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Nicky Newton-King CEO at the JSE

High net worth investors Advised to get asset allocation right but will they listen?

Retirement annuities

Bad but getting better

Asset allocation & risk


The evolution of wealth



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High Net Worth Investors: Advised to get asset allocation right – but will they listen? | 08 ASSET ALLOCATION AND RISK | ASSET ALLOCATION | 18 Profile Nicky Newton-King, Chief Executive Officer at the JSE | 20 Head to Head Melanie Brown CEO of Global Credit Ratings and Kevin Lings, Chief Economist, Stanlib | 22 Retirement annuities Bad but getting better


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Nicky Newton-King CEO at the JSE

High net worth investors Advised to get asset allocation right but will they listen?

Retirement annuities

Bad but getting better

Asset allocation & risk

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Letter from the editor letter from the

editor A

year ago I wrote that we faced an uncertain year. That prophecy certainly held true, especially when we consider the tragic mine shootings and the violence and strikes that followed. I can only conclude that 2013 will continue in this manner. The Black Swans are likely to flutter up from political and economic issues. Nevertheless, welcome to 2013. Perhaps I’m the eternal optimist but I don’t believe uncertainty is necessarily a bad thing. For investors and financial advisers who are in tune, it presents investment opportunities. I would like to brag that this issue of INVESTSA takes all that away; it might not be entirely true, but the great articles that follow will certainly help to clear up a lot of the uncertainty.

For those of you who didn’t get what you wanted in your Christmas stockings, our veteran adviser, Sunél Veldtman, takes a look at how much is enough, a philosophical account of our unhealthy obsession with always wanting more. In a similar vein Carmen Nel, economics and fixed interest strategist at RMB, considers what could also be a philosophical topic about the more things change. Read her views on what 2013 might hold in store. Murray Anderson, MD at Atlantic Asset Management tells us how to have a wonderful 2013. All you need is get your asset allocation right and the battle is nearly won. He does caution that making the right asset allocation decisions isn’t easy. Colleague Fiona Zerbst explores things from a different angle; that of paying more attention to allocating risk when considering asset allocation. The painful truth is that in this uncertain market, more risk must be taken to beat inflation. Fiona also tells us what to do when the Rand weakens; a question troubling investors and those in the industry in South Africa. I also dip my toes into asset allocation, particularly the difficult job for advisers when wealthy clients just won’t listen; and I take a look at those infuriating but popular products, retirement annuities.

EDITORIAL Editor: Shaun Harris Features writer: Fiona Zerbst Publisher - Andy Mark Managing editor - Nicky Mark Art director - Herman Dorfling Design - Dries van der Westhuizen | Vicki Felix Editorial head offices Ground floor | Manhattan Towers Esplanade Road Century City 7441 phone: 0861 555 267 or fax to 021 555 3569 Magazine subscriptions Glen Trussell | Advertising & sales Matthew Macris | Michael Kaufmann | Editorial enquiries Greg Botoulas |

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There’s so much more in this issue. To all our readers, all the best for 2013. I hope it brings you the success and happiness you are looking for, remembering that success and happiness isn’t always the same thing.

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Shaun Harris

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Shaun Harris

High net worth investors Advised to get asset allocation right – but will they listen?

There are more downbeat investment factors flying around right now than investors and financial advisers can count on the fingers of both hands. In response, that’s exactly what investors should be doing: sitting on their hands.




ut this time around the old investment adage might not be appropriate, because it’s different. At least, from an investment and economic perspective, as different as it’s been, some commentators say, since the start of the Great Depression. It’s a time to take a hard look at investment portfolios and try to position your money as tactically as possible to get through the period of fear that lies ahead. Many investors will take a deep breath and call on their financial advisers, but what about high net worth (HNW) investors? Perhaps wealthy investors should not be singled out, except that they do often tend to behave differently in a crisis. This is for at least two reasons: there’s a lot of money at stake, often a personal fortune that has been built up over a long time; and

most HNW investors are financially literate. The result – they want to make their own investment decisions, at times with disastrous results. As you will read elsewhere in INVESTSA, asset allocation is one of, if not the, most important part of the investment process, more than getting the individual asset selection right and the correct valuations. It’s about how those assets are combined that determine investment returns over the long term. But asset allocation is not easy. Fortunate investors, and that includes the professionals, may be sitting on their hands if they believe their asset allocation is correct. Paul Stewart, head of asset management at Grindrod Asset Management, sums up the big changes in both the global and local investment landscape over recent weeks and concludes that pessimism abounds. “Notwithstanding these concerning facts, our

investment outlook and asset allocation have not perceptibly changed at this stage,” he says. Note that Stewart says “at this stage”. Tactical asset allocation in this investment climate is something that can happen at any stage, depending on how severe the next shock is. But if the investor feels confident that their asset allocation is right, well they can sit on their hands, for now. But in terms of asset allocation what should HNW investors be looking at? Stewart says the biggest risk to investors, particularly retirees, is inflation risk. “Yet when we look at asset classes globally, fewer and fewer of the mainstream asset classes are able to jump this basic hurdle rate for inclusion in the portfolio.” Here’s where HNW investors might be in trouble. In the past a well-constructed, cautious portfolio would have included bonds, both government and corporate bonds, as a large part of the asset allocation. Bonds are a certain way to protect cash and provide a known source of income. But now? Lower interest rates and weaker bond yields mean few can manage to beat inflation, globally and locally. “Therefore, two important sources of positive real returns over the past 10 years will be the source of negative real returns for the next three to five years. Accordingly, investors are going to have to focus their attention on asset classes that at least have a fighting chance of beating CPI in the future. Investments in listed equity, listed property, private equity and hedge funds may provide the potential inflation-beating return solution,” Stewart says.

Are HNW investors doing this? Only, it seems, with a lot of prodding from financial advisers, and even then the advice is often ignored. Many HNW investors are notorious for wanting to do things their way. If bonds worked in the past, they will probably hang on to them. The danger is up to five years of negative real returns can do a lot of damage to an investment portfolio. And seeking more equities is often where HNW investors and their advisers part ways. When financial conditions get tough HNW investors are prone to wanting to dump equities, all equity holdings, from their portfolios, again contrary to the advice they are getting. So for the really stubborn HNW investor who insists on acting against advice, the future looks dim. They are going to cling to bonds and face several years of lower-than-inflation returns. And they are going to get rid of equities, one of the asset classes that just might offer real returns over the longer term. That sounds like a sure recipe for taking some of the high out of their net worth. A further potential problem facing HNW investors is that many favour tangible assets, especially property. Many made their fortunes through property investments. When times get tough they want to go back to property at the expense of other asset classes in their portfolios. Not that there’s anything wrong with physical property as an investment. The danger comes when investors are over-exposed to property, says Morris Crookes of Foord Asset Management. “Such investors are often overexposed not only to a single asset class, but to a single asset within that class.”

Crookes is talking about the average investor here but his thoughts are probably even more pertinent to HNW investors. Over-exposure to property will not be limited to one or two residential houses but probably include farms, game lodges and commercial property, as well as other tangible assets, which Crookes says would include art, Persian rugs and gold coins. For this reason he says investors must be encouraged to look beyond the comfort of tangible assets. “Without doubt, it is more difficult to appreciate something that we cannot see. It is more difficult to extrapolate those abstractions over the long term without the benefit of sensory cues. It is more difficult, but it is necessary in order to achieve an optimal investment outcome.” However, there are also other HNW investors who do listen to advice and, while they may not follow it slavishly, will act on the advice if it’s in line with their own thinking. After all, that’s how this group of investors became wealthy. But while few advisers will admit it on the record, many other HNW investors are not listening to advice. This puts the adviser in a difficult situation. They can put forward the best arguments but the customer is king and will make the final call on whether to act on that advice or not. If they don’t follow the advice, there’s a good chance that same client might come back in five years or so and want to know why their investment portfolio has not been performing well. And they won’t want to hear about the advice they refused to follow five years earlier.






allocation and risk

What does it mean to allocate risk and should we be paying more attention to this when we consider a portfolio’s asset allocation? Fiona Zerbst investigates.




ost of the literature on investing will tell you that about 80 to 90 per cent of your portfolio’s performance can be explained by the portfolio’s asset allocation. Received wisdom argues that a diversified, balanced portfolio will deliver, taking into account both your time in the market and your appetite for risk (of course, you may not get positive nominal returns but diversification will at least reduce the extent of underperformance).

Yields from bonds are at historically low levels now – they’ve always been in double digits, but now they’re around seven per cent. But should we not look more closely at how we allocate risk in the face of increasing market volatility? In his paper Some Recent Trends in Portfolio Construction, former CIO of the Swedish public pension fund, Erik Valtonen, argues there has been a shift from thinking about asset allocation as a pure capital allocation problem to thinking about it in terms of risk allocation. In his fascinating book, The Great Disruption: How the Climate Crisis Will Transform the Global Economy, Paul Gilding argues that global growth cannot continue at the rate it has done during the past few decades, for the simple reason that ecological, social and economic shocks seem likely to generate more economic stress – resource scarcity, price pressure, the trap of debt to foster growth. The newspapers remind us daily of strikes, food security issues (loss of arable land as well as banning food exports to protect food supplies), extreme weather and peak oil (the point after which oil extraction can’t be increased because of the difficulties of extraction). Gilding holds that the financial markets will soon grasp the long-term implications of all this: “Perhaps driven by a series of major corporate collapses or national economic crises, they will then simply reprise risk in global share markets. This will lead to a dramatic drop in global share markets and a tightening of capital supply.” Alarmist? Not really, says Paul Stewart, executive director and head of asset management at Grindrod Asset Management. Stewart believes investors will be faced with flatter returns in an increasingly low-yield, low-return environment, largely because global growth will be tepid at best for the next five to seven years. Outperforming inflation is going to be a singular challenge and much of this will come down to how asset allocation is approached. “There’s little question that diversification is a sound strategy, which is why we have Regulation 28 in place,” says Mike Brown, managing director of etfSA. “But the market has changed and you may not get the returns you expect.” By way of illustration, let’s look at cash and bonds. For the past decade or so, we’ve watched them beat inflation, but there is no guarantee this trend will continue. “This year, the Reserve Bank adopted a negative

real interest-rate regime, meaning the repo rate is below the rate of consumer inflation, for the first time in many years,” says Stewart. “Yields from bonds are at historically low levels now – they’ve always been in double digits, but now they’re around seven per cent. The question is, how do you provide your clients with more money in real terms in three, five or 10 years if two major asset classes – cash and bonds – are no longer capable of giving you the inflation beating returns you’ve come to expect?”

stable over time). Do we need to consider such extreme measures? If diversification doesn’t protect your capital, how do you protect the downside?

Typically, asset managers will come up with a best guess as to what combination of asset classes will give the highest level of risk adjusted return, depending on past performance data. And here’s where the future may be tricky – the data is always backward-looking. There is no other way to predict performance, except to adopt the reasonable notion that real returns will be reasonably stable over time. But this assumption, especially in bonds, is looking somewhat less reasonable because of the recent past. Delivering the same returns in future may involve assuming more risk that in the past. Of particular concern are very long-term investors like pension funds, because trustees and members like capital values to remain stable, not always appreciating that the purchasing power of the capital is being eroded over time.

“It still makes sense to put a diversified, balanced portfolio together and you still need to assess whether a client has a low, moderate or aggressive risk profile and tilt the portfolio relative to benchmark,” says Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI). That said, given the slowing economic growth, and global bond yields bottoming out, SPI’s view is that marginally overweighting equities is the most appropriate positioning against this background. Weakness in equity prices will be viewed as a buying opportunity.

This year, the Reserve Bank adopted a negative real interest-rate regime, meaning the repo rate is below the rate of consumer inflation, for the first time in many years. Of course, the return and risk profiles of asset classes are not constant, so returns will depend on the level of valuation indicators for a given asset class. Valtonen’s suggestion is that dynamic asset allocation may be wise because the set of indicators will be broader and will include macro, risk and valuation gauges. His contention is that portfolios may need to diversify beyond the obvious asset classes and consider, for example, a risk parity portfolio, whereby risk is spread equally among asset classes, so that each contributes equal volatility to the portfolio (tricky because the correlation among asset classes isn’t

“It may be that investors will have to readjust their expectations,” says Stewart. “Given starting yields in most asset classes, pension fund trustees may be forced to accept more volatility for the same returns. You need to be clear to your clients that more risk must be taken on to beat inflation.”

Grindrod is similarly inclined to look to equities and local listed property. “The introduction of REIT legislation in SA should also be positive for the local listed property sector,” Stewart predicts. Listed property still has the ability to deliver inflation-beating returns via a combination of high-starting income levels that grow with inflation over time. Mike Brown says that the demand for balanced portfolio ETFs may see these products introduced in South Africa sometime next year. Much like their unit trust counterparts, these products will be packaged so clients can make their own asset allocation. Different style indices and credit classes could perhaps distribute risk within the equities and bond spaces. Finally, how can you tell if an asset manager is allocating risk optimally? “When a client is assessing the performance of an asset manager, he or she should bear in mind that surveys don’t tell the full story regarding risk characteristics,” says Van der Merwe. “You can find performance numbers based on past performance, but this does not tell you about the risk taken on to produce the return. How risky is an investment over time? Asset managers have the answers and few diligent consultants care to do the work. But it is really the duty of the client’s financial adviser to spell it out.”





Mind your S’s in asset allocation Daniel Schoeman | Portfolio Manager, Analytics multi-manager

A thorough financial needs analysis may shed light on which style of asset allocation will be most suitable for an individual client. 10


It is important to remember the three S’s in asset allocation when constructing optimal investment portfolios for clients. Placing undue emphasis on only one or two of the three S’s may lead to sub-optimal results. The three S’s refer to style, strategy and system and is a simple way of attempting to summarise a complex endeavour such as asset allocation.


he style of asset allocation can broadly be described as conservative, moderate or aggressive. A conservative asset allocation will typically have a low exposure to risk assets such as equity and property; a moderate asset allocation will have a medium exposure to risk assets; and an aggressive asset allocation will have a high exposure to risk assets. A conservative asset allocation is expected to display lower volatility and generate a higher proportion of its return by dividend and interest income, while the moderate and aggressive asset allocations will display higher volatility and generate most of their returns through capital growth. The optimal time horizons for the three styles will also be different, with a short (rolling three years), medium (rolling three to five years) and long-term (rolling five-years plus) horizon assigned to the conservative, moderate and aggressive asset allocations, respectively. A thorough financial needs analysis may shed light on which style of asset allocation will be most suitable for an individual client. The strategy of asset allocation can be depicted as a strategic, tactical or blended approach. The backbone of each of the styles (cautious, moderate and aggressive asset allocation portfolios) should have a strategic benchmark, with a static weighting to each of the different asset classes. The respective strategic benchmarks will be a portfolio of assets with the highest probability of achieving the respective target returns at target volatility over specific rolling periods. These strategic benchmarks may serve as long-term guideposts around which tactical asset allocation moves could be implemented in the short term. Reasons to overweight

or underweight specific asset classes should be based on a sound methodology, such as evaluating the attractiveness of forward ratings of local to global assets to decide which asset classes are undervalued or overvalued at a specific point in time.

A conservative asset allocation is expected to display lower volatility and generate a higher proportion of its return by dividend and interest income, while the moderate and aggressive asset allocations will display higher volatility and generate most of their returns through capital growth. The system of asset allocation implements the style and strategy components in a practical manner. Factors to consider include which data sources to use for historical and forward estimates, which methodologies to use to calculate optimal strategic benchmarks and derive robust tactical asset allocation exposures, and how to display the insight derived from the information in a userfriendly and efficient manner. Developing a decision-support system is imperative to bring asset allocation to life. At Analytics, we have found that communicating and explaining the three S’s of asset allocation to clients gives them a greater sense of comfort in entrusting their hard-earned money to us.

MARY Early detection of cancer saved her life...



Tristan Hanson | Head of Asset Allocation, Ashburton


ON ASSET ALLOCATION The first decision an individual investor makes is the most important – the decision as to what risk they are willing to bear in order to meet their investment goals. Advisers know this can typically be a frustrating exercise. Individuals may not have realistic expectations of what to anticipate from financial markets (which is dependent on available interest rates and valuations). Moreover, people are not consistent in their stated risk preferences. They tend to become greedy after markets have rallied and excessively cautious once they experience a loss.




his decision is often further complicated by the investment industry’s confusion of risk and volatility. Volatility refers to short-term deviations in the market value of an investment portfolio. It is what investment professionals typically refer to as the measure of ‘risk’. But the risk most investors worry about is that the savings they have invested will be permanently impaired and their future liability needs (e.g. retirement, or a child’s education) will not be met. The volatility or standard deviation of short-term returns is sometimes a useful indication of the possibility of large losses, but not always. An unanticipated inflation shock, for example, will reduce the future purchasing power of a portfolio of bonds, but prior to the shock the bond market may have been very calm, exhibiting low volatility, and therefore appearing to be low risk. The second decision, once risk parameters have been set, is the investment strategy. Will the investor maintain a static strategic asset allocation comprised of different building blocks (direct investments, funds or cash)? Will the adviser employ tactical asset allocation on top of this? Or will the adviser leave decisions of tactical asset allocation to someone else; for example, by investing in a multi-asset fund? Just as manager or stock selection is a recognised skill, so too is tactical asset allocation. Is it realistic to expect someone will be exceptional at both? If the adviser is going to decide upon asset allocation, how will they do so? Optimised portfolios based on statistical models are highly sensitive to the inputs used. Models, therefore, are only a tool and subjective inputs may be required. For example, only a minority of investors truly have multidecade investment horizons and yet asset correlations can be diametrically opposed for such lengths of time. US bonds and equity returns have been negatively

correlated for the past 15 years or so, but were positively correlated for much of the previous 30 years. Such changes in correlation between asset classes have profound consequences for diversification and therefore portfolio construction.

Avoiding big mistakes is critical and the risk of such mistakes is often greatest in times of high emotional stimulus, i.e. during times of widespread irrational exuberance or extreme pessimism. In our view, tactical asset allocation is a skill in itself and a source of potential alpha (or risk-adjusted outperformance). Avoiding big mistakes is critical and the risk of such mistakes is often greatest in times of high emotional stimulus, i.e. during times of widespread irrational exuberance or extreme pessimism. This is when the right investment decision is in direct opposition to our emotional impulses. Experience and a robust process are therefore necessary to make the best of such opportunities. Over time, in our Replica Asset Management Fund (which has been running since 1992), we have used tactical asset allocation to generate steady returns with relatively low volatility. Since 1992, the Sterling-based fund has delivered a return of 6.27 per cent p.a. in contrast to global equities (5.41 per cent) but with substantially lower volatility (7.19 per cent for the fund versus 14.6 per cent for equities. Source: Morningstar as at 31/10/2012). Over this period, the UK consumer price index (CPI) has risen 2.2 per cent per annum on average (source: Bloomberg).

Offshore or local In South Africa, it is often seen as a big decision whether to invest internationally or domestically. In reality, it should not be. The fear of missing out must be taken out of the decision. It is also very unlikely to be an all-or-nothing choice. Individuals should first look at how much they wish to spend overseas or potential future foreign liabilities (e.g. overseas university education). They should also consider whether they consume a lot of foreign-produced goods, as foreign assets can provide a hedge to rising foreign prices (in Rand terms). Individuals must also be honest with themselves as to why they are taking money offshore in the first place – is it an insurance policy against domestic policy risk, a means of investing in industries or technologies not available domestically or a decision made to maximise investment returns? A considered decision along these lines is more likely to achieve a desired objective and will avoid the temptation of looking at short-term returns and excessive re-evaluation of the prior decision. Moreover, if the decision is for insurance purposes, the individual should realise that the price of insurance fluctuates. It will be cheaper to take out insurance before you notice a fire in the basement than after the event.

MARY ...but it nearly ruined her bank balance.





It is a well-recorded fact that in order to achieve your financial goals you have to get your asset allocation right, and research shows that it’s 90 per cent of the battle won if you do.

Murray Anderson | MD Atlantic Asset Management



As far as fixed income allocations are concerned, in retirement planning the allocation or exposure to fixed income is legislated by Regulation 28 of the Pension Funds Act and the minimum permissible allocation is set at 25 per cent. What this allocation does is provide exposure to an asset class that offers the portfolio some immunisation against potential equity downside volatility. Of course, within this asset class there are also myriad options investors need to consider, such as long bonds versus short dated government bonds, inflation-linked bonds and corporate bonds, not to mention preference shares or listed property as an income-generating asset class. Hence the allocation decision can become quite complex and in a low interest rate world, leaving 25 per cent of the portfolio in call accounts to satisfy this Reg 28 requirement would not be a prudent option since costs and inflation will erode that return over time. Cash is thus seen as a potential big

An elegant solution to a pure cash allocation is to optimise the fixed income component by using a portfolio that can make use of all of the fixed income or other income-producing assets in one portfolio. While such an income return is very attractive, the downside would be some capital volatility as has been experienced, albeit to a very limited extent, over the past three months. The benefit of using a portfolio of this nature is that the asset allocation can be altered by the fund manager at any time in order to take advantage of the market shifts that occur on a daily basis. Thus, an optimal balance between the income yield, potential capital gains, and the downside possibilities are all taken into account.

The benefit of using a portfolio of this nature is that the asset allocation can be altered by the fund manager at any time in order to take advantage of the market shifts that occur on a daily basis. Getting this asset allocation mix right is essential and, if not done correctly, can potentially lead to a disastrous outcome; in particular for retired investors, who do not have the flexibility and longer investment time horizon. For example, if you are a conservative investor yet have many years to retirement and run a low risk portfolio, you could reach the retirement age with an underfunded position, or put in plain English – not enough money on which to retire comfortably. While there are many decisions to contemplate when selecting the appropriate asset allocation, it is often carried out incorrectly. The first step should not be selecting a fund – it should be setting up a financial plan. Often the real problem prospective retirees face is that they fail to plan. Taking responsibility for your own financial wellbeing is the first step and the hardest, but once that is done there is plenty of help at hand since there are more than enough qualified financial planners and investment advisers wanting to assist with setting up an appropriate asset allocation. It is important to appreciate that no one person has the same set of financial circumstances as the next and therefore with the array of fund choices available to choose from and a good financial adviser, you can build your own unique portfolio to achieve your unique long-term financial goals.

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The first step in the asset allocation process is usually quite simple in that there are generally accepted allocation parameters to use as guidelines, with younger investors with more time to retirement having a larger allocation to equities which, depending on risk tolerance is generally accepted to be around 75 per cent or more. Middleaged investors, or those with less risk tolerance or lower return objectives, will find a lower equity allocation suits them, moving down to maybe 50 per cent equity exposure. Investors who are already in their retirement years may end up having an exposure below 25 per cent to equity and, of course, much more of their savings allocated to income-generating assets. Drilling down into the equity allocation we then have to look at the broad range of options available, e.g. domestic versus offshore exposure, a growth versus value style and even deeper allocations to large cap versus small and midcap shares. These, however, are intra-asset class allocations, rather than across asset class.

detractor to the overall investment objective one is working towards.



he concept of asset allocation is designed to help you create a balanced portfolio of investments where your age, risk tolerance and appetite and several other factors, including the health of your personal balance sheet are used to calculate an appropriate mix of equities, bonds and cash that delivers the required return, for a given amount of risk. Once you’ve determined the optimal allocation you have to implement the strategy and stick to it in order to achieve the long-term goal. There is no one-size-fits-all solution to allocating your investments across these asset classes and every investor requires a tailored solution for their specific set of circumstances.


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If investment decisions are not based on valuations or fundamentals, what is driving them at present? Duggan Matthews | Investment Professional at Marriott Asset Management

If we look at both the equity and bond markets at the moment, we see that they are both suffering from weak fundamentals and low yields, yet they are both attracting fund flows. By contrast, the money market is seeing a net outflow of funds.


ond and equity valuations are stretched at the moment with bonds currently yielding 6.9 per cent and the JSE All Share Index on a three per cent dividend yield. Bond yields are driven by inflationary expectations as well as the supply of bonds. Many commentators are looking to a rise in inflation. The gold price, which acts as an interesting proxy for inflationary expectations, is also pointing to a hike. As quantitative easing began in 2008/9, the gold price started rising from around $900 an ounce to almost $1 900 an ounce in 2011, before settling around $1 750 in 2012. At the same time the supply of bonds has exploded. We have witnessed gross central government debt as a percentage of GDP for the advanced economies rise to the highest level in over 100 years, a trend that has been echoed in South Africa. On the equity front, yields are driven by dividend growth fundamentals. The Nielson Q2 2012 Online Consumer Survey reveals that global consumer confidence is declining as the Eurozone crisis continues to deteriorate, US job growth remains weak and China’s 2012 GDP forecasts are revised downwards. In fact, more than half (57 per cent) of global respondents believe they are in recession and half of those say it will continue for another year. Clearly, we are not experiencing an environment conducive to galloping equity or bond markets, yet investors are favouring these asset classes over others. In the 15 months to June 2012, R44 billion flowed out of money market funds and R47 billion was added to 16


balanced funds, which represents a significant change in investor behaviour and a greater adoption of risk. But why would investors be prepared to up the ante? Locally, no asset classes are producing high or even average levels of income and the environment is poor so the demand cannot be driven by valuations or by the fundamentals. Marriott believes that the major driver of this trend is the exceptionally low prevailing interest rates internationally. The local investment trend is a reflection of the international flows and SA bonds have been a beneficiary of this movement, too. With global investors hunting for yield, there has been a consequent massive flow of funds into SA bonds from foreign investors. Over the period 1993 to 2008, the SA bond market witnessed a net R36 billion outflow of foreign capital. In the subsequent period from 2009 to 2012, there has been a net inflow of R126 billion. However, we are concerned that, at 4.5 per cent, the yield on a balanced fund comprising 60 per cent equities and 40 per cent bonds is at its lowest level in 40 years and well below the historic average of 7.1 per cent. Added to this, the key elements within them – bonds and equities – are fundamentally weak. Marriott urges investors to consider carefully before withdrawing assets from the money market, particularly those who require income from their investments. By switching into a more volatile asset class, particularly at a stage when yields are low, investors may be taking on excessive capital risk. We would guard against

assuming such risk and recommend that investors err on the side of caution. There are better options for those investors who require income. High quality companies with the ability to produce reliable, growing dividends in difficult economic conditions, both locally and offshore offer a far more appetising option. Interestingly, we have seen fewer investors externalising assets this year: flows into offshore equities from South Africa are down 20 per cent this year compared to last year. With a yield of 3.9 per cent, higher than the average yield of 3.1 per cent and the SA equity market yield of 3.0 per cent, combined with good quality dividends, offshore equities present an attractive investment possibility. With a solid offshore dividend yield, investors would do well to maximise their offshore equity exposure. They should opt for equities in defensive industries; for example, those supplying household necessities with solid brands. Some examples of global companies which have shown steady dividend growth over time, through all market conditions, include Proctor and Gamble, BAT, Kellogg, Nestle, Unilever and Johnson & Johnson. Closer to home, the types of counters which display these investment characteristics include Mr Price, SAB, Standard Bank, Tiger Brands, Spar and Clicks. There are also creative solutions for investors seeking income. These instruments include high yielding equities, inflation-linked bonds, preference shares, corporate debt, structured NCDs in addition to cash and fixed deposits.

High net worth



wealth abroad Anthony Markham, Partner and Dalila Ver Elst, Senior Associate, Maitland

South Africa is a high tax jurisdiction with a sophisticated tax system and exchange control. It also grapples with crime, corruption and poverty. Hence South Africans seek not just personal, but also financial safety by diversifying their investments out of South Africa. They are looking for wider markets, different currencies, different counterparties, banks and investment media.


elaxed exchange controls mean that South Africans can now achieve tax efficiency and legitimacy of their foreign interests. An international pension scheme offers tax savings and can be a secure vehicle in which to hold and accumulate wealth internationally – particularly desirable to protect against the slide of the Rand. Exchange control has been relaxed significantly with the result that each individual South African resident effectively has an annual allowance of R5 million for investment abroad. Foreign earnings and inheritances of South African residents can be freely retained abroad. Foreign dividends are not taxed at 40 per cent, the normal rate, but at only 15 per cent. This beneficial rate will apply to income that is made up of foreign dividends. An international pension arrangement does not attract the taxes that are imposed on those who settle a trust and are thus a favourable alternative to safeguard family wealth. In general, international pensions are money purchase schemes that are structured as trusts. Employer participation is not an essential feature. An individual can establish one for himself. Sometimes they are an umbrella scheme with many participants and associated with

an investment programme, enabling easy investment of the pension funds. In other cases they are stand-alone, self-invested schemes, where the responsibility to invest rests with the member. They are generally subject to supervision and regulation but this is typically imposed with a light touch. Certainly this is the objective of the regulator in the Isle of Man, a suitable jurisdiction for South African offshore planning. The key to a pension arrangement is that there is no donation. This has two crucial consequences: there is no donations tax (even though the assets are no longer in the estate of the scheme member); and the settlor charging provisions do not apply. A transfer of assets to an international pension is not a donation, because the member expects to receive back his contributions and the investment returns, in due course, and if the member does not receive it back, then he expects his family to benefit. As there is no donation, the settlor charging provisions applicable to trusts are also inapplicable to international pensions. The investment gains and income can accumulate in the pension free of South African taxation in the hands of the member. Once in the pension scheme, the funds do not form part of the estate of the member. Accordingly should the member die before he has received all the benefits of the

scheme as retirement benefits, the assets remaining in the scheme are available for his family free of estate duty. If in due course a pension is paid from a member-funded scheme it will normally be taxable in South Africa as income. Foreign dividends can be distributed in the year in which they arise, and be subject to tax at 15 per cent. But international pension trusts are flexible arrangements and the benefit may be paid in lump sums. Income tax does not apply to lump sums and instead the sum will be taxed under the beneficiary charging provisions applicable to trusts that are flexible and beneficial for recipients. Contributions, which are capital, can be redistributed to the member free of tax. The rate of distribution can be adjusted to meet the needs of the family. If the member does not take benefits during his lifetime, the funds invested will remain in a flexible international trust after his lifetime to provide benefits to his family. The fact that it is conventional to fund pensions over a period of years and that the South African investment allowance now has become an annual allowance is another reason why this particular arrangement has become an arrangement of choice, to be preferred over an international trust, for many South Africans. 17


NNK Profile

Also driving competition in our industry is the proliferation of other trading platforms and products that compete directly with exchanges.

1. You joined the JSE in 1996. Has the industry changed since you started?

The global exchange industry has changed hugely since I first entered this world in 1996. Perhaps the most obvious change is that most exchanges, including the JSE, have demutualised and have become listed businesses themselves. In my mind this has made the industry more efficient and more competitive. Also driving competition in our industry is the proliferation of other trading platforms and products that compete directly with exchanges. Then there is the rise of the importance of technology in our world as the need for speedy execution has meant that technology has had to evolve just as rapidly. Last but not least, there is the call for increased regulation of our industry and much debate on how the exchange industry can be regulated. 2. What is the biggest challenge facing investors currently? Our clients and their clients in turn are under financial pressure. In order to alleviate this, we try to ensure that we price our products and services fairly while earning a reasonable return for shareholders and being able to reinvest in our business. 3. What are your plans for the JSE over the next five years? We are working to a five-year strategy to ensure that the JSE is positioned to play its



part in a thriving South African financial ecosystem. At a high level, this means becoming more agile and more responsive to clients and the changing environment; ensuring timely and quality IT delivery; ensuring our products and services are consistent with what our clients need and want; maintaining the hard-won reputation for appropriate regulation; and engaging on the key regulatory issues that face our industry.

We will continue to focus on providing access to Africa and other emerging markets as a key part of our five-year vision. 4. How critical is it for Africa to be a key part of any future strategy for the JSE?

As the appetite for investment in the continent continues to grow, the JSE aims to be the preferred destination for investors looking for exposure to the African growth story and for those entities looking to raise capital outside their own home markets. We feel that we have moved beyond the time where African clients have to go to London or the US to get that capital.

We have done good work around increasing the range of African products available on the JSE. We will continue to focus on providing access to Africa and other emerging markets as a key part of our fiveyear vision. 5. There are still concerns around the global market following the 2008 economic crisis. What do you think investors can expect for 2013? I don’t know what the market will do tomorrow, let alone next year. As the head of the company running the market, I prefer not to make forecasts. However, investors can be reassured that we run the JSE for all weathers, with regulation and surveillance that they can rely on. 6. Do you think all of the regulation in the financial services industry has helped the JSE’s recent performance? The JSE’s performance is driven by investors seeking investment returns in emerging markets rather than anything that the JSE has done or regulation. However, investors do demand a certain level of comfort so South Africa’s number one ranking by the World Economic Forum as having the world’s best regulated exchange does help.

Nicky NewtonKing Chief Executive Off i c e r at t h e J S E



Head to head


Global Credit Ratings M e l a n i e

1. Were the recent downgrades to South Africa’s credit rating justified?

3. What impact do you think this has on SA as an investment destination?

Rating agencies compile their own financial and economic forecasts, but unexpected events often cause us to re-evaluate these. If recent events such as Marikana and the ongoing strikes indicate that forecasts are significantly overstated, and that growth and deficits for this year and the medium term will come in well outside of the agency’s estimates, then a review of the rating would be warranted.

Given what is happening globally, there has already been a flight by investors from what are perceived as riskier asset classes. If there is a further downgrade of the rating, this will exacerbate the flight of risk adverse investors. The flood of bad news increases uncertainty, and the lack of clarity is not good for investor confidence. If investors where to put a hold on investment decisions or even take a negative position with regard to investment in South Africa, this would have a significant impact in terms of funding the current account deficit.

However, it would appear that the downgrade first by Moody’s and then by Standard and Poor’s (S&P) was heavily influenced by the belief that underlying social tensions will result in policy changes leading to spending pressures and reduced fiscal flexibility, particularly as it leads up to the 2014 elections. Given all the negative news, it appears S&P has lost confidence that government will maintain its conservative approach to the fiscal policy framework and that policies intended to reduce deficits and debt accumulation will be compromised because of political pressure. 2. Are the agencies right to be concerned about SA? From an economic perspective, specifically employment and slow economic growth, the challenges have been exacerbated by the state of the global economy. Europe, a major trading partner, accounts for more than 30 per cent of SA’s manufacturing exports and is currently experiencing major economic challenges. Thus reduced demand globally will significantly dampen our economic outlook and could ultimately exacerbate unemployment.



4. Will it have any long-term impact on SA? The long-term impact of another downgrade increases the possibility of a further slowdown in economic growth and a larger fiscal deficit. Ultimately, a slowdown in economic growth and an increase in the cost of raising funding becomes a vicious cycle where borrowing money becomes harder, economic development is encumbered and credit worsens. In this regard, S&P’s decision comes swiftly after Moody’s move to downgrade South Africa’s credit rating; however, this is the first downgrade that will have a real impact. Moody’s decision to cut its credit rating from A- to BBB+ was an outlier that needed to be corrected and was therefore not a major surprise. The serious concern we have now is that the action by S&P could trigger one or both of the other two rating agencies to make a similar move, and that would have significant ramifications. Another downgrade will significantly impact investment decisions and will raise the cost

B r o w n

of borrowing for both South Africa and State-owned entities. In this regard we can’t afford to spend more if we want to maintain current levels of social spending and fund the infrastructure investments announced, given that the revenue base is not growing. 5. Should events such as Marikana and the strike action trigger downgrades? As a rating agency, the burden we carry is that a rating movement can be a self-fulfilling prophecy, and we have a responsibility to ensure that any action we take is backed by facts, not speculation. Continuing strikes and wage demands are having a hugely detrimental effect on South Africa’s image around the world. Perhaps more importantly, they come at an already difficult time when international ratings agencies had already expressed their concern about populist pressure and uncertainty around policy direction, which could undermine commitment to low budget deficits and debt targets. 6. Do you expect such ratings movements to continue? Yes, although Fitch has indicated that it will wait until January before making any decisions. If Moody’s decides to downgrade the credit rating again this year, South Africa will feel the full effects sooner rather than later. In its report, Moody’s said the current fractious domestic environment is not conducive to reforms being implemented. In addition, while government is working towards a stabilisation of the debt-to-GDP ratio through increased spending discipline, the agency noted that these plans were rendered more challenging given recent events.

Chief Economist

Stanlib K e v i n

L i n g s

1. Were the recent downgrades to South Africa’s credit rating justified?

4. Will it have any long-term impact on SA?

Yes. The social conditions in SA have clearly deteriorated, including an increase in unemployment, especially among the youth. A high degree of uncertainly has also emerged around the economic policy direction of the country. This has been in part accentuated by discussion around nationalisation. The rating agencies have been concerned about government’s ability to cope with growing social tension and have been equally concerned around the lack of initiatives to significantly stimulate growth and employment. Ultimately, all of this could undermine the government’s financial position.

It depends. If SA responds to the ratings downgrade and endeavours to eliminate areas of policy uncertainty, as well as push forward with its initiatives to undertake more investment spending, then it is unlikely to have a significant long-term impact. However, the rating agencies have kept SA on a negative outlook, which implies that if there is no improvement in the socio-economic conditions, then a further ratings downgrade is possible, which would clearly have significant long-term implications.

2. Are the agencies right to be concerned about SA? Yes. Many countries have had their credit ratings downgraded over the past couple of years, impacted in large part by the global financial market crisis. In South Africa’s case, the deterioration in socio-economic conditions has been mostly due to domestic policy decisions. Therefore, the rating agencies would be concerned that the current path of policy formulation could lead to a further deterioration in the SA economy. 3. What impact do you think this has on SA as an investment destination? SA continues to struggle to attract foreign direct investment (FDI) and relies very heavily on foreign portfolio investment. The downgrade is unlikely to have a significant impact on the flow of portfolio investment as this is driven by issues such as the yield gap and corporate earnings. However, SA’s ability to attract FDI has clearly taken a step backwards.

This is the first time the South African credit rating has been downgraded since 1994, and is clearly a point of significant concern.

SA continues to struggle to attract foreign direct investment (FDI) and relies very heavily on foreign portfolio investment.

credit rating. However, in this case, the Marikana incident reflects and is indicative of a broader social tension in SA. The rating agencies would be expected to respond to it. 6. Do you think this may have any impact on investment portfolios in SA? In the short to medium term, this is unlikely to have a meaningful effect on investment portfolios in SA, but the long-term impact will be highly dependent on the policy response from government and any further action taken by the rating agencies. By international standards, SA’s government finances, especially the level of government debt, is very favourable, and at this stage, there is little risk of SA defaulting on any of its debt. It is possible that the heavy criticism levelled at the ratings agencies in the financial crisis has resulted in them adopting a far more cautious approach in assigning credit ratings. 7. Do you expect such ratings movements to continue? The agencies are likely to assess the decisions taken at the ANC leadership conference in December, coupled with the outcome to the National Budget in February, before making a decision on a further downgrade. As long as the areas of policy uncertainty are addressed, SA should be able to avoid a further downgrade given the still favourable fiscal position of the country.

5. Should events such as Marikana and the strike action trigger downgrades? Any one single event, while tragic, shouldn’t necessarily reflect on the entire country’s






annuities bad but getting better

Retirement annuities or RAs are a lousy investment. Anecdotal accounts from thousands of people will tell you that. Investment returns are poor, expenses are high, and the products do little to add to the money you need on retirement. However, RAs do have some redeeming features, if investors and financial advisers shop around carefully.




adly, it’s advisers and insurance company agents who are guilty of flogging these products to the public. In the early days the incentive was the upfront commission. “In the past, assurance companies sold very expensive RAs that paid insurance agents massive upfront commissions and delivered very poor growth to investors. The actual investment portfolios were so opaque and the investment reporting was so poor that you had no idea what was actually happening to your money,” says Warren Ingram, a director at Galileo Capital. Gregg Sneddon, CEO of The Financial Coach, is even more direct. He believes that RAs that tie investors into a contractual obligation should be banned. “Stick to RAs that are invested in unit trusts,” he says, adding that even after recent industry reforms he still doesn’t like annuities offered by life insurance companies. “These RAs remain inflexible and still penalise you if you have to stop investing before retirement. With RAs invested in unit trusts, you can stop and start as you like.”

That’s the main distinction between RAs. The older policies were sold by life companies, which managed the money internally. Upfront commissions were charged. Unit trust-based RAs are most often sold and managed by asset management companies.

Investment returns from unit trust RAs and the new policy products being offered by life companies are improving steadily. But RAs remain an important part of the savings history in South Africa. A recent paper from the Department of National Treasury shows that while pension funds have R417 billion assets under management, RAs account for a not insubstantial R261 billion assets under management. Ideally an investor should hold an RA to its full term and make all the minimum payments. This enforces saving because the person holding the policy cannot access the capital until retirement age, defined as 55 years. And while investment returns on the old RAs have been poor, at least the investor is saving something towards retirement. Investment returns from unit trust RAs and the new policy products being offered by life companies are improving steadily. Rowan Burger, head of investment strategy at Liberty Retail, lists disciplined savings as one of the advantages of RAs. “You do not have access to your RA savings until the age of 55. This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working,” he says. Ingram ran a model to compare returns from a self-funded portfolio of investments against returns from RAs. The results were quite surprising. “From my analysis, it was clear that in most cases and at different taxable income levels, an individual would be better off making use of an approved RA structure, that is the tax deductibility benefits, versus trying to build your retirement wealth with after-tax monies,” says Daniel Wessels, who constructed the model for Ingram. That underscores what’s probably the biggest benefit of RAs, the tax breaks they offer investors. Contributions to RAs are tax deductable up to a maximum of 15 per cent of non-pensionable, taxable income. Investment returns from RAs are tax free. And the remaining benefits are taxed on a favourable basis. This is where financial advisers can play a key role. After carefully studying the tax savings, based on the size of contributions to be made in an RA, they can help a client construct a favourable tax saving investment while still working. A further advantage of a RA, says Burger, is that the one-third cash benefit that can be paid out on retirement falls outside the investor’s estate. “So if you die and are insolvent, your benefit is paid to your family rather than your creditors.”

But a word of warning: the cash lump-sum withdrawal may attract a tax liability. An investor who owes money to SA Revenue Services, or whom the taxman has deemed owes money to them, might find that amount subtracted from the total before they are paid out. Another contentious issue around RAs is the sometimes very steep penalties charged to investors if they want to move their RA to a different company or different type of annuity. Often investors stuck with the old generation RAs want to move them to a better option. But the penalties on transfer can be large, representing a claw back by the company of unrecovered broker commissions and costs. However, in the 2009 budget these penalties became regulated. Investors can transfer RAs through Section 14 of the Pension Funds Act, though they may still be liable for a penalty. “One of the big factors that needs to be considered before doing a Section 14 transfer is the term left on the RA,” says Sneddon. “This is because even though the new option might appear to offer a better return over time, the effect of the penalty that’s being applied could mean that you end up with a lower value at retirement.” That’s where investors score with unit trust-based RAs. Penalties are not applied, regardless is what the investor might do with premiums or transfers.

You do not have access to your RA savings until the age of 55. This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working. “I believe RAs have an important role to play in any working person’s financial planning. With all the new legislation and transparency offered by unit trust-based RAs, I have little fear of recommending them to investors,” says Ingram. “Unfortunately, the old fashioned RAs still exist and these are not good investments. My recommendation is to invest in products offered by specialist investment companies and avoid paying upfront fees.” However, Burger argues that there is still a place for upfront commissions. “For lower paid workers, the upfront commission is often the only way to incentivise an adviser to make the sale. For more sophisticated investors wanting regular feedback and investment strategy changes, the ongoing commission structure is more appropriate.” Fortunately RAs are evolving. Advisers can find the right product for their client and fees are getting lower all the time. There are now RAs that invest in exchange traded funds (ETF) rather than unit trusts. Developments like this will keep RAs alive for some time to come. 23




SA employers

urged to focus on a smooth transition to umbrella funds Hugh Hacking | Head of Retirement Fund Solutions at Old Mutual Corporate

The drive for cost containment and fund governance, as well as the onerous risk and responsibility of trustees in an increasingly legislated environment, has seen many employers in the South African retirement industry opt for umbrella funds as a way to manage their employee retirement and risk obligations. By April this year, there were 559 commercial umbrella funds, of which 356 were active.


hile the umbrella funds were initially adopted by small to medium sized employers, increasingly, we are seeing very large companies electing to go this route,” says Hugh Hacking, head of retirement fund solutions at Old Mutual Corporate. According to Hacking, an umbrella fund pools the retirement investments of multiple employers. This reduces the average cost per member and provides other advantages such as professional governance. He says that regardless of the size of the fund, if you are considering a switch to an umbrella fund, it is crucial that you ensure the transition is as smooth as possible. “Managing a smooth transition is a critical but often overlooked aspect of making the move to an umbrella fund. The most important consideration for employers facilitating the switch from a stand-alone fund to an umbrella fund is not to make too many changes at the same time as this can create uncertainty and confusion among employees.” Especially in the current, turbulent economic times, companies can ill afford any disruptions to operations and employee uncertainty. “Therefore, employers need to 24


implement a tested and structured transition process to facilitate the move to an umbrella fund. In doing so, employers will also avoid the myriad hidden costs and problems that arise in an unstructured transition,” he says. The first step is to ensure that everything is in order from a technical point of view. “This means checking the details of all employment contracts to ensure that there will be no technical obstacles to the move to an umbrella fund. The umbrella fund’s service provider should be able to advise and assist the employer in this regard.” Another key aspect is to ensure that there is continuity from an investment and risk benefits perspective when switching to an umbrella fund. “It’s important to choose a service provider that offers investment and risk options that are consistent with the previous fund, so that members are not required to alter their strategies unnecessarily. This also enables employers to slowly phase in, or even improve upon, any changes to the investments strategy and benefits of the fund.” According to Hacking, constant engagement with staff is required throughout the process to assure employees of the security of their retirement savings in an umbrella fund. “By

keeping employees engaged and informed through each stage of the transition process, employers will ensure a smooth and hasslefree transition to the umbrella fund. “Many people are particularly sensitive to financial changes at the moment. Therefore, it’s crucial to communicate with employees on a regular basis and that the benefits of the change to umbrella fund are made very clear,” he says. The umbrella fund’s service provider or its consultants should be able to assist the employer and the stand-alone fund in this regard. One of employees’ greatest concerns with umbrella funds is likely to be that there could be a loss of control over their money by the employer due to a perceived barrier that exists between trustees and members. “In order to address this concern, employees need to be reassured that the umbrella fund enables them to access independent trustees with a range of expertise. Furthermore, they will be able to draw from valuable investment expertise and benefit from reduced costs and better fund compliance,” Hacking says. Employers should also be encouraged to set up a member committee that specifically deals with the retirement fund and is able to play a crucial interface roll between the umbrella fund and the employees.



Make sure your clients’ money outlives them Helping your clients to prepare for retirement means taking steps to ensure that they have a reliable source of income that will last them for the rest of their life. Getting the right advice is especially important when it comes to investing large sums of money and planning for the next chapter in life – your client’s retirement. It’s important for clients to know exactly what their income needs are post retirement, what retirement capital is available to them, and what the payout options are at retirement. This will help them to make the right decision and find a solution that will suit their needs and the lifestyle that they want in their retirement years. Old Mutual Launches a Safety Plan Old Mutual launched a new Retirement Income Safety Plan, brought to you by Fairbairn Capital, which eases the dilemma that customers often face when choosing between a living annuity and a guaranteed annuity as the income solution for their retirement. This product is suitable for a wide range of customers due to volatility of investment markets, even with low “safe” income levels, there is still a significant chance that your customers will outlive their market-linked income. Research has shown that clients are on average taking higher income draw-downs than they should when we consider the market’s consensus expectations of future returns. The Safety Plan is a next generation hybrid annuity – it combines the flexibility of a living annuity and the security of a conventional guaranteed annuity. The product functions within an advice framework, following a guided approach to income management. The adviser’s understanding of the client’s needs remains crucial. Caution should not require a client to unnecessarily forego returns, and the Safety Plan enables clients to find a balance between risk and security. So Why Choose Old Mutual? Old Mutual offers the complete range of retirement income solutions to meet your client’s specific lifestyle needs and circumstances, and is a specialist in making these retirement income solutions work for you.

Guaranteed Income – Consider Our Max Income Bonus Escalation Guaranteed Annuity This is a guaranteed monthly income with annual increases from bonuses, depending on market performance. This helps your client to protect the purchasing power of their income against inflation. Market Linked Income – Consider Our Living Annuity Invested in Old Mutual’s Absolute Smoothed Growth Fund This is a market linked income, but without the highs and lows associated with market fluctuations. The smoothing mechanism reduces short-term ups and downs in market movements. This ensures a smooth increase of income with no sudden changes to your client’s income and their lifestyle if markets suddenly become volatile. This option is available on both Old Mutual’s Fairbairn Capital Retirement Income Plan and Max Income’s Investment Funded Income. A Combination – Consider Fairbairn Capital’s Retirement Income Safety Plan The Retirement Income Safety Plan combines the flexibility of a living annuity and the security of a conventional guaranteed annuity. It gives guidelines on how much income should be drawn each year. Income withdrawals within these guidelines will give your client a greater chance of receiving a sustainable income for the duration of your client’s retirement. However, should the investment value drop to a level that no longer generates a sustainable income, the safety features kick in automatically – and your client will then be moved into a conventional guaranteed annuity for the remainder of their life. So in short, the Safety Plan provides a combination of a living annuity’s flexibility (through fund choice, market performance and leaving a legacy), with the security of a guaranteed annuity if the markets work against you. Visit for more information.



views on retirement reform Steven Nathan | CEO 10X Investments


ational Treasury is frustrated by the cost and complexity of retirement saving and the “systematic irrationality” of savers who start too late, contribute too little and withdraw too soon. These factors threaten an ever-larger pension gap, and an unmanageable welfare burden for the State. Clearly, leading the horse to water – be it through the FAIS Code of Conduct, tax incentives and financial education – is not enough; it is now time to dictate the required behaviour. To this end, Treasury has released a series of discussion papers, detailing its reform proposal. The answer, it appears, lies in making the system simpler and taking advantage of the notorious fund member apathy. Treasury thus proposes to standardise the tax treatment and annuitisation requirements across the different retirement fund types and impose default solutions on members leaving their fund. The latter would prevent members spending their savings pre-retirement (by automating the transfer to another retirement fund) and outliving their savings post-retirement (by prescribing longevity protection, either through a conventional annuity or a retirement income trust). To wean people off their stop-gap dependence on debt and retirement savings, Treasury also proposes new, more marketable, incentives for non-retirement saving. These reforms are overdue. All retirement savings essentially have the same objective; having different fund types, each with its own rules and quirks, is counter-productive. It creates complexity, which adds to costs and reduces the investor return. By streamlining the system – limiting choice and flexibility – Treasury anticipates that members will require less advice and earn a higher return. The proposals are well-meaning, but the message is inconsistent as Treasury must 26


balance economic imperatives with fiscal and ideological constraints. It is obviously difficult to raise the savings rate and instil sober financial habits for lower income groups while curtailing savings incentives for middle and upper income groups.

prejudices younger savers who will take 10 years or more to recover these by way of the new incentives. Just as incongruent, money withdrawn from an individual savings account may not be replaced. These restrictions will likely reduce, not increase, our savings rate.

All retirement savings essentially have the same objective; having different fund types, each with its own rules and quirks, is counter-productive. It creates complexity, which adds to costs and reduces the investor return.

The papers also still condone the use of retirement savings to fund housing and unemployment. This dilutes the message, namely that retirement funds are to be used just for retirement. In the context of the reform objectives, the only consistent solution is full preservation until retirement. At that point, Treasury comes out strongly against living annuities as it believes the accompanying investment choice, high fees and excessive draw-down rates cause investors to outlive their savings.

The contribution caps are a bone of contention. Treasury argues they “should not prevent most individuals from attaining a reasonable standard of living in their retirement”. But the goal of retirement saving is not to achieve a reasonable standard, but to maintain the accustomed standard. This goal should be achievable for all, not just for most. Curtailing the savings incentives for younger savers sends the wrong message. Treasury admits that few South Africans work consistently for 40 years and stresses saving from an early age because of compound interest. Yet it is those over 45 who qualify for the higher caps and the accelerated phase-in period for individual savings accounts. Phasing out the interest exemption on non-retirement savings over two years

But these are symptoms, not causes. The real harm is done by financial service providers. Their behaviour is regulated by the FAIS Code of Conduct. This Code imposes a duty on FSPs to render their services honestly, fairly and in the interests of the client. If the majority of pensioners own inappropriate products and pay high fees, then it is FAIS that has failed, not the living annuity product. This failure afflicts not just living annuities but most investment products. The funding shortfall may manifest post-retirement but it originates pre-retirement. To solve this problem, the regulators should target the accumulation phase and enforce FAIS. Once the industry acts in the interests of clients, this should result in more appropriate advice, less complexity, less choice, lower charges, more transparent reporting on fees and above all, higher investor returns. This would make it unnecessary for Treasury to prescribe financial products. And it would go a long way towards closing the pension gap.



“They’ve been putting their money into the one place that’s giving a good return.”

What to do when the rand weakens

Investors need not panic about currency weakness


he Rand is looking more vulnerable than it has done since October 2008, when it plunged to R10.87 to the Dollar. Four years ago, the Rand’s weakness was part and parcel of the global financial crisis. But wildcat strikes, violence and a lack of political leadership have contributed to the plunge this time: it traded at 8.995 on 8 October – a three-and-a-half-year low. Granted, the Rand has been weakening since mid-2011, but several factors seem to be leading it into anaemic territory. “Rand money supply has increased by 10 per cent as against less than 5 per cent in the US, UK, EU and Japan. In July 2011, the Rand was trading at R6.65 and was weakening long before Marikana,” says Chris Becker, market strategist at ETM Analytics. For those who feel the Rand was previously too strong, R8 might seem to suggest a competitive advantage, but the counter-argument is that although currency weakness promoted industrial development in the short term, it is also one of the reasons why industrial activity has shut down in recent months. R8 to the Dollar might not look like a crisis, but Becker says a weakening currency means that savings and investments lose out to consumption spending. Furthermore, we know the Rand can slide fast and nobody wants to see it hitting R10 to the Dollar. Apart from anything else, rising inflation will make food, fuel and almost everything else so expensive that an already restive population may well decide than even government’s increased social spending is not helpful enough. And if more

spend is allocated to handouts, bond investors may be less keen on South Africa. “Our inclusion in Citigroup’s World Government Bond Index was received favourably by pension fund managers who have set about getting their exposure to South Africa right,” says Magnus Heystek, investment strategist at Brenthurst Wealth Management. But despite this fact, the currency is still looking shaky relative to other emerging markets. If South Africa receives another ratings downgrade, particularly by Standard & Poor’s, we will find ourselves just a notch above junk-bond status, which will mean bond holders will offload. Add to this our large current account deficit, which widened as our European exports took a knock, as well as slower growth in China, which could lead to reduced demand for commodities like coal and iron ore, and our economy is beginning to look fragile. What, then, can we expect over the next six months or so? Becker predicts that the Rand will weaken further against real commodities such as gold and silver, as well as against Brent crude. “Continued currency weakness means that going forward, investors will need to exchange more devalued Rand to buy one unit of the ALSI index than they did before, which will translate to a rising stock market,” he says. Being one of the most volatile currencies, Rand value will probably fluctuate on the strength of global economic data, but it seems unlikely to strengthen dramatically. In its medium-term budget policy statement in October, Treasury pointed out that the Rand was seven per cent

weaker in real terms in the first half of 2012 than in the first half of 2011. Sentiment seems decidedly bearish, with good reason. The question is: what can investors do to mitigate currency or sovereign risk? Becker suggests investors consider overweighting equities and real assets over cash and sovereign bonds in their portfolios. Heystek feels that investors should certainly look at Rand hedges to protect themselves against devaluation. He believes the JSE has been strong due to some ‘hot money’ in the market that is not being invested elsewhere. “There’s momentum in the market, but companies are not building new factories or offices,” he says. “They’ve been putting their money into the one place that’s giving a good return.” Becker points out we could be seeing the ‘Zimbabwefication’ of the stock market, where share prices rise not because of improved earnings prospects, but purely because of a weakening currency. According to Rob Spanjaard, Investment Director at Rezco Asset Management, it may be that commodities have had their best run and the tide is therefore against us. It may be prudent for investors to use their foreign exchange allocation and look at investing in balanced funds; some unit trusts can also have up to 25 per cent invested offshore. “But investors should realise that returns may be lower than they are in South Africa,” he cautions. “The bottom line, though, is that we need foreign investment. We cannot afford more reputational damage. No country is an island in today’s global economy.” 27




w hy cash/

currency may not be the safe

haven you think it is


etail investors generally view cash as a safe haven. However, Felix Ubogu, head of asset consulting at Liberty Corporate, warns that with incredibly low interest rates in developed markets, local investors invested in offshore cash are exposed mainly to the fluctuations in exchange rates which is dependent on a wide range of, often unpredictable, factors.

He notes that while economic theories that aim to determine currency movements may work in the long term, in the short term there are too many variables that can play a role in driving currency movements to make actual forecasts accurate.

a year through investment or loans to help balance South Africa’s books. This should be easily manageable since Africa is currently seen as the go-to place to get investment returns, but this remains true only if the country is seen as a great place to invest.

Closer to home: Political instability to cause SA Rand to weaken even further?

Furthermore, it is extremely challenging to accurately forecast the direction of any currency in the short term. However, in the case of the Rand it becomes even more difficult to do so as it is often used as a proxy for other African currencies, making it even more volatile. “Almost anything can drive the movement of the Rand. If investors become increasingly bearish on emerging markets – not just South Africa – then the Rand can suffer in sympathy as it is one of the more liquid currencies for people to trade. This was evidenced at the time of the Arab Spring almost two years ago when the Rand was hit by the wave of demonstrations and protests,” he says.

South Africa could very likely see the effects of these variables in practice. Rob Spanjaard, investment director at Rezco Asset Management warns that failure to find some strong political leadership for South Africa in the coming months could severely impact foreign sentiment towards local investments – and could even result in the Rand collapsing to more than R10 to the Dollar.

However, the events at Marikana and the subsequent national downgrade by Moody’s have already had a serious impact on South Africa’s profile around the world, so to be followed so quickly by another – more serious – downgrade by S&P, as well as seemingly unending strike action, means that the picture has deteriorated even further,” he says.

He says South Africa remains very dependent on foreign investment to fund its budget deficit and current account deficit, which amount to 4.5 per cent and 6.5 per cent of GDP respectively. “The maths is simple. Foreigners need to invest around R150 billion

Then there is a couple of hundred billion Rand that foreigners have invested in South African shares and government bonds over the past couple of years that theoretically could be repayable at a moment’s notice. “Unless an urgent solution can be found, it seems that investors should start dusting off the old Rand hedge playbook in order to mitigate against the recent volatility, but should stay clear of most commodity shares,” says Spanjaard.

what you see may not be what you get What lies behind the headlines? “JSE hits another record high” has been a regular headline over the last few months and each time it has the potential to trigger the assumption that all shares have performed well. This is not often the case according to Nic Andrew, head of Nedgroup Investments, who says that attention-grabbing headlines



such as indices hitting new highs actually mask some interesting facts.

financial counters solid and SA’s industrial stocks spectacular,” he says.

“While the index has reached new highs, this has certainly not been true of all stocks. In fact, the dispersion of performance among the underlying constituent sectors has been extreme. Broadly speaking, investments in the resource and construction stocks have been woeful;

Andrew continues that investors should be very wary of getting carried away with the story of the day and extrapolating recent successes or failures indefinitely. At the same time, investors should be exceptionally cognisant of the price they pay for an investment as this is often the

most critical determinant of their future return. Today the market is reflecting an almost polar opposite of the story of June 2008. “Five years ago, the headlines were full of negative comments about the retailers, the over-indebtedness of the consumer, the neverending Chinese growth story and the enormous benefits of globalisation. The wheels of fortune have truly turned.”



sorting the gems from the duds in the

art market Stefan Hundt | curator of Sanlam Corporate Art Collection and head of Sanlam Private Investments (SPI) art advisory service

For those South Africans who can afford it, collecting art offers more than the enjoyment of a beautiful work. Given some of the returns we’ve seen in the art market over the past couple of years, it can be a worthwhile investment. This year we’ve seen a new world record for an artwork sold at auction, when Edvard Munch’s The Scream sold for more than R1 billion.


hy the renewed interest in art? Art is a safe haven – particularly for the wealthy – as financial markets remain volatile and interest rates languish at record lows. Because art prices don’t correlate with the market, buying art can be a great way to diversify assets. And quality art is likely to prove resilient during a downturn, all the while bringing joy in into a home or office. This outlook is borne out in the rise in global art indices over the past few years. The Mei-Moses World Art Index – the index most frequently quoted to highlight art market trends globally – rose 10.2 per cent last year, and 22 per cent in 2010. That’s better than the S&P 500, which remained largely flat, and the JSE, which lost around 17 per cent in Dollar terms last year. We’ve seen a number of records over the past two to three years, with the market boosted by big-name local artists, like Irma Stern. Trophy hunters have largely been behind the soaring prices; for example, Tretchikoff’s Portrait of Lenka (Red Jacket) sold for nearly R4.7million at a recent auction in London. Investors should be aware though that not all record prices are warranted. It does seem the market is becoming more discerning for quality works, irrespective of the artist. In South Africa, we’ve seen a number of lots go unsold at recent auctions, including the likes of Stern and Pierneef. Collectors are clearly not as ready to

put their hands into their pockets for anything big, as was the case two years ago. Even Stern’s Still Life of Fish and Flowers, which was modestly estimated at around R2.6 million, remained unsold at a Stephan Welz & Co (Swelco) auction in October.

Art is an illiquid investment and you may be unable to sell it should you need the money quickly. Take a long-term view on your artwork: the market will go through dips. Instead, the trend is now swinging towards lesser-known artists, with some enjoying exceptional prices. Globally, the Mei-Moses Art Index noted in its latest report that highpriced art does not offer returns consistently above less expensively priced art. And South Africans are taking note of this. Paintings by Peter Clarke achieved top prices at the Swelco auction (the bidder paid R450 000 for the Ruined Houses at Simon’s Town C.P.). Works by the innovative Christo Coetzee have also seen strong demand. At recent auctions at Bonhams in London Coetzee’s Still Life with Fruit Bowl and Empty Box sold for more than R600 000, three times its estimate, and at Strauss & Co in South

Africa most Coetzee works sold at close on two times the higher estimate. The lesson for potential art collectors is to not get caught up with the artist’s name, but to rather look at the quality of the piece. How do you know it will make a good investment? Do your research thoroughly – both on the artist and on the art market in general. Speak to experts in the field and, wherever possible, to the artists themselves. Consider what is unique about the art, the artist, or the context for the art. Then take note of the risks. As with all investments, there are times when prospective investors should remain cautious. Art is an illiquid investment and you may be unable to sell it should you need the money quickly. Take a long-term view on your artwork: the market will go through dips. And beware of becoming emotionally involved, especially when bidding at an auction. Good value art is available, especially for the better works of some of South Africa’s less-celebrated artists. If you bought a Pieter Wenning or a Christo Coetzee a decade ago, you could be handsomely rewarded today. I have been keenly watching artists like Lawrence Lemaoana, Clare Menck, Judith Mason, Kenneth Bakker, Johann Louw and Diane Victor, and sculptors such as Willem Boshoff, Wim Botha and Sydney Kumalo. Here you could find quality work, often at bargain prices. What more could any investor ask for? 29




TCF vs FAIS Almo Lubowski CFP® FPSA(TM) | head of technical and advocacy services at The Financial Planning Institute of Southern Africa (FPI)

If you have made FAIS a part of your business and processes, then TCF won’t be a massive adjustment – Part 1


reating Customers Fairly is becoming more than just a murmur in the industry. Product providers have taken a bit more of an active approach and I think rightly so, as I am of the opinion that it is the product providers who have more reason for concern in the TCF framework.

skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.

As far as advisers are concerned, I think the FAIS Act is more comprehensive than initially thought. Due to the Regulatory Exams, advisers are more familiar with the obligations imposed by FAIS. In this vein, the Level 1 Regulatory Exams have been a good thing for the industry and consumers alike. So perhaps it is prudent to very briefly compare the six TCF outcomes with existing obligations that advisers have in terms of FAIS. The first three are discussed here in part one.

Outcome 2 – Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.

Outcome 1 – Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture. It has been said that this outcome will be the most difficult to implement in organisations as it requires a culture change. It is argued that FAIS is primarily rules based. However, Section 16 of the FAIS Act dictates that financial services providers must act honestly and fairly, with due skill, care and diligence, in the interests of clients and the integrity of the financial services industry. Furthermore, they must act with circumspection and treat clients fairly in a situation of conflicting interests. Section 2 of the General Code of Conduct (the Code) goes on to reiterate these points, stating that a provider must at all times render financial services honestly, fairly, with due 30


By the looks of it, FAIS is certainly not only rules based as the above sections do expound some general principles that financial service providers must bear in mind in all their actions.

Although this outcome appears to be aimed at product providers when they are designing products, advisers can’t sidestep this outcome. Advisers are the ones who will provide the advice on the product directly to clients, and furthermore in many respects FAIS does not allow for any sidestepping. Section 8 of the Code obliges an adviser to gather as much information from the client as is possible and thereafter conduct a financial needs analysis before making any recommendations. Section 9 of the Code then ensures that a detailed record of advice is kept about the recommendations that were in fact made based on the analysis conducted. This includes all products considered and which were eventually implemented. Outcome 3 – Customers are provided with clear information and kept appropriately informed before, during and after point of sale. This outcome is often referred to as the disclosure outcome. Undeniably disclosure has become a huge element in consumer fairness. The FAIS Code of Conduct has a large amount of principles-based provisions that advisers

must adhere to. Information provided to a client must be factually correct, in plain language, must be adequate and appropriate in relation to the assumed level of knowledge of the particular client, and be in writing if so requested by the client. The client must also be informed of all relevant monetary obligations, which includes fees and charges to the product supplier and

An adviser is then also required to establish and maintain systems and procedures that ensure that any communication, verbal or written, is recorded appropriately, retrievable and safe from destruction. commissions and/or fees that will be paid to the financial adviser or intermediary. Furthermore advisers must, in writing, disclose any conflict of interest and what has been done to mitigate such a conflict, any possible ownership interests or otherwise financial interests or the general nature of a specific relationship that may give rise to a conflict of interest in the circumstances. An adviser is then also required to establish and maintain systems and procedures that ensure that any communication, verbal or written, is recorded appropriately, retrievable and safe from destruction. It is quite evident that the principles and stringent requirements of the FAIS Act, if applied adequately by an adviser would ensure fair outcomes. The remaining three outcomes and how they compare to the FAIS Act will be discussed in part two.



The more

THINGS CHANGE… Carmen Nel | Economics and fixed income strategist | Rand Merchant Bank

Looking back on the year that was, you can be excused for thinking someone hit the replay button given the numerous similarities to 2011. Oil prices surged again, causing many a household and central banker consternation, food price fears reemerged amid widespread drought in the US, and local inflation is again a talking point, much as it was 12 months ago. Eurozone officials are navigating choppy waters, still succeeding (since May 2010) in keeping the currency union together and Obama’s re-election ensures that policy uncertainty in the US continues despite hopes that a timely fiscal compromise will be reached.


omestically, there were dark clouds and silver linings. South Africa was included in the Citigroup World Government Bond Index (WGBI), thanks to a notable increase in government debt. The inclusion should ensure that the country attracts a steady inflow of investment into the bond market, which is much-needed in light of the growing current account deficit. The latter is at least partly due to the supply disruptions in the mining sector which started with Marikana. These protests were enough to tip the rating scales in the wrong direction, with Moody’s and Standard & Poor’s downgrading South Africa’s credit rating in September and October, respectively. With growth risks abound and substance in the interest rate differential it should not have been too surprising that the Reserve Bank decided to pre-emptively cut the policy rate to a 32-year low of 5.0 per cent in July. Having survived 2012, it is understandable to look ahead to 2013 with some trepidation. Growth should be somewhat stronger next year, but there are many risks: the US fiscal cliff and a revisit of the debt-ceiling; a possible Eurozone break-up; and geopolitical tensions in the Middle East. China’s economy is looking better but may not be

strong enough to pull the rest of the major economies along. Home-grown constraints have put the Rand on the back foot at a time when the economy is already contending with rising inflation, policy risks post-Mangaung and a government that needs to keep a close watch on the purse strings. The labour unrest in the mining sector is a harbinger of what subtrend growth in a very unequal society means. And while Finance Minister Gordhan should receive a hat-tip for keeping expenditure unchanged from the 2012 Budget projection, his wage negotiators will have a very tough time on the ground. Policy makers are moving closer to the wall but, compared to the rest of the world, South Africa still has some options left. Similar to other emerging markets, the debt metrics are still low compared to the developed world and so far foreigners have been forgiving of the credit rating downgrades. That government is planning to gear up even more is not necessarily the primary concern, rather, it is how the funds will be utilised. Spending on productive capacity and skills would be welcome, but the risk in the wake of Marikana is that the government borrows more to pay the civil service and expand the

welfare state – the making of a very unstable situation (just ask the Greeks). The Reserve Bank, while facing notably less room to manoeuvre on the inflation front, still has a spread of 400bp to 500bp over the developed economy policy rates and is not yet constrained by the zero bound. If needed, the bank could do more of the heavy lifting.

Policy makers are moving closer to the wall but, compared to the rest of the world, South Africa still has some options left. For all the talk of “tipping points”, the “new normal” and “new orders”, we can look forward to more of the same in 2013. The Rand will be volatile, President Zuma will be re-elected, Eskom will get another large tariff increase, SA Inc. will make the most of a notso-good situation and, as 2012 showed, you should be careful in betting against the South African consumer. 31




A proposed framework for the regulation of

hedge funds in South Africa Gareth Weston, Director at Norton Rose SA (incorporated as Deneys Reitz Inc)

National Treasury and the Financial Services Board have published a proposed framework for the regulation of hedge funds for public comment. These amendments will drastically alter the South African hedge fund industry.


reviously, the hedge fund industry operated in a largely unregulated arena with only the hedge fund managers being regulated under the Financial Advisory and Intermediary Services Act. This all seems set to change with the introduction of the new proposed framework as the policymaker and regulator seek to bring hedge funds under regulation by including a new chapter in the Collective Investments Scheme Control Act, (CISCA).

Early regulation likely Introducing a new chapter in CISCA would necessitate an amendment to the existing legislation and this would usually entail a lengthy parliamentary process. However, the policy framework has indicated that this regulation is imminent and the Minister of Finance is likely to exercise its powers under section 63 of CISCA and deem all hedge funds to be collective investment schemes (CIS). The types of funds The new framework proposes two types of hedge funds: restricted hedge funds and retail hedge funds. Restricted hedge funds will not be allowed to market themselves to the general public and will instead be limited to private arrangements among qualified investors. Retail hedge funds will be able to market themselves to general public who will be able to invest in them. Retail hedge funds will be subjected to more rigorous regulation in order to ensure adequate investor protection. It is anticipated that these funds will have more stringent asset restrictions, asset spreading requirements, leverage restrictions and obligations to clients. 32


Tax treatment A question which remains to be answered under the proposed framework is how the returns on an investment in a hedge fund will be treated for income tax purposes. Currently, traditional CISs are tax transparent and receive favourable tax treatment by the South African Revenue Service. There has in the past been opposition to the inclusion of hedge funds in the CIS regime on the basis that such inclusion may jeopardise the current favourable tax treatment for CISs. It remains to be seen whether National Treasury will allow hedge funds to enjoy the same benefits as traditional CISs or whether it will introduce legislation allowing for the separate taxation of hedge fund CISs. Hedge fund structures Currently, most hedge funds in South Africa are structured as en commandite partnerships, bewind trusts or variable rate debenture issuing companies. Of these structures, the en commandite partnership and the variable rate debenture issuing company are by far the most prevalent. The proposed framework seems to indicate that the inclusion of hedge funds under CISCA will not require existing hedge funds to conform to any model investment structure. Hedge fund managers themselves will, however, need to register as CIS managers in terms of CISCA and will need to comply with the same requirements as currently imposed upon managers of traditional CISs. Risk management The proposed framework introduces a number of new concepts to ensure effective management of risk in investing in hedge funds. Among other things, the framework introduces prudential

restrictions for hedge funds (asset class limitations), a conflict of interest policy for all hedge fund managers, daily pricing and independent valuation of assets of a hedge fund, a liquidity requirement for retail hedge funds and the requirement for a risk management programme to ensure effective management of the usage of derivatives and the employments of leverage. Leverage A key component in the operation of a hedge fund is the employment of leverage to mitigate market exposures or to enhance the returns of the hedge fund. The intension of the framework is to allow hedge funds to create leverage by borrowing funds or by engaging in derivative transactions with counterparties. Further, the proposed framework plans introducing broad rules for the limitation of leverage, especially in the case of retail hedge funds. For example, a manager of a retail hedge fund must ensure that the fund’s total exposure relating to derivative instruments does not exceed the total net value of its portfolio. Transparency A significant move away from the current hedge fund regime is the introduction of a transparency requirement whereby hedge funds are required to provide certain information to investors including valuation methodology, positions and leverage exposure. Hedge fund managers will also be expected to prepare a key investor information document which is intended to be a short document containing information such as the investment policy and objectives of the fund, a risk and award indicator, an indication of the fees and charges levied to the fund, a past performance presentation and all other practical information about the hedge fund.



risk-adjusted INVESTMENT Chris Hart | Chief Strategist, Investment Solutions

Savings are essentially unconsumed income, the surplus that remains after deducting expenses and consumption. To achieve returns, savings are invested, which means putting them at risk. Investment must consequently consider the return potential as well as risk. However, investment risk can be a tricky concept to manage in any investment strategy.


he industry conventional wisdom is to regard assets such as cash and bonds as low risk compared with property and equity, which are considered high risk. Advice assessments of clients are designed to determine whether they are risk averse or not and then suggest a potential investment strategy. A risk-averse client is automatically corralled into investment products deemed to be conservative. Investment products that hold predominantly cash and bonds are regarded as conservative, while aggressive or risky portfolios would have a high weighting to listed property and equities.

To reduce inflation risk, listed property and equities provide significantly better odds of achieving an investment outcome that takes care of this risk. However, the biggest problem with the clientadvice model and industry conventional wisdom is that the nature of risk is not given proper consideration. The risk assessment done is against volatility, which results in an investor, who wishes to avoid or minimise volatility, being told that a high weighting to bonds and cash would be appropriate. Yet volatility is not the only risk requiring

consideration. Many others need to be assessed, such as concentration risk, political risk, location or geographic risk and liquidity risk. Another critically important risk consideration is inflation as this risk is a constant enemy of the investor, especially when long time frames are involved. This is why it is so important to assess the nature of risk. If an investment assessment is done and it determines that a client is risk-averse, it is also key to determine what risk that investor is averse to. While cash and bonds are the right solution to reducing volatility risk, it is virtually entirely inappropriate to reduce inflation risk. To reduce inflation risk, listed property and equities provide significantly better odds of achieving an investment outcome that takes care of this risk. In other words, if the investment strategy seeks to reduce volatility risk, the strategy must take on more inflation risk. If inflation risk is to be reduced, more volatility risk must be assumed.

materialises which has not been considered that investors panic. It is consequently extremely important to assess multiple risks when making investment decisions. The desired investment outcome must be understood and assessed against risk that then needs to be avoided, as well as risk that must be taken on. However, too often the focus on investment performance is entirely on the performance of the capital against a benchmark while the more complex underlying investment risk is neglected.

Investors cannot therefore hope to eliminate all risks from their investment strategy. Such a wish merely makes for a schizophrenic strategy in the case of just two risk considerations. The picture becomes much more complex once more risks are taken into consideration. Complexity is why investment advice often sticks to a one-dimensional risk assessment, which is a focus on volatility. Many other risks are simply shut out of the investment strategy consideration. It is only when risk 33




The real cost of compliance Paul Kruger | Head: Communication | Moonstone Information Refinery (Pty) Ltd

Cast your mind back to the spaghetti western, The good, the bad and the ugly.


n one scene, Eli Wallach, on horseback, leads Clint Eastwood, on foot and without water, deep into the desert. When Eastwood is totally exhausted, Wallach drops a spade next to him and says: “In this world there are two kinds of people – those with loaded guns, and those who dig. You dig.”

use of an external compliance officer. Possibly the strongest motivation for this is the choice to delegate this function to an expert, while the adviser focuses on their own expertise. Of greater concern, though, is the fact that 14 per cent of the respondents had not seen their compliance officer in over a year.

FAnews, Third Circle Asset Management and the Institute of Practice Management recently sponsored a survey on the cost of compliance. The responses suggested that there are also two kinds of advisers out there: those who are properly prepared to take on the challenges brought about by compliance, and those who are busy digging their own graves through apathy and ignorance.

A major hidden cost of compliance is its impact on the production time of the business. In the survey, 29 per cent of the respondents spend between 11 per cent and 20 per cent of their monthly time on compliance-related activities, while 31 per cent indicated using between 20 per cent and 50 per cent of their time on these matters. The harsh reality is that you cannot delegate or abdicate responsibility for compliance. While the compliance officer monitors the status of compliance and suggests remedies, the implementation ultimately rests with the key individual.

In response to the question of who does their compliance, a healthy 60 per cent of the participants indicated that they make

“In this world there are two kinds of people – those with loaded guns, and those who dig. You dig.”

The survey result publishes the following interesting calculation: If we assume that most advisers work, on average, a 48-hour week (192 hours per month) and 20 per cent of this time is spent on compliance, it comes to 38 hours per month. If this is multiplied by an average of R250 per hour (this is far too low, in our opinion) an adviser can charge in that time, then the monthly cost of compliancerelated activities per adviser is around R9 500 per month. The survey indicates that compliance-related activities



increase, on average, by 10 per cent per annum. If we consider future demands which will emanate from the Level 2 Regulatory Exams, Continuous Professional Development and Treating Customers Fairly, the future looks bleak. At this rate, we are likely to set a new record for the most compliant bankrupts in the world.

client. After all, FAIS is there to protect clients and they will need to pay for the financial services rendered to them in this regard.

Bad news for clients is that financial advisers will need to commence recouping their compliance expenses from the

There is an urgent need for the industry and the authorities to have frank and open discussions about the practical implications

This, in turn, will lead to the service being available only to the very rich, which is the exact opposite of why regulation was implemented: exclusion of the poor from quality advice.

of regulation of the industry. While it is easy to emulate what happens in Europe and Australia, the demographic and historic realities in South Africa prohibits a copy and paste approach. Proceeding at the present pace will merely lead to the earlier demise of an industry that is crucial to turning around the dwindling real savings rate of the country. It is time for those with the loaded guns to reconsider their options.


South African companies invest in Zimbabwe


Around 40 South African companies are seeking to trade and invest in Zimbabwe due to the potential opportunities in the neighbouring country. According to South Africa’s Ambassador to Zimbabwe, Vusi Mavimbela, South

Africa is one of Zimbabwe’s biggest investors with investments exceeding US$682 million. Britain’s double-dip recession ends The Office for National Statistics announced that the double-dip recession is over for the United Kingdom after

Britain’s gross domestic product rose by one per cent in the third quarter of 2012. This marks the economy’s strongest quarterly growth in five years. Sub-Saharan Africa holds opportunities for SA companies According to Finance Minister Pravin

Gordhan, sub-Saharan Africa is rapidly growing and offers opportunities for South African businesses. The IMF’s World Economic Outlook estimates that sub-Saharan Africa will grow by five per cent in 2012, compared to 1.3 per cent in advanced economies and 5.3 per cent in developing countries.

SA improves its ranking, but still lags behind South Africa gained one position in the World Bank’s 2012 Ease of Doing Business report and is now ranked 35 among 185 countries. While this improvement is positive, the country still lags behind the top African country, Mauritius, which is ranked 23rd.

Sideways Google fumbles


Google’s accidental early release of its quarterly financial results saw the Internet giant lose $20 billion in value. The catastrophic error revealed that profits were down by 20 per cent and caused investors to dump the stock, which saw the

share price plummet by nine per cent in only eight minutes.

risk as a direct result of the strikes plaguing various sectors.

Credit agencies lower South African rating

South African foreign direct investment plunges

Standard & Poor’s and Moody’s Investors Service lowered their South African rating due to increased political

According to the United Nations Conference on Trade and Development’s

(UNCTAD) latest Global Investment Trends Monitor, foreign direct investment (FDI) has plunged by 43.6 per cent this year. The decline makes South Africa the worst performing emerging market, with the largest decline in FDI.






IS ENOUGH? Sunél Veldtman, CFP CFA is the author of Manage Your Money, Live Your Dream, a guide to financial wellbeing for women. She is also a presenter and facilitator. Sunél is currently the CEO of Foundation Family Wealth and has more than 20 years of experience in financial services, most of which as a private client adviser.

How Much is Enough? is the title of a book by Arun Abey and Andrew Ford. It should be compulsory reading for every investor and adviser. Our culture is all about having more. The message the financial market sends out is: “We’ll help you to get more!” Financial advisers promise to help you have more. We have created more choice, better products and more variety – it has resulted in more confusion, worse strategies and even worse results.


ot only are we talking about having more, we’re talking about having more in abundance. Happiness gurus teach people how to get and hold onto abundant lives. What do we want to do with this abundance, I wonder? Do we think that abundance will clear the way for a problem free life? Will so much choice bring us the happiness we desire? Our industry is obsessed with achieving higher investment returns and choosing the best fund managers. Our clients feel that there is always an investment that they have missed out on. Their golf buddies or bridge partners achieved better returns with their more glamorous investment advisers. The media makes them feel that they don’t know enough and will never have enough. It sends them messages that they are not clever enough to understand investment experts and don’t have enough time to spend on their money. Brene Brown writes in her book, Daring Greatly: “We get scarcity because we live it. Never good enough, thin enough, successful enough, smart enough, safe enough, certain enough, extraordinary enough. Never enough. Scarcity thrives in a culture where everyone is hyper-aware of lack. We spend inordinate amounts of time calculating how much we have, want and don’t have. The opposite of scarcity isn’t abundance. The opposite of scarcity is enough. At the very core of 36


this is vulnerability and worthiness. Facing uncertainty, exposure and emotional risks knowing that I am enough. The greatest casualties of a scarcity culture are our willingness to own our vulnerabilities and our ability to engage with the world from a place of worthiness.”

with their efforts and never reach a point of enough with their money. In How Much is Enough?, the authors point out that investors’ desire to have more often prevents them from having enough. They follow strategies that are designed to get more, which causes them to have less. They take the wrong risks, trade often and change plans more often.

We get scarcity because we live it. never good enough, thin enough, successful enough, smart enough, safe enough, certain enough, extraordinary enough. Never enough.

There is a well known quote: “Happiness is wanting what we already have.” The chances are that if you’re reading this article, you are privileged to fall into the top 10 per cent of the wealthiest people in the world.

Brown’s argument about our focus on scarcity, starting with our inability to believe that we are enough, strikes a chord. We want more so that we can hide the fact that we don’t believe in our own worth – a better house, prettier clothes and more adventurous holidays. We try to hide because we believe that we are not as good as the Joneses. I know there are other reasons that drive ambition but perhaps we should examine our true motives more often. In our industry we can help people to save and invest, to protect and grow their wealth. Often we cannot help our clients with their deep, emotional feelings of lack. Consequently, they never feel satisfied

People who operate with enough give more of themselves and of their possessions. They live in a place of “I am enough and I have enough to give.” In a country with one of the biggest divides between rich and poor, it is extremely important. Our office receptionist helps 30 orphans to survive. She knows about enough. She knows that what they need is the value that lies within her and her little bit of money is more than enough for them. Compare her with the multimillionaire who continues to work so hard that he is never available for his own children’s sport matches and concerts. His drive is fuelled by his own childhood, grounding him in lack. In this season of giving, let’s think about how much is enough. In this season of new year’s resolutions, put enough at the top of your list. Enough is not a number. Enough is a state of mind. Enough borders on gratefulness. Enough produces happiness.

And now for something

completely different

Investing in photographs returns worth gawking at


n an era where photographs are artificially enhanced by post-editing programs such as Adobe Photoshop, valuable photos taken by professional photographers may be hard to distinguish among the bulk of pictures taken by the man on the street. However, once identified, authentic valuable prints are definitely worth more than a thousand words and could prove to be a lucrative investment. The most important factor to bear in mind when identifying the authenticity of masterpiece is the photographer. The questions that should be asked are: who are they? Where do they fit into the history of art and the history of photography? What is their place in the present market and how does their work relate to future trends? Is their work exhibited regularly, and is it critically acclaimed?

Other factors that should not be overlooked are the date of the print; the medium, either digital or film (platinum or calo types); and the condition and the size of the image. Another crucial factor to be cautious of is trends; what is fashionable today could be out of date tomorrow.

By visiting museums, exhibitions, art fairs and flipping through the odd photography book, an eye for iconic trends, quality photography and famous photographers can easily be developed. Equally important to consider is how much appeal a particular photograph has. This is obviously very subjective but in addition to the investment potential, good photographs need to have aesthetic considerations due to the likelihood that a collector will display the photograph in their home. Thus, it needs to be visually appealing.

By visiting museums, exhibitions, art fairs and flipping through the odd photography book, an eye for iconic trends, quality photography and famous photographers can easily be developed. Through this process, collectors are also able to familiarise themselves with what is available on the market as well as identify styles that are of personal preference. Here are a few of the highest earning photographs of all time:

Untitled #96 – $3 890 500

Rhein II – $4 338 500 Hailed photographer, Andreas Gursky’s photograph of the Rhine River in Germany taken and printed in 1999 expected to fetch a maximum of only $3.5 million at a Christie’s auction in November 2011. However, the photograph which portrays the river and surrounding grass plains with strong horizontal lines fetched $4.3 million and set the world record for the most expensive photograph ever sold.

This photograph taken in 1981 by photographer Cindy Sherman, as part of her Centrefold series, was auctioned by Christies in 2011 for $3.8 million. Untitled #96 depicts Sherman adopting the persona of a young teenage girl dressed in an orange dress and pull-over clutching a torn classifieds page while lying on the floor. Although it may appear normal to some, this piece of work speaks to what Sherman is best known for – her conceptual portraits. Through a number of different series of works, Sherman sought to raise challenging and important questions about the role and representation of women in society, the media and the nature of creating art.

Dead Troops Talk – $3 666 500 Taken by Canadian artist Jeff Wall in 1992, Dead Troops Talk, a staged image which depicts bloodied and dismembered soldiers from Russia’s Red Army conversing on the side of a rocky hill, sold for $3.6 million at a Christie’s auction in May 2012. It was expected to fetch only $1.5 million. Wall used actors for this particular photograph and it is among his most recognisable works of art to date.




Domestic equity and resources funds top the performance charts while real estate suffers further losses in October David O’Leary, CFA, MBA | Director of Fund Research, South Africa | Morningstar South Africa

Investors dump resources and real estate funds for the safety of fixed income.


trong returns from South African energy and materials stocks propelled funds in the resources and basic industries category to strong returns while also propelling domestic equity funds higher. Meanwhile funds in the real estate sector suffered losses for the second consecutive month according to performance numbers released today by Morningstar South Africa. The best performer among the 22 ASISA categories that Morningstar tracks was the Domestic Equity Large Cape category which saw gains of 4.9 per cent in October. The remaining domestic equity categories also saw strong returns ranging from three to four per cent. This performance was in part driven by strong returns among resources stocks as the Domestic Equity Resources and Basic Industries category landed in third place with a 4.4 per cent return for the month. Meanwhile the tiny Foreign Fixed Income Bond category rounded out the top three categories landing in second place with a return of 4.6 per cent.

The best performer among the 22 ASISA categories that Morningstar tracks was the Domestic Equity Large Cape category which saw gains of 4.9 per cent in October. Resource stocks continued to rack up gains despite employee unrest within the South African mining sector. Platinum miner Lonmin (JSE: LON) made headlines first in August after escalating tensions between police and its striking miners resulted in the death of 34 people in a clash at Marikana mine. Since then strikes spread rapidly across many companies in various industries whose workers are demanding dramatic pay hikes. Despite strong performance in the sector, funds in the

October 2012 Asset Flows (top five ASISA categories)


resources category lost R31.5 million in October. At the other end of the spectrum, the Domestic Real Estate General category – one of the best performing categories year to date – continued its descent in October falling 2.8 per cent after losing 2.9 per cent in September. Weakness in real estate stocks was led by Growthpoint Properties Ltd, the largest constituent in the FTSE/JSE SA Listed Property index, which suffered a five per cent loss in October. Investors reacted to these losses by trimming their holdings in real estate funds by a net figure of R117 million. This was the biggest outflow of any category for October. Generally speaking the more conservative fund categories saw the biggest net inflows for the month with the Domestic Asset Allocation Prudential Low Equity, Domestic Fixed Income Varied Specialist, and Domestic Fixed Income categories all attracting over R1 billion in net inflows.

October 2012 asset flows (bottom five ASISA categories)

Category name

Net flows (R)

Category name

Net Flows (R)

Domestic AA Pru Variable Equity

2 171 203 894

Domestic RE General

117 878 067

Domestic AA Pru Low Equity

2 035 587 717

Domestic AA Flexible

105 980 984

Domestic FI Varied Specialist

1 453 445 192

Domestic EQ Res & Basic Ind

31 484 592

Domestic FI Income

1 220 882 311

Domestic EQ Financial

8 379 751

Domestic AA Targeted A&R Return

469 868 017

Foreign FI Bond

6 825,053



he latest performance survey indicates that, with over 60 ETPs trading on the JSE, plus 15 unit trusts that have index tracking mandates, the selection of passive investment products available to the investment public is growing rapidly. The Data Performance Survey provides performance data, from one month to five years, for each of these products. In addition, daily tracking of performance data can be obtained through the website, either through the creation of watch lists or through the daily price sheets published for each ETP product.

For the long-term investor, the consistency of performance of Satrix INDI 25 ETF, NewGold ETF and Property index tracking products, such as the Prudential Property Enhanced Index fund and Proptrax SAPY ETF is noteworthy and such products deliver, not only very competitive performance, relative to active managers, but often with significantly lower risk and costs. In the short term, up to one year, the highest performing funds tend to be rand hedge related, such as the Standard Bank Commodity Linker ETNs and the DBX Tracker ETFs.

The etfSA Performance Survey measures the total return (Net Asset Value (NAV to NAV)) changes including reinvestment of dividends) for index tracking unit trusts and exchange traded funds (ETF) available to the retail public in South Africa. The performance tables measure the one month to five-year total return for a lump sum investment compared with the benchmark index returns (including reinvestment of dividends). Note, as the FTSE/JSE calculates the index without taking into account any brokerage or other transaction costs, index tracking products will typically underperform the index because of their transaction and other running costs. Monthly Performance Survey. Best Performing Index Tracker Funds – 31 October 2012 (Total Return %)* Fund Name


5 Years (per annum)

Fund Name


3 Years (per annum)




Satrix INDI 25



Satrix INDI 25






Prudential Property Enhanced

Unit Trust


Prudential Property Enhanced Index Fund

Unit Trust


Satrix DIVI Plus



Proptrax SAPY



2 Years (per annum)

1 Year

Standard Bank Silver-Linker



NewFunds eRAFI FINI 15






Satrix INDI 25



Satrix INDI 25



Standard Bank Wheat-Linker



Standard Bank Gold-Linker



Standard Bank Corn-Linker






Satrix FINI 15



6 Months

3 Months

Standard Bank Corn-Linker



Standard Bank Platinum-Linker



Standard Bank Wheat-Linker



Standard Bank Silver-Linker



DBX Tracker MSCI Eurostoxx 50



DBX Tracker MSCI Eurostoxx 50



Source: Profile Media FundsData (31/10/2012)

* Includes reinvestment of dividends.

Now, for the FIRST TIME ever, all South Africa’s ETFs & ETNs on a SINGLE WEBSITE. • Everything you need to know about each ETF/ETN • Absa (NewFunds), BIPS (RMB), DBX Trackers, Investec, Nedbank, Proptrax, Satrix, Standard Commodity Linkers • Transact online all ETFs/ETNs • Low costs • Easy access and switching • From R300 per month • From R1 000 for lump sums

Visit the website: or call 0861 383 721 (0861 ETFSA1)




Element Investment Managers, a niche value contrarian boutique asset manager has appointed Jeleze Hattingh as its income and asset allocation specialist. Hattingh holds an MSc in business mathematics with six years’ investment industry experience, and is both a chartered financial analyst (CFA) and a certified markets technician (CMT). Prior to Element Investment Managers, Hattingh worked at Allan Gray and was previously employed by Credit Suisse and Deloitte Consulting in the UK.

ASISA launches new fund classification system for 2013 From January 2013, saving for retirement and long-term saving will be more transparent as investors will know more about what they are putting their money into and where due to the new fund classification structure launched by the Association for Savings and Investment SA (ASISA). Under the new fund classification structure, all funds will be classified according to geographic exposure and underlying assets. This will make a comparison of funds’ performances much easier for investors. The geographic exposure of the fund will be classified according to four categories. A South African fund, currently called a



Nico Smuts joined 36ONE Asset Management and will be responsible for internal fund accounting and investor reporting. He was previously an associate portfolio manager at Capital Generation Partners, a boutique asset management firm based in London. Prior to this he worked at Newton Investment Management in London and Towers Watson in Cape Town. Smuts is an actuary and holds a master’s degree in finance from the University of Cambridge, where he received the Director’s Award for academic distinction.

domestic fund, will be allowed a 25 per cent maximum global exposure compared with the current 20 per cent. The minimum exposure in South Africa has been reduced from 75 per cent to 70 per cent, while exposure in Africa will be retained at five per cent. A worldwide fund will have no restrictions on where it can allocate assets. These used to have a guideline of 15 per cent minimum exposure in South Africa and 15 per cent minimum foreign exposure. A global fund, which is presently known as a foreign fund, will be able to invest a maximum of 20 per cent in South Africa compared with the current 15 per cent and will have a minimum of 80 per cent global exposure or less in specific regions. A new category is a regional fund, which

Investec Asset Management announced the appointment of Richard Ladbrook, who will join the Frontier and Emerging Markets Equity team as an analyst aiding its analysis of banking and diversified equities. Ladbrook, who joins Investec Asset Management in Cape Town from Absa Capital, has five years’ financial sector analysis experience. Ladbrook graduated with a bachelor of commerce honours degree from the University of Pretoria and is a chartered accountant and chartered financial analyst. His career includes positions at KPMG and Barnard Jacobs Mellet.

can invest a minimum of 80 per cent in any specific country or region in the world and a maximum of 20 per cent in South Africa. In terms of the ASISA Fund Classification Standard, the names will have to describe each particular fund. For instance, money market portfolios will have to have the words ‘money market’ in the name, and portfolios will use the word ‘institutional’ only if these are exclusively available to retirement funds, long-term insurers, investment managers or collective schemes. Meanwhile, three fund categories will be discontinued. These include fixed interest – varied specialist funds; asset allocation – targeted absolute and real return funds; and asset allocation – prudential funds. But Regulation 28-compliant portfolios in prudential funds will be flagged irrespective of the categories.

Atlantic Asset Management opens new business unit Atlantic Asset Management, the Cape-based specialist fixed income asset manager, has announced the opening of a new business unit focusing on the high impact, unlisted debt market. The unit will do business as Atlantic Specialised Finance and is in response to regulatory changes (particularly Regulation 28 of Pension Fund Act) that has made such investments increasingly possible for the mainstream investment management industry. Announcing the new business unit, Atlantic Asset Management MD, Murray Anderson says they are very excited about the new venture and the prospects for growth it presents. “At the appropriate time, the team will expand further, adding to its capabilities and resources.” Jackson says that recent regulatory changes for institutional, retail and corporate interests in South Africa have opened up a vast and growing opportunity in unlisted investing. “This is particularly true for unlisted debt, which is favoured by the regulatory changes and given additional impetus by the commercial banks’ declining ability to lend into perceived higher risk areas as a result of more stringent capital requirements under the new Basel III limits. “Apart from the regulatory aspects, Atlantic will be investing in an often overlooked sector of South Africa’s economy. Although unlisted, such investments offer very attractive returns which are difficult for investors to access. There is thus a large and growing demand for unlisted debt, in particular, where one can invest in already proven and sustainable business models. “Given South Africa’s country’s socio-economic challenges, there is a wonderful congruence in financing innovative private sector solutions to social demands and which are not being met by government, hence the term ‘high impact’. “Atlantic Specialised Finance will provide a mechanism to unlock capital for this sector, as well as providing investors with a means to access the very attractive returns available to those providers of capital. Atlantic intends to be a catalyst in this sector in line with the business philosophy of being a force for good,” Jackson says.

Grindrod launches inaugural bond on JSE Grindrod Bank has issued its inaugural bond on the formal interest rate market of the Johannesburg Securities Exchange (JSE). Grindrod Bank raised R500 million under this domestic medium-term note programme (DMTNP) and has the capacity to issue further amounts up to R1 billion under the programme. The initial note was for a period of three years and has a yield of JIBAR plus 180 bpts. “We believe that the successful placement is an endorsement of our business model and the bank’s prudent approach to lending,” says Grindrod Bank CEO, David Polkinghorne. “The bank’s balance sheet has grown steadily under the Grindrod brand and we look forward to further growth from our financial services business. The rationale for the issuance is to diversify Grindrod Bank’s funding sources. This will also increase our liability duration, ahead of changes to the capital and liquidity requirements banks will face with the adoption of Basel III regulations.”

Cadiz Absolute Yield Fund exceeds R3 billion milestone The Cadiz Absolute Yield Fund has been a significant beneficiary of investors’ search for yield in the current negative real yield environment, resulting in the fund’s assets under management now exceeding R3 billion.

Investec CEO awarded European Asset Management CEO of the Year award Investec Asset Management CEO Hendrik du Toit has been announced as the Chief Executive of the Year at the prestigious Financial News Awards for Excellence in European Institutional Asset Management. Viewed as the authority on the performance and strategy of the European institutional asset management industry, the winners in each category were decided upon by a distinguished panel of more than 100 pension fund consultants, fund management executives and marketers from across Europe. Financial News, a Dow Jones publication, is one of Europe’s top institutional trade publications. The CEO of the Year award recognises Du Toit as the chief executive who has made a real difference at the helm of his firm and is considered one of the most prestigious

of the 25 categories in the awards. Du Toit says, last year, Investec Asset Management was named runner-up in the category for Firm of the Year, so for him the award is not about individual excellence but what the firm has collectively achieved. “This award confirms our position as a well-established competitor in the global asset management arena. What makes this unique is that we are the first firm from the emerging markets to receive this honour from industry peers.” Du Toit’s award comes as Investec Asset Management celebrates its 21st anniversary. Having founded Investec Asset Management in 1991, he and his team have grown the business from a start up in South Africa to an international investment manager serving a global client base with approximately R800 billion in assets under management today.

The fund has successfully provided investors with a return of inflation plus three per cent (CPI+3 per cent) over rolling three-year periods and a positive return over every rolling 12-month period. For the three-year period to 30 September 2012, it achieved an annualised return of 9.65 per cent per annum (source: Morningstar), whereas CPI+3 per cent was equal to 7.61 per cent per annum. Furthermore, the fund has delivered more consistent returns than a traditional income fund and reduced the volatility normally inherent in the bond market. Paul Hutchinson, head of Cadiz Collective Investments says in the difficult investment environment of the past couple of years, the Cadiz Absolute Yield Fund has appealed to retail and institutional investors who do not want to make the complex asset allocation decision between the growing (in number and complexity) range of fixed interest instruments. “It is, however, the fund manager’s ability to make use of the myriad available investment opportunities to diversify risk and enhance the yield of the fund that has proven to be extremely attractive and beneficial to investors.”




Based on these metrics, the mechanism removes the stocks showing least quality compared to their peers and avoids an explicit bias towards undervalued stocks.

Absa Capital launches two listed securities From January 2013, saving for Absa Capital, the Barclays affiliated corporate and investment banking division of Absa Bank Limited, has launched the Black Chips Protector and Black Chips Accelerator, referenced against the Barclays Black Chips Index. The Black Chips Protector and Black Chips Accelerator are among many long equity investment plan securities (LEIPS) that make up the Absa Capital LEIPS suite of structured investment products. The launch is in response to investor appetite for access to financially robust offshore shares via a single Randdenominated term investment, with a choice of capital protection levels. “We have seen a strong flight to quality driven by the uncertain global and local economic environment,” says Ryan Sydow, head of retail distribution at Absa Capital. “The Barclays Black Chips Index seeks to pick out the best stocks from across Western Europe, North America and Asia.” The Barclays Black Chips Index employs quantitative measures to ensure investors participate in so-called ‘Black



Chips’ – an enhancement of the ‘Blue Chips’ concept of widely regarded high quality stocks. The companies included in the Black Chips Index are selected from a global basket based on their financial robustness, liquidity, debt to earnings levels and the amount of dividends they distribute. The index follows a specific investment mechanism defined in advance and governed by transparent rules, and is refreshed every three months to identify a new portfolio of quality stocks. The specific selection of mechanisms seeks to identify quality stocks through the use of fundamental accounting metrics such as the price earnings ratio and the return on equity ratio. “Based on these metrics, the mechanism removes the stocks showing least quality compared to their peers and avoids an explicit bias towards undervalued stocks,” said Vladimir Nedeljkovic, head of investments at Absa Capital. “In launching the Black Chips Protector and Black Chips Accelerator, we have met the needs of investors by offering a relevant, unique and innovative solution that can be used as a building block to express tailored investment views,” said Nedeljkovic.

“By bringing the Black Chips Index to market illustrates the strength of harnessing the global expertise of Barclays for the benefit of South African investors,” said Sydow.

Investec launches gold exchange traded note with a difference Investec has launched a new exchange traded note with the JSE ticker symbol, ‘Golden’ offering South African investors the Dollar gold price. Although two gold exchange traded products are already listed on the JSE – Absa Capital’s NewGold exchangetraded fund and Standard Bank’s gold exchange traded note – Investec said its new product differs by tracking the US Dollar price of gold rather than the price of gold. For example, if the price of gold is $1.750 per ounce in London, Investec’s gold exchange traded note will trade at R175 (one-tenth of an ounce).


world portugal, japan, europe, asia, angola, zimbabwe, australia, zambia, spain, greece

Portuguese Government proposes tax hike The Portuguese Government recently proposed an income tax hike of four per cent, which is set to increase the current tax of 9.8 per cent to 11.8 per cent. Finance Minister Victor Gasper claims the increase is needed for government to collect enough revenue to cut the country’s debt by 4.5 per cent. Government also plans to cut two per cent of the country’s 600 000 public employees to save 2.7 billion Euros. Japanese export declines as a result of 558.6 billion Yen trade deficit Japan is at risk of another credit-rating downgrade due to the decline of monetary stimulus. This is according to Japanese Economic Minister Seiji Maehara who says the 10.3 per cent decline in exports in September caused a trade deficit of 558.6 billion Yen ($7 billion). Maehara says this is the lowest the country’s exports have fallen since the earthquake last year. Western Europe financial services job losses The Western Europe financial services sector recently cut 30 000 jobs, and according to the International Monetary Fund, the economy of 17 Eurozone countries will decline by 0.4 per cent this year and will grow by 0.2 per cent in 2013. Christopher Wheeler, a London-based analyst at Mediobanca SpA, believes job losses will continue through year-end as banks focus on cutting costs rather than exploring new revenue avenues. World Bank cuts its growth forecast on East Asia The World Bank cut its economic growth forecast for the East Asia and Pacific region. East Asia’s economic growth forecast is currently at 7.2 per cent compared to 8.3 per cent in 2011 as a result of the decline of China’s economy. Some of the affected

countries are Cambodia, China, East Timor, Indonesia, Laos, Malaysia, Papua New Guinea, the Philippines, Thailand, Vietnam and Pacific Islands. According to the report, this is the result of weak exports and low investment growth. Angola launches $5 billion wealth fund Angola launched a $5 billion wealth fund to invest its vast oil earnings in infrastructure and hospitality sectors as business travellers flock to the oil rich country. According to José Filomeno de Sousa dos Santos, a member of the fund’s board and the son of President José Eduardo dos Santos, the fund’s purpose is to promote social and economic development by investing in projects that create opportunities, which will positively impact the lives of Angolans. IMF forecasts slow economic growth for Zimbabwe The International Monetary Fund (IMF) predicts that Zimbabwe’s economic growth will slow down to four per cent by 2017. According to the IMF’s recent World Economic Outlook report the Zimbabwean economy is expected to reach a GDP growth of five per cent this year. The IMF states the key risks resulting in this outlook for the country includes political instability, decline in exports and financial sector stress. Australian budget surplus strengthened The Australian Government announced an extra $16.4 billion in budget savings over the next four years. According to the Treasurer of Australia Labour Party, Wayne Swan, the mid-year budget revealed a 1.1 billion Dollar surplus in 2012/13, down from the 1.5 billion Dollar surplus forecast in the May budget. The economic growth forecast for this financial year lowered to three per cent from the 3.25 per cent during the mid-year as a result of the European financial crisis and a weakened USA economy.

Zambia sold its debut $750 Eurobond Zambia sold $750 million of its international bond to help fund its budget and invest in the country’s infrastructure. Zambia joins other sub-Saharan African nations such as Nigeria, Ghana, Gabon, Senegal and Namibia that sold international debt. According to Deputy Finance Minister Miles Sampa, the Zambian Government is capable of paying back US$750 million Eurobond debt because of infrastructure development, which is said to increase economic activities in the country. Spanish Government implements ‘bad bank’ The Spanish Government is setting up an asset management company or a so-called ‘bad bank’ to buy foreclosed real estate assets of up to 90 billion. According to Bank of Spain deputy governor, Fernando Restoy, the asset management company will enable property transfers which represent a significant discount as property loans will receive an average discount of 45.6 per cent. This is designed to strike the balance between being low enough to attract private investors but at the same time not damage the bank. Greece labelled a risky place for investment The annual survey of finance directors from global business consultancy BDO considered Greece as a riskier place to invest and conduct business in than wartorn Syria. BDO surveyed 1 000 chief financial officers (CFO) from medium-sized companies planning foreign investment. According to BDO chief executive, Martin van Roekel, CFOs are becoming increasingly cautious of southern Europe, which they see as riskier than the politically unstable countries of the Middle East.





They said “The government will find itself in the situation of an increasing lack of funds and growing fiscal deficit if it persists with the short-sighted policy of attempting to freeze the remuneration of executives, as these individuals also make up the bulk of spending power in the economy.” Investec group analyst Annabel Bishop offered her opinion regarding the economy’s future and the role government and the Minister of Finance will have in dealing with it. “Our operations will be of sufficient size to have a strong impact on the markets ... There is no plan to prepare for the exit of any country from the Eurozone.” Christian Noyer, European Central Bank policy maker took a strong stance against the possibility of Greece exiting the Eurozone. “He did indeed walk the fiscal tightrope, trying hard to balance the need for additional stimulus for the domestic economy against the need to curb spending to reduce the budget deficit.” Nakrien Kader, leader of Deloitte’s tax services, expressed his view of Pravin Gordhan’s medium-term budget speech. “Retail hedge funds will be subject to more intensive oversight including restrictions on minimum investment



amounts, asset portfolios and limits on leverage.” Lesetja Kganyago, the Reserve Bank deputy governor elaborated on the legislation relating to the regulations of hedge funds due to be applied in 2013.

commission Algirdas Semeta, commented on the controversial new financial transactions tax (FTT), commonly referred to as the Robin Hood tax that is set to raise substantial funds for the European public sector.

“Nedbank’s share price has performed well as management had consistently delivered on its targets and guidance to the market. For the 2012 year to date, Nedbank’s share price has increased by about 25 per cent, making it the second-best performing big bank after First Rand.” Equity analyst at Cadiz Asset Management, Adrian Cloete, commented on Nedbank’s success in 2012 amidst a highly competitive South African banking market.

“This number can be doubled if the lost procurement, wages, capital expenditure, taxes and other contributions that are not happening due to the strikes are included in the calculation.” Roger Baxter, the Chamber of Mines top economist, commented on the R10 billion economic loss in 2012 as the direct result of illegal mining strikes.

“The current position is of a win-win economic benefit ... This will further deepen relations between the two countries.” Lionel October, the Trade and Industry director general, said the growing relations between China and South Africa has reaped mutually beneficial results. “I firmly believe that an EU FTT has great benefits to offer ... I also believe that now is the right moment to move ahead with it, because in difficult times, fairness matters.” European Union’s taxation

“Since 2001, South Africa and many other African countries have seen a significant shift in trade partners. Our dependency on Europe has been reduced, while trade with Asia as well as intra-Africa has picked up significantly. This is proving to be extremely positive, in light of the economic pressure Europe is currently experiencing.” Charles Brewer, managing director of DHL Express, sub-Saharan Africa, commented on figures released by the International Monetary Fund and compared them to the company’s own shipment numbers, which revealed an extremely positive economic outlook for Africa, and, to an extent, South Africa.



u o Y id sa ets e w t st e t b s a e l h f t er the o e som you ov f o tion ned by eeks. c e l A se mentio four w as @SureKamhunga: “Learnt today life insurance originated in ancient Rome when they devised ways to assist families of injured or ill members, courtesy PwC.” Sure Kamhunga – Financial Services Editor for Business Day/Bdlive, South Africa. (Opinions personal & RT not always endorsement) @paul_vestact: “As I said in 2010 and 2011, if your investment base case was that Europe would disintegrate, then you don’t know what you are doing.” Paul Theron – CEO of Vestact, equities asset manager Johannesburg/NewYork. Business Blunders on Radio702 on Fridays. ‘Resident Expert’ on Hot Stoxx on CNBCAfrica daily. Johannesburg · @MarcHasenfuss: “Verimark interims set 4 release Nov 9. The big question: Should you buy now, or wait to peruse the damage to the H1 numbers? #intheprice?” Marc Hasenfuss – Financial journo, whose real passions are Henry Miller, Frank Zappa and watching his kids destroy things Kommetjie @LaMonicaBuzz: “Boeing Boeing! Boing Boing! $BA earnings top forecasts. Guidance great too. Nice news after

yesterday’s earnings wreckage. Up 3% pre-market.” Paul R. La Monica – Paul R. La Monica’s The Buzz on @cnnmoney. All stocks and economy. All the time. New York, NY · @chrismoerdyk: “With Eskom wanting price hikes, e-tolls, petrol price hikes etc, there is a misguided assumption that consumers actually have extra money.” Chris Moerdyk – Marketing analyst, chairman of Fellow of the Institute of Marketing Management. CMO Council. Former head of strategic planning at BMW Cape Town · @LMariB: “Electricity still carries a weight of only 1,74% in the #CPI basket. If we adjust the basket where is inflation going with 16% pa increases?” (Lydia) Mari Beukes – General economics and markets reporter @sake_24. Loves fiction, fashion and finance and writes about most things that includes index in the title. Johannesburg @hiltontarrant: ”The $150 million Facebook made from mobile ads in Q3 is nearly what it made from payments ($176 million). Growing fast.”

Hilton Tarrant – Financial journalist at Moneyweb. Broadcaster. Product guy. Obsessed about mobile, tech, telecoms. Joburg · @mayaonmoney: “Credit card and store card value grown from R19bn to R79bn from 2002 to 2010 #indebtednesssummit”. Maya Fisher-French – personal finance columnist focusing on information that actually matters South Africa · @PeterBrownIIFT: “We are now in the next leg of the bear market. This run to year end could be vicious.” Peter Brown – Peter Brown is the founder and main lecturer in The Irish Institute of Financial Trading (IIFT) which specialises in education and mentoring. Dublin, Ireland · @mcleodd: “Telkom’s AGM never fails to deliver a huge serving of drama. Some really unhappy shareholders here.” Duncan McLeod – Founder and editor of @techcentral (on the Web at www., tech columnist at the Financial Mail, bulldog owner, Sharks supporter Johannesburg, South Africa · http://www.





of tastes at Pepperclub on the Beach


n the heat of the Cape summer, a thirstquenching drink and a revitalising meal are inevitable. The popular Camps Bay Beach strip offers visitors an array of upmarket restaurants.

with a prawn and crab crust, sweet potato mash and vegetables is delicious. A beer tempura hake with a micro sauce and shoestring fries also piqued my interest, and then of course there is a choice of seafood platters.

Pepperclub on the Beach, overlooking the promenade, offers a range of refreshing cocktails and an extensive wine list. However, if you are going to have the oysters topped with the chef’s choice of ganache (highly recommended), you’ll feel on top of the world washing it down with a glass of bubbly.

Meat dishes range from the traditional grilled sirloin; beef fillet medallions with artichokes and sautéed mushrooms; a braised lamb shank; and a grilled ostrich fillet. The Thai green chicken and prawn curry was delicious and I was again impressed with the consistency of high quality and rich flavours.

The starters range from mussels in a light white wine sauce, Cantonese Patagonia calamari, venison Carpaccio, and prawn and avocado Ritz. The Asian duck breast salad complete with mixed baby leaves, sprouts, baby corn and tom yum dressing, and the seared tuna Niçoise with teriyaki glazed tuna, kalamata olives, capers, cherry tomatoes and a soft boiled egg will please any health nut. The sushi isn’t out of the ordinary but it is extremely fresh.

For those with a sweet tooth, the toffee brownie cheesecake is the favourite; or the espresso crème brûlée and the tropical sundae might be what you’re after.

Executive head chef, Scott Hendrie, comes to the party with his exotic and intriguing blend of dishes. I’m not a big fan of white fish dishes, usually opting for line fish, crustacean or red meat servings, but the pan-fried kingklip served

Guests of Pepperclub Hotel and Spa, located on Loop Street in the city, can take Pepperclub’s complimentary shuttle back to the hotel. The shuttle service is available every two hours so guests can enjoy a hassle-free stay. Guests are also able to use the Beach Club shower and changing rooms before and after the beach. At the hotel, guests can enjoy a range of soothing Dermologica massage treatments at Cayenne Spa, while the therapist weaves

her magic. The pool is the perfect place to enjoy the magnificent views of the city and the fitness centre is accessible on a 24-hour basis. The in-house Odeon Cinema seats 29 in a luxury retro sixties-style theatre, offering a totally different experience. On the ground floor, the Piano Lounge and Paparazzi Cocktail Bar are ideal for evening drinks or snacks, or kick back and relax on the balcony couches and listen to the sounds of the city. The hotel’s main restaurant, Sinatra’s, offers light snacks from the bar menu. I opted for the chicken sandwich on rye, which came with fries and a fresh, healthy portion of salad. The staff even went out of its way to enquire if the chef could whip up a platter not listed on the menu, a good indication of the quality of service I received. The hotel is centrally located, which is ideal for guests wanting to enjoy the sights of the neighbouring city. There are number of fine restaurants and upmarket bars within walking distance. Access to the V&A waterfront can easily be arranged at the concierge, as well as enquiries into local tours around Cape Town and the plush wine region.

PepperClub on the Beach The Promenade, Victoria Road, Camps Bay Telephone: +27 (0)21-438-3174 e-mail: PepperClub Hotel and Spa Telephone: +27 (0)21-812-8888 Address: Corner Loop and Pepper Streets, Cape Town



A challenging journey needs an expert guide. Our Asset Management Funds are managed by specialists who know the territory. Like sherpas, our investment managers know how to survive and flourish in an adverse climate, finding shelter when it’s needed and making the most of any opportunities that present themselves. Multi Asset investing. Welcome to our territory. Scan the code to find out more or email Ashburton’s Multi Asset Investment Style a 30 year track record % Growth 2001 9/11



2010 EU debt crisis

1999 Bubble

1990 Recession



2007 Global Liquidity Crunch

1994 Bond Crisis 1987 Black Monday

2008 Lehmans Bros Collapse

2005 Global Credit Bubble



1992 UK leaves ERM

China becomes No.2 Economy

1997 Asian Crisis



















*The Replica Sterling Asset Management Fund was launched in February 1992. The Fund’s investment policy and portfolio content replicated the existing Ashburton Sterling Asset Management Personal Portfolio. The above graph details average performance of the Sterling Asset Management Personal Portfolio (Jan 1981 Jan 1992) continued by the Replica Sterling Asset Management Fund from its launch to end September 2012. Source: Morningstar A member of the FirstRand Group

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This advertisement is for professional financial advisors only and should not be relied upon by private investors. Issued by Ashburton (Jersey) Limited, PO Box 239, 17 Hilary Street, St Helier, Jersey JE4 8SJ, Channel Islands. Ashburton is regulated by the Jersey Financial Services Commission and licensed as an Authorised Financial Services Provider under the Financial Advisory & Intermediary Services Act 2002. The value of investments and the income from them can go down as well as up and you may not recover the amount of your original investment. Past performance is not necessarily a guide to future returns. Where an investment involves exposure to a currency other than that in which it is denominated, changes in exchange rates may cause the value to go up or down. The Collective Investment Schemes (“CIS”) detailed are domiciled and regulated in Jersey and registered with the SA Financial Services Board as Foreign CIS. Please refer to the Scheme prospectus for further information including pricing and charges.

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