convention Centre in Johannesburg on Thursday, 9 June 2011.

provide intermediaries with the opportunity to recognise the leading product suppliers in the financial services industry. “These awards are an important tool with which the intermediary industry is able to pay recognition to, and honour, those providers in the industry who provide excellent service to clients via the

intermediary channel.” “We hope that product providers use this information to assist them in recognising those areas in which they need to improve and those in which they are performing well,” said Van Flymen.

Liberty came away with a clutch of awards after being named best Long-term Insurer of the Year – Risk Product. The group also took top honours in the investment space after its asset management subsidiary, Stanlib, was announced the investment Supplier of the Year for Retail Investments. “Winning in this category is an acknowledgement of the strength of our relationship with our intermediaries and the superior quality of our product offering,” said Thabo Dloti, chief executive of Stanlib. According to Brian van Flymen, recently elected President of the FIA, the awards

Asset manager financial results prove optimistic for SA Two of South Africa’s leading asset fund managers released financial results recently – with both being well received by investors. Investec Asset Management said five of its six businesses reported an increase in profit for the 12 months to March 2011, including a record profit from its asset management arm. However, the news was somewhat tempered as its private

banking unit announced a loss of £91.4 million against a profit last year. This was due largely to trouble in Ireland, where the group took a hit on bad debts.

warmly welcomed, as the group said an increase in assets under management to R231 billion, from R176 billion a year earlier, resulted in a 32 per cent rise in half year profit to R299 million.

Stephen Koseff, chief executive at Investec said the private banking unit would return to profit next year and that most of the losses had already been taken. “These were bull market trades and there was obviously business written that with hindsight we would rather not have done and clients that we would have been better off not to have dealt with.”

The firm cited increasing interest from international investors towards African portfolios during the six-month period. However, the company also cautioned investors against expecting too much in the future, saying the last 18 months had been exceptional.

The news from Coronation Fund Managers was also

50

INVESTSA


PRODUCTS

PRODUCTS First multi-asset class ETF hits JSE courtesy Absa Capital The Johannesburg Stock Exchange (JSE) has listed the first multi-asset exchange traded fund (ETF), a new product offered by Absa Capital. The new ETF known as MAPPS (Multi-Asset Passive Portfolio Solutions) allows investors to invest in, and passively track, the performance of a portfolio of equities, government nominal bonds, government inflation bonds and cash – all through the purchase of a single ETF. This is a new avenue for the ETF model, which has traditionally offered exposure to only one asset class. Vladimir Nedeljkovic, head of investments at Absa Capital said there was strong investor interest in MAPPS, with R38 million in initial investments attracted during the initial public offer, and further investments lined up.

accounts, to debit cards and digital payments. With the new system, the banks will be muscling into the consumer-to-consumer payments market dominated by PayPal, whose president recently predicted the company’s annual revenue would double to as much as $7 billion by 2013. Standard Bank launches new equity index product The Standard Bank Group has launched a new equity index product on the JSE called the Standard Bank Africa Equity Index Exchange Traded Note (ETN). The bank said the ETN offers investors a costeffective and convenient way to access a broad range of listed companies that were active across Africa, excluding South Africa, Lesotho and Swaziland.

Bank of America, Wells Fargo and Co. and JPMorgan Chase and Co. are setting up an Internet exchange that will allow their customers to send money via text and e-mail messages to customers at participating banks.

According to Leanne Parsons, head of equity markets at the JSE, the newly launched product would help the JSE realise part of its Africa strategy and help local investors expand their horizons. “We’re very excited. Once people understand the dynamics, we certainly think this is the kind of product that will fly in the market.”

The program, called clearXchange, accelerates a trend away from checks and cash, the conventional ways to tap bank

Goolam Ballim, chief economist at Standard Bank, said that with growth expected at six per cent for 2011, Africa was a good

Banks team up for online payment system

investment destination as macro situations such as price stability, external trade relations and economic integration had improved significantly on the continent over the past few years.

INVESTSA

“The program, called clearXchange, accelerates a trend away from checks and cash, the conventional ways to tap bank accounts, to debit cards and digital payments.”

51


eventS

events SA home to the world’s

seventh biggest financial planning population

industry. She said the number of certified financial planner professionals (CFP) in South Africa has already topped 3 700, making it one of the largest financial planning hotspots in the world. “At the end of 2010, there were nearly 134 000 CFPs worldwide. We’re seeing tremendous growth, as high as 52 per cent, in territories like China, Brazil, India and Indonesia. In terms of overall numbers, South Africa now has the seventh largest population of CFP professionals.”

T

he annual Financial Planning Institute’s (FPI) Convention, which was held at the Sandton Convention Centre in June, celebrated the cream of South Africa’s financial planning industry and examined the burning issues currently affecting the country’s financial planners.

The Financial Planner of the Year Award went to Warren Ingram (middle), with runners-up Jan-Carel Botha (left) and Shaun Latter (right).

Warren Ingram, co-founder and executive director of Galileo Capital, was announced the FPI’s Financial Planner of the Year 2011. Ingram is responsible for Galileo’s financial planning division and has been a financial planner since 1996. Wessel Oosthuizen, director of the University of the Free State’s (UFS) Centre for Financial Planning Law in the faculty of law, was awarded the Chairman’s Award for lifelong outstanding contributions to the financial planning profession, while Nico van Gijsen, managing director of Finlac, was also awarded the first FPI Media Award to recognise an FPI member who has made an outstanding significant contribution to promote financial planning in the media.

The Chairman’s Award for lifelong outstanding contributions to the financial planning profession was awarded to Wessel Oosthuizen (left) with FPI board chairperson, Gerhardt Meyer

52

Also at the event, internationally acclaimed financial planning professional and keynote speaker, Karen Schaeffer, noted what an important role South Africa – and other emerging markets – are playing in the financial planning

INVESTSA

She said the need for competent financial planners is growing at a rate of six per cent globally per year, as a result of the need for increased consumer protection following the global financial crisis. “The economic downturn was a wake-up call for consumers. Studies have shown that those who worked with a financial planner felt more confident in their existing strategies, which is reflected in the growing numbers of CFP professionals around the world,” noted Schaeffer. Schaeffer also said some of the global trends currently impacting the financial planning profession include the move towards a relationship-based approach between financial planners and their clients, with holistic service offerings and regulatory change. “As the global financial crisis highlighted the need for increased protection for consumers, regulators, including the Financial Services Board (FSB), are looking for ways to increase transparency, disclosure and improve the duty of care given to consumers.” “Regulators want greater consistency for best practices, which has opened dialogue about consumer protection, governance, transparency and professionalism around the world,” said Schaeffer.


we make over 2 536 beds daily we manage 26 proper ties we're 2 years old

but this year . . . . . w e a r e g o i n g B I G !

www.signaturelifehotels.com

24 Hour Reservations: 0861 238 252


eventS

INVESTSA and Investment Solutions host industry event at Durbanville Hills

“Themed with the tag-line, Horizons – Challenging the Status Quo, the event was held at the Durbanville Hills Wine Estate in Cape Town on 22 June and attracted a number of financial intermediaries in the Western Cape.” 54

INVESTSA


events

W

e are now one year on from the launch of INVESTSA. This milestone coincided with the launch of the first of our co-sponsored events. In partnership with Investment Solutions, the leading provider of multi-manager investment portfolios, this first event proved hugely successful. Themed with the tag-line, Horizons – Challenging the Status Quo, the event was held at the Durbanville Hills Wine Estate in Cape Town on 22 June and attracted a number of financial intermediaries in the Western Cape. One of the major drawcards was the esteemed panel invited to discuss a range of investment-related issues pertinent to intermediaries. Manoj Gopal, head of retail at Investment Solutions, hosted proceedings while chief strategist at Investment

Solutions, Chris Hart, gave an insightful keynote address touching on the issue of sovereign debt in Europe. At the time of going to press, it seems this is once again the hot topic and even the US is now in the frame of being a possible defaultee. More clarity will certainly be found by the time you are reading this – we hope. According to Chris, however, the end result is not if, but when, the US will default; interesting times indeed. The much-anticipated panel discussion was chaired by our very own Maya Fisher-French, who aimed to keep the panel in check, and on time. Among those taking part were Piet Viljoen, Sunel Veldtman, Muitheri Wahome, Anne CabotAlletzhauser and, once again, Chris Hart.

There was much debate – and disagreement – regarding the benefit or otherwise of regulations governing the industry such as FAIS and Regulation 28. One question that we left with was whether all of this new regulation actually impedes the giving of advice to clients. You, our readers, will no doubt have strong views on this. One of the other central themes which emerged from this discussion was the question of who should be making the asset allocation call for clients – asset managers or advisers. This is a recurring theme and no doubt one we will touch on again in the future at the next INVESTSA event. Look out for our August issue for a special feature from Maya Fisher-French who will be providing some in-depth analysis of the issues raised at the event.

One year on from the launch of INVESTSA, and the first of our cosponsored events.

If you are interested in attending future INVESTSA events please do contact us on investsa@comms.co.za to register and we will provide you with all of the necessary details. Not only is there no charge to attend but FPI members can also claim CPD points.

Brought to you by The evolution of wealth

INVESTSA

55


Snippets | THE WORLD

Battle over investor advice in Oz Financial planners in Australia could be facing a far tougher regulator if mooted changes to the Australian Securities and Investments Commission’s (ASIC) powers are given the green light. Under the proposals, tougher penalties may be meted out to financial planners including fines of up to $1 million and lifetime bans for breaches of new regulations.

Spain lays down gauntlet to Germany Spain warned it could launch legal action against Germany over accusations that Spanish cucumbers caused an E.coli outbreak that has so far killed 16 people in Germany and one in Sweden. Spanish Deputy Prime Minister Alfredo Perez Rubalcaba said the government in Madrid may issue a legal challenge to officials in the German port city of Hamburg.

Temporary flight fears as second Iceland volcano erupts Business and leisure travellers were in a state of flux in May after the Grimsvotn volcano began erupting in Iceland – echoing the similar event a year ago when hundreds of flights were cancelled. However, any impact was short-lived and the volcanic ash cloud soon began to dissipate causing little disruption to flights.

Ireland’s Transport Minister in hot water over second bailout claims Ireland’s Transport Minister Leo Vardakar’s comments to a newspaper that it was “very unlikely” the country would be able to borrow from the financial markets next year landed him in hot water with his colleagues. Vardaker later responded that his comments had been “hyped up”.

US has no choice but to use pension funds Treasury Secretary Timothy Geithner has warned that the US may have to make use of federal pension funds to free up borrowing capacity, as the US hit the $14.294 trillion legal limit on its debt. The government has until early August to postpone the investment before it starts defaulting on paying bond investors. Nigeria lures investors into the country with attractive investments The Nigerian Government is promoting a range of incentives for South Africans with the aim of attracting further investment into the country. Roberts Orya, MD of Nigerian ExportImport Bank (Nexim Bank), which was part of a Nigerian delegation to the World Economic Forum, said there are a lot of opportunities for strategic partnerships. China drought crisis deepens China continued to experience its worst drought in a half-century, as dry weather left millions without enough drinking water. The crisis is pushing inflation higher and adding to widespread power shortages. Shipping has also been obstructed by low water levels inland, while farmers have complained that crops are dying.

56

Moody’s calls for financial reforms in Japan Japan has secured an emergency budget of four trillion Yen for the reconstruction of the disaster stricken country but there are questions as to whether a second budget will be passed. Adding to the gloom Tom Byrne, senior vice-president of Moody’s Investors Services, warned that Japan’s credit rating could be negatively impacted due to the recession and unsuccessful reforms.

INVESTSA

India invests $5 billion into Africa For the next three years, India will invest $5 billion into Africa to help the continent achieve its development goals. Indian Prime Minister Manmohan Singh said this will boost support for infrastructure projects, regional integration, skills training and human resource development. Britain’s top billionaires increase their collective wealth Britain’s richest people have increased their collective wealth by 18 per cent over the past year and are now worth £395 billion, according to the UK’s Sunday Times newspaper’s annual rundown of Britain’s 1 000 richest individuals and families. The UK is currently home to 73 billionaires, still shy of the record 75 set in 2008, when their collective wealth was £413 billion.


AND NOW FOR SOMETHING COMPLETELY DIFFERENT

royal fashion

a new kind of investment Royal wedding fever swept the world in April when more than two billion people watched Catherine Middleton marry Prince William, the future King of England. The outpouring of emotion in the lead up to and during the event signified the value that many people place on all things blue-blooded. Most recently, the infamous ‘see-through’ dress that Kate Middleton wore during a fashion show at university, which is said to have been what first caught Prince William’s eye, was sold at auction in April for £78 000. This was ten times its original estimate and a far cry from the £50 that the dress reportedly cost to make. The trend for royal wedding-related memorabilia continued again when the hat that Princess Beatrice, daughter of the Duke of York, wore to the wedding was sold on eBay for an incredible £81 100, all of which was donated to UNICEF. Phillip Treacy, who created the hat, said: “I’ve been surprised by the overwhelming response to ‘the hat’. I’m delighted, flattered and touched by HRH Princess Beatrice’s decision to donate the hat to charity. I hope that people all over the world will be generous and that this hat will benefit many.” Unsurprisingly, the royal whose clothing has collected the most amount of money at auction is Princess Diana. In 1997, eight weeks before the tragic car crash in Paris, 14 of her dresses were auctioned for a collective £420 000 to American businesswoman Maureen Dunkel. She stands to bank a tidy profit from the investment if estimates of an upcoming auction are to be believed. Just one of the dresses, a blue velvet gown worn by Diana to a dinner with President Ronald Reagan at the White House in 1985, has a starting price of £750 000. “I hope someone buys all the dresses and keeps the collection together,” said Dunkel, rather optimistically, given the price tag on some items. “It has been an odyssey. Now is the time to wave goodbye.”

INVESTSA

57


THEY SAID...

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

“(It is) an obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe.” A joint statement issued by the BRICS countries commenting on public statements by high-level European officials to the effect that the position of MD of the International Monetary Fund should continue to be occupied by a European.

“It is always difficult for an honest adviser who tells the whole truth to potential clients to compete favourably with a salesman who only cares about selling the next product.” Warren Ingram, director at Galileo Capital, on why honest advisers lose out to unscrupulous salesman.

“His continued presence is the biggest overhang on Microsoft’s stock.” David Einhorn, long-time Microsoft shareholder and influential hedge fund manager, who accused Microsoft CEO Steve Ballmer of being stuck in the past.

“Some investors seek profit by rapidly latching on to trends, especially trends involving ‘smart money’ placed by major institutions.” Absa Multi Management analyst Miranda van Rensburg, suggesting the latest trend is to move money offshore.

“I have already over and over again pointed out the danger of a ticking bomb, that unless we can do something drastic about the crisis of unemployment, in particular youth unemployment, we risk another 1976 uprising.” Cosatu general secretary Zwelinzima Vavi.

“I want a very simple and clear message to come out of this summit, and that is that the most powerful nations on Earth have come together and are saying to those in the Middle East and North Africa who want greater democracy, greater freedom, greater civil rights: ‘We are on your side’.” British Prime Minister David Cameron at G8 leaders, who met in France in May.

“It gets dug out of the ground in South Africa or someplace. They melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their heads.” Warren Buffet on the current obsession of investing in gold.

“Having come through a terrible recession, our challenge today is to meet these obligations while ensuring that we’re not consuming, and hence, consumed with a level of debt that could sap the strength and vitality from our economies.” US President Barack Obama on America’s commitment to reducing government debt during his state visit to London.

58

“I’m not saying there’s a bubble but prices for commodities always return to the marginal cost of production. The fact that iron ore producers have been earning an 80 per cent operating margin is just not sustainable.” Piet Viljoen, chief chairman of RE:CM, commenting on the surge in commodity prices.

“This comes as no surprise, as commodities such as gold have been offering a very attractive alternative to the struggling stock market as a real store of value at a time when Dollars and paper money seem doomed to fail.” Dr Prieur du Plessis, chairman of Plexus Asset Management, on the bull market in commodities that has attracted much attention over the last few months.

INVESTSA


Investment Solutions Limited is a licensed Financial Services Provider. FAIS license number 711.

INVESTSA July 2011  

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