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Contents

CONTENTS

06 08 10 12 14 20 24 28 30 43

Too many investors wasting money in money market funds

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MONEY MARKET FUNDS CONTINUE TO DOMINATE INVESTMENT FIELD Profile AdrĂŠ Smit, Manager of the Cadiz Money Market Fund: Cadiz Asset Management Challenging the status quo: Turning the concept of risk on its head FPI turns 30 HEAD TO HEAD Mazars Financial Services / Acsis The impact of retirement caps on your clients Commodity investing Many routes, many potential pits FUND PROFILES SECTOR REPORT: Telecommunications, media, technology and electronics

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Letter from the editor

letter from the

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

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

t’s a very challenging time for financial advisers. Constructing a portfolio for clients that will comfortably meet their needs in retirement is not easy. The balance between fixed income investments and equities has to be just right. And offshore investments, necessary as they are in an investment portfolio, have so far not lived up to the hoopla. Where do you put your clients’ offshore exposure? In the US, which might still default on its extended debt ceiling, or Europe where a saved Greece will probably default down the line? I had a look at stock markets in Africa recently and was amazed at the returns they are providing, much better than the JSE; even in countries like Egypt surrounded by the conflict. Africa, of course, entails additional political risk. But is it any worse than the debt risk in developed countries? Advisers should take a look at African markets, or consider the number of Africa unit trust funds, run from this country. Maya Fisher-French has written two feature articles that will help advisers with client portfolio construction. One is on the controversial proposals by Finance Minister Pravin Gordhan to introduce caps on retirement funding. Maya points to the shortcomings in the proposals. Her second feature is on the concept of risk and why it should be turned on its head. Risk will be different for every client. Advisers need to understand the changing perception of risk.

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

Sunel Veldtman has written an excellent feature on whether your client’s wife

any information contained in this publication.

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will fire you. One study says that 70 per cent of women do in the first year after their husband has died. Her advice is to not concentrate on the male but rather design an holistic strategy for the family. Head-to-head has Marius Fenwick, COO of Mazars Financial Services, and Andrew Bradley, CEO of Acsis, on the planned amendments to Regulation 28, other regulations and those badlyconstructed and-worded regulatory exams. Their views are interesting. Into its second month now, our sector report is on the telecommunications, media, technology and electronic sectors. We profile Adré Smit, manager of the Cadiz Money Market Fund. He gives clear views on when clients should and shouldn’t be in a money market fund. As it turns out, one of my features is on the overuse of money market funds. It’s good to see my view is not much out of line with Adré. I also look at investing in commodities. I was fortunate to visit Istanbul last month for the annual Franklin Templeton Investments conference. Their top commodities manager said then that gold would keep going up. He’s been so right. Enjoy this issue of INVESTSA and put it to good use for your clients. All the best,

SHAUN HARRIS

Too many investors

wasting money

in money market funds At the end of May, R3.941 billion flowed into money market funds. That’s a lot of money and, while we don’t have a breakdown between institutional and retail investors, it’s well known that cautious retail investors continue to play it safe by investing in money market funds. Safe might turn out to be quite risky as money market funds battle to provide a real return in the face of rising inflation.

By Shaun Harris

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“Investors put money in money market funds and leave it there for years, receiving lower returns and paying higher tax than would be the case in other types of funds.”

ssociation for Savings and Investment SA (ASISA) category inflow figures show that money markets attracted the largest amount of money for the month of May. The only encouraging sign is that to date, more (R8.163 billion) has been invested in prudential variable equity funds. Money market funds are second at R4.725 billion, but that is probably only because of an outflow in April. Tal Nieburg, head of Morningstar South Africa, noted that “a remarkable turnaround occurred” with the R3.941 billion inflow in May versus an outflow of R2.477 billion in April. But this was caused largely by one fund, the Absa Money Market Fund, with R3.094 billion. Nieburg said it accounted for a hefty 78,5 per cent of the flows. The latest inflow figures continue a trend that has been seen for a few years now. Investors in cash, nervous of equity markets, missed the 30-odd per cent return from the JSE/FTSE All Share index in calendar 2009 and about 18 per cent in 2010. So far this year, the return from local equities is flat, maybe up 0,5 per cent. So money market funds are providing better returns. But this is only over the short term. Money market funds definitely have a place as an investment vehicle; provided the client, no matter how cautious, has a specific investment target. This would typically be a short-term investment. But often it’s not. The client just continues to sink capital into money market funds. And about the best explanation frustrated financial advisers get from clients is that they want their money there for capital preservation and to avoid equities. One private client adviser, who can’t be named because of client confidentiality, tells of how a client with a large portfolio came to him in 2009 and said he wanted no more exposure to equities. “He had a well-adjusted portfolio but he just said: sell all the equities. At that stage, local equities were down six or seven per cent and I tried to explain that if he left his money there, the market would come back. But the client was adamant, so I had to sell.” So the client, through his own choice, was effectively hit twice by missing the subsequent run in equities and enduring the low returns of money market funds. Sensible advisers will want to ensure that clients have some, no matter how limited, exposure to equities for long-term returns. And it seems some clients are starting to

listen, judging by the strong inflows into prudential equity, essentially balanced funds. But when it comes to stubborn clients they are banging their heads against a wall. Money market funds are all they want. “At the moment, as investors, the last couple of years have not provided high returns in bank accounts or money markets. And while the expectations are for interest rates to rise going forward, both the timing and the size of these hikes is uncertain,” said Albert Botha, fixed income fund manager at Atlantic Asset Management.

“Money market funds definitely have a place as an investment vehicle; provided the client, no matter how cautious, has a specific investment target. This would typically be a short-term investment. But often it’s not.” Yet investors in money market funds will argue that they are well positioned for rising interest rates. Well positioned? When interest rates rise they will probably get an extra 0,5 per cent, before tax, from a money market fund. This is meant to compete with inflation, before any possible inflation shocks, of about five per cent and trending higher. “Savings accounts are often used by individuals for ease of access and the perception of safety, yet when viewed objectively, well run money market funds are not only safer, but provide higher returns along with high liquidity,” said Botha. “This is because a money market fund obtains its returns by investing assets into several different banks and institutions, while a savings account in effect lends money only to that one bank. This is what is called concentration risk.” He added that for most retail investors, the use of a money market fund for short term or emergency savings makes a lot more sense than using a savings account. Philip Liebenberg is head of absolute returns at Sanlam Investment Management (SIM). He looks after fixed interest investments in

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the SIM Low Equity Fund, a prudential low equity sector fund for cautious investors, while colleague Patrice Rassou, head of equities at SIM, runs the equities side of the fund. Liebenberg tries to analyse why money is going into money market funds. “You have to try and separate some of the emotions of the past few years. People are risk averse, scared, it’s a behavioural finance issue. But investors must realise they need equity exposure. That’s what we are trying to give them in this fund, a balance between growth and income.” Botha said that while there is a definite use for money market funds and savings accounts for investors, there is an overreliance on them in the South African market. “Investors put money in money market funds and leave it there for years, receiving lower returns and paying higher tax than would be the case in other types of funds. When you next look at your portfolio, ask yourself what and when you need the money for and then consider moving into other interest based funds.” Atlantic Asset Management has funds in both these categories, the Atlantic Cash Plus and Atlantic Enhanced Income. Pieter Koekemoer, head of personal investments at Coronation Fund Managers, said while not new, the key trend is investors using balanced funds. And that’s a wise decision. But he’s also aware of very cautious investors using money market funds and that they might find it difficult to get real returns with inflation rising. He expects regulations for money market funds to tighten in the next six months, for instance by limiting the period they can be invested in a bank. “It’s very much in line with international trends post the financial crises. The regulatory changes are coming from the Financial Services Board, but are also part of a wider industry investigation into non-equity investments.” So while clients might want to remain in money market funds with the prospect of interest rates rising, this has to be set against both greater growth in inflation and the expected regulatory tightening on money market funds, that will reduce returns but also risk. If clients insist on money market funds, advisers should make sure they have a clear objective for the investment. And explain to them that over the medium to long term, money market funds offer the lowest returns of all unit trust funds.

Heinrich Dietzsch

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“Yes, equity investments carry a higher risk and are more volatile, but over the longer term, equities have consistently outperformed fixed interest and inflation. Only time in the market will enable investors to benefit from the growth potential of equities, not timing the market.”

characteristics of a money market fund

es, nearly half of all money invested in collective investment schemes (unit trusts) is in very low risk, fixed interest funds, with no less than 31 per cent – nearly R287 billion – in pure money market funds. This phenomenon that the biggest single sector of investments is money market funds is not a temporary phenomenon or one which is particular to the prevailing market conditions either. On the same date in 2010, these funds made up 32 per cent of the total (2009, 37 per cent; 2008, 28 per cent and 2007, 27 per cent). Speaking at a media conference in Johannesburg on 2 February this year, ASISA CEO Leon Campher noted that in 2010 the JSE All Share Index (ALSI) produced a 19 per cent return in Rand terms (the average money market fund returning less than seven per cent) bemoaning how few investors had shared in this growth. “In 2010, investors continued the trend of sacrificing long-term capital growth for the perceived safety of fixed interest funds. Yes, equity investments carry a higher risk and are more volatile, but over the longer term, equities have consistently outperformed fixed interest and inflation. Only time in the market will enable investors to benefit from the growth potential of equities, not timing the market.” Given these figures, we must ask ourselves why money market funds attract the majority of savings and what makes them so special.

of instruments which delivers a yield higher than bank savings accounts which need maximum liquidity. Bank savings accounts do not have the freedom to invest beyond call. Benefits of pooling

Safety One of the most important functions a money market fund can provide is an investment which will not suffer capital losses over any term. (During the credit crisis in 2007, some foreign money market funds ’broke the buck’ when some instruments that they held defaulted. This did not occur in South Africa and the security of a fund’s holdings is one of the crucial differentiators when choosing the right money market fund to invest in.)

A money market fund – as a collective investment scheme – allows the pooling of investments to the advantage of all investors. Unless an investor has about R50 million to invest, it is nearly impossible for them to replicate what can collectively be achieved in the fund. An individual investor rarely has large amounts of capital to enable them to buy high-yielding instruments like negotiable certificates of deposit (NCD), promissory notes, treasury bills and short-dated listed bonds, which a money market fund can do.

Liquidity Low return Another important function of a money market fund is to provide liquidity to any type of investor. Daily liquidity allows the investor to meet obligations immediately and to switch funds out to alternative investments when attractive opportunities present themselves. More attractive than in the bank’s savings account A money market fund can invest in various instruments with a term of up to 12 months, while the maximum weighted average maturity (WAM) may not exceed 90 days. This optionality allows the fund manager to purchase a range

Everyone knows that the lower the risk, the lower the return. Taken over the long term, the money market funds have historically delivered the lowest return relative to other types of fund. In such an environment, it is crucial to keep an eye on the costs being paid because, as a percentage of the total return, these can be very significant. Crucially, any up-front costs which are ‘chopped off’ before the investment is made can make a big difference to an investor’s return over time.

Hein

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rich Dietzsc

PROFILE | Manager of the Cadiz Money Market Fund

A d r é S mit

AS M anager of the C adi z M oney M arket F und : C adi z A sset M anagement

With more than 30 years’ experience managing fixed income portfolios, Adré Smit is one of the longest serving fixed income managers in South Africa. INVESTSA asked him about the changes he has witnessed over this time and his views on the castigation given to investors who pile into money market funds.

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“Avoid the temptation of chasing today’s winners. Investments by their nature are cyclical so today’s winners have very often run their course. You should spend more time looking for tomorrow’s winners.”

You have over 30 years’ experience managing fixed income portfolios. What are the major changes that have taken place in this space during this time? The most exciting thing about having been involved in the South African fixed income market for as long as I have is that it has never stopped evolving and, as such, it has been a continuous learning curve. When I entered the market we were operating in an environment of prescribed assets where life offices and pension funds had to invest 33 per cent and 53 per cent, respectively, into fixed income securities, the bulk of it having to go into government bonds, or gilts, as they were known. As a result of this captive market, government was able to borrow at negative real rates of interest which resulted in fixed income securities generating very poor returns. At the time, there was a fairly limited secondary market in bonds, with only Eskom making a market in its own bonds. During this period Eskom actually borrowed at rates lower than government, and that was without a government guarantee. A secondary market in bonds started developing with the advent of the JSE Bond floor, which was an open outcry market. This has since evolved into a telephone market and the appointment of primary dealers to make a market in government bonds. We went through a period when Kruger Rands were very popular as they qualified as fixed income securities and we were able to generate income on these assets by lending them to banks that could use them as liquid assets. From being largely a domestic market we have seen foreigners playing an ever increasing role in our local market. As the new South Africa started developing, a range of infrastructure projects started coming to the market on a PPP basis like the funding of tollroads. These opportunities have grown into the SRI funds of today. We have seen the development of the corporate bond market which has required

fixed income managers to acquire credit skills. Quantitative skills have also become more necessary in this area as the derivatives market has grown. As banks have come under increasing pressure to manage their capital more effectively we have seen the development of the securitisation market. A common complaint about investors is that they invest too heavily in money market funds. What is your view? This complaint is typically made after a crash in the equity market when investors seek a safe haven in the money market after equity prices have already come down meaningfully. They then sit with the next problem of having to decide when to get back into the equity market. This results in investors being overexposed to money market funds at the wrong time and end up selling low and buying high. Money market funds certainly do have their place in a portfolio of investments and the level of exposure should depend on your stage in life. As someone in or nearing retirement, you do not want to have all your investments in the equity market as you need to be able to generate a cash flow without having to sell equities at a time when the market is down. This is where a money market fund has a role to play for an investor. What do you think are the biggest challenges for investors over the next 12 months? The biggest challenge is to get a good grasp on the macro fundamentals. There is growing concern that global growth is going ‘soft’, which would result in interest rates remaining lower for longer and equity markets performing sub-optimally. In the developed market space, there is more concern over deflation than inflation. With more robust growth in the developing markets we have seen those equity markets outperforming the developed markets, but they would appear to be fairly fully priced. From a local fixed income perspective the major challenge is going to be inflation and how

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the Reserve Bank responds to it in terms of raising interest rates. With inflation now firmly on an upward trend, there is the concern that the Reserve Bank could fall behind the curve, which could result in it having to raise rates higher at a later stage. Our view is that we should be seeing the first hike in the repo rate in November. What do you think are the biggest contributors to being a successful fund manager? The first factor would be to have a deep seated interest in the financial markets and what makes them tick. The second factor would be to develop a solid decision-making process that reflects your philosophy that you are prepared to apply consistently. What advice would you have for someone getting into the investment industry now? Learning through experience is not necessarily the most efficient way of acquiring knowledge. My advice for a newcomer into the market would be to hitch their star to a good mentor. They can assist you moving up the learning curve much more efficiently. What advice would you have for financial advisers in the current environment? Avoid the temptation of chasing today’s winners. Investments by their nature are cyclical so today’s winners have very often run their course. You should spend more time looking for tomorrow’s winners. How do you define success? While financial success is not unimportant, of more importance is whether you enjoy what you do and feel fulfilled doing it. Finally, if you had R100 000 to invest, where would you put it? I would invest it in a product that provides me with a capital guarantee but also gives me an exposure to the upside of the equity market.

Maya Fisher French

Challenging the status quo: Turning the concept of risk on its head

While we can debate, analyse and take bets on whether the US will ultimately default or whether Greece will be saved, one thing we do know, with absolute certainty, is that inflation will eat into our savings over time and that we are all living longer.

by Maya Fisher-French

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“Globally in an environment where many countries, the US included, are so indebted as to raise the question of defaulting on their sovereign debt, one could argue that shares (or debt) held in individual companies are actually a safer bet than government bonds.”

t the recent Horizons: Challenging the Status Quo event held for financial intermediaries, Investment Solutions chief strategist Chris Hart argued that risk as we know it has completely changed. Globally in an environment where many countries, the US included, are so indebted as to raise the question of defaulting on their sovereign debt, one could argue that shares (or debt) held in individual companies are actually a safer bet than government bonds. At the same time, most developed economies are running negative interest rates which mean that long-term savings will be eroded if invested in cash. Add into this mix the fact that we are all living longer and the inflation rate for retirees is substantially higher than the official inflation rate due to higher medical costs, and the idea of bonds and cash as risk-free savings is turned on its head. As Hart said, “Equities may not guarantee you a return above inflation, but at least they give you a fighting chance.” So what do you tell your clients when they say they don’t want to take any risk but their retirement needs clearly show that they require a return significantly above inflation if they are to survive their retirement? Panel member Sunel Veldtman said it is extremely important to spend time helping your client understand the nature of risk because their risk appetite changes with market movement and usually becomes a hindrance to investing in the correct asset class at the right time. Veldtman explained that our brains perceive market risk in the same way as the savanna man perceived a lion running towards him. It registers in the most primitive part of our brains, whereas positive market news is not perceived in the same way. The brain equates perceived market losses with physical risk. In addition, if the market is positive and people have made money in the market, the positive feeling this creates acts like a drug and can induce people to take more risk than they should. “In order to profit from opportunities in investments, client will often have to make investments that make them feel anxious,” said Veldtman. If clients are susceptible to the greed and fear factor, who should be left with the

task of asset allocation? Is it the financial adviser or the fund manager who should be selecting the assets? Piet Viljoen, head of asset management company RE:CM, argues that there are some top asset managers in South Africa who can deliver above average returns if allowed to select the asset allocation for the client. For example, there is no point in constructing a portfolio with 25 per cent in bonds simply because this meets a long-term strategic asset allocation, when in fact at that time bonds are too expensive and therefore inherently more expensive. In the same way, it makes no sense to limit the exposure to equities when the markets are showing value. Viljoen concluded that the simplest solution is to give your clients’ money to one of South Africa’s top balanced fund managers, make sure they save enough and then draw down on both the capital and income in retirement.

“Over time, market risk diminishes and inflation risk increases which makes bonds and cash higher risk assets in the long-run. Even in retirement, cash can carry higher risk than equities when it comes to the generation of income as cash returns move in line with interest rates while income (dividends) from equities grow with inflation.” Anne Cabot-Alletzhauser, head of Alexander Forbes Research Institute disagreed. She argued that you need to match the liabilities of the client with the investment outcome and the asset manager has no idea of the needs of the individual clients within the fund. It is the role of the financial adviser to work out an holistic financial plan that meets the total financial need of the client. CabotAlletzhauser believes that there is too much focus on the investment side and not enough on the individual’s entire financial situation.

protection, a person with a family would need more going to life cover and in retirement, funding medical costs becomes a priority. Clients need to view their finances holistically and not in silos. The question was raised as to whether current legislation makes it difficult to give good advice. Regulation 28 now limits exposure to equities at member level. In an environment where clients need to increase their exposure to growth assets to meet the challenges of inflation and longevity, does a prudential investment really constitute best advice? Muitheri Wahome, head of technical solutions at Investment Solutions, argued that Regulation 28 does in fact allow for clients to have further exposure to growth assets. Although direct equity exposure may be limited to 75 per cent, members can include hedge funds, private equity as well as property in their retirement portfolios. Therefore, it is possible to provide a client with a well-constructed portfolio that meets their individual needs. This will, however, require advisers to think outside the box and not just default to lower risk investment portfolios. In conclusion, the panel agreed that education of clients is paramount and that advisers need to reframe the way they and their clients consider risk. Over time, market risk diminishes and inflation risk increases which makes bonds and cash higher risk assets in the long-run. Even in retirement, cash can carry higher risk than equities when it comes to the generation of income as cash returns move in line with interest rates while income (dividends) from equities grow with inflation. Retirees have seen their income from cash fall by 30 per cent over the last five years. A portfolio of growth assets which can provide a steady income increasing with inflation is the best solution for a client; unfortunately, in order to deliver this solution, clients need to save more so that they are not drawing down significant amounts of capital in retirement.

For example, a younger person may need to have a higher percentage of their retirement savings going to income

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FINANCIAL PLANNING INSTITUTE anniversary

fpi The Financial Planning Institute of Southern Africa (FPI) is a nonprofit professional body formed in July 1981 as the Institute of Life and Pension Advisors (ILPA) to improve levels of professionalism. Today, the FPI is regarded as the leading independent professional body for financial planners in South Africa. Through the global partnership with Financial Planning Standards Board (FPSB) in the United States, along with other 23 other countries, the FPI is the only institution in South Africa able to offer the CFP® certification.

“The FPI is uncompromising in establishing and maintaining professional financial planning standards in South Africa and plays a major role in ensuring that the public has access to competent financial planners.”

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celebrates Living in a global village meant ensuring that local financial planning practices were aligned to global standards. To ensure that Financial Planners in South Africa met international standards, in 1998 the FPI affiliated with the Certified Financial Planner® Board of Standards Inc. in the United States. In April 2000 the institute adopted its new name (FPI) and were a founding member of FPSB. The Certified Financial Planner/ CFP mark asserts that the financial planning professional has met appropriate competency, ethics and professional practice standards to provide comprehensive personal financial planning services to clients. In addition to the CFP mark, the FPI also has two local trade mark levels of membership: Associate Financial Planner™/AFP™ and Registered Financial Planner™/RFP™. The FPI is uncompromising in establishing and maintaining professional financial planning standards in South Africa and plays a major role in ensuring that the public has access to competent financial planners who are professionally qualified, are experienced and have agreed to abide by a Code of Conduct, Ethics and Practice Standards. Many top financial institutions have adopted the FPI as an independent standards partner and our members include both general practitioners and specialists in particular branches of financial planning.

Benefits available to From the CEO: Godfrey Nti Given the economic crisis that we are still recovering from, it should come as members of the FPI - Exemptions from certain FSB Level 2 Regulatory Examinations for CFP professionals. - Commissioners of Oaths ex officio status for CFP professionals due to the professional designation they hold. - Focused technical communications to keep members abreast of the rapidly changing financial planning environment. - Access to Continuous Professional Development (CPD) opportunities via the annual FPI Convention, regional FPI events, FPI-accredited CPD providers and negotiated discounts at industry events. - Six subscriptions annually of the FPI Journal, The Financial Planner. - Free annual subscription to the LexisNexis online news and legislation monitoring tool. - Access to solutions to financial planning practice needs through associations with value chain partners and a wide range of industry products and services. - Support for the financial planning profession with volunteer representatives in regional and Industry Sector Groups (ISGs) committees who are actively engaged with government, industry bodies and key stakeholders on members’ behalf on various industry and legislative issues. - Various PR and marketing initiatives to promote financial planning as a career and to the consumer. - Access to international trends, research and best practice through FPSB affiliation.

no surprise to anyone to see the intense focus on regulation of the financial services industry, as regulators and policy makers in South Africa join their counterparts around the world in an attempt to prevent a similar crisis in the future. We see the shift in the tone of regulation as a massive opportunity for the FPI, its members and the companies for which they work.

In 2011 and beyond we intend to significantly increase our effort in the area of engaging with regulators and policy makers as the voice of the profession, since we are well positioned to educate and raise awareness of the benefits of financial planning and the important benefits that our rigorous certification standards provide to South African consumers. Policy discussions tend to be wide-ranging and we intend to cast a similarly wide net for input and dialogue as the FPI takes its place in coming debates. The opinions and insights of the FPI member community and others working in the public interest will be a vital factor in developing our policy positions and priorities. We will be updating our members on policy development and will be actively seeking their input and thoughts on the future of regulation in the financial services industry, as well as on FPI’s potential role in any new regulatory environment as we seek to increase access for the South African public to professional, competent and ethical financial planners.

Godfrey Nti

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30th Birthday What are the biggest changes in the industry over the last 30 years? The landscape has changed significantly over the last 30 years in the area of financial products which has resulted in the development of an overwhelmingly wide and complex range of financial solutions being made available to the consumer. Numerous changes to financial planning legislation and regulation of financial planners with the introduction of the FAIS Act and more recently, the increased licensing requirements for financial planners in terms of the new Fit and Proper Regulations, has resulted in an increased complex environment for financial planners which has had a significant impact on the way in which financial planners operate and provide advice to consumers compared to 30 years ago. Has the FPI’s vision and mandate changed during this time? The FPI was originally formed as a member body representing the interests of financial advisers. This vision was changed when the strategic decision was made a few years ago to operate the business as a true professional body. This new vision enabled the FPI to focus its activities on protecting and promoting the financial planning profession, setting the standards for professional financial planners in the industry and demanding increased ethics and competence to ensure that the best interest of consumers is served.

The difficulty of attracting new talent is often cited as a concern – has this always been a problem? Typically 30 years ago, financial planners entered the industry as a result of working at large financial institutions and had limited access to specialised education programmes. This has resulted in the current high average age for practicing financial planners. With the introduction of specialised education programmes over the last 10 years, this has provided new talent with access to financial planning as a career choice. This has seen a new breed of financial planners entering the industry and also increased the competitiveness and demand for these new, young professionals. How has the role of financial planners changed over the last 30 years? Historically, financial planners were regarded as salesmen of financial products responding to the specific needs of a consumer. In current day, consumers are more demanding of their financial planners, especially considering the worldwide phenomenon of consumerism as well as the incredible access to information the media and especially the Internet has provided to the consumers, and expect high levels of professionalism and competence.

The CFP®, CERTIFIED FINANCIAL PLANNER® and are trade marks owned outside the U.S. by Financial Planning Standards Board Ltd. The FPI is the marks licensing authority for the CFP marks in South Africa through agreement with FPSB. Visit FPSB‘s for more at www.fpsb.org Invest SA website - 175x13021 information July 2011.FH11 Thu Jul 21 17:17:54 2011 Page 2 C

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Great things happen when we work together TJDR48479

Absa Insurance and Financial Advisers (AIFA) would like to congratulate the Financial Planning Institute of South Africa on their 30th anniversary. Together, the partnerships of today are the successes of tomorrow. Insurance and Financial Advisers (Pty) Ltd, Reg No 1970/002732/07. Authorised Financial Services Provider.

I N V E S T S A W O U L D L I K E TO W I S H T H E F I N A N C I A L PLANNING INSTITUTE OF SOUTH AFRICA A

HAPPY

B I R T H D AY

CONGRATULATIONS!

ECONOMICS

EUROPEAN FRAGILITY

REMAINS A CONCERN FOR EMERGING MARKETS Adenaan Hardien | Chief Economist: Cadiz Asset Management

The global view Global economic activity continued gaining strength over the first quarter of 2011, with annualised growth of 4,3 per cent, after ending 2010 on a firmer note. This follows a slump in activity over the middle quarters of 2010, as the effects of inventory restocking and policy stimulation dissipated. The baton has been picked up by households, mainly in emerging economies. With time, the corporate sector should join in. To be sure, their participation is essential in ensuring a sustainable recovery through the impact that this would have on employment. Despite gaining greater traction, activity has remained uneven across regions. Emerging economies continue to enjoy very strong performances, while advanced economies struggle. The experiences are certainly not universal, with major economies like the US and Germany outperforming their peers, while others like Japan struggle with the additional pressure of disasters and other problems. The world economy encountered a number of obstacles over the first half of the year, which caused a temporary lull in the pace of the expansion in the second quarter. These include supply-chain disruptions from Japan’s disasters, elevated commodity prices and adverse weather conditions in several major economies, a sharp increase in political risks in the Middle East and North Africa, and ongoing market volatility from events in the Euro Area. Monetary policy in advanced economies should remain accommodative, given financial sector vulnerabilities and still-large output gaps. But given much stronger economic performances across emerging economies

and potential asset price bubbles in some of these economies, their monetary authorities will continue the process of policy normalisation.

“With increasing signs that South Africa’s growth recovery is gaining momentum, albeit slowly, and heightened inflation risks, we remain comfortable with our view that the repo rate hiking cycling should start later this year, with November the likely month that sees the first hike.” The local view The strength of the Rand, and the successive cuts in the repo rate that followed, were the key features on the local economic front in 2010. But, year-to-date, the local currency has been one of the worst-performing currencies. It has been on the back-foot against all major currencies, losing 6,1 per cent on a trade-weighted basis, 9,7 per cent against the Euro, 5,4 per cent against the British Pound and 1,9 per cent against the US Dollar. The Reserve Bank Monetary Policy Committee (MPC) has left its benchmark repo rate unchanged at 5.5 per cent since its last rate cut in November 2010. The bank sees inflation rising to six per cent by the fourth quarter of 2011, peak at 6,3 per cent in the first quarter of 2012, and fall back within the target range by the second quarter of that

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year. But it sees inflation remaining close to the upper end of the target range. Consumer inflation rose to 4,6 per cent in May from 4,2 per cent in April and a bottom of 3,2 per cent in September 2010. Our expected profile for consumer inflation is similar to that of the Reserve Bank, but we see a risk that the six per cent target is breached as early as the third quarter of 2011 and that the anticipated peak over the first quarter of 2012 is higher than the Reserve Bank anticipates. South Africa’s economic recovery remained on track, gaining further momentum over the first quarter, although with quite differing performances across sectors. Real activity expanded at a faster pace than was generally anticipated over the first quarter, with annualised growth of 4,8 per cent over the quarter. As with the global expansion, the second quarter will likely see some moderation in growth momentum, but the recovery remains intact. Our forecast is for real growth of 3,8 per cent over 2011. The risk to this forecast is on the upside, even with some moderation in activity expected over the second quarter. With increasing signs that South Africa’s growth recovery is gaining momentum, albeit slowly, and heightened inflation risks, we remain comfortable with our view that the repo rate hiking cycling should start later this year, with November the likely month that sees the first hike. We remain of the view that the cumulative hikes over this cycle are likely to be more aggressive than is generally anticipated. The key risk to our rate view lies in events outside of South Africa. Southern Europe remains fragile and market dislocation resulting from events there still pose a significant downside risk to global growth.

HEAD TO HEAD | Mazars Financial Services

The FSB recently confirmed that the much-debated amendments to Regulation 28 would be delayed for six months to allow time for retail investors and funds to comply. These amendments are just the latest in a string of legislative developments to hit the financial services industry. INVESTSA poses the question: is all this legislation necessary and does it impede the provision of good advice?

Mazars Financial Services M arius

F e n w i c k

COO at Mazars Financial Services

1. Do you think all of the recent legislation in the financial services industry â&#x20AC;&#x201C; regulatory exams, FAIS and Regulation 28 â&#x20AC;&#x201C; is having a positive impact for consumers, brokers and the industry? I donâ&#x20AC;&#x2122;t think the FSB thought the regulatory exam process through properly. For example, it is currently reviewing various issues including the dates by which the exams must be passed and Category 2 exams have been extended until further notice.

The financial services industry has a crisis on its hands. The average age of financial advisers is over 50 with very few young new entrants into the industry. This is not helped by the large insurance companies and banks that still have the age-old approach of forcing new entrants into selling insurance aggressively on a commissiononly basis.

Originally, all advisers including individuals involved in low-cost insurance products at motor dealerships and furniture stores, as well as individuals selling only funeral policies were to write the same exams as fully qualified financial advisers. Fortunately the FSB has now changed its mind and such advisors have been granted exemption.

The first graduates of the BCom Bus Sci (financial planning) graduated in 2008. It is estimated that less than 40 per cent of those graduates are still in the industry due to the rude awakening experienced when employed by the banks and insurers. The industry led by these large institutions must work at making the profession more professional and move away from the old times. This will benefit the consumers as well as the industry.

That being said, the technical level of the exams is still very high and many of the questions border on trickery. The potential fallout of financial advisers expected to exit the industry due to not being able to pass the regulatory exams is detrimental to the industry as well as to consumers.

Currently, with the legislation and processes required through FAIS, etc. it is becoming more onerous to be a financial adviser and the existence of the one-man practices is under severe threat. All this leads to a serious issue and this is one where the individual that needs advice and falls into

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the low- and medium-income groups will no longer be viable to advisers to service and they are going to be left to fend for themselves. Advisers will become even more focused on the high net worth individuals. It will just not be financially viable to service low profit individuals. That is very negative for consumers since the majority of the public falls into this sector and they will be placed into assurers high commission products since they will not be able to afford fee-based advice or have sufficient funds to meet the minimum requirements of R1 million and upwards of specialist investment advisers. Regulation 28 has both positive and negative impacts. For pension funds, I think there are more positives in that they are allowed to use more instruments for protection of investment portfolios. The increase in the limit of offshore exposure to 25 per cent could have been increased more to say 40 per cent and the limit of 75 per cent exposure to equities undoubtedly is negative for individuals that still have 15 years+ to retirement.

HEAD TO HEAD | Acsis

Acsis A ndrew

B r a d l e y

CEO at Acsis

1. Do you think all of the recent legislation in the financial services industry – regulatory exams, FAIS and Regulation 28 – is having a positive impact for consumers, brokers and the industry? These are diverse pieces of legislation and regulations, with differing consequences. However, clearly the intention of the regulators and legislators is to further protect the consumer – and rightly so. Everything possible should always be done to protect the consumer as much as possible in an area like savings and investment, which has a lot of subtlety. The old buyer-beware principle is not adequate. This is where the Financial Planning Institute of Southern Africa must be commended for the key role it plays in promoting and advancing the financial planning profession. Our industry has evolved significantly over the last few decades and the true value that financial planners can add is increasingly being recognised. By effectively educating and guiding clients along their financial journeys, we can significantly improve the quality of their lives. We have made great strides and we need to continue to push ahead to ensure

that consumers’ interests and well-being are always at the heart of our profession. When the simple intended point of departure is to enhance the consumers’ wellbeing, it will not have overnight results and there are also unintended consequences. As far as benefiting the consumer is concerned, there are mostly benefits. The negatives are the additional complexities this all creates and that can and does create confusion for many consumers. FAIS and the regulatory exams have and will certainly have a positive impact on consumers as behaviour is guided and knowledge and understanding are enhanced. Although the regulatory exams will be disruptive in the short term, they will be very good in the long run as all advisers up-skill themselves and have a better understanding of their regulatory obligations.

think it is a good start. We, as a company, work fully within the FAIS legislation and I believe we provide an excellent quality of advice to clients. Having said that, however, I do believe that FAIS has a few flaws in it, but it is a start and will improve as these flaws are ironed out. 3. Do you believe the delay in implementing Regulation 28 was necessary? Yes. Although the intention and objective of the changes have some merit, there are a number of unintended consequences. In certain scenarios they are totally impractical and nonsensical. This will potentially change the way funds invest their money or alternatively significantly increase their costs. Neither of these options makes sense.

2. Some experts have commented that FAIS actually impedes advisers in their ability to provide good financial advice? What is your view? I am not sure who these so-called experts are. FAIS provides a minimum base standard for providing advice. As such, I

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Mazars Financial Services

Acsis

2. Some experts have commented that FAIS actually impedes advisers in their ability to provide good financial advice? What is your view?

4. Do you support the principles behind Regulation 28?

FAIS does not impede the quality of advice. It does, however, take away a lot of time from advisers which may lead to them choosing their clients more diligently according to the profitability of a client as mentioned above. 3. Do you believe the delay in implementing Regulation 28 was necessary? Yes. Considering the amount of individual clients who need to rebalance their portfolio, more time was needed. It also means that portfolios can be adjusted in a more orderly manner giving the administrators time to do so. 4. Do you support the principles behind Regulation 28? For a certain sector of investors: yes. I still believe that the individual must be able to ultimately have the final say on how his or her funds should be invested. There is a sector of investors that most certainly can take much more offshore and in particular more equity exposure. Investors who have more than 10 years to invest will be prejudiced by between two and four per cent per annum by being prevented to take 100 per cent equity exposure. Where the value of the Rand and offshore equities are at the moment, I won’t be surprised if those figures increase considering the limitation of offshore exposure as well. 5. Why is it so important for investors? For uninformed investors, Regulation 28 is important to ensure that their funds are treated prudently in particular where their investment horizon is short and where their risk adversity places them in a position of discomfort during volatile times. Not that Regulation 28 will prevent all volatility. We have seen Regulation 28-compliant funds reduce drastically during market corrections as well, but the downside is definitely less than pure equity funds. For prudent investors and investors with long investment horizons, my point made above in 2) stands.

No. Any regulation that puts in place parameter investing along the lines of Regulation 28 tries to create an answer for any questions that may ever be asked. This is dangerous and will never suffice. It also significantly undermines the key role that investment consultants play together with trustees in determining the needs and liabilities of retirement funds. Only once these have been assessed can an appropriate investment strategy be developed. In a number of circumstances, Regulation 28 parameters would suffice, but in a number they would not. A totally different approach to Regulation 28 should be applied and that is to place an onus on trustees to make sure that they have properly assessed the needs and liabilities of their members and developed an adequate investment strategy for them. In this way, the members’ needs and liabilities should determine their investment strategy and how their money should be invested. Regulation 28 also by and large focuses on volatility risk and ignores the risks each member faces of not having enough money in retirement. As an example, for almost every member irrespective of their age and certainly all members below 50, their best way to ensure that they have enough money in retirement is to be fully exposed to equities. By limiting exposure in equities to 75 per cent of the fund, the regulators have significantly reduced the members’ chances of having enough money in retirement. This makes very little sense. The logic of this is supposedly to reduce the apparent risk to members. However, by introducing some of the additional investment options like private equity and hedge funds, there is the strong likelihood that this will increase the members’ risk. 5. Why is it so important for investors? Before you start investing, you need a clearly developed investment strategy to make sure you achieve your objectives. Understanding any external parameters that may be placed on your investment strategy is crucial. It may result in you having to change your objectives.

INVESTSA

Maya Fisher French

the impact of retirement caps In his budget address, Finance Minister Pravin Gordhan proposed that from March 2012, all employees will be allowed to deduct up to 22.5 per cent of their taxable income for contribution to retirement funds up to a maximum of R200 000.

on your clients

by Maya Fisher-French

INVESTSA

“Ultimately the best advice a client can follow is to start saving from their first pay cheque so they are not trying to play catch up 20 years later.”

hile this may bring pension and provident fund rules in line, for the approximately 33 000* individual tax payers who earn more than R1 million a year, the R200 000 cap on tax-free savings will have a serious impact on their retirement provision. National Treasury’s position that people earning over R1 million do not need tax breaks to save is a very short-sighted view in a country where savings are at a critically low level. The latest savings figures show that households are saving at a rate of only 1.5 per cent of GDP while our total savings rate declined to 16.4 per cent. IMF research shows that a country needs to have a savings rate in the region of 25 per cent of GDP in order to achieve an above average growth rate. South Africa remains critically dependent on offshore investment flows to fund our economic expansion. Savings are savings, whether it comes from the wealthy or the middle class. This tax limit seems also to suggest that high-income earners already have sufficient savings and do not need further incentives to save. As many advisers will attest, the amount a person earns has absolutely no correlation to the amount they save. In fact, it is high income earners, who have the most access to credit, that tend to under-save; the higher the earnings, the bigger the lifestyle. It could be argued that a salaried person earning over R1 million a year would be at the peak of their career, past the age of 40. Like all South Africans, they would have under-saved for retirement and it is at this latter stage of their careers that they would need to boost their retirement savings and take advantage of the tax-free savings up to 22.5 per cent of income.

By limiting their tax-free savings, highincome earners will be disadvantaged in providing for their retirement. Independent financial adviser, Janet Hugo, said the industry, including the Financial Planners Institute, is raising questions about many of these retirement provisions which appear to be focusing on bringing in more tax now at the expense of a reduced pension savings base later. The industry is also looking for clarity around some of the provisions such as whether the cap of R200 000 applies to retirement annuities or only to the combination of provident and retirement funds. There is the question of whether a person who contributes above the tax-free percentage would be able to claim this back as a tax deduction on their lump sum at retirement. “More advisers should get involved in applying their minds to the proposals coming from Treasury and other government departments, like the Financial Services Board. They should find representative bodies and support them where they can.”

“This tax limit seems also to suggest that high-income earners already have sufficient savings and do not need further incentives to save. As many advisers will attest, the amount a person earns has absolutely no correlation to the amount they save.”

a month for 10 years and received a 12 per cent growth on the portfolio, at the end of the period he or she would have accumulated R2.3 million which would attract capital gains tax of R110 000 – equal to 11 months of saving. If 25 per cent of the portfolio was invested in cash and bonds earning six per cent a year, a further R50 000 of tax on interest income would be paid. With questions being raised by the authorities around the tax treatment of many investment schemes like unlisted preference shares and high dividend income funds, there are limited tax-efficient investment options for high-income earners outside of a retirement fund. A non-tax advantage is that a retirement annuity also enforces a savings discipline as the funds are not accessible. Mulholland said that high net worth individuals can also take advantage of a tailor-made share portfolio housed within a retirement annuity which would allow a client to have a more aggressive approach to his or her investment as there would be no tax consequences when trading. If there were concerns about market valuations, a client could theoretically move the portfolio to 100 per cent cash with no capital gains or tax in interest income implications. Mulholland does warn, however, that you have to look at the client’s entire financial situation as well as the costs of the retirement product and whether the tax benefit offsets those costs. Tax efficiency must be balanced by costs, income and growth of the investment. Ultimately, the best advice a client can follow is to start saving from their first pay cheque so they are not trying to play catch up 20 years later.

What should clients do? Jenny Gordon, senior legal adviser at Alexander Forbes said that concerns have also been raised by the industry that if higher earning members reduce their contributions to retirement funds, the cost of running retirement funds for lower earning members could escalate due to the reduced levels of cost cross subsidisation. She added that the cap of R200 000 assumes that a person contributes the same amount to a retirement fund each year over their entire lifetime, which is incorrect. People often have volatile income streams during their working years and they contribute more in years of prosperity and less in leaner years, which the cap fails to accommodate.

*Source: 2009 Tax Statistics These current proposals have not yet been finalised, so it may be premature to advise clients, however, it does raise the question whether clients should still consider a retirement fund if they are not fully benefiting from the tax deduction. Richard Mulholland of BOE Private Bank said that although a client does not receive a tax-break on the contributions, there is still a significant benefit to saving within a retirement structure as there is no tax within the fund on interest income or capital gains tax. For example, if a client saved R10 000

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Retirement Investing - Richard Carter

The devil

is in the asset allocation detail “Getting the asset allocation balance right on an ongoing basis is difficult. Before a client begins, they should consider how much growth they need to sustain their investment and how much risk they can afford to take.” mistake of investing in assets based on past performance alone.” Allocating capital to assets based on your risk appetite and ability to handle decreases in income is the second leg of the asset allocation decision. Asset classes with the potential for greater returns come at the expense of increased risk of capital loss as well as increased short-term volatility. Therefore, if clients want to enjoy the benefit of a greater lifetime income, they must be prepared to tolerate both these risks.

“To cope with volatility, Richard Carter | Allan Gray

ecause living annuities need to provide an income for life, careful asset allocation is particularly important as that will influence how long the investment will last and what standard of living a client will be able to afford, said Richard Carter of Allan Gray. “Getting the asset allocation balance right on an ongoing basis is difficult. Before a client begins, they should consider how much growth they need to sustain their investment and how much risk they can afford to take,” said Carter. “Based on this, they should do two things: look for assets that offer long-term growth potential, and allocate capital to these assets based on their risk appetite and ability to handle decreases in income.” Carter added that a key step in the investment planning process is to decide which asset classes currently offer value for money and are likely to increase in value over the long term. “Try not to make the

instead of drawing an income set at a constant percentage, clients should consider setting their income in Rands and then increasing it yearly with inflation.” “In a living annuity, your ability to handle volatility is especially important as it affects both your investment growth and the income you receive. Specifically, when you invest in more volatile assets, you should be able to restrict your income if growth disappoints and is low or negative.” To cope with volatility, instead of drawing an income set at a constant percentage, clients should consider setting their income in Rands and then increasing it yearly with inflation. “Returns not withdrawn during the up times help to cope with periods of low or negative returns. During periods of negative growth, a client may need to decrease the amount withdrawn to protect capital, as drawing too high an income can erode capital quickly.”

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Making asset allocation decisions can be very challenging. Carter said that clients who feel they don’t have the time or expertise to make these decisions should consider paying for the services of an independent financial adviser or consider investing in asset allocation funds that allow you to hand over the decisions to the investment manager. “Even if you invest in these funds, it’s important to ensure that the fund you choose matches your risk appetite.” Asset allocation decisions should always be based on value and be influenced by your ability to stomach risk. “Falling into the common pitfalls of choosing asset classes based on recent past performance, and ignoring the effects of volatility, could mean that your living annuity runs out too soon.”

Retirement Investing - Bongani Madikiza

South Africans lack awareness

around retirement savings needs Bongani Madikiza | Head of Retirement Fund Solutions The 2011 Old Mutual Retirement Monitor revealed that a lack of awareness around personal retirement savings and contributions to retirement schemes is one of the key reasons why the majority of working South Africans are not saving enough for retirement. Furthermore, the majority of South Africans anticipate having to work for financial survival after formal retirement.

he survey comprised 1 005 hour-long face-to-face interviews and examines pre-retirement perceptions among working South Africans; in particular, their confidence regarding the financial provision they have made for their retirement. Bongani Madikiza, managing director of Old Mutual Corporate, said the survey results reveal that because many South Africans are struggling financially, they end up prioritising their income towards other needs, rather than long-term savings such as retirement savings. According to the survey, respondents’ primary savings motivation was the need to save for their children’s education. Madikiza explained that this pressure on middle-aged people (35-49 years) to focus on saving for their children’s education means that their retirement preparation is likely to fall short. “The possibility exists that some respondents regard their children as a form of substitute retirement policy. However, irrespective of respondents’ views on the role of their children in their retirement, it remains very concerning that only 54 per cent of respondents who are currently 10 years or less away from retirement are actually saving for that retirement,” he said. “By their own admission, most individuals are not meeting their retirement goals. While short-term solutions may be possible for those who already find themselves in this situation, it is clear that long term, mindset-changing interventions are needed in order to educate people regarding disciplined retirement savings from an earlier age. As a society, we also need to investigate mechanisms that help

make this affordable for the majority of South Africans,” said Madikiza. Furthermore, among respondents from lower income brackets, the importance of providing for death or funeral expenses competes directly with saving for retirement. Many respondents are doubtful that they will in fact reach retirement age at all. For this reason, 58 per cent of respondents earning less than R3 000 feel that death, funeral and disability cover is more important than retirement savings. “This mindset is concerning as it does not take inter-generational savings into account and contributes to the cycle of poverty,” Madikiza said.

“The data also revealed a significant lack of awareness among respondents regarding the size and adequacy of their contributions towards their retirement.” The data also revealed a significant lack of awareness among respondents regarding the size and adequacy of their contributions towards their retirement. “Only 23 per cent of respondents knew the approximate value of their retirement savings. In addition, the respondents reported contributing on average only eight per cent of their salary, while it is generally accepted that on average people should contribute around 15 per cent of their

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salary,” said Hugh Hacking, umbrella fund manager at Old Mutual Corporate. What makes this finding especially interesting, according to Hacking, is that although 70 per cent of respondents believe that their contributions towards retirement are about right and only 15 per cent of respondents felt that they were contributing too little towards retirement; approximately 58 per cent said they expect to need to work after retirement, primarily for financial reasons. “Unfortunately this again points to the fact that individuals are not able to accurately assess their post-retirement needs and carefully calculate their pre-retirement funding requirements to meet those needs,” said Hacking. Furthermore, while respondents indicated that they have been kept aware of fund basics and fund rules, few indicate that they have received communication around the value of their savings, administration and management costs, adequacy of provisions and education on how to improve their retirement provision. “Results also revealed that the lack of communication around preservation of retirement funds at the time of leaving a fund is actually having the effect of discouraging preservation. “Only 24 per cent of respondents who had left employment in the last 15 years say that they were given any advice by their fund or employer as to what to do with their retirement funds on leaving,” added Hacking.

SHAUN HARRIS

Commodity Investing , many potential pits Many routes By Shaun Harris

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“The first point advisers must warn about is that, if the client insists, they are taking a short-term, high-risk decision. But taking a step back, the demand/supply equation looks fairly healthy for some commodity prices.”

he commodities boom has many financial advisers hot under the collar. Suddenly clients want exposure to one or two specific commodities, despite perhaps having a well-balanced portfolio with general exposure to commodities through a commodities unit trust fund. And any index fund tracking the JSE/FTSE All Share index or Top 20 stocks will have significant exposure to commodities. But with many prices continually setting new highs, investors now want part of the action. The first point advisers must warn about is that, if the client insists, they are taking a short-term, high-risk decision. But taking a step back, the demand/supply equation looks fairly healthy for some commodity prices. Gold is a perfect example; nearly every day it sets a new high above US$1 500/ounce. But gold can be the most difficult commodity price to call, and investment lore says when the man in the street wants to buy gold, get out. But there are arguments going both ways. “The gold price could go higher. While one thing I’ve learned is that you can’t predict the gold price, it is now underpinned by good fundamentals. The driver is the supply and demand balance,” said Steve Land, fund manager of the international Franklin Gold and Precious Metals Fund. Apart from investors getting excited about new highs in the gold price, Land said that investing in gold has a curious recent history. “In the 80s, investors were trying to figure gold out. It didn’t back currencies anymore, so what did gold do?” This is a question many investors will ask, and probably shudder when they find that gold does not do much, at least physically. But Land added that new technology provided a new boost for gold production. “But now a lot of those mines are near the end of their lives – despite the high gold price.” Gold does not back currencies anymore but in many ways it behaves like a currency. And as experienced advisers will know, currencies can be one of the most difficult calls. Another problem for advisers being pushed by clients to get them into commodities is that, despite recent record prices, commodity prices don’t go up in a straight line. Experienced investors accept this. Inexperienced investors will get ecstatic when a new high is set, despondent when the price pulls back, and generally drive their advisers up the wall. But

if a client insists on exposure to gold, what options can the adviser point towards?

terminal is the world’s largest single coal exporting facility.

There is physical gold; typically gold coins like Kruger Rands or gold jewellery. But investing in the physical product is clumsy, hard to store and may prove hard to sell when the investor wants out. Advisers should rather look at an investment product backed by gold. In the local market, Absa Capital’s NewGold exchange traded fund (ETF) is the best example. It tracks the Rand price of gold, backed by gold bullion bought to underpin the ETF.

A single unit of the RMB Coal ETN gives an investor exposure to one ton of coal, said Goodwin. A futures contract in coal will trade in 5 000 tons, beyond the price range of many retail investors. This is just one reason why ETNs are worth exploring by advisers whose clients want to invest in the price of a single commodity. Direct equity investments could be considered. But often the shares trade out of kilter with the commodity the stock is meant to represent. This is particularly true with gold shares. Despite share price highs for certain mines, like Harmony, other factors like the Rand and productivity levels at the mines, and strikes, have an even bigger effect on share price performance.

“Commodities raise investor emotions and enter the world of behavioural finance rather than fundamentals. The adviser has to know where to draw the line. There will always be periods of commodity price or market weakness.” ETFs have opened up the gold market to many new investors. “It’s cumbersome to buy gold bars but ETFs have changed all that. You still own the gold – and at a lower cost. ETFs are bringing a lot of people into the gold market,” said Land. But investors can gain even more direct exposure to one chosen commodity through an exchange traded note (ETN). Often these use futures contracts to track the price of the commodity. ETNs have now been launched in the local market for just about every commodity, including gold and other precious metals, base metals, oil and coal. Like ETFs, the notes offer investors affordable access to the underlying commodity. Coal is one of the more durable commodity prices, backed by strong demand from China and India. “That demand has been boosted by the near collapse of the Australian coal exporting industry following the floods in Queensland earlier this year,” said Vicki Goodwin, following the recent launch of the Rand Merchant Bank (RMB) Coal ETN. The note is invested in Richards Bay Coal Futures contracts. Despite regular rail link delays, the deep water port is the largest base for coal exports in Africa and the coal

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Tracking the oil price in South Africa can be done through investing in Sasol, a reasonable proxy for the oil price. But the investment can become obtuse due to, for example, petrochemicals and waxes in Sasol’s share price. An oil ETN is a cleaner route for investors. However, investing in commodities involves circles within circles and a headache for advisers. There are short-term commodity cycles and long-term commodity cycles, driven by different factors like local buying and foreign investment. Daniel Malan, portfolio manager at RE:CM, said local commodity markets have attracted a lot of capital from around the world. “It’s an easy-sell story. China and India want commodities but the world will run out of commodities. So investors pile in.” It’s a telling point advisers always have to be aware of. Commodities raise investor emotions and enter the world of behavioural finance rather than fundamentals. The adviser has to know where to draw the line. There will always be periods of commodity price or market weakness. That’s when advisers should invest in commodities on behalf of clients. The trick is to reign in investor impatience and watch commodity prices closely.

FUND PROFILES

FUND PROFILES Allan Gray Money Market Fund three-month assets but is still relatively short in duration. The duration of the fund on 30 June was 69 days. Please provide some information around the individual/team responsible for managing the fund. Andrew Lapping completed his BSc (Eng) and BCom at UCT. He joined Allan Gray in February 2001 as a fixed interest trader and moved to the research team as an equity analyst in February 2003. He was appointed as fixed interest portfolio manager in June 2006 and he is a fund manager for the Allan Gray Bond and Money Market funds. In February 2008, he took on the additional responsibility of managing a portion of client equity and balanced portfolios. Please provide performance of the fund over one, three and five years (please include benchmark). Fund performance shown net of all fees and expenses as at 30 June 2011.

Please outline your investment strategy and philosophy for the fund. The Allan Gray Money Market Fund aims to preserve capital, maintain liquidity and generate a sound level of income. It is an interest-bearing fund that invests in South African money market instruments with a term shorter than one year. These instruments can be issued by government, parastatals, corporates and banks. The fund is managed to comply with regulations governing retirement funds. While capital losses are unlikely, they can occur; for example, if one of the issuers of an instrument in the fund defaults. In this event, losses will be borne by the fund and its investors. Who is the fund appropriate for? The fund is appropriate for those investors who: • Require monthly income distributions. • Are highly risk-averse but seek returns higher than bank deposits. • Need a short-term investment account. How have you positioned the fund for 2011? The second quarter of 2011 was one of continued stability of the exchange rate and interest rates. We are concerned that the outlook for inflation over the next few years could be worse than the outcome anticipated by the market. The reason being the strength of the Rand over the past two years, and hence lower imported inflation, has offset the deteriorating domestic inflation picture. Some of the drivers of the domestic inflation are electricity price increases and substantial real wage increases with no offsetting productivity growth.

% Returns

Fund

Benchmark*

Since inception (unannualised)

138.5

137.3

Latest 5 years (annualised)

9.0

8.8

Latest 3 years (annualised)

8.5

8.3

Latest 1 year

6.3

6.0

* Since inception to 31 March 2003, the benchmark was the Alexander Forbes three-month deposit index. The current benchmark is the Domestic Fixed Interest Money Market Collective Investment Scheme sector excluding the Allan Gray Money Market Fund (Source: Morningstar), performance as calculated by Allan Gray as at 30 June 2011.

Please outline fee structure of the fund. A fixed management fee of 0,25 per cent per annum (excl. VAT).

“The Allan Gray Money Market Fund aims to preserve capital, maintain liquidity and generate a sound level of income. It is an interest-bearing fund that invests in South African money market instruments with a term shorter than one year.”

The Monetary Policy Committee of the Reserve Bank is unlikely to increase interest rates pre-emptively if inflation rises slowly as private sector credit growth is still only five per cent and economic growth fairly muted. For this reason, we favour the six-month area of the yield curve as it benefits from a higher yield compared to cash and

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Cadiz Money Market Fund What are your top five holdings at present? Synthesis – Nedbank conduit – F1+ Airports Company of South Africa – F1+ Aspen Pharmacare Holdings – F1 Barloworld – F1 Sanlam Capital Markets – F1+ Who is the fund appropriate for? The Cadiz Money Market Fund aims to deliver high levels of income in excess of returns available through fixed deposits and call accounts offered by banks, while providing investors with capital protection and the stability of monthly returns and liquidity. As such, the fund is appropriate as an alternate to bank accounts, for people wanting a temporary parking bay for funds they want to phase into other unit trusts, for assets allocation purposes and for those people who are looking for regular cash flows from living annuities. Have you made any major portfolio changes recently? We have recently started investing into longer term floating rate notes in anticipation of interest rates starting to rise towards the end of this year. Please outline your investment strategy and philosophy for the fund. The investment decision-making process is based on the information flow from a very wide range of research inputs. The process starts with an analysis of the international environment which is then overlaid on the local economy. The Reserve Bank’s benchmark policy rate, the repo rate, anchors short-term interest rates. Movements in short-term rates thus reflect market perception of the future course of the policy rate. The Reserve Bank adjusts the repo rate to a certain inflation outcome over its (two-year) policy horizon, given the bank’s inflation targeting framework. The view on short-term interest rates thus comes down to a view on inflation. We have developed a detailed analytical framework for understanding the drivers of inflation. In addition, we have developed a money market tool-set for the purposes of analysing the money market. Based on this analysis, a portfolio of approved money market instruments with an agreed modified duration, taking specific cognisance of the benchmark, is then established.

How have you positioned the fund for 2011? During the earlier part of this year, we kept the weighted average term of the fund at the maximum of 90 days as we believed interest rates were likely to remain at the then current levels for an extended period of time. As the year has progressed, we have shortened the term of the fixed rate investments to mature towards the end of this year in anticipation of interest rates starting to rise then. Please provide some information around the individual/team responsible for managing the fund? The fixed interest process at Cadiz Asset Management is very much team-based in terms of arriving at an interest rate view. The team is headed by Jonathan Myerson who has been in the fixed income markets for over 16 years. Within that process, various mandate types are managed by specific individuals. The Cadiz Money Market Unit Trust is managed by Adré Smit. He has managed the fund since its inception some five and a half years ago. He has been a fixed interest portfolio manager for over 30 years. Please provide performance of the fund over one, three and five years. Fund Performance

Benchmark Return (Stefi Composite)

Outperformance

1 year

6,31%

6,19%

0,12%

3 years

8,71%

8,33%

0,38%

5 years

9,14%

8,77%

0,37%

Please outline the fee structure of the fund. The fund has an annual management fee of 0,25 per cent (excluding VAT) and zero initial fee.

“The fund is appropriate as an alternate to bank accounts, for people wanting a temporary parking bay for funds they want to phase into other unit trusts, for assets allocation purposes and for those people who are looking for regular cash flows from living annuities.”

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Investec Money Market Fund market strategy with a balanced focus on yield pick-up over short-term fixed deposit rates, counterparty diversification and capital preservation. How have you positioned the fund for 2011? The market is currently pricing in a very benign rate cycle because the Reserve Bank has gone to great lengths to focus on its concerns around slow growth rather than rising inflation. We agree, but feel that the market has gone too far in pricing in this scenario. As a result, you are not compensated for the risk of rates rising by investing in longer-dated money market instruments. We would prefer to finish 2011 with most of our cash in the short end of the market so that we are in a position to take advantage of higher rates when the rate hiking cycle finally gets underway. Please provide some information around the individual/team responsible for managing the fund. Investec Asset Management has one of the largest, most experienced fixed income teams in South Africa with 13 investment staff in Cape Town, supported by an additional 23 fixed income professionals in London (at 30 June 2011).

Please outline your investment strategy and philosophy for the fund. The Investec Money Market Fund aims to earn a higher level of income than fixed and call deposits over time, while protecting capital and providing investors with high levels of liquidity and diversification of counterparty exposure. The fund targets returns in excess of the STeFI threemonth money market index, measured over one-year periods. The fund invests in highly rated South African money market instruments, including negotiable certificates of deposit and treasury bills. The fund may only invest in money market instruments with a maturity of less than one year and its average duration may not exceed 90 days. The fund has an AAA rating from Fitch. What are your top five holdings at present? • Nedbank Ltd • ABSA Bank Ltd • Standard Bank of SA Limited • African Bank Ltd • Investec Bank Ltd Who is the fund appropriate for? The Investec Money Market Fund is the ideal solution for both corporate and retail investors seeking to earn a higher level of income than a call account or three-month fixed deposit rate while enjoying high levels of liquidity on their investment. The fund offers an easily accessible money

Lisa MacLeod is the portfolio manager with ultimate responsibility for the Investec Money Market Fund. Lisa has been with Investec Asset Management for 14 years. She is supported in this role by Tsitsi Hatendi, money market dealer and analyst. Please provide performance of the fund over one, three and five years (please include benchmark). Annualised returns

1 year

3 years

5 years

Investec MM fund

6.71

9.0

9.40

Benchmark

5.86

7.99

8.59

Returns are calculated on a true daily time-weighted basis gross of fees. Why would investors choose this fund above others? Our fixed income team believes that we can deliver the target performance of our clients’ money market mandates consistently over the long term. We conduct detailed proprietary research and have superior insight into where yields should be priced. We have a long, successful history of generating outperformance in our money market portfolios and the sheer size of the funds we manage makes us an important counterparty, allowing us to negotiate superior rates which are beneficial to our money market portfolios. We constantly look to exploit opportunities across money market curves and take advantage of temporary mispricings in the market.

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“Our fixed income team believes that we can deliver the target performance of our client’s money market mandates consistently over the long term.”

Gryphon Money Market Fund Who is the fund appropriate for? o Corporates o Individuals o Multi-managers o Institutional funds Many corporates, multi-managers and consultants make use of the fund, so we do experience flows as big as five per cent of the fund from time to time, in or out. Our track record is proof of our ability to manage liquidity well. Please provide some information around the individual/team responsible for managing the fund? Abri du Plessis, economist and fund manager, manages the Gryphon Money Market Funds since 2002. Abri takes responsibility and is accountable for the fixed income function at Gryphon. He heads the fixed income team, comprising of the CIO, all fixed income portfolio managers (Abri du Plessis, Gregg Bayly and Reuben Beelders), compliance (Pankie Kellerman) and credit and risk (Sunette Swart) managers.

Please outline your investment strategy and philosophy for the fund. The Gryphon Money Market Fund, a registered Collective Investment Scheme, generates a high monthly income while retaining capital. It invests in money market instruments such as government and public sector securities, treasury bills, debentures and bank deposits. This instrument has a maturity of not more than 12 months. In order to ensure liquidity is available and the capital is retained, the average term will not exceed 90 days. Money market instruments such as government and public sector securities, treasury bills, debentures and bank deposits. Gryphon’s Money Market is a flexible, low risk, highly liquid product, the specifics of which can be custom designed to meet the requirements of the client’s mandate. At Gryphon, money market funds are managed conservatively, in line with our underlying belief that money market clients are generally first and foremost concerned with capital security and secondly, the maximisation of yield. Gryphon believes in keeping the money market management process simple, yet disciplined adding incremental value.

Please provide performance of the fund over one, three and five years (please include benchmark). Fund performance: (Annualised):

Benchmark: (Annualised):

1 year

6,681%

6,191%

3 years

8,84%

8,332%

5 years

9,25%

8,766%

Why would investors choose this fund above others? The fund has been a consistant top performer in the domestic money market funds while maintaining low volitility. Our track record is proof of our ability to manage liquidity well. Gryphon is a registered Financial Services Provider: FSP 581.

The Money Market fund management process starts off with Gryphon’s house view on the economy. The house view serves as the basis for the view on interest rates and forecasts across the yield curve are debated by the full team during weekly investment meetings. Money market instruments are valued against this view on a real-time basis to indicate value opportunities across the yield curve. Proprietary valuation and risk management spreadsheet-models assist the portfolio manager in determining the optimal allocation of funds across instrument, institution and duration; this is done daily and drives the investment process.

“At Gryphon, money market funds are managed conservatively, in line with our underlying belief that money market clients are generally first and foremost concerned with capital security and secondly, the maximisation of yield.”

Decisions relating to the term to maturity (duration) and credit exposure of a fund are all consistent with our core philosophy of maximising return at the appropriate level of risk and within statutory requirements and limits. An overall portfolio approach to investment is adopted, which ensures that there is always an adequate degree of diversification across issuers and deposit takers. What are your top five holdings at present? o FNB o African Bank o Standard bank o Investec o Ivuzi (RMB) Conduit

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ASSET MANAGEMENT

Asian markets offering investors a buying opportunity

nvestors are a canny lot. Never to be put off a buying opportunity, recent data released by Japan shows that overseas investors eyed the earthquake and tsunami which occurred on March 11 this year as a money-making tool from the outset. As INVESTSA reported earlier this year, the days following the events saw the Japanese stock market suffer its worst fall since the crash of 1987. In the two days following the disaster, the Japanese stock market lost 16.3 per cent of its value and in total more than $1 trillion was wiped off the value of stock markets around the world. However, that pessimism clearly didn’t last long. Data released by Japan’s Finance Ministry showed that in the week of March 13–19, overseas investors bought the highest amount of Japanese stocks since 2005.

While the events of that week clearly spurred a buying trend among investors, the same data does show that this has been an ongoing trend, with overseas investors being net buyers of Japanese stocks for eight straight months up until May 2011 – with the first break in this chain happening only in June this year.

Jonathan Schiessl, head of equities and fund manager of Chindia and Japan Funds at Ashburton, said he was surprised that Japan received such a degree of foreign inflow following the events in March, as there was still far too much uncertainty. “Many investors believed that in comparison to the Kobe earthquake of 1995, this time around it would be much easier to recover as so little industry was affected. However, the consequent Fukushima disaster revealed the real fragility of the situation, particularly with regard to industries such as automotive part suppliers.” Schiessl said other Asian markets, such as China and India, also offer valuable exposure to investors but that South African investors are often nervous of accessing emerging market offshore exposure as they believe the fact they invest in local equities means they already have sufficient exposure. “In theory, China and India are also emerging markets; however, there is a clear distinction between these two and South Africa. India and China are commodity consumers not producers, so what drives both markets are different ends of the spectrum. For a South African investor geared towards the current commodity boom, by accessing the likes of China and India you are able to buy the other half of the story.” He cautioned, however, that while there is value to be had in these markets he wouldn’t advise investors to access them on their own. “Probably one of the best ways for someone to access exposure to Chindia and Japan is through a global managed equity fund. However, it is important to realise that there are huge variations between funds. While the benchmark exposure to Japan may be around eight per cent, some may have no exposure while others could have as much as 15 per cent. As a result, Schiessl says it may be advisable to use a global fund as a core investment and have some more specific emerging market exposure as a satellite investment. “I do believe there is a strong case for upping exposure to emerging markets such as China and India. The case for investing in China is particularly strong as it has been tightening its policy for over a year now and the outlook for earnings is also very good.” Schiessl said that while there is no ideal weight for emerging market exposure, there does tend to be more volatility in these markets. However, he suggested that for young investors with a long-term investment horizon, exposure of as much as 30 per cent if not slightly higher, is preferable.

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Confidence returns to local market –

but no consensus among asset managers

onfidence levels in the local equity market among institutional investors and financial planners have improved significantly, according to the latest South African Investor Confidence Index for May. However, while the outlook between these two groups is strengthening, there is little consensus among local asset managers. “The latest South African Investor Confidence Index indicates a significant change in attitude among the institutional investors and financial advisers who participated,” said Theo Vorster, chairman of Institute of Behavioural Finance (IBFSA). “The same surveyed participants indicated low levels of confidence in the equity market during previous months.” Vorster said that while none of the institutional participants believe markets are undervalued, confidence has improved significantly over the three, six and 12-month periods with estimated returns up by more than 2,5 per cent from estimates in April. The last time a rise of this size was

870-1_INVEST_SA_hlf_pg_final_artwork.indd 2

recorded was during the Soccer World Cup in June 2010. “For the first time in nearly 24 months, institutional investors and financial planners almost reached consensus on expected returns 12 months into the future,” said Vorster. “With their views differing by a mere 0,5 per cent, a collective return of 5,2 per cent is expected.”

“While none of the institutional participants believe markets are undervalued, confidence has improved significantly over the three, six and 12-month periods with estimated returns up by more than 2,5 per cent from estimates in April.” However, while institutional investors and financial planners have grown increasingly confident, there are very different views between some asset managers. “There is little

consensus on domestic equity weightings in the asset management industry,” said Miranda van Rensburg, a leading Absa Multi Management (AMM) analyst. “At some asset management firms we recently found equity allocations in balanced funds as low as 50 per cent while some of their peers had weightings of 75 per cent; yet the risk profile of the funds was supposedly much the same. If weightings among the professionals fluctuate like this it’s no wonder many private investors don’t know which way to jump,” said Van Rensburg. She said analysts at AMM have ascribed the divergence to some nervousness about relatively high JSE valuations and growing market volatility. “It’s difficult in these scenarios to suggest guidelines that might help retail investors select an appropriate fund manager. But generally, the current situation highlights the value of strong asset allocation skills – an investment manager capable of getting the right mix of equities, bonds, cash and property,” concluded Van Rensburg.

04/03/2011 16:03

REGULATORY DEVELOPMENTS

FSB delays deadline for regulatory exams

he Financial Services Board (FSB) recently announced that it was finally making some adjustments to its muchcriticised regulatory examination process including delaying the final deadline by a further six months.

In a circular dated 12 July, the FSB said that examination data as at 30 June 2011 indicated that only 11 per cent of candidates who are required to write the examination have in fact sat for the exam. As a result, the FSB said it had decided to extend the deadlines for the level 1 regulatory examinations from 31 December 2011 to 30 June 2012 with a further three-month extension to 30 September 2012 for rewrites. “Despite the above concession, affected person are urged not to delay their enrolment for the examination as this will result in candidates being placed under unnecessary time constraints and ultimately being unable to write the examination on a preferred date and at a preferred venue due to examination sessions being fully booked,” the FSB said in a statement. The FSB also said it was investigating the possibility of reducing the cost of rewriting an examination and would communicate the outcome of such investigation as soon as possible. However, any cost reduction would not apply retrospectively. In response, the Financial Intermediaries Association of Southern Africa (FIA) said it welcomed the decision by the FSB. Arnold van der Linde, the newly elected vice-president of the FIA, said the decision follows extensive engagement and discussion with regard to the examinations between the two parties.

examinations. According to latest estimates, the majority of the industry has still not yet written the exam and it is critical that all financial advisers are given ample time to prepare for and write these important exams.” News of the lack of enrolment among advisers is not a huge surprise. A survey conducted by CIB Insurance Administrators in April this year found that over one quarter of the brokers surveyed (25.6 per cent) had not yet made the necessary arrangements to write the exams. Jonjon Smit, sales director at CIB, said the statistic was extremely worrying. “We urge brokers to write these exams as soon as possible, in case there is any need to repeat them. One broker revealed that in order to prepare for both the representative exam and the key individual exam, he spent over 50 hours studying.” “Whether the industry likes it or not, the regulatory exams are going ahead. Brokers who fail to pass the exams will find it challenging to continue servicing existing clients and sourcing new clientele, especially as they

“We wholeheartedly agree with the decision to delay the deadline for the level 1

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will now be measured against accredited brokers who have passed the exams,” said Smit. Previous discussions between the FIA and the FSB also led to the regulator offering the exam in Afrikaans. The FSB also now stipulated that exams in Afrikaans will be made available on a limited number of specific dates and at specific venues, and the deadline will be the same as the English exams. For those opting to take the exam in Afrikaans, there was further good news as the FSB said no additional fee above the R900 per exam will be payable. Previously, the regulator said the cost of providing the exam in an additional language was prohibitive and warned that this additional cost would be borne by those taking the exam in a different language. In its statement, the FSB also said it would not be lowering the pass mark from the current 65/66 per cent as it believes this will defeat the purpose of the exams. The FIA said, however, that it will continue to negotiate with the FSB regarding this matter in an effort to lower the pass mark.

ALTERNATIVE INVESTMENTS

Commodities: Is there an alternative to gold?

ommodities have become increasingly topical for investors with even retail banks talking about how investors can access hot commodities such as gold. However, while the yellow metal has undoubtedly reaped some great rewards for investors, there are many other commodities available that don’t tend to get as much airtime. According to Daniel Sacks, portfolio manager at Investec Asset Management, gold is still set to retain its title as the leading investment commodity as he predicted that the best performing commodity over the next year will be the yellow metal. He said gold is different from other commodities in that its appeal is now primarily as a currency. “You can see this in the behaviour of central

banks, which have become net buyers of gold after having been net sellers for the past 20 years. Gold has a safe-haven status, so the price tends to benefit during times of economic uncertainty.” Nickel will be the worst performing commodity according to Sacks. “Like other industrial commodities, it suffers both during a slowdown in developed markets and state-induced tightening in the emerging markets like China. Furthermore, there is a large gap between the cost of production and the current price, so supply closures are not likely and, finally, there is a lot of above-ground stock.” Sholto Dolamo, resources fund manager and equity analyst for RMB Asset Management, said he expects copper to continue being strong over the next year as supply and demand fundamentals remain tight.

However, he cautioned that investors might want to avoid manganese as it may underperform due to high levels of inventories in China. However, investing directly into any commodity can be a risky strategy and one that many clients, unless fully cognisant of the risks, may be better off avoiding. Sacks added that it is advisable to invest in a diversified commodity fund, where the fund manager makes the asset allocation call. “Commodities don’t always move in lock step, and each year there’s a divergence of return between commodities. Last year, for example, silver rose by 82 per cent while natural gas declined by 40 per cent.”

New survey reveals confidence in local PE market

outh Africa’s private equity market is faring far better than its overseas counterparts according to the results of a new joint survey of 63 fund managers conducted by the South African Venture Capital and Private Equity Association (SAVAC) and KPMG. The survey revealed that the South African private equity market continued to display ongoing resilience and performed more positively than peer sectors abroad during 2010. It said investor confidence in the sector can be attributed to a number of factors, including the relative insulation of South African financial institutions during the downturn, relatively low interest rates and infrastructure developments in 2010. “The survey revealed that despite an overall decrease in funds from R105.4 billion to R97.6 billion, we see undrawn commitments in the region of R31 billion from R33 billion in 2009,” said Warren Watkins, SA and Africa head of private equity markets at KPMG. “This represents many investment opportunities for the private equity industry.”

encouraging, even though about 30 per cent of that came from new participants in the survey. “Nonetheless, it helps us present a more accurate picture of what’s happening in the sector and displays some significant market confidence.” He said that in more developed markets the PE sector growth has stabilised and, in many cases, has dropped. Watkins is also optimistic that both South Africa and Africa represent significant growth opportunities for international funds, which in recent months have displayed interest in the African continent. “It is also good to note that general investor interest, and that of PE fund managers, extends north of our borders as well.”

Watkins said the fact that the total number of funds raised rose from R3.8 billion in 2009 to R11.1 billion in 2010 was very

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SUNéL VELdTMAN

WILL YOUR client’s wife fire you?

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Sunél Veldtman, Author Financial Adviser l Presenter l Facilitator Sunél Veldtman is the author of Manage Your Money, currently available in all good bookshops

recent research study, quoted in the New York Times stated that 70 per cent of widows fire their financial professionals within the first year of widowhood. This is a startling statistic, given that it may take years if not decades to build client relationships. Financial advisers often assume and even promise that they would be there to look after the wife when their male clients pass away. This is even more worrying considering that we may see the biggest transfer of wealth in the history of the world in the next decades. On average, women live longer than men. As the baby boomers pass on their wealth, their wives are likely to benefit first. Will you be there when this transfer of wealth takes place? In addition, the stereotype view of female clients as the wives is fast disappearing. There are now more female students at universities than male students and, in the USA, women now make up the majority of the workforce. This is a growing market. Two other separate studies by GenSpring Family Offices researched the views and attitudes of men and women towards wealth. These studies surveyed high net worth individuals (on average assets more than $1 million) of similar ages and education levels (most had college qualifications and higher). These studies showed two remarkable differences between men and women. There was a significant difference between their ratings of their own knowledge level. For example, only 57 per cent of women felt knowledgeable on financial planning, compared to 88 per cent of men. In addition, while more than 90 per cent of men felt that they were in control of their wealth, only 68 per cent of women reported the same. What is really startling about this research is the level of education of these women – more than half held masters or PhD degrees. I believe that these findings hold the key to why women feel uncomfortable with their husband’s choice of financial professional. A financial adviser, comfortable with advising men, may not find rapport with women. What is it that women need? Are their financial needs really different from those of men? (In answering these questions, I need to generalise and make assumptions. I apologise in advance to the women who don’t fit the ‘average’ women

mould and to the advisers who don’t fit the ‘average’ adviser mould.) Although women have made huge advances in academic achievements and entering the workforce, they are still the primary caregivers of children and ageing parents. Women make career sacrifices involving part-time employment, taking time out to be with small children and less demanding career paths. These choices have huge financial implications, especially for retirement, not to mention the implications after divorce. Women tend to pay the price for motherhood by accepting less financial security for themselves. It is our responsibility as financial advisers to help our clients achieve financial security. This includes women, especially mothers. We should encourage them to plan for motherhood, save more, preserve their retirement savings and not to settle for the idea that financial insecurity is a price of motherhood.

“Women live longer. They should therefore become more involved in their family’s financial affairs since they are more likely to suffer if their affairs are not managed properly. We should insist on it, if only for our own benefit, since we may be more likely to retain the relationship.” Women live longer. They should therefore become more involved in their family’s financial affairs since they are more likely to suffer if their affairs are not managed properly. We should insist on it, if only for our own benefit, since we may be more likely to retain the relationship. We should focus on the family and not only the man. Pay attention to the woman and you may keep her as a client. In my workshops for women, I often ask women to tell me their stories of financial advisers. They are not pretty tales. It is surprising how many women don’t trust their financial advisers

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and how many simply don’t have any rapport with the person. Is it surprising though that women love their hairdressers, therapists and beauticians but don’t like their financial advisers? Women want connection – they want to feel heard and valued. They want to be treated with empathy. They don’t want to be patronised, overwhelmed by sales talk or talked down to. In the same GenSpring study, trust was the factor mentioned first by most women. Coming back to the study’s findings on knowledge levels. It is puzzling that women have advanced in other areas but seem to lack the interest in the financial world. There may be many contributing factors, but the maledominated financial world speaks a language that doesn’t resonate with women. Women tend to focus on benefits to them and their family, not on achieving high returns and beating indices. Women want knowledge and education. They want to feel that they completely understand an investment or product. It is our responsibility as advisers to educate our clients and to ensure that they understand the investments and products that they are buying. Educating women is also a way of connecting with them. It seems that women prefer learning in groups. Consider inviting your female clients to educational events or events where they can share their experiences with women in similar situations. Women are more likely to be involved in charitable giving and caregiving, starting with their own families and extended family. This often presents complicated financial arrangements and emotional involvement, which goes beyond the financial advice leading to product sales. Consider the complicated arrangements to help parents and the financial complications with that. As an industry we need to think about fee structures and advice models that will allow us to advise on the wider family financial needs and not just when we make a product sale. I have heard the stereotype remarks from financial advisers on dealing with women: “They are hard work.” Initially, you’ll have to spend more time to understand your client but once a woman trusts, she becomes a loyal client and is more likely to refer business to you than a man. Can you really afford not to pay attention to the female market including your client’s wife?

CHRIS HART

Mitigating

Risk Chris Hart | Chief Strategist | Investment Solutions

re-2008, the investment world was an idyllic place where 50 years of investment experience provided a good indication what risk was and how to mitigate it. Defensive assets such as bonds and cash provided a refuge from risk while property and cash provided more risky growth opportunities. Rotation between assets could be done on valuation signals but even then, asset management was not easy. Risk post2008 has become an entirely different ball game. The problem with cash is that to deal with the crisis, negative real rates are now ubiquitous. Even in positive real interest rate countries like South Africa, the meagre real rates now on offer become negative once tax is taken into account. Quantitative easing, a convenient euphemism for outright debasement of the currency has also raised the risk of holding cash. After inflation is considered, the investor is in a guaranteed lossmaking position on all cash holding. US Dollars, the Euro, Pound and Yen are increasingly becoming toxic waste. However, bonds may well be in a worse position. Sovereign debt has become a global problem with the developed world facing solvency issues. Governments have ramped up sovereign debt levels, drunk on low bond yields. Solvency issues are focussed on Europe at the moment but Japan, the UK and the US face exactly the same problems but have escaped market discipline so far. While the problems were in ‘peripheral’ Europe, it appeared that the solvency issue was containable. However, both Italy and Spain have come onto the chopping block in recent weeks.

This becomes serious. Portugal, Greece and Ireland are small enough to bail and systemic enough to have to bail. Spain is at the limit of bailout capacity and will work only if there is unity and concerted action, something lacking so far within Europe.

“Essentially, risk needs to be managed through the use of assets outside the normal financial system. Gold is the easiest vehicle.” Italy, the third biggest bond market in the world, is simply too big to bail. While Italian spreads over German yields have been blowing out over recent weeks, French spreads have also reflected the same alarming tendency. The classic conditions for a massive contagion are in place. Western governments have promised to their electorates way more than what their tax bases can ever deliver. Raising debt has hidden this nasty problem so far, but investors appear less willing to fund this profligacy. A debt contagion will sweep through the Western financial system and will take no prisoners. Cash and bonds have started to become the epicentre of risk rather than a refuge from it. This begs the question as to how to mitigate risk as an investor. Hard assets are coming to the fore once again. This includes property, in particular farmland. Both hard and soft commodities can also be used. However, there is a risk the China is also slowing and this would adversely affect commodity prices. Gold, in particular, has

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stepped forward as the ultimate safe-haven asset. Increasingly described as such in the media rather than as a risky asset on volatility grounds, gold has soared into record territory in multiple currencies. There is probably more to go as authorities persist with deficit spending and prevailing negative real interest rates. There is no political stomach to take difficult decisions. Excessive debt levels prevent high interest rate solutions and governments still hope to maintain benefits, promised to gain power. Electorates have been unwilling to let go of their entitlements. The high debt levels and burden of government has raised the risk of a double dip recession, which will exacerbate the solvency problem. Essentially, risk needs to be managed through the use of assets outside the normal financial system. Gold is the easiest vehicle. Sovereign insolvency has become inevitable and its disruptive effects need to be mitigated.

PRACTISE MANAGEMENT

The unintended consequences of FAIS The unintended consequence of legislation is that the minimum standards set often become synonymous with the accepted standard of excellence.

his is the view of Anton Turpin, MD of Mi-Plan, a company specialising in integrating asset management and financial planning, who says the introduction of the Financial Advisory and Intermediary Services Act (FAIS), while very necessary in some quarters, has had unintended consequences in others. “Faced with the choice of excellence or compliance, it’s easy to see why compliance has taken precedence. A situation can easily arise where compliance does not lead to excellence and vice versa,” said Turpin. He noted that following the minimum requirements set by FAIS does not automatically lead to excellence but is sufficiently time consuming to ensure that most advisers don’t go any further considering tax and asset class risk (or fund risk) issues. “The consequences of the FAIS legislation are that risk management has taken precedence over all other factors. This focus has manifested itself in most cases in the delivery of a psychological risk profile, based on the client’s interpretation of their attitude towards risk and returns. Investments are then selected on this self-analysis or client risk profile. In many instances, the simplistic view is flawed with clients believing for example that they are risk averse and therefore should not be exposed to anything that is volatile, whereas in fact this may be an exceptionally risky strategy for their circumstances.” Turpin said the effect of tax, asset class risk modelling or planning excellence over time to ensure that the client has sufficient income through all stages of their life are all ignored. These aspects are material and should be the primary focus of any planner’s advice offering. “If client’s views were canvassed properly, the mandate to the client’s planner would be

the ability to create and implement a plan to provide for their income needs, after tax, for life and with the greatest certainty. In contrast, at best a risk profile would not address this mandate, and at worst it could lead the client to a sub-optimal conclusion – the consequences of which would however not be immediately apparent.”

“Faced with the choice of excellence or compliance, it’s easy to see why compliance has taken precedence. A situation can easily arise where compliance does not lead to excellence and vice versa.” Two of the biggest factors in this are tax and risk. “If the client’s psychological risk profile indicates a conservative approach to risk, this will result in a portfolio low on equity and rich in interest-bearing assets. While this investment strategy will reduce short-term volatility, it is likely to introduce tax consequences that could lower real returns. This may, in turn, undermine the after-tax real returns required to sustain the client’s income for life, a consequence totally ignored by the psychological risk profile.”

or optimising risk management. “And yet the so-called simple tool most used by advisers to quantify and allocate risk, and in turn investment strategy, is a psychological risk profile that draws on the client’s experience and understanding of risk and tax.” “Surely this is the expertise or knowledge that the client is expecting from the experienced adviser, not simply a pat answer based on the client’s own uninformed understanding of risk.” “Asking the investor for their assessment of risk, or simply defaulting the risk profile to the desired return that is required to meet their lifestyle needs, adds little value. Using the principles of time, risk and return management, however, allows financial advisers to help the investor optimise risk and return through sound strategic asset allocation – giving clients the best chance of achieving their objectives.”

“The aspect of risk that dampens most clients’ appetites to accept risk in return for reward is the volatility of returns or potential loss of capital. The trade-off is not simple and is certainly not single dimensional.” Turpin added that it is unrealistic to expect a client to be aware of these relationships, let alone how to use the information in constructing a portfolio

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BAROMETER

HOT

sideways

Nedbank shares lead banking sector For the first half of 2011, shares in Nedbank were the best performing among the big four banks, up 13 per cent during the period. Both Standard Bank and Absa saw their shares price fall by 6,1 per cent and 2,4 per cent respectively, while FirstRand was 1.5 per cent higher. Nedbank also announced first-half earnings would be as much as 20 per cent higher than the same period last year.

Double-dip not on the cards? The Organisation for Economic Co-operation and Development (OECD) announced that it does not foresee a return to a recession. This is despite the current global economic slowdown due to sovereign debt problems in the Eurozone, higher commodities prices, a struggling US housing sector and political unrest in the Middle East.

Economic optimism high among SA businesses Businesses in South Africa are much more optimistic than their global peers according to Grant Thornton Internationalâ&#x20AC;&#x2122;s Optimism/Pessimism Index. South African business recorded an economic optimism balance of +66 per cent in the second quarter, way above the comparative global optimism balance of +28 per cent. IMF confident of growth of SA economy The International Monetary Fund (IMF) has upgraded its growth outlook for South Africa, raising its earlier estimate of 3,5 per cent for 2011 to four per cent and its 2012 forecast from 3,8 per cent to 4,2 per cent.

NOT

Financial services provider loses licences Local companies, Dynamic Wealth Management (Pty) Ltd and Dynamic Wealth Stockbrokers (Pty) Ltd lost their appeals to have their licences reinstated by the Registrar of Financial Services Providers. The two companies in the Dynamic Wealth Group will now no longer be authorised to do business as financial services providers. Asset manager confidence falls during Q2 Confidence levels amongst asset managers in South Africa fell during the second quarter of 2011, due primarily to soft inflow institutional funds, according to the latest Ernst & Young survey. The survey showed confidence levels were particularly low among large asset managers with assets of R20 billion or more. SA consumers still not saving enough The 2011 Old Mutual Retirement Monitor revealed that 58 per cent of South African surveyed expect to continue to work for pay after formal retirement and for the majority, this will be due to financial necessity rather than choice. The survey revealed that younger South Africans focus on saving for cars and houses, while people aged between 35 to 49 focus on saving for their childrenâ&#x20AC;&#x2122;s education.

Telecommunications, media, technology and electronics sector

sector report: Telecommunications, media, technology and electronics Johan Snyman | Telecoms analyst, Renaissance Capital

he telecommunications, media, technology and electronics (TMT&E) sectors of the JSE are looked at as one for purposes of this report â&#x20AC;&#x201C; we believe there are many examples of convergence which support such a view.

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Telecommunications, media, technology and electronics sector

“Investment in the TMT&E sectors is not without risk. The South Africa mobile and fixed-line sectors, with reference to voice, is at the top end of the cycle, characterised by saturation in subscriber growth, stabilising ARPU, and increasing competition.”

he TMT&E sectors have a combined market capitalisation on the JSE of almost R62 billion or 13 per cent of the total market capitalisation of the bourse in Johannesburg. From a contribution point of view, it is about equal in size to the bank sector, with both sectors overshadowed by the resources sector, which was featured in this publication last month. The delisting of Dimension Data, following the acquisition by Japanese giant NTT, left the technology sector poorer from a market capitalisation point of view by almost 70 per cent. At the time of delisting, Datatec’s market capitalisation, the second-largest technology company, was about 30 per cent that of Dimension Data. How do we think about growth drivers for the TMT&E sector? There are a few examples we would like to highlight, which go some way to support the concept of convergence. • The global online video community surpassed one billion users by the end of 2010. This number of people is exceeded only slightly by the populations of China (1.3 billion) and India (1.1 billion), making this user group equivalent to the third largest country in the world (research from Cisco).

• Internet data centres and hosting are one of the fastest growing areas in the build-out of the mobile Internet. According to Intel’s calculations, an extra server is needed for every 600 smart-phones that are sold, and for every 122 tablet computers. These servers are typically hosted in data centres. • The adoption rate of new devices is astonishing: 28 days for the Apple iPad, 74 days for the Apple iPhone and 360 days for the Apple iPod, to achieve sales of one million units. It took about 300 days for Blackberry to have sold a million units. Let us look at the shipment dates also: iPod – 23 October 2001; iPhone – 29 June 2007 and iPad – 3 April 2010. None of these three shipment dates coincided with festive or holiday seasons, making the adoption rate even more amazing. Let us also look at some share prices of global names and leaders in respective segments: Amazon, Apple, Cisco, Dell, Google, HTC, Microsoft and Nokia. We have rebased the share prices of the eight companies to 100 at the beginning of 2005. The key points: • From a technology point of view, it is now the world of the consumer, with mobile Internet

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computing taking centre stage and desktop Internet computing a past cycle. • The emergence of the smart-phone with names such as Apple and HTC compared to traditional makers of feature phones such as Nokia. • The need for data networking companies to reinvent themselves. • Each technology wave has its array of leaders with new emerging names such as Facebook and Google and HTC and no longer names such as Cisco and Dell and Microsoft.Where does it leave an investor on the JSE? There are only a handful of companies that are positioned to benefit from emerging trends in the world of TMT&E. The two major names, if you think mobile and Internet, are MTN and Naspers. In fact, the creation of MTN as a mobile network operator had its origin in Multichoice, a division of Naspers. The diversified asset base of MTN, a strong balance sheet, economies of scale in procurement and well-known brand, provides it with the best leverage in terms of the three growth drivers in mobile, namely level of SIM penetration, market share and innovation. On a blended basis, SIM penetration across its 21 markets is 58 per cent, and market share is 45 per cent. In contrast, a mobile operator

Share prices rebased to 100, beginning of2005 Apple

Amazon

Cisco

Google

HTC

Nokia

Dell

eBay

technology unit trusts, managed by investment houses such as OMIGSA and Stanlib. It is fair to say the attractiveness of these unit trusts have waned significantly after the technology bubble at the turn of the last decade.

Microsoft

2 500 2 000

Of the four sub-sectors, the performance of the media index, dominated by Naspers, has been spectacular since the mid-2000s. It is followed by telecoms and technology indices. The electronics and electrical index has not kept up with the All Share since the middle of 2007, partly explained by poor earnings performance.

1 500 1 000 500

Jan 2011

Jul 2010

Jan 2010

Jul 2009

Jan 2009

Jul 2008

Jan 2008

Jul 2007

Jan 2007

Jul 2006

Jan 2006

Jul 2005

Jan 2005

Investment in the TMT&E sectors is not without risk. The South Africa mobile and fixed-line sectors, with reference to voice, is at the top end of the cycle, characterised by saturation Source: Bloomberg in subscriber growth, stabilising ARPU, and increasing competition. The above factors should result in modest revenue growth (if any at all).

such as Vodacom has to contend with a high headquartered in South Africa, it has limited SIM penetration concentrated in South Africa, exposure to South Africa’s IT market, through and market share, and as such, its only growth the local Westcon (IT distribution) business. driver left is innovation. It does exhibit market Almost 50 per cent of Datatec revenue is leadership in mobile broadband in South Africa, derived from sales of Cisco product, with Where does mobile it leave an initiative investor There aretoonly handful are positioned towith and its M-Pesa money hason a the JSE? increasing exposure data a security and of companies Regulatorythat interventions are on the rise, benefit frompotential emerging trends in the world of TMT&E. The major names, you thinktomobile Internet, lot of upside in South Africa, despite converged products fromtwo leading vendors such if adjustments wholesaleand mobile termination rates a poor start.and The Naspers. mobile money in creation as Checkpoint Fortinetnetwork and Avaya.operator (MTR),had SIM registration portability are MTN Ininitiative fact, the of MTNSoftware, as a mobile its originand in number Multichoice, hasofbetter traction, being longer in common themes impacting margins. Competition aTanzania division Naspers. operation with higher adoption rates. Looking at The ‘forgotten’ component of the TMT&E in the data/broadband market has intensified, dividend yields, on a 12-month forward basis, sector is electronics, which includes names firstly C late last year and and, more recently, the The diversified asset base of MTN, a strong balance sheet, economies of scale inCell procurement wellVodacom’s is the highest, followed by MTN such as Altech, Altron and Reunert. Altech is entrancein of mobile, Telkom SA’snamely mobile business, known brand, provides it with the and best leverage in terms of the three growth drivers level 8.ta. of then penetration, Telkom SA. the listed subsidiary of Altron and included in Outside South Africa, the landing of undersea SIM market share and innovation. On a blended basis, SIM penetration across its 21 markets is The ‘forgotten’ component of the TMT&E sector is electronics, which includes name the Telecoms Index. It derives more than 70 cableas systems such as Seacom, WACS 58 per cent, and market share is 45 perand cent. In contrast, mobile operator such Vodacom toTEAMS contend Reunert. Altecha is the listed subsidiary of Altron andhas included inand the Telecoms I We believe Internet fundamentals in emerging per cent of revenue from its telecoms division, has resulted in significant decline in bandwidth with a high SIM penetration concentrated in South Africa, and from market anddivision, as such, its only growth 70 per cent of revenue its share, telecoms from activities such as service pro markets have a long way to run. Increasing from activities such as service provision to prices, impacting profitability of carriers’ businesses driver left is innovation. It does exhibit market in mobile broadband in South Africa, its and M-Pesa in Southleadership Africa, data carrier and ISP businesses in Eastand Africa design/manufac Internet and broadband penetration should drive mobile operators in South Africa, data carrier markets such as Kenya. For a company such mobile money initiative has a lot of upside potential in South despite ainin poor start. Thein mobile money major customers such Africa, as Multichoice Africa, Foxtel Australia and Reliance in In online usage, engagement and monetisation. and ISP businesses in East Africa and design/ as MTN, which derives more than 75 per cent of initiative in Tanzania has better traction, beingand longer in operation with higher adoption Looking at Altron Reunert are not dissimilar and includerates. infrastructure spending (mainly ele Also, market growth for MMO games, Internet manufacturing of set-top boxes for major EBITDA from outside South Africa, a strong Rand dividend yields, on a 12-month forwardacross basis, aVodacom’s is the of highest, followed bythe MTN andand thenhome Telkom broad spectrum sectors, such as office environments in o value-added services (IVAS) and other paid social customers such as Multichoice in Africa, Foxtel has resulted in modest earnings growth since SA. automation/improvement in productivity and entertainment. networking services is significant. in Australia and Reliance in India. Growth 2008. However, with peak investment cycles now drivers for Altron and Reunert are not dissimilar behind the group, significant cash flow generation We Internetmarket fundamentals in emerging markets have long way to run. Increasing Internet andto TMT&E investments inathe JSE/FTSE can be accessed directly inshareholders, listed names suc The believe Internet advertising is largely and include infrastructure spending (mainly does imply improving cash returns broadband penetration should drive online usage, engagement and monetisation. Also, market growth Datatec. Another avenue is the few technology unit trusts, managed by investment untapped. Naspers as a group has some of electrification), convergence across a broad and hence our opening remark withfor reference to MMO games, Internet value-added services (IVAS) and other paid social networking services is significant. and Stanlib. It is fair to say the attractiveness of these unit trusts have waned signifi the best-positioned Internet assets including spectrum of sectors, such as the office and dividend yields. technology bubble at the turn of the last decade. Tencent and mail.ru in China and Russia home environments in office automation/ The Internet advertising market is largely untapped. Naspersand asentertainment. a group has some of fundamentals the best-positioned respectively. In the medium term, continued improvement in productivity Improving for diversified groups Internet including Tencent in China and Russia respectively. In medium term, Of the four sub-sectors, the performance ofasthe media index, dominated integrationassets of different communication tools and mail.ru such Altron and Reunert, although not in by Naspers continued of different tools in and should that the Internet and services integration should ensure that the Internetcommunication TMT&Ethe investments the services JSE/FTSE can be byensure the near term, should translateplatform to indices. improvedof The electron since mid-2000s. It is followed telecoms and technology Naspers well positioned to withstand competition, experience above-market monetisation and generate platform ofisNaspers is well positioned to accessed directlyup in listed such as MTN, and henceofrelative outperformance of the by poo has not kept withnames the All Share sinceratings the middle 2007, partly explained withstand competition, experienceIn aboveNaspers and Another is the fewInternet broaderassets indices. of Naspers are high EBITDA profitability. general, execution soDatatec. far has beenavenue good. The market monetisationby and EBITDA in Africa which exhibits market leadership, and high level of profitability. complemented a generate pay-TVhigh platform profitability. In general, execution so far has JSE TMT&E indices against ALSI, rebased to 100 at beginning of 2005 The Internet assets of Naspers areprovides investors with exposure to emerging trends in telecoms and Abeen thirdgood. JSE-listed company, which ALSI Electronics & Electrical Media Technology Telecoms complemented by a pay-TV platform in Africa

Internet, is Datatec. The group comprises three business streams, with 56 per cent, 26 per cent and 18 per whichofexhibits leadership, highIT level cent grossmarket profit derivedand from distribution, 500 ICT Solutions and Services respectively. Almost 30 per cent profitability.is derived from outside North America and Europe, with growing contributions from South ofofrevenue 400 Although headquartered in South Africa, it has limited America, Africa and the Middle East, and Asia. A third JSE-listed company, which provides exposure to South Africa’s IT market, through the local Westcon (IT distribution) business. Almost 50 per cent with exposure to emerging trends ofinvestors Datatec revenue is derived from sales of300 Cisco product, with increasing exposure to data security and in telecoms and Internet, is Datatec. The converged products from leading vendors such as Checkpoint Software, Fortinet and Avaya. 200 100

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July 11

January 11

July 10

January 10

July 09

January 09

July 08

January 08

July 07

January 07

July 06

January 06

July 05

0 January 05

group comprises three business streams, with 56 per cent, 26 per cent and 18 per cent of gross profit derived from IT distribution, ICT Solutions and Services respectively. Almost 30 per cent of revenue is derived from outside North America and Europe, with growing contributions from South America, Africa and the Middle East, and Asia. Although

Telecommunications, media, technology and electronics sector by Johan Snyman Company business description Entrepreneur Bill Venter and three other people formed Allied Electric, the forerunner of Altron, on 1 April 1965. It turned out to be the start of a successful electronics and electrical engineering group employing more than 12 000 people, with total assets of R12.4 billion and headline earnings of R719 million. The group comprises three primary subsidiaries, with Altech, which is JSE-listed, the largest contributor to total earnings.

Total (ZARmn) 22,810 Powertech 31% Altech, 42%

• Altech (61.5 per cent owned). The company represents the telecommunications, multimedia/electronics and certain technology interests of Altron. • Bytes (wholly-owned). The company is one of the largest IT companies in South Africa, with a substantial footprint in the UK. In a South African context, it represents major vendors such as Xerox and NCR. • Powertech (wholly-owned). The company comprises Altron’s power electronics and engineering interests, and is a leading player in South Africa focused on the electrical engineering sector. It has a telecoms cable joint venture with Reunert. Blue: Share price

Green: 40 Day Moving Average

ALTRON

Bytes, 27%

Dividend yield

Orange: 200 Day Moving Average

4,2%

Turnover growth

2,1% (FY11)

Profit growth

15,0% (FY11)

Share price performance

1 year

3 year

5 year

7,4%

-22,7%

20,5%

*Figures correct at time of print

YEAR

Price graph supplied by

Company outlook Altron’s results for the 12 months ended 28 February 2011 reflect on efforts to reduce costs in underlying business units of Powertech, against the backdrop of continued weak demand across most end-user markets. A solid performance from Bytes underscores our view that corporate IT spending in South Africa is healthy, although competition in securing large corporate deals is fierce. The profitability of Altech was severely impacted by under-recovery of costs in the Kenyan carrier business and ongoing margin pressure at Autopage Cellular. Visibility going forward continues to be limited. The strength of the Rand is of concern given the impact this has on the translation of results of foreign operations, reduced export opportunities and competition from imports. Although order books across most business units of Powertech has improved, compared to last year, the power cable business continues to suffer from little demand from the building and construction industries. However, we remain hopeful of a recovery in 2012, with improving sales of cement products an indication that gross fixed capital formation (GFCF) growth is slowly accelerating, being negative to flat in recent quarters. Technology refresh of verticals such as financial services and retail underpins the growth of the order book of Bytes in South Africa. The completion of a major three-year project at National Health Services (NHS) in the UK has left a gap in the revenue base of Bytes, and although low-margin business, it would take a while to fill the gap.

ALTRON

ALLIEDELE CTRONICS CO R P O R AT I O N L I M I T E D

“We remain hopeful of a recovery in 2012, with improving sales of cement products an indication that gross fixed capital formation (GFCF) growth is slowly accelerating, being negative to flat in recent quarters.”

datatec

Telecommunications, media, technology and electronics sector by Johan Snyman Company business description In its 25th year of existence, 17 of which were as a listed company (first listed in Johannesburg in 1994 and then on AIM in London in 2006), Datatec continues to embrace a strategy of delivering long-term, sustainable, above-average returns to shareholders through the development of its three principal operating divisions – Westcon, Logicalis and consulting services (comprising Analysys Mason Group [AMG] and Intact). • Westcon. Westcon is the mainstay of the Datatec business and, since its acquisition in 1998, its revenues have grown almost eightfold. Westcon is a specialty IT distributor of communications and related products for leading technology vendors such as Avaya, Cisco and Checkpoint Software. • Logicalis is a provider of ICT solutions. It is headquartered in the UK and the original entity, Logical Networks, was acquired in 1997. This division differs from Westcon as it derives its revenues from providing integrated information and communication technology (ICT) solutions, rather than product only. • The smallest of Datatec’s three divisions is its consulting services, TMT Consulting, which comprises AMG and Intact. The division was established in 1999 with the acquisition of Mason. The markets in which the consulting division participates are becoming more blurred, given the trends of convergence and related technology advancements in the fields of telecommunications, media, broadcasting and IT. Blue: Share price

Green: 40 Day Moving Average

Orange: 200 Day Moving Average

Revenue % by geography for FY11

Revenue split for FY11 Total ($mn) 4,303

South America, 11%

Africa Middle East, 7%

North America, 35%

Asia Pacific, 11% Europe, 36%

Dividend yield

2,2%

Turnover growth

15,1% (FY11)

Profit growth

40,7% (FY11)

Share price performance

1 year

3 year

5 year

13,7%

40,9%

71,1%

*Figures correct at time of print

Company outlook There are more than enough growth drivers for Datatec’s earnings over the medium term: 1) Growth of the networking and communications market 2) Increased demand for network security 3) Convergence of voice, data and video communications 4) IP network growth 5) Service-oriented architecture (SOA) should drive enterprises to view communications and computing as a single ICT platform, and 6) Operational efficiencies in the telecoms market. This will act as a main driver of growth given the pressure on voice ARPU and a concomitant slowdown in top-line growth.

YEAR

Price graph supplied by

The group appears to be in a strong position, both operationally and financially, to make the best of the current IT up-cycle. Datatec is set to add to its Logicalis skill set in its high-growth segments, such as unified communications (UC), and is adding capacity to its cloud services and data centres. In the case of Westcon, ongoing consolidation continues to present acquisition opportunities, such as the recent acquisition of an IT security distributor in Germany, bolstering the presence of Westcon in pan-Europe in IT security. The Group also has a number of long-term initiatives to drive its global diversification and in particular its exposure to higher growth market such as to Asia and Latin America.

“Datatec continues to embrace a strategy of delivering long-term, sustainable, aboveaverage returns to shareholders.”

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BETTER BUSINESS

How to set yourself apart from your peers

“The trick is to know your offering and figure out how it compares with those of other advisers.”

In a world where potential clients are bombarded with vast amounts of information about products and services, you may have what it takes to differentiate yourself from your peers, but do you know how to communicate and demonstrate your value?

A good unique value proposition must:

Putting together a clearly defined value proposition will help you find success. It will encourage you to articulate what exactly it is that you offer, and enable you to position your business, define your target market and attract new clients.

Capture the essence of the services that you offer In a few words, you need to summarise how your services will add value to your clients’ lives; what tangible results you aim to achieve for them. It will help to thoroughly research your competitors: you need to figure out your competitive edge.

Talk to your target market It is crucial to identify your target market before you put together your value proposition. Although it may seem short-sighted to limit yourself to one particular group of people, it is almost impossible to successfully appeal to everyone.

A value proposition is a powerful description of you and your practice. It is a crucial piece of your overall business strategy and needs to be thought through carefully so that it generates interest and gives clients a sense of your expertise. It must set you apart from your competitors.

Be designed with the client in mind You should define what you do from a client’s point of view. The best way to do this is to survey your clients. Find out how they believe you have added value to their lives. Ask them what they consider to be your greatest strengths, what they think of their interactions with you, and what they feel you have been able to accomplish for them.

But how do you create a unique value proposition?

Be passionate and powerful Keep your proposition brief, but make it work for you. See this as your opportunity to make a statement and win business. Test your value proposition on existing clients and friends – find out if they think others will be motivated to do business with you.

Your value proposition must focus closely on what your potential clients really want. The trick is to know your offering and figure out how it compares with those of other advisers. Importantly, put yourself in your clients’ shoes to find these answers. By positioning yourself appropriately, potential clients will be encouraged to ask more about you and how you can help them.

Best of luck in summing it up! Sources: www.mindtools.com, AdviserQuest, Richard Weylman (wsj.com), The Institute of Practice Management.

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.

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etfSA.co.za

INDEX TRACKING ETF AND UNIT TRUST MONTHLY PERFORMANCE SURVEY – END JUNE 2011 Mike Brown | Managing Director | etfSA.co.za Best Performing Index Tracker Funds – June 2011 (Total Return %)* Fund Name

Type

5 Years (per annum)

Unit Trust

18,89%

ETF

17,34%

Stanlib Index Fund

Unit Trust

10,84%

Satrix SWIX Top 40

ETF

10,71%

Prudential Property Enhanced Satrix INDI 25

3 Years (per annum) Prudential Property Enhanced

Unit Trust

26,41%

Proptrax SAPY

ETF

25,52%

Satrix DIVI Plus

ETF

22,58% 1 Year

Satrix INDI 25

ETF

33,92%

Satrix RAFI 40

ETF

26,22%

NewFund eRafi INDI 25

ETF

25,65%

Proptrax SAPY

ETF

6,02%

Unit Trust

5,32%

ETF

3,50%

3 Months

Prudential Property Enhanced BIPS Inflation-X

1 Month Unit Trust

1,75%

Proptrax SAPY

Prudential Property Enhanced

ETF

1,19%

DBX Tracker MSCI Japan

ETF

0,00%

Source: Profile Media Funds Data (30/06/2011) * 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 exchange traded funds (ETF) available to the retail investor in South Africa. • The Property Sector has shown superior performance over the period surveyed. The only funds which produced positive investment growth over all the periods surveyed were the Prudential Enhanced SA Property Tracking Unit Trust Fund and the Proptrax SAPY ETF, which tracks the FTSE/JSE SAPY Property index. The Prudential fund was the best performer of all the funds surveyed for the five-year and three-year periods. Property portfolios have the advantage of high distribution yields – the average yield on the SAPY index over the past 12 years has been around nine per cent per annum – but also benefit from the capital appreciation of the underlying property portfolios. • The Satrix RAFI 40 Total Return ETF and the NewFund eRAFI Industrial 25 ETF were amongst the top three performing funds over the past 12 months. Although the Satrix RAFI Fund has not been listed long enough to participate in three-year performance records, other RAFI Funds, such as the Plexus eRAFI Enhanced Strategy Unit Trust Fund and the NewFunds eRAFI Overall SA Index Fund, have shown significantly better three-year performance (over 10 per cent per annum on average) than conventional index tracking funds that track the Top 40 or All Share indices (which have delivered average performances of three per cent or less per annum) over the past three years. The RAFI technology uses fundamental accounting data to identify value opportunities in the equity market and appears to provide a significant performance premium over conventional passive tracker finds in the South African market. The full performance survey can be accessed on www.etfsa.co.za.

INDUSTRY NEWS

Appointments

Kobie-Marié Hamman

Ali Khalpey

Sanlam Private Investments (SPI) has appointed Kobie-Marié Hamman as manager of its Johannesburg branch office. In her role, Hamman will lead an investment team which will service high net-worth individuals. Prior to joining SPI she worked at Aurum Fund Management, Astute FSE and Absa Investment Management Services. Ali Khalpey has been appointed as head of equities for South Africa at Renaissance

Nomkhita Nqweni Capital. He retains his post as head of sales for Africa but will oversee the growth of the firm’s equities platform. Khalpey joined Renaissance in January last year and previously worked at Investec Bank. Absa Wealth has appointed Nomkhita Nqweni as global market manager to Africa with the responsibility of steering strategies to take advantage of business and growth opportunities

Otshepeng Sokhela in the region for Absa Wealth and Barclays Wealth units. Nqweni continues in her position as managing executive for Absa Wealth. Otshepeng Sokhela has been appointed investment analyst for Novare in the funds of hedge funds team. Sokhela holds a BSc degree from the University of Witwatersrand and began her career at Alexander Forbes Financial Services as an actuarial analyst.

Sanlam cautious but looking for growth Sanlam is actively pursuing expansion plans, the financial services group announced alongside the reporting of four-month results; but tempered the news saying it remains only cautiously optimistic about the financial services environment in 2011. CEO Johan van Zyl said the company plans to explore opportunities both in India and Africa. “As previously indicated, our preferred

utilisation of excess capital is an investment in value-adding growth opportunities. We are well positioned to take advantage of growth opportunities and we are currently pursuing a number of strategic ventures.” Sanlam also cautioned that ongoing market volatility, as well as the strong comparative performance in the latter part of 2010, could have a negative impact on the level of growth

to be achieved in the group’s key performance indicators for the remainder of the year. There was good news from the first four months of the year though, with total new business volumes up 11 per cent and overall net fund inflows increasing by 27 per cent to R8.6 billion compared with the same period last year.

Fund system is corrupt In an address to government and market professionals, Andrew Canter, chief investment officer of fixed income fund manager Futuregrowth, labelled the current system of fixed income pricing and placement as close to being “corrupt”.

Canter said the current system allows for a “big buddy” mentality where the small group of players which operate in the industry need to be kept on side, for fear of falling foul of them and getting poor prices. Canter said back channels of communications and reliance on

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the telephone results in a “bad market”. Canter, together with a committee of investment professionals lobbying for change, is calling for a central order book to be implemented urgently.

and the winner is... African Bank Investments leads the pack at IAS Awards The Investment Analysts Society (IAS), together with the JSE, recently hosted its 26th annual awards acknowledging JSE-listed companies for excellence in communication and financial reporting to the investment community. Deputy chair of the IAS, Mike Brown, said the society gives 12 awards in total to companies drawn from the main JSE sectors that show excellence in reporting and investor communications, and for the best presentations to the society’s members in 2010. Brown said the overall winner this year was African Bank Investments. “The society members were very impressed with the detailed analysis

made by African Bank, not only of its credit risk and exposure, but also the high level of disclosure on contributions made to earnings, on a risk-adjusted basis for different sectors of its business and its client base.” Prescient wins Investment Manager of the Year At the recently held Imbasa Yegolide Awards for 2011, the Overall Investment Manager of the Year was given to Prescient Investment Management. The awards, hosted by the Principal Officers Association (POA) in conjunction with Global Pensions, give principal officers across the country the chance to highlight those service providers who have provided exceptional service to their clients.

This is the latest in a clutch of awards for the group over the last year after Prescient Investment Management won the Morningstar award for the best bond fund and two Prescient Securities’ analysts ranked first in the Financial Mail Analyst Ranking.

Islamic investors to benefit from asset-backed Sukuk bond Muslim investors and Islamic-compliant finance companies are set to benefit from the proposed inclusion of a Sukuk into South African tax legislation, as the changes should help to open up opportunities for additional savings, investment prospects and specific tax benefits.

“Since Sukuk will be equated with government bonds, any transfer duty and or VAT that currently exists will be exempt as government acquisitions are already exempt from transfer duty and VAT.

This makes the Islamic financing market, especially the Sukuk industry, a very niche one, but with huge potential for growth which is likely to have a longterm positive effect on the South African economic landscape,” concluded Gangat.

A Sukuk is the Arabic name for the Islamic equivalent of bonds and is a type of assetbacked bond which is structured within accordance to Shari’ah law. It can also be traded in the financial market. Tasneem Gangat, a tax consultant at Grant Thornton Johannesburg, said that unlike conventional bonds which merely confer ownership of debt, a Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risks. “In essence, the Sukuk instruments act as a bridge by linking issuers with a wide pool of investors, many of whom are seeking to diversify their holdings beyond traditional asset classes.” “Instead of interest payments, Sukuk investors receive a pass through of income generated by the underlying assets which basically means that a Sukuk represents a proportionate beneficial ownership in the underlying asset.”

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PRODUCTS

PRODUCTS Novare expands into retail investment with new unit trust-based funds Specialist independent investment manager Novare Investments has announced its expansion into the retail investment market with the launch of two new unit trust-based funds of funds – the Novare IP Capital Preserver Fund of Funds, and Novare IP Wealth Accumulator Fund of Funds.

According to Marius Kilian, chief executive of Novare Investments, the new funds of funds are intended to allow clients to easily tailor investments to suit their unique risk profile. “In an increasingly volatile environment, investors should articulate their desired outcomes clearly and then seek to achieve the required return at appropriate risk. Avoiding deep draw-downs is paramount, and the power of compounding will take care of the rest.” After a decade of providing successful independently managed and advised multimanager portfolios for pension funds and institutional clients, Novare said it has embarked on providing expertise to the broader independent financial adviser (IFA) and retail market.

Can-do currency options now available on JSE The JSE, in conjunction with Absa Capital, has listed the first exotic-style currency options contracts in an effort to offer currency traders more choice and flexibility. The two new options are based on the Dollar/ Rand exchange rate and offer asset manager and hedge fund participants an exchange traded product similar to what has previously only been available over-the-counter (OTC). “The products will allow investors to create more diversified trading strategies using exchange traded products without taking on any credit risk. As market participants seek to avoid bilateral counter-party risk and with more regulation being imposed, our new products offer a regulated alternative and compete directly with OTC contracts,” said Warren Geers, general manager of derivative trading at the JSE. These options represent the first currency can-do contracts offered by the JSE. Can-do options are a type of product first created by the JSE in June 2006 to offer investors the flexibility of an OTC product with the credibility and transparency of the listed derivative.

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Snippets | THE WORLD

funds before a deadline to recapitalise. This is according to Ibukun Adebayo, the LSE’s head of primary markets for the Middle East and Africa, who said Nigeria’s Central Bank has ordered lenders to boost capital by September 30, or it may withdraw inter-bank guarantees.

Slovenians reject retirement age increase plan Slovenians voted to reject an increase in the national retirement age in a referendum. The news dealt a major blow to the government, which also lost a referendum on labour reform in April. The proposal was to gradually raise the retirement age to 65 from the minimum age of 57 for women and 58 for men.

Political risk a concern for South Africa Moody’s had words of warning for South Africa after the ratings agency warned that the country has ensured a serious deterioration in its fiscal position that is unlikely to reverse quickly. The agency also said that nationalisation demands from the ANC Youth League were “disturbing” potential investors. Al-Qaeda gains new leader after Bin Laden death Ayman al-Zawahiri was confirmed as the new leader of al-Qaeda, the Islamic terrorist network, following the death of Osama bin Laden. Mr al-Zawahiri has already gained prominence in the West for fronting a number of the group’s public video and audio messages.

Afghan bailout denied by IMF as requests seen as invalid The Afghanistan Government’s request for an $830 million bailout was rejected by the IMF as it declared plans to clean up the Kabul Bank scandal to be inadequate. Nearly $1 billion disappeared from Kabul Bank in insider loans last year bringing the war torn economy to the brink.

Job vacancies rise at city institutions The number of job vacancies at financial services companies operating in the City of London jumped 11 per cent to 5 440 in May. British recruitment group Astbury Martin said investment banks are now looking to replace employees who left after the latest bonus round. Islamic finance faces dearth of skills Shari’ah-compliant financial services products have been growing in popularity in recent years but the industry has a dearth of skilled professionals. Bank of Indonesia’s Halim Alamsyah said the rapid growth of the industry is not being met with a sufficient supply of human resources to meet demand. Nigerian banks seeks LSE listing to avoid liquidation Nigerian banks are considering listing on the London Stock Exchange (LSE) in order to raise

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Global central bank proposes new rules to prevent global financial crisis The Bank for International Settlements – an umbrella organisation for the world’s central banks – has requested that the world’s biggest banks enforce new rules to hold an extra 1.0 per cent – 2.5 per cent of capital on their balance sheets, to better protect the global financial system and economy against financial crisis in the event of a collapse.

Greece still at risk of default Beleaguered Eurozone country Greece still appears to be at major risk of default according to S&P, which said both proposed financing options pushed by French banks would amount to a default under its criteria. This followed the news that Greece passed austerity measures worth €28 billion and promised to deliver €50 billion in sell-off revenues by 2015. IMF appoints first female chief French Finance Minister Christine Lagarde was announced as the new leader of the International Monetary Fund (IMF), marking the first time the global lending organisation has appointed a female managing director. The appointment followed speculation that South Africa’s own former finance minister, Trevor Manuel, could be in the running for the position.

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the value of wine collecting Phantom of the Opera and Cats composer, Andrew Lloyd-Webber, added an extra £3.5 million to his bank balance earlier this year, not from the profits of another tour, but with the sale of some choice bottles from his vast wine collection. At an auction held earlier this year in Hong Kong, Lloyd-Webber said he was selling part of his wine collection as he had nowhere suitable to store it. Difficult as the storage concern may be to believe for a multimillionaire, Lloyd-Webber has been an avid collector since the age of 15. Lloyd-Webber is not alone in his enthusiasm for wine. Last year, auction house Sotheby’s recorded the highest ever year for wine sales totalling $88.27 million. Currently, the three most expensive bottles of vintage wine ever sold are as follows: Chateau Mouton-Rothschild 1945 (Jeroboam) – $310 700 The most expensive bottle of wine (of any format) ever sold at auction is the Chateau Mouton-Rothschild 1945 (Jeroboam), which was sold in New York in 2007. One of the most admired vintages of the 20th century, this bottle changed hands only once before at a London auction in 1997 for around $114 614, less than half the amount it was auctioned for just 10 years later. Chateau Cheval Blanc 1947 – $304 375 The world’s second most expensive bottle of wine is the six-litre Château Cheval Blanc 1947, a Bordeaux previously owned by an anonymous Swiss collector. The wine was sold at an auction at Christie’s in Geneva for more than $300 000 and holds the status of being one of only two wines that have been given the Class A status in the Classification of Saint-Emilion wine. Chateau Lafite 1869 – $232 692 Sold at an auction in Hong Kong in 2010, this vintage wine is the most expensive single bottle of standard size wine (750 millilitres) and was once in the possession of US President Thomas Jefferson. The bottle also has his initials ‘ThJ’ etched in the glass of the bottle.

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THEY SAID...

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

“At current levels, US Treasuries are fairly valued, I don’t think that there is a bond bubble. Every time there is a global bout of risk aversion, and every other week there is another tail risk or black swan event, people dump the Euro, dump the Yen and go to the safety of the US Dollar and treasury.” Nouriel Roubini, economist who predicted the global financial crisis, discussing US Treasury prices.

“We must be able to talk about our leaders ... that must not be seen as a vote of no confidence in our leaders. Discussion of leadership must not be seen as a plot against a certain leadership.” Julius Malema, leader of the ANCYL discussing political party leadership candidates.

“The political time has been compressed. Each day is of extreme importance and hence we cannot afford to waste a single hour.” Greece’s newly appointed finance minster, Evan Venizelos, commenting on the Greek debt crisis and the fact that European finance ministers have postponed emergency loans to Greece until the country approves new austerity measures.

“Today, the money went out of the bank of Walmart and into the pockets of shareholders.” Nedbank Securities analyst, Syd Vianello, commenting on Walmart finally completing its $2.4 billion purchase of a majority share in South African retailer Massmart.

“The problem – and a source of potential growth for the Malemas of this world – is that no-one else is offering them anything better. This is his equivalent of the garlic and beetroot offered not so long ago by the ANC and its late health minister as a cure for AIDS.” John Kane-Berman, South Africa Institute of Race Relations CE, commenting on the poor not being given an alternative to proposals put forward by ANCYL President, Julius Malema.

“As Congress debates the president’s request for an increase in the statutory debt ceiling, the Congressional Budget Office warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic.” House budget committee chairman, Paul Ryan, commenting on a study warning of a looming US fiscal crisis.

“The key worry of the market is that the events that we’ve been seeing in Greece are being repeated in Portugal.” Michael Leister of WestLB commenting on the downgrading of Portugal’s credit rating to “junk” status by ratings agency Moody’s.

“It’s clearly people power that has forced this decision, the revulsion that people have felt about what’s happened at the News of the World and, indeed the decisions that advertisers were then making.” Ed Miliband, leader of the UK’s Labour party on the scandal that saw the closure of the 168-year-old newspaper.

“While local food retailers are fantastic businesses, they do not present an attractive value proposition for investors when compared with their global counterparts.” Johannes Visser, senior analyst at RE:CM, who says that the high valuation multiples for companies such as Massmart, Shoprite and Pick n Pay means that in some cases they are priced for exceptional outcomes and overall, offer average prospects for investors.

“Risk aversion can prevent investors from making investment mistakes, but it can also prevent investors from entering equity markets and gaining better long-term growth.” Gerda van der Linde, executive director of the Institute of Behavioural Finance.

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