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R37,50 | November 2013

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Delistings

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R37,50 | November 2013

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exChange tRaDeD FUnDs

DisClOsURe

ARE YOU DOiNg THE FULL MONTY?

Delistings

6

Exchange traded funds Lower costs but confusing complexity

8

Exchange traded products State of the industry review Third Quarter 2013

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ETF Commentary

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HEAD TO HEAD Gareth Stobie, Capital Markets, Grindrod Bank and Leonard Jordaan, Exchange Traded Funds at STANLIB.

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Profile: Hywel George, Director of Investments, Old Mutual Investment Group

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From

the editor Readers will know that truly rewarding investments are those that are held over the long term. Readers will also know that once an investment portfolio is structured, it should not be changed too much. But these two points cannot be emphasised enough. We want you to get the best, lowest risk returns from your investment portfolio, and at the lowest cost. At times, changes are necessary, particularly in the unsettled investment world we are living in. However, think hard before you make changes to your portfolio. Whatever your risk appetite might be, often it’s best to just ride out the storm. Sitting on your hands can be a great investment principle. The articles that follow cover lots of these bases. For instance, exchange traded funds (ETF) are excellent products for forming the core of a portfolio. They are not without risk, mainly market risk, but they offer in most cases the lowest-cost route to a solid, transparent index tracking portfolio. Many experts comment on the ups, and some of the downs, of ETFs in this issue. Particularly revealing is the Head to Head section, where two people who are investing your money in ETFs – Gareth Stobie of Grindrod Bank and Leonard Jordaan of Stanlib – analyse these products. And while the emphasis is on long-term investing, there are times when some investors might want to partake in quick trades. Personally I think it’s risky and should be left to the experts, but if you want to trade – typically on a physical commodity or foreign currency – ETFs or exchange traded notes could be the way to go. We also look at listed property, one of the top performing assets of the past decade. It’s noteworthy that many of the experts here are sounding a word of caution about future returns, for a number of reasons. A clear warning comes from Rafiq Taylor of Sanlam Multi Manager International, who raises a red flag on listed property. Chris Hart, chief strategist at Investment Solutions, writes his usual outstanding piece, taking his cue from a Kenyan proverb. And Marc Hasenfuss always finds something new to write about, this time telling the untold story of unlisted shares. As always there’s more on the pages that follow than I can mention here. But definitely read the feature by Richard Rattue, MD of CompliServe SA, on an important principle – disclosure – asking advisers if they are doing the full monty. For those not familiar with the term, he recommends the movie.

Shaun Harris

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www.investsa.co.za Editor Shaun Harris | investsa@comms.co.za Publisher Andy Mark Managing editor Nicky Mark Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Layout and design Mariska Le Roux Editorial head office Ground floor Manhattan Towers Esplanade Road Century City 7441 phone: 021-555 3577 fax: 086 6183906

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Copyright COSA Communications Pty (Ltd) 2013, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.


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Exchange traded funds Lower costs but confusing complexity By Shaun Harris

Statistics are always tricky, especially those measuring investment product performance. Depending on the time frame, the statistics can show just about whatever the compiler wants them to show. However, there is growing evidence that over time, especially longer periods of time, index tracking funds outperform actively managed general equity funds.

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hile investor interest and understanding is still growing, exchange traded products, most notably exchange traded funds (ETFs), have caused a revolution in the investment industry. In most cases performance is better than index tracking unit trust funds because total costs are lower. A further advantage is that these are passive funds, only rebalanced when there are changes to the shares or other assets making up the index, for instance as shares enter or drop out of the index or are


place is the Prudential Property Enhanced unit trust fund with a return of 20.4 per cent per annum. But ETF tracker funds dominate all the other time periods, though Brown notes that performance tends to improve over time. Investors commonly buy ETFs on the JSE. In this case the JSE serves as a secondary market. There is also a primary market where ETFs can be bought, that is directly from the company or asset manager issuing the ETF. Here too fees are being brought down. Earlier this year Deutsche Bank, which has five ETFs linked to offshore indices, said it was reducing the maximum management fee on its flagship MSCI World Index tracker from one per cent (plus VAT) to 0.6 per cent. The management fees on its other four ETFs were reduced to 0.75 per cent. Wehmeyer Ferreira from Deutsche Securities said the lower fees resulted from economies of scale due to asset growth. When ETFs were first launched the initial funds were fairly simple, easy to understand tracker funds. But not unlike the unit trust industry, as investment inflows have grown, so have the number of products. Today there are a total of 63 exchange traded products, 40 ETFs and 23 ETNs. The complexity of the products has increased; choice for investors is no longer as simple as it used to be. What’s good about the increase in the number of ETFs and ETNs is that all asset classes, including offshore investments, are now covered. But the choice for investors without some specialist knowledge has become bewildering. For example, ETFs and ETNs cover a range of commodities, from relatively simple gold and platinum trackers to silver, oil, coal, copper, and even corn and wheat. And there are a number of ETNs based on foreign currencies.

removed through corporate action, such as delisting from a stock exchange or being bought out by another company. ETFs are also listed on a stock exchange so buying, selling and market performance takes place in real time. And transparency is better, with the share prices that make up the index available to the public all the time. Mike Brown, the godfather of ETFs who introduced the products to South Africa, compiles a monthly survey showing ETF and exchange traded notes (ETN) performance, as well as index tracking unit trust funds. The latest report clearly shows the outperformance of passive ETFs. For example, over five years the top performing tracker fund is the Satrix INDI 25, the ETF constructed to replicate the JSE’s INDI 25 index. It has produced a handsome return of 25.7 per cent per annum. However, the five-year table also shows that unit trusts should not be written off. In second

While Brown argues convincingly that ETFs tend to be lower risk than unit trusts, there are risks. Satrix identifies these as market risk, where the trackers are subject to unexpected market movements, tax risk, which depends on the tax status of the investor, and political risk, such as changes in government policies. But in some categories ETFs comprehensively outperform unit trusts. One category Brown has analysed is multi-asset unit trusts. He draws on the 107 unit trusts in the ‘high equity’ multi-asset section, saying he has chosen this sector because it has attracted significant retail investor money inflows, while other unit trust sectors have stagnated. His research shows that by replicating the methodology of multi-asset unit trust managers with passive exchange traded products, a R1 million investment in the 107 unit trusts would have generated an average return of R1.45 million after three years. The return from the ETFs over the same period would have been R1.78 million. The same R1 million investment in unit trusts would have produced R1.56 million over five years, while ETFs would have generated

R2.11 million over five years. From this Brown draws two conclusions: firstly that costs are compounded over time. “The average total expense ratio (TER) of the six ETFs used in the passive portfolio is 0.52 per cent per annum. The average TER of all the high equity multiasset unit trusts is 1.92 per cent. Higher costs compound over time to destroy investment performance,” he says. Brown’s second conclusion is that active selection of shares does not add value. “Both the multi-asset unit trusts and the ETFs have exactly the same asset allocation, so this cannot account for the differentiation in performance. It would appear that the active selection of shares to deliver multi-asset performance may not really add value.” Yet unit trust asset managers, no doubt spurred on by lower-cost ETFs and the often better performance provided, have been coming back, both through lowering costs and working on performance beyond the benchmark. Success has been mixed. Actively managed unit trusts should be able to provide higher returns than index-tracking products, but as Brown has shown above often do not. At times they do, though much like statistics it depends on the time periods presented. One exception is the small and mid-cap unit trust funds, especially if it is a small fund and therefore not restricted by too many assets under management. However, market risk will be higher and long-term performance not as consistent as ETFs. Well-known commentator Warren Ingram, in a recent article on Moneyweb, says some great, low-cost indexed unit trusts are giving the ETF industry a run for its money. Unit trusts he singles out are those available for smaller monthly debit orders. Ingram also takes a critical look at the large ETF funds. “I believe Satrix 40 should be the lowest cost equity ETF in South Africa as it has been going the longest and has accumulated a lot of investor’s money, nearly R8 billion. It has already achieved economies of scale, so the fixed investment costs of the ETF are being spread across a massive pool of money. Satrix 40 has a TER of 0.45 per cent, which I feel is too high for such a large ETF,” he writes. What should investors who are looking at building or expanding an index-based investment portfolio do? Opt for unit trust index tracking funds or ETFs? The intelligent investor will include both. Costs are important so ETFs can be used as the building blocks of a low-cost index tracking portfolio. Particularly as all asset classes are now covered, the portfolio can have sufficient diversification. To this can be added selected unit trusts that could or should beat indices. And as always, once the investment products have been selected, stick with them for the long term. This is especially true for investors near or in retirement. investsa

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Exchange traded products State of the industry review – Third Quarter 2013

New capital raised In the first nine months of 2013, R9.3 billion was raised in new capital by the exchange traded products (ETP) industry through new listings on the JSE. Absa Capital has been the main raiser of fresh

capital, accounting for R8.3 billion of the total capital raised on the JSE this year. The main contributor has been the NewPlat ETF, listed in May 2013, which had raised R9.4 billion in new security issues by the end of September. NewPlat ETF, which physically holds platinum bullion and issues securities

Table 1

Market capitalisation

New capital raised on the JSE* (January – September 2013)

Issuer

Total new capital raised (Rm)

Total market capitalisation** (Rm)

Absa Satrix Deutsche Bank STANLIB Rand Merchant Bank Investec Bank Standard Bank Grindrod Bank Nedbank Capital Totals

8 201.0 133.1 729.1 70.0 53.1 15.0 62.2 69.4 9 332.9

28 007.9 13 945.9 7 298.9 3 079.9 2 078.5 1 850.5 1 355.5 437.6 265.8 58 320.5

Source: etfSA.co.za; JSE; Profile Data (30 September 2013). * Capital raised by issue/redemption of ETP securities on the JSE. ** Total market capitalisation at 30/9/2013.

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100 per cent backed by this physical holding, is now the largest platinum ETF in the world. NewGold ETF has delisted securities amounted to R1.1 billion in 2013, thereby reducing the net capital raised by Absa Capital to just over R8.2 billion. The other ETF issuers have raised relatively small amounts of new capital as shown in Table 1.

The total market capitalisation of all 63 ETPs listed on the JSE amounted to R58.3 billion as at 30 September 2013, an increase of R10.5 billion or 22 per cent on the market capitalisation of R47.8 billion at the end of 2012. With approximately R7 billion invested in index tracking unit trusts in South African and an estimated R90 billion invested in South Africa by international ETFs, mainly emerging market funds, the total identifiable passive investment in South Africa now accounts for some R150 billion. Investment performance Table 2 shows a summary of the top performing index tracking products over periods of three months to five years. The full Performance Survey of all 63 ETPs and 15 index tracking unit trusts is available on the etfSA website (http://www.etfsa.co.za/ docs/perfsurvey/perfsurvey_sept2013.pdf). The dominant performer over most periods has been the Satrix INDI 25 ETF, which tracks the FTSE/JSE 25 index, and has no mining or financial shares in its portfolio which reduces volatility. The Satrix INDI


etfsa.co.za Table 2

etfSA.co.za Monthly Performance Survey Best performing index tracker funds – 30 September 2013 (Total return %)*

Fund name

Type

5 years (per annum)

Fund name

Type

Satrix INDI 25

25.67%

DBX Tracker MSCI USA

ETF

20.36%

Satrix INDI 25

ETF

29.15%

Proptrax SAPY Satrix DIVI

ETF Unit Trust ETF ETF

3 years (per annum) 29.75%

DBX Tracker MSCI World DBX Tracker FTSE 100

ETF ETF

Satrix INDI 25 DBX Tracker MSCI USA NewFunds eRAFI FINI 15 DBX Tracker MSCI World

ETF ETF ETF ETF

DBX Tracker MSCI Japan DBX Tracker Eurostoxx 50 DBX Tracker MSCI World DBX Tracker MSCI USA

ETF ETF ETF ETF

DBX Tracker Eurostoxx 50 DBX Tracker MSCI Japan DBX Tracker MSCI USA Satrix INDI 25

ETF ETF ETF ETF

18.51% 18.36% 2 years (per annum) 40.97% 37.41% 34.21% 33.83% 6 months 29.93% 21.25% 19.65% 19.28%

NewFunds eRAFI RESI 20 Satrix RESI 10 DBX Tracker Eurostoxx 50

ETF ETF ETF

25.27% 23.10% 1 year 59.47% 54.15% 45.50% 44.30% 3 months 18.09% 17.85% 17.49%

Prudential Property Enhanced

Source: Profile Media FundsData (30/09/2013) * Includes reinvestment of dividends. The etfSA.co.za 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 (ETFs) available to the retail public in South Africa. The performance tables (attached) measure the 1 month to 5 years total return for a lump sum investment compared with the benchmark index returns (including reinvestment of dividends). All indices are shown in total return format. 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. Please Note: future performance will not necessarily repeat historic performance data.

25 ETF also has strong Rand hedge qualities which has enhanced long-term performance. There is growing evidence that the industrial index, as elsewhere in the world, should be the benchmark index in South Africa.

price cycle, as well as inherent Rand weakness, and such commodity-linked products might be worth considering in present market conditions going forward.

which offers three risk adjusted portfolios, using purely exchange traded products, with the assets managed by Nedbank Capital, is one of the new products.

Passive retirement funds

The DBX Tracker funds, which give direct access to global stock markets, but are listed as “inward investments” on the JSE, do not require access to foreign exchange allowances nor tax clearances and are among the best performing products over the past three years.

The National Treasury’s call for greater use of passive investment products in its Retirement Fund Reform papers has elicited some response from the South African industry.

The etfSA RA Fund offers low ‘clean’ costs, complete transparency, ease of access and full investor flexibility. It is one of the first new generation funds to meet the demands of the 21st century.

Rand hedge considerations have been the key factor generating investment in DBX Tracker products and this could continue to be the case in future.

Passive investment products, particularly ETFs which now cover all asset classes and market sectors, can add considerably to long-term investment performance, because of low costs and consistency of performance.

More recently, sector tracking ETFs, like the Satrix RESI 10 ETF and the NewFunds eRAFI RESI 20 ETF, have come to the fore. Also, nearly all the commodity tracking ETPs have shown positive growth performance over the past months. This may indicate the early stage of a recovery in the commodity

Over extended periods of time, 90 per cent or more of investment returns are typically derived from asset allocation and not from stock picking. ETPs can be used in the construction of multi-asset solutions to deliver balanced portfolio asset allocation. The etfSA RA Fund,

Mike Brown, Managing Director, etfSA.co.za

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ETF Commentary

ETFs and South Africa’s

online trading industry

As the needs of investors in South Africa continue to diversify in tandem with the changing market dynamics, local investors are looking for an offering to meet their growing trading demands for multi-asset online trading platform.

was until recently considered the norm, and a definite shift towards increased activity in the online investing field.

D

Another development is the positive relaxation of the exchange controls in South Africa. While this is a ruling that is not restricted to the online trading space; it does mean that South Africans are now able to be a part of the global investment universe. Because an individual is able to invest up to R5 million offshore each year, it affords investors the opportunity to diversify their portfolio and ultimately their risk. Simply put, online trading has become ‘the way’ investors’ trade. There is no question that online trading is a simple solution that offers no frills trading without compromising on quality.

espite challenging global and local economic conditions, the online trading industry is constantly growing and developing. This is because South Africans have demonstrated that they do indeed have an appetite for online trading and this is set to increase as this option becomes better understood. So what has led to the rise of online trading and does it have permanency? Over the last 20 years, the advent of technology within the investment industry has spurred a major change in the investment space. With this development, the investment universe is no longer a closed platform accessible to only a limited few; but a reality to many thousands across the globe. As connectivity and availability to information increases, it allows investors’ access to information that is easily available, which is both live and relevant. Resulting in a move away from passive investing, that

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Dovetailing off of this is the factor of time. Time is considered one of the most precious commodities. In today’s hectic lifestyle, no matter where in the world you are based, if investors can be provided with a tool that allows them to live in real time, all the time; this is something they would consider their ultimate. Online trading allows investors the freedom to trade whenever, wherever and in real time.

The average daily volume in over-thecounter FX instruments (including spot, FX swaps, forwards and option transactions), for example, is over $1.0 trillion, resulting in FX being considered one of the most important economic aspects within the financial arena. Before trading went online, investors and speculators wanting to trade in currencies had to do so through large authorised

dealers like the banks. Some of the challenges included restrictive minimums for retail investors, opaque pricing and difficulties in telephone dealing. Retail investors now have real-time, online access to global, ETFs, CFDs, futures, FX markets, options and stocks. The spreads have reduced significantly and the developments in technology now allow for live trading through smartphone applications. While there are multiple benefits of online trading, it is in no way foolproof. Any investor, before investing any amount of money, needs to do their homework, even when using an online investment platform. They need to shop around looking specifically for online platforms that are backed up by sound track records and financial backing. If an investor is unsure about a firm, they can check with the FSB to do background checks to ensure all information provided is accurate. As technology evolves and the accessibility to a range of information increases, it makes online investing a growing trend. Investors can access a wide range of ETFs from various Tier one providers such as iShares, Powershares, Rydex, StreetTRACKS, SGAM ETFs, Lyxor ETFs and many more, through online trading platforms such as Saxo Capital Markets. Since Saxo opened its doors in South Africa a little over 18 months ago, it has seen a significant increase in assets under management – with the South African office contributing 30 per cent of assets for the entire UK region of Saxo Bank.


ETF Commentary

Passive funds 101 A cost-effective and transparent investment option

S

outh Africans wishing to participate in the Johannesburg Stock Exchange (JSE) for investment purposes can do so easily and cost-effectively via two main types of passive investment funds – unit trusts or exchange traded funds (ETF). Helena Conradie, chief investment officer of SATRIX, says, “Passive investing makes owning a piece of the stock market as simple as possible.” She believes that ETFs and passive unit trusts are ideal for achieving savings and investment goals. SATRIX, wholly owned by Sanlam Investments (SI), is a leader in the market for passive investment products. Its ETFs were introduced in 1999 and proved so popular with investors that SATRIX also decided to launch a range of passive unit trusts. Today SATRIX has more than R35 billion of retail and institutional investor capital under management across these products. What is a passive investment? “It can best be described as a product which mirrors the performance of a specified section of the stock exchange,” says Conradie. “Index trackers and passive unit trusts share exactly in the performance of shares in a certain index.” The JSE All Share (ALSI) 40 index, for example, is a predefined combination of the 40 largest locally listed firms as stipulated by the JSE each quarter. Other popular indexes include the JSE Resource index (RESI), Industrial index (INDI) and Financial Index (FINI). How do investors decide whether a unit trust or ETF is the better route to go? “How an individual investor chooses to incorporate passive investments into their overall financial plan differs significantly from one person to the next,” says Conradie. “Whether they purchase a unit trust or an ETF from SATRIX depends entirely on their specific requirements.” ETFs are popular among sophisticated investors who like the fact that they trade like shares and offer immediate exposure to the index. They typically purchase ETFs through a

stockbroker as part of their share portfolios. The product can also be purchased directly from SATRIX (through the SATRIX Investment Plan) or on platforms such as ETF SA. Investors can purchase unit trusts directly from an asset manager, on a LISP platform (as part of their retirement annuity investment) or via their financial advisers. Unit trusts are popular with retail investors due to the ease of access and substantial regulatory protections built into the collective investment environment. “It is important to view passive investments as part of an overall investment portfolio,” adds Conradie. “Investors should engage the services of a competent financial adviser to match their portfolio to their unique situation; our products are yet another tool that advisers can use to structure a sensible solution for investors.” Key benefits • ETFs are listed on the stock exchange so you can buy and sell them like ordinary shares. • ETFs offer intra-day liquidity – there is always a price at which you can trade. • ETFs give you immediate exposure to an underlying index.

The total expense ratio for SATRIX 40 ETF is 45 basis points (0.40 per cent) excluding VAT. Other costs (costs vary depending on how you purchase the product). • You will incur standard brokerage fees when purchasing or selling ETFs through your stockbroker. • You will incur a brokerage fee of 0.1 per cent when purchasing or selling ETFs on the SATRIX Investment Plan. • An annual administration fee of between 0.35 per cent and 0.65 per cent is levied on the SATRIX Investment Plan. • Additional financial adviser fees may be charged (adviser dependent and capped). Where to buy? • You can purchase ETFs through your stockbroker. • You can purchase ETFs through a Satrix Investment Plan (www.satrix.co.za).

Why purchase the product? • Investors use ETFs to gain exposure to an index through a single cost-effective transaction. • Investors can use ETFs to take short-term positions in a particular sector of the stock market or a commodity (such as gold or platinum). TER (total expense ratio is a cost measure that allows investors to compare products – it does not reflect all costs associated with an investment).

Helena Conradie, Chief Investment Officer of SATRIX

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Head To Head DETERMINING WHAT ETFs MEAN FOR INVESTORS

Capital Markets, Grindrod Bank

G areth

What are the main issues facing investors today, and how do exchange traded funds help in this environment? Two main issues in the investment environment are to keep things simple and economical, and the quest for yield. From a product design perspective, ETFs tick these boxes. They are highly governed under the Collective Investment Schemes Control Act and by the exchange on which they trade, such as the JSE. ETFs are significantly cheaper than actively managed funds and the costs are also far more transparent than many other structures. They are rules driven and highly transparent, which makes them reliable and simple. In terms of the quest for yield, some ETFs serve this goal more than others and, indeed, this trend will change over time. The Grindrodissued ETFs (Proptrax and PREFEX) all have a yield focus. The variety of ETFs available now is strength in itself, as investors can adapt their strategy to the prevailing markets. Why are ETFs so important when building a portfolio? I believe in the ‘core and satellite’ approach to portfolio construction. ETFs can be used as the core in a portfolio (or indeed the satellite), thereby achieving broad market exposure at minimal cost. Tweaks can then be made to the portfolio depending on the investor’s specific circumstances. ETFs also provide investors with true asset class exposure without additional manager risk. Who are ETFs appropriate for and how can financial advisers help? There are over 60 exchange traded products (ETP) available in the South African market, so 12

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there is certainly something for everyone. ETFs are aimed at all levels of investors.

How do you choose the weighting methodology for your ETFs?

As always, independent financial advisers are an important cog in the system. They bridge the gap between understanding an investor’s particular financial needs with various products available in the market.

We generally advocate equally weighted and fundamentally weighted strategies (but we also house market cap weighted products). Market cap weighted products have been criticised in the past as they automatically overweight larger companies.

ETFs help to bring down the aggregate cost of the advice and product for the investor. What are the benefits of ETFs for investors vs. actively managed strategies? The case for ETFs (or passive strategies) lies largely in the principle of efficient market hypothesis. This simply assumes that all information, both good and bad, is already priced into a security and therefore, as an active manager, your ability to ‘know more’ than the market is reduced. South Africa has a proud and highly skilled active management industry and there are merits in investing with an active manager. That said, if you assume that securities are already appropriately priced, the goal is then to buy them at the lowest possible cost within a well-diversified portfolio (these aspects apply to most indexes/ETF). What are the risks of ETFs? There is minimal risk in the actual product structure, given the excellent levels of governance. It should be further noted that ETFs, unlike exchange traded notes (ETN), have no issuer risk, as each ETF is housed in a solvency remote vehicle. Of course, when investing in an ETF, you carry the risk of the actual asset class or investment strategy being tracked.

This is potentially flawed, as larger companies don’t always offer the best value and there is the risk that one overweights shares that have already run. However, the decision very much depends on the market being tracked and the efficiency of that market. What are the tax considerations for ETFs? ETFs generally enjoy the same tax treatment as CIS funds: they operate as vesting trusts and the conduit principle applies. Put more simply, they are tax neutral. Security holders receive income in the same form as it was received by the portfolio. ETFs are generally exempt from capital gains tax, which is levied at an investor level. Where do you see the ETF market in South Africa in five years? If South Africa takes its lead from international trends, the ETF market should be significantly larger in five years’ time. The global market for ETPs is only a decade or so old and yet assets exceed $2 trillion. The asset management landscape in South Africa is dominated by a handful of larger brands, which are generally active brands with a well-entrenched market share. It is not necessarily in these asset managers’ interests to promote ETFs, as they pose a potential threat to their business. We expect greater use of ETFs in the future given the merits of the argument.


Exchange Traded Funds at STANLIB

L eonard J ordaan

What are the main issues facing investors today, and how do exchange traded funds help in this environment? Returns among all asset classes are expected to be more subdued than in recent years. This has led to two significant developments: firstly, investors are looking for yield beyond the traditional asset classes and are starting to invest in alternatives such as infrastructure, private equity and hedge funds. Secondly, investors have become far more cost conscious and are aware of the impact of costs on their portfolio return. For this reason, where they don’t believe that an active manager adds significant value, investors are opting for lowcost passive products. Why are ETFs so important when building a portfolio? ETFs are arguably the lowest cost products available to investors. They offer diversified exposure to various asset classes and are relatively simple products. It is possible to blend ETFs with other investment products that offer investors some outperformance of the market. Who are ETFs appropriate for and how can financial advisers help? While passive investment does have advantages, the decision on which asset classes to invest in must be tailored to suit an individual’s risk profile and return requirements.This can be a difficult process as retail investors are often influenced by emotions, particularly fear and greed. It may result in being too aggressive or too conservative. A financial adviser is very valuable in providing an objective analysis for their client and structuring an appropriate portfolio, as they are able to remove emotion from the process.

What are the benefits of ETFs for investors vs. actively managed strategies? Most active strategies tend to be cyclic; that is, they may perform well or poorly relative to the market depending on the prevailing economic conditions. Passive managers aim to provide investors with the exact performance of the market, and so their performance relative to the index is consistent; it is not likely to under-, or out-perform, the market at any time. What are the risks of exchange traded funds? There are very few risks with ETFs as a product, but there are some risks with the service providers that operate the fund. The main risk is that the asset manager is unable to replicate the underlying index or does so at a high cost, as this can have an impact on the expected return that the investor will achieve. Replication of the index is not guaranteed and so the investor bares all of the risk of any mis-tracking. For this reason, it’s important that the asset manager running the fund has demonstrable ability and track record in indexation. There are operational risks that exist, but ETFs are highly regulated and generally these risks are mitigated as far as possible and are only likely to surface in very extreme conditions. How do you choose the weighting methodology for your ETFs? STANLIB’s current product range includes a variety of weighting methodologies. We don’t believe that any one methodology is universally superior to another, as a lot depends on the risk and return profile of the investor. Ultimately, our index team is able to track most indices very well regardless of their construction, and is equally open to so-called

‘smart-beta’ indices as it is to traditional indices. The fundamentals of index tracking as a function remain the same, regardless of the weighting methodology. What are the tax considerations for ETFs? If the fund is structured as a collective investment scheme, the fund itself will usually not incur any tax. Investors in ETFs will incur all of the tax that would be associated with capital growth and the receipt of income and dividends by virtue of holding the ETF units. Where do you see the ETF market in South Africa in five years? The passive industry is poised for growth. Its low cost structure is appealing to investors. ETFs are well positioned to pick up their natural share of the passive industry, and with growth in the type of the assets that ETFs may invest in, should increase this share. If international examples are anything to go by, the ETF industry in South Africa should enjoy substantial growth over the coming years. Our financial markets are well regulated, trading systems are world class and investors are increasingly taking greater responsibility for their savings. All of these factors give me confidence that while ETF growth has been unexciting until now, we really are going to see ETFs take their rightful place as a preferred investment vehicle in the near future.

If international examples are anything to go by, the ETF industry in South Africa should enjoy substantial growth over the coming years. investsa

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DELISTINGS By Marc Hasenfuss

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here are times in the market cycle when listed company valuations come unhitched from underlying fundamentals. There is a current ongoing debate about some of the ‘rich’ earnings multiples accorded to blue chip growth stocks like Naspers, SABMiller, Aspen or even Richemont. Here we will look at the converse, focusing on those companies that have (for a variety of reasons) fallen out of favour with the investment community. Although the average earnings multiple on the JSE is currently close to 18 times, it’s not that uncommon to find counters that are trading on earnings multiples that rank in the single digits. By most measures, a company that reliably generates profits – albeit not always increasing the bottom line – might be deemed to offer good value on an earnings multiple of between six and 10. It would not be long before value inclined investors saw the wisdom of pursuing such attractively priced stocks. But some companies tend to fall outside the market’s gaze for prolonged periods. This may be as a result of a series of strategic or operational setbacks, which may have caused the market to dismiss management’s efforts to create value and sustainable growth for investors. Or the company may simply operate in a segment of industry that is not deemed conducive for long-term growth. The clothing and textile segment or printing and publishing would be good examples. Ultimately, there is a moment of realisation that only management really believes in company’s prospects. And if the market is paying no mind to the company’s endeavours – to the extent that the company can no longer use its undervalued scrip to raise fresh capital – what, frankly, is the point of incurring the cost of staying listed on the JSE? The big question is whether the many forsaken and forlorn JSE counters are going to be able to resist the temptation to embark on a buyout of minority shareholders and a delisting. On the other hand, how do you spot these opportunities and (more importantly) make money out of developments? At this delicate juncture, the market has seen five years pass since its last listings boom (brought unceremoniously to a halt by the 2008 global financial crisis). Previous listings booms – and here I’m thinking specifically of the late eighties and early nineties – saw a good chunk of newly listed companies disappear from the bourse, mostly by ‘natural attrition’. I don’t think anyone will deny that the quality of listings during those two listings booms was open to question – although the handful of survivors (Spur Corporation, Bowler Metcalf, Mediclinic, OneLogix, Brimstone, HCI – to name a few) are now thriving enterprises. It might seem crazy to contemplate the possibility of a swathe of buyouts and delistings when market sentiment – swept up by the seemingly unstoppable rushes from the JSE’s biggest blue chips counters – has looked chipper in recent months.

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It might surprise some observers that so far in 2013 there have already been 20 companies delisted from the JSE. There were 17 delistings in 2012, 18 in 2011 and 15 in 2010. That means that in just four years the JSE has seen 70 counters shuffling off its various trading boards. In truth, the good number of the delisting would be deemed corporate transactions that in effect spurred a new listing. Here we can point to SA French (which induced a mirror listing of Torre Industrial Holdings); Marshall Monteagle (which restructured its underlying listed subsidiaries and re-listed); Paladin Capital (which gave rise to the listing of private education venture Curro); or Avusa (which reconfigured as the Times Media Group). Still, the contention might be that most delistings are simply companies that are left for dead, and eventually are terminated by the JSE (usually for not issuing audited financial statements). It’s true that after every listings boom, a good number of companies simply snuff it. Recently we’ve seen companies like Queensgate, Quantum Property Group, AG Industries, Alliance Mining, Country Foods and Kimberley Consolidated Mining booted or about to be ushered off the JSE. There have also been corporate restructurings that have resulted in delistings: Allied Technologies, Mobile Industries, NAIL, Simmer & Jack Mines and New Bond Capital. But more tellingly, many counters like Lonrho Africa (a private equity transaction), Amalgamated Appliances (acquired by Bidvest), Infrasors (acquired by Afrimat), Iquad (acquired by Sasfin), Hardware Warehouse (acquired by Steinhoff) and Cipla Medpro (acquired by the company’s Indian patent holder), were part of well-documented buyouts. In all instances, the share price of the companies listed above was lagging

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either the respective companies’ fundamentals or the underlying value of assets. This allowed the buyers to pitch an offer at a decent premium to the market price but also at a level where considerable long-term upside could be garnered. Even more intriguing are the buyouts and delistings that transpired because the companies concerned were so devoid of meaningful market interest that the controlling shareholders could pitch a buyout offer that arguably discounted the underlying intrinsic value. In 2013, these would include services group Excellerate, property developer IFA Hotels & Resorts, property investment company Sable Holdings, security group Muvoni Technology Group and empowerment investment company Cape Empowerment Ltd. In previous years, promising and interesting counters Mercantile Bank, bakery and catering supplies business Universal Industries, technology services company O-Line, alternative telecoms groups Celcom and Vox, insurance broker Glenrand, a.b.e Construction Chemicals, Dynamic Technology Holdings and industrial services group Set Point were all bought out and delisted. Obviously alert punters can make a nice turn from these market exits. An opportunity effectively offers limited downside risk but also a chance of further upside (especially if strong minority resistance prompts a higher buyout offer, or if a rival bigger emerges with a higher priced offer). But that’s easier said than done. An investor might observe share price weakness and recognise potential for a buyout. But ultimately the investor is buying into share price weakness. The lag in the share price is usually caused by shareholders losing patience with efforts to restore value at the company, preferring to cash out and channel their money into another company with better prospects. Persistent selling will see the share price dribble down to levels that are

completely detached from reality (or realistic value). In these circumstances trying to call the bottom of the share price can be a trying and expensive exercise. In this regard punters should consider the following before lurching at a company they believe will be earmarked for a buyout and delisting. • Does the company have tangible assets that either provide a solid underpin to the share price or are discounted by the share price? If a buyout does not materialise or is called off, an investor needs some security around value. • Does the company have a viable business model? Nothing can erode tangible asset value quicker than a company loses money on a consistent basis. In this instance, beware of companies that are enduring drawn out turnaround plans. • Is the company lumbered with a dangerous debt load? Nothing will scare off a suitor faster than a debt load that cannot be serviced out of operational cash flow. • Does management hold a meaningful stake in the company? Unless it’s a pure asset strip, a suitor would want key management to stay aboard; and, more importantly, keep ‘skin in the game’. • Will the new controlling shareholders or owners allow shareholders to remain aboard after delisting the company? Excellerate and Cape Empowerment are two recent examples of companies where a good number of minority shareholders have remained aboard after delisting. Unlisted shares have certain disadvantages (liquidity being one), but if an investor is certain the new owners can unlock substantial value or deliver of pent-up potential then it’s worth staying aboard. Shareholders who stayed aboard HomeChoice after its delisting in 2003 have been richly rewarded with capital growth and generous dividend payouts over the years.


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Allan Gray

Formalise your recommendations with an

investment

policy statement Jeanette Marais, Director of Distribution and Client service at Allan Gray

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n investment policy statement is an important basic document for your client interactions as it records your investment process and recommendations in a clear and formalised way. All too often the rulings against advisers by the FAIS ombudsman have singled out advisers for issuing investment advice without proper consideration or supporting documentation. A record of understanding An investment policy statement is essentially a record of the understanding between you and your clients regarding their investment objectives and how you plan to achieve them. It gives you a clear process to follow when devising your investment approach and ensures that all the relevant aspects of your investment decision-making framework have been considered. An investment policy statement has the additional benefit of guiding you towards making similar investment-related decisions for clients with similar financial needs; a good practice management principle. It also serves as a document within your practice to guide other staff. If your investment policy statement clearly identifies your client’s investment universe, you will not need to assess every new product that comes to market; rather you can use your time strategically and focus on the individual financial planning needs of your clients. A good investment policy

Complicated investment products, volatile markets, increasing regulatory and compliance requirements and uninformed clients; this is the challenging world that investment advisers navigate daily. Putting processes into place in the face of so many variables helps to create structure and reduce risk.

statement is fairly time consuming to draft, but well worth the effort; after all, it will be the backbone of your long-term plan for your client. But where do you begin? 1. Set investment goals Besides the obvious step of acquiring your client’s personal details, start by finding out everything you can about their current investment accounts and ongoing contributions. Then establish investment goals. This will help you to determine what types of returns you’ll need to generate and what to base future decisions on. 2. Establish the investment time horizon The concept of time horizon is frequently misunderstood as many investors assume their time horizons are shorter than they actually are. This can lead to critical asset allocation errors. Your clients’ time horizons aren’t necessarily the day they retire. Time horizons can extend into retirement and beyond, if the investments are to be passed on. So ensure the time horizon is accurately identified before the investment process begins. 3. Consider risk appetite Establishing and recording your clients’ tolerance for risk is another building block of your investment policy statement. If they can’t afford to ride the ups and downs of the

market, either because their time horizon is too short or because they simply haven’t the stomach for it, you’ll need to tailor your asset allocation accordingly. 4. Review and rebalance Your investment policy statement should provide guidelines around when you will review and possibly rebalance your client’s portfolio. A good approach is to rebalance when target asset ranges have been violated. For instance, your investment policy statement may specify that 75 per cent of a portfolio should be invested in domestic equity. However, the portfolio is allowed to hold as little as 70 per cent domestic equity and as much as 80 per cent. Accordingly, the portfolio would be rebalanced any time the domestic equity component is outside of this window. Understand what your client expects An investment policy statement is an opportunity to clarify your client’s expectations, test them against reality and map out how those expectations can and will be met. It should be the result of an informed series of discussions and should be written in plain English so that you, your clients and your staff clearly understand what is to be achieved and how the recorded investment approach should be implemented. Sources: Fundhouse; www.investopedia.com; Jill Gardiner: How to Write an Investment Policy; Mark P Cussen: How to Develop an Investment Policy Statement

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

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Alternative investments

Hedge funds Providing protection where you need it most

returns, we get drawdowns in 17 of these months. The returns of an equity fund of hedge funds portfolio for those negative months show that in most of the months when the market was down, the fund of hedge funds portfolio either delivered positive returns (in 10 of these 17 months) or fell by much less than the market (the biggest negative month of 1.7 per cent relative to the index which was down 4 per cent) providing downside protection.

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ith the revision of Regulation 28 of the Pension Fund Act making an explicit allowance for the inclusion of hedge funds in the asset allocations of pension funds, the industry thought that it would start to see significant inflows and allocations from pension funds. Following the revision, we actually saw outflows from hedge funds; those pension funds who had already made allocations needed to bring their allocation in line with the limits of 2.5 per cent for a single hedge fund and five per cent for a fund of hedge funds, as well as the overarching limit of 15 per cent for all alternatives (including private equity which didn’t offer the liquidity for any redemptions). However, since the initial outflows following the regulatory change, the hedge fund industry has continued to grow at a modest pace. According to the Novare Investments survey of the South African hedge fund industry, the size of assets managed within hedge fund strategies grew to its largest ever of R42.2 billion as at June 2013. Whether the industry will grow to over R100 billion which would be an easy target if all pension funds took up their 10 per cent allowance to hedge funds, is debatable but hedge funds still do offer opportunities for investors. Hedge funds need to be seen as particular investment strategies within the asset classes in which they invest, as opposed to a separate asset class themselves. They offer the investor the opportunity to access different sources of return because they have the ability to employ different investment views through the use of derivatives and shorting which long-only strategies don’t have access to. In the equity space, for

example, a long-only manager at the extreme can choose not to hold any of a particular stock if they feel that the outlook for the share price is bad. In reality, most long-only managers will hold a small position in that stock but maybe less than the benchmark weight because they worry about benchmark risk. A hedge fund manager can hold a short position in the stocks they have an unfavourable outlook for. If their view is correct, they will make money as the stock price declines whereas the long-only manager will only avoid losses. The result is a different return profile that can be less correlated to the overall market. This does not mean that hedge funds never lose money or never have negative returns. Because they are strategies within an asset class, they will always have some exposure to what the performance of that asset class is, but they should be able to offer an element of protection in using the strategies they have at their disposal to reduce their overall market exposure at times when the market may appear shaky. In May 2013, when the All Bond Index was down -4.6 per cent for the month, nine out of the 14 fixed income hedge funds in the Hedge News Africa fund survey also had negative returns but the average return of -.6 per cent outperformed the market and provided investors with the diversification sought. If we look at market data for the period February 2009 to August 2013, and filter all the months in which the Shareholder Weighted Index (SWIX) delivered negative

A fund of hedge funds approach adds value in selecting those hedge fund managers which when combined consistently deliver returns that offer some diversification within an asset class. While some pension funds have elected to invest with single hedge fund managers, there are many that still prefer to utilise the skills of a fund of hedge funds manager to select and blend the best of breed single hedge funds. Not only does it diversify sources of return, but it also allows access to some managers who may have closed their funds on the back of very good performance track records which attracted significant inflows. A fund of funds reduces manager-specific risk and allows for the inclusion of smaller, start-up managers where the investor can have confidence that at the fund of funds level, the operational as well as the investment risk of all underlying managers is monitored on a continual basis. Until such times as an investment can be found that captures all of the upside in a market while at the same time protecting against all of the downside, diversity in portfolio construction will continue to enhance returns through market cycles. This diversity can still be found in the alternative strategies offered by hedge funds and fund of hedge funds.

Claire Rentzke, Head of Manager Research, 27four Investment Managers investsa

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Asset management

The

managed

investment debate rages on

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he active/passive debate has sparked a storm of differing responses across the financial services industry, especially when it comes to the role of investment advisers and the selection of fund managers. While some argue that the era of actively managed funds is a thing of the past, others believe that one cannot simply rely on the market to produce satisfactory returns. What are the considerations that should go into the decision to go active/passive in investments, and how should one assess the abilities of individual fund managers? This has become the new investment conundrum. Nic Andrew, head of Nedgroup Investments, which offers individual and institutional investors access to a range of South African and offshore unit trusts managed by a range of ‘best of breed’ fund managers, says: “The key to choosing a suitable fund manager requires two primary considerations. First, you need to find an experienced investment manager who follows a sensible philosophy backed by a rigorous and repeatable process. Second, you need to have the conviction to stick with them through the inevitable periods of underperformance.” According to Andrew, by continually monitoring managers, they are able to better understand the reasons for short-term underperformance or the impact of other issues such as a change to the investment team. Warren Ingram, executive director of Galileo Capital, although a self-professed advocate of indexed investing, says some fund managers can generate excellent performance. However, he believes that while index tracking has its own problems, a highly diversified portfolio of indices will 20

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reward the investor and what the market is going to reward of that manager’s skills going forward. We almost need a whole new kind of professional who helps people understand how to make financial decisions that are meaningful and within the context of a complex market. This should have absolutely nothing to do with whether one picks Allan Gray or Investec,” she says. deliver returns over the long term. “If you have a large portfolio of assets, you might consider adding a low-cost, actively managed investment that aims to limit exposure to excessively priced shares,” he adds. Ingram points to the study of fund managers over the long term which was conducted by two respected US finance professors, Gary Porter and Jack Trifts and concluded that fund managers who have been in the job for more than 10 years are likely to deliver deteriorating performance the longer they remain in charge. This sentiment is echoed by Steven Nathan, chief executive of 10X Investments: “Empirically, the great majority of fund managers underperform their benchmarks, after adjusting for fees and survivorship. In addition to this, it is impossible to predict who will outperform. Certainly, no fund manager has yet guaranteed to do so. Index funds produce superior returns against most active funds after fees,” he says. The issue is a complex one and it seems clear that a change in perceptions is required. Anne Cabot-Alletzhauwer says there is a perception that financial advisers can somehow miraculously pick a fund manager and make them wealthy overnight. “While you might be able to identify who you think is a skilful manager with pretty good assurance, it’s very difficult to identify who is going to

Cabot-Alletzhauwer also highlights the importance of maintaining a long-term investment strategy, especially when it comes to measuring the performance of fund managers. “If you look at some research that was done in Australia with regard to the super annuation industry, they discovered that there was as much as three per cent of value destruction per annum that was occurring, not because fund managers performed badly but because consultants were chopped and changed; and every time an investor changes consultants, they tend to change their investment strategy. The irony of the results is that, when asset managers were analysed in terms of their quarterly performance, trustees would demand that they be chopped and changed usually at exactly the wrong time,” she says. It seems that it is par for the course when it comes to selecting which strategy is best. If it is above par, it is better, and if it is below par, it is worse. Inevitably a host of other factors can influence the result. However, while you may favour active or passive investments, an adviser should be in the position to advise their client of what the investor’s risk profile is best suited for, and ensure that they don’t chop and change when the market seems to land in the rough.


Barometer

HOT

NOT Growth forecast for SA cut A poll conducted by Reuters with 19 economists concluded that South Africa’s economic growth will slow through the rest of the year, especially during the third quarter. The lower growth outlook was attributed to the widespread industrial conflict.

Development Bank of Southern Africa reports loss State-owned lender, the Development Bank of Southern Africa, reported a net loss of R826 million in the year to March due to stagnant operating income and strenuous economic conditions. Impairments on development loans of R1.6 billion and revaluation losses on financial instruments of R403 million were attributed for the cause of the loss.

SA most attractive investment destination in Africa The latest Where to Invest in Africa report by Rand Merchant Bank (RMB) revealed that Africa continues to increase in popularity as an investment destination, with South Africa remaining the most attractive on the continent, although closely followed by Nigeria, which moved up from third to second place.

Indian economic adviser lowers growth projection The Prime Minister’s Economic Advisory Council cut India’s growth forecast to 5.3 per cent for the financial year 2013/2014. The cut is as a result of policymakers struggling to stabilise the Indian currency, which fell around 14 per cent against the Dollar this year, after weak growth and a record low current account deficit.

Local banks remain stable Findings from PricewaterhouseCoopers’ (PwC) South Africa Major Banks Analysis: Finding Strength in Adversity reveals that the South African banking system remains stable, despite the challenging local and global economic climate, and that the banks are adequately well capitalised, with solid returns on equity.

Mauritius investment increases According to the central bank, foreign direct investment in Mauritius increased by 16.1 per cent to 4.736 billion Rupees ($153.27 million), up from 4.077 billion a year ago, in the first six months of 2013. Investment was largely directed to the real estate sector, followed by construction, with France as the biggest source of foreign direct investment, followed by South Africa.

s y a w Side

Less favourable trade activity, yet positive expectations According to SA Chamber of Commerce and Industry (SACCI) Trade Activity Index (TAI), trade conditions tightened in August 2013, with the index gradually deteriorating from 61 in April 2013 to 52 in August 2013. This drop was attributed to respondents experiencing a less-favourable environment. The trade expectations index however, while declining from 64 to 61 over the same period, remained in positive territory.

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Chris Hart

Fighting elephants, grass

and the big taper wimp-out muted effect on financial markets, with the exception of a weaker Dollar.

Chris Hart, Chief Strategist, Investment Solutions

T

he big taper wimp-out in September by the Federal Reserve will in time probably define the moment when fantasy and reality in financial markets began a face off. The Fed had started to provide ‘forward guidance’ earlier in the year that it was considering reducing the mammoth $85 billion a month quantitative easing (QE) programme. Fed chairman Ben Bernanke had previously flagged the possibility of starting to taper in September and completely ending it by mid-2014. Financial markets had priced in the start of a QE taper for September 2013, but despite the forward guidance, the Fed decided to maintain its QE at $85 billion a month. This decision immediately jolted equity markets higher but weakened the US Dollar. Within a few days, equities had completely reversed their gains but the Dollar extended its weakness. US treasuries held on to their gains. The US Government shutdown at the beginning of October initially had a relatively 22

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Whatever the case, the Kenyan proverb, “when elephants fight, it is the grass that suffers” is apt. US financial markets and its economy remain globally dominant. The US Dollar remains the cornerstone of the global currency markets and the pace in equity markets is set in the US. US treasuries provide the key reference yields against which global asset prices are compared. US financial markets are deep and resilient. Smaller countries with weaker financial markets would probably have reflected much more distress than that exhibited in the immediate aftermath of the government shutdown and such extreme monetary policy. However, this does not mean the US is immune to significant distress. And the risks continue to rise. Massive QE continues to ramp up debt levels that are probably already unpayable. The insufferably intransigent US political establishment continues to heap unsustainable promises to the electorate onto its already over-stretched tax base. It is clear this will end badly at some stage. But when? The rest of the world can only watch with bated breath and hope the malaise will end tamely; that the US will raise the debt ceiling and pass the budget. But decisions also need to be made to put the US and global economy back onto a sustainable path. Electoral promises will have to be pared back and the small guy allowed back into the economy. However, in the meantime, investors must be able to deal with markets that appear increasingly risky. Essentially, investors are the grass the elephants are fighting

on. Valuations across asset classes look increasingly stretched. Negative real yields have become entrenched in the global financial system, the result of zero interest rates and financial repression. The big taper wimp-out shows the Fed is trapped and unable to reverse policy. Expect negative real interest rates for the next several years, which is a sub-optimal starting point to manage assets. The so-called riskfree rate might be volatility-risk free but the inflation risk has been magnified and will only compound over time. The tax risk is also rising as stretched authorities seek out pools of wealth to target. The alternative is increasingly overvalued risky assets, which may help mitigate some inflation risk, but only if they continue to appreciate. Underlying fundamentals underpinning risky assets are not robust enough to maintain full investment confidence at current valuation levels. The Fed will probably attempt a taper of QE, but this will negatively affect equity markets and the housing market, both key underpins to the US recovery. As soon as consumer confidence and housing start to decline in response to the taper, the Fed will reverse course and possibly even escalate QE to help restore the equity and housing markets recovery trajectory. This means financial markets are possibly facing a risk-off period, followed by another surge. Returns will not be smooth and will probably struggle over the long term. Over the short term, the Fed will continue to feed the Wall Street party with QE and zero rates, which will prove tricky for investors trying to navigate around the elephants.


Economic commentary

Where are we?

Where are we going?

T

his has been an unfortunate year for South Africa’s economy, having kicked off with expectations that GDP would measure 3.0 per cent during 2013, only to see significant downgrades to an expectation that 2.0 per cent is more likely. Firstly, the accumulation of inventories (or stock), is lacking more than expected and is a sign of low confidence in production and investment. This is hardly surprising given the extent of labour unrest and renewed global uncertainties. Manufacturers and miners have had a difficult time. While a weaker currency typically benefits production through export demand, heavy strikes (particularly in vehicle manufacturing and gold mining) have offset this. Similarly, input costs have risen due to more expensive imports, higher wages and transport costs. Captured in low levels of business confidence, inventories are not expected to pick up significantly for the rest of the year. A second disappointment to the economy has been softer than expected household consumption growth. Currency-driven inflation is a burden to real incomes and, as a result, consumer spending (particularly spending on discretionary goods such as furniture, vehicles and clothing) is now

expected to be lower. Adding to this is the continued deceleration in unsecured lending growth which while healthier in the long run for consumer balance sheets, will certainly be felt in the retail sector in the short term. While consumption is expected to soften, we don’t think this will be enough to help narrow the current account deficit which presently measures 6.5 per cent of GDP. What’s more, with exports failing to benefit sufficiently from a weaker currency due to local challenges, this is also an unlikely factor to a quick narrowing in the deficit. Put together, this means that the current account deficit is likely to remain wider for longer and because of its financing risk (which is mostly through portfolio flows), leaves considerable risk premia on the currency. A still-weak Rand means that inflation is likely to remain sticky, hovering around the SA Reserve Bank’s six per cent target ceiling for quite some time. This creates a policy dilemma for the SARB: does it hike rates to tackle inflation risk or keep rates unchanged to help economic growth? In our opinion, inflation will rise but probably not high enough to justify a decision to hike

interest rates right now, or through 2014, particularly if GDP stays below three per cent in 2014 as we expect it to. Amid all the bad news, perhaps this is one bit of good news for the consumer: if interest rates remain at current low levels, the debt servicing burden will be manageable for longer. Let’s just hope this means deleveraging and not more discretionary spending.

Gina Schoeman, South Africa Economist, Citibank

The economic outlook for 2013 is poor,

2014 may be better

T

he third quarter Rand Merchant Bank (RMB) Global Markets Research quarterly sector report highlights concerns for the performance of nearly all sectors of the South African economy in the current year. The report takes into account global and local economic developments to forecast sectoral performance. The tertiary sector, the largest contributor to economic growth, and which includes retail, transport, communications and financial services, is coming under increasing pressure in the wake of poor job creation, slowing real wage growth and high levels of consumer indebtedness. Slower growth is forecast for this year. However, the communications sector seems to be outperforming other sectors mostly as a result of investment in network and government infrastructure projects.

The primary sector, which includes agriculture and mining, is expected to suffer slower growth as declining economic performance in China weighs on industrial metals, and commodity prices continue to fall. In the secondary sector, which includes manufacturing, construction and electricity, the forecast for manufacturing is for ‘pedestrian’ growth mostly because of financial pressure on consumers, higher input costs brought on by the weaker Rand and higher labour costs. Construction, however, is expected to be one of the best performing sub-sectors. Both primary and secondary sectors should be able to take advantage of the current more favourable conditions for their performance created by a weaker Rand and an improving global economy. However, structural

constraints, such as strikes and productivity problems, are inhibiting production and therefore the performance of both sectors. Despite a gloomy outlook for 2013, the forecast for next year is more positive mostly because of expected more robust growth in the US and a gradually improving European economy. But, for South Africa to achieve sustainable growth, and reduce its considerable current account deficit, the report emphasises the need for the economy to move from the consumption of goods and services to one which is focused on production.

Rand Merchant Bank (RMB)

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Events

Fiduciary experts hold third annual conference of intestate succession. He emphasised the delays and costs of dying without having made your own will, and also spent time discussing how inaccurate wording in a will can have disastrous consequences. He referred to the case of Raubenheimer vs Raubenheimer 2012 (5) SA 290 (SCA) in which the Supreme Court of Appeals said: “It is a never-ending source of amazement that so many people rely on untrained advisers when preparing their wills, one of the most important documents they are ever likely to sign.” Tiny Carroll, a fiduciary specialist at Glacier by Sanlam, pointed out the effect of the different matrimonial property regimes on estate planning. He stated that, although they do not realise it, most people have four different estates. These are (1) the personal assets; (2) the trust assets if the person had estate planning done and a family trust is in existence; (3) contractual arrangements like life assurance with nominated beneficiaries; and (4) the retirement benefits, the latter three which the person cannot bequeath in their will. He referred to the fact that the usual clause in a will stating that any inheritance shall be free from the consequences of the heir’s marriage may create a false sense of security. It does not protect the inheritance against the creditors of the other spouse in a marriage in community of property.

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he Fiduciary Institute of Southern Africa (FISA) held its third annual conference on 19 September in Midrand. The aim of the annual event is to bring fiduciary practitioners and academics together to discuss industry issues with a view to lifting the standards of fiduciary practice in South Africa. The conference was attended by 200 people, including FISA members, as well as guests and other stakeholders. Fiduciary practice includes estate planning, the drafting of wills and the administration of trusts, beneficiary funds and deceased estates. Here are executive summaries of some of the eight papers given at the conference. Ronel Williams, a fiduciary specialist at Nedbank Private Wealth, spoke about the practical problems the executor in a deceased estate faces in cases where potential heirs are disqualified, either by the mentioned existing provisions of the Wills Act, or by the bloedige hand rule. The consequences of a disqualification are usually disruptive on the performance of the functions of executor. Anje Vorster, a lecturer in estates and financial planning at North West University (Potchefstroom), spoke about the corporate liability of trustees. She emphasised that trustees are duty bound to understand the contents of the trust deed, and to execute it faithfully while exercising an independent discretion. A further point of emphasis is that trustees are sometimes 24

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Back row: Arnold Shapiro, Louis van Vuren (Conference chairman), Adv Lester Basson (Chief Master), Ms Anje Vorster, Prof Francois du Toit, Dr Henk Kloppers Front row: Angelique Visser (National Chairperson, FISA), Tiny Carroll , Ronel Williams, Suraj Lallchand (MD, Standard Executors and Trustees (event sponsor)

lulled into a false sense of security by indemnity clauses in trust deeds, while these have limited effect. This is mainly the case because the trustee is under the so-called fiduciary duty to act with care, diligence and skill and with utmost good faith. Arnold Shapiro, director and head of the wills and deceased estates department at attorneys Routledge Modise, spoke on wills under the title: ‘Your will – a legacy of love or a deluge of destruction?’ He pointed out that all people die with a will. You either make your own will, or the law makes it for you – under the rules

Dr Henk Kloppers, a senior lecturer at the faculty of law at North West University (Potchefstroom), discussed the potential use of trusts for corporate social responsibility (CSR) by businesses in South Africa. He alluded to the tension in any business between achieving strategic business objectives and practising philanthropy. Trusts are very popular for CSR purposes because of the loose legislative framework and the flexibility of the trust form. He has, however, posed the question how a CSR trust deed could be amended if the original parties to the trust were no longer around. Prof. Francois du Toit, deputy dean of the law faculty at the University of the Western Cape, focused on the so-called ‘joint action rule’ in trusts. This rule requires trustees to act jointly and take consensus decisions on all matters, except if the trust deed makes express provision for majority decisions. Even then, trustees must take care that all trustees are properly informed and invited to all trustee meetings, and in a position to take part in decision-making. This also applies in those cases where a trustee(s) does not agree with the majority. If there is a minority who does not agree with the majority, the minority has to accept and implement the majority decision. A trust engages with the world at large through the trustee resolutions.


Global economic commentary

Global investment outlook

Despite the anaemic US economic growth now predicted to be around 2.2 per cent GDP growth for 2013, down from the Fed’s earlier 2.5 per cent prediction, the US is still leading the rest of the world out of its deep malaise since the 2008 crisis. US real estate prices particularly in the residential markets remain up across the board; on average 12 per cent year on year.

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lobal equity and bond markets retreated slightly in August, but by mid-September had fully recovered, with US equity markets recently hitting all-time highs. The US economy continues to lead the rest of the developed world out of its deep malaise since the 2008 crisis. Increased talk of Fed tapering (i.e. reducing its monthly $85 billion bond buying binge) clearly unsettled markets during August. We expect only moderate Fed tapering to begin within the next two months. This will likely ensure the weak emerging market currencies remain under pressure. Given that year-to-date returns for the US, Europe and many sector funds show significant double digits, the August retreat was not wildly unexpected and helped the market consolidate impressive gains over the past few months. Over the past year, the broad MSCI World, MSCI US and MSCI EMU indices are now each up approximately 20 per cent. Weak US economic data persists – with job growth figures averaging well below the required 200 000 monthly level – which is seen as a benchmark for a faster recovery. Unemployment remains stubbornly at 7.3 per cent, well above Bernanke’s 6.5 per cent target level for no further Fed bond buying stimulus (QE3).

Recent European economic data shows the recession ending in the UK, Spain and other parts of the Continent. The recent German election result will empower Merkel (it is hoped) to play a more activist role in Europe; specifically helping policymakers come to agreements on a centralised banking supervisory system and deposit insurance regime. With the Fed delaying its tapering, sentiment briefly turned positive on emerging markets with developing currencies receiving a boost by the Fed’s decision. Despite weak currencies persisting, by mid-September, it was clear that emerging markets had enjoyed a rally, gaining 10 per cent off their earlier year lows (MSCI Emerging Markets index). The global equity market rally that recovered in July stalled in August. The MSCI World Index lost 2.1 per cent in August, but by mid-September had retraced and improved on such losses. The benchmark is up a total of 17.6 per cent over the past year and 11.7 per cent year to date. The global Consumer Staples sector gave back 3.5 per cent in August after gaining 4.0 per cent in July. It remains up 10.9 per cent in 2013, and 12.8 per cent over the past 12 months. The US markets measured by the broader MSCI US Index lost 2.8 per cent in August, but had hit all-time highs following the Fed’s tapering non-decision in mid-September. By the end of August, US equities are up 15.9 per cent year to date and 18.3 per cent over the past year. By comparison, Europe lost 1.1 per cent (MSCI EMU in Euros), but remains up 8.1 per cent for the year and 17.1 per cent over

the past 12 months. Europe is trading at just 12 times earnings, while the US trades at close to 16 times earnings, as measured by the broader MSCI US Index. We continue to be bullish on European equities given the beginning of a recovery on the continent. We see more valuation upside for the region (including a rerating of large cap stocks), as compared with many of their US counterparts that have already enjoyed significant gains this year. The Japanese rally stalled again in August, with the MSCI Japan losing 2.4 per cent. Nevertheless for 2013 the Japan market remains up an impressive 30.2 per cent in Yen terms. The market is up 55.6 per cent over the past year (MSCI Japan) as stimulus measures in Japan are exerted to generate at least two per cent inflation, so-called Abenomics. The MSCI Emerging Markets Index fell 1.7 per cent in August, but since then has powered up almost nine per cent during September as sentiment improved. By mid-September, the index was expected to erase most of its earlier losses for the year. Recent new economic growth figures in China and Latin America point to a steady rebound in activity which should boost prospects for large cap stocks comprising the MSCI Emerging Markets Index. We expect this index to outperform a good deal of the developed world over the next two to three years.

Anthony Ginsberg Director, GinsGlobal Index Funds

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Investing in property

Property as part of a

well-balanced investment strategy for retirement more than five per cent may be invested in a single property. So while a fund now has the opportunity to buy physical property, there is difficulty in this approach – especially for smalland medium-sized pension funds. • What can be bought for a million Rand? The difficulty of the requirement lies in the price range of property. Let’s look at an average-sized fund that has R20 million worth of assets as an example. Fifteen per cent of that R20 million may be invested in immovable property, which is a reasonable roperty is one of the largest and most R3 million. But, of the initial R20 million, widely held asset classes. It presents only five per cent may be invested in a single itself as a secure and balanced property. R20 x 5 per cent = R1 million. In investment, satisfying the moderate the current property market, what can be risk appetite. Due to its tangible nature bought for one million Rand? and attractive risk profile, property is an asset class that trustees would naturally wish to include • Limited diversification. Diversification in any retirement fund. reduces risk. If diversification is limited, risk is increased. Adequately diversified property As with all investment decisions, investing in portfolios include a range of commercial, property as an asset class requires consideration industrial and retail properties to protect and ground work. What you choose to invest in investors from downturns in any of the is crucial in determining the rewards that can be sectors. Geographical diversification ensures reaped. Invest in the wrong type of property and that the risk associated with investing in you may fall short in meeting investment goals. property is spread over a combination of established and emerging regions. The key is to understand what to invest in and the decisions that will impact that investment. Taking the retirement fund that is worth R20 Trustees looking to invest members’ retirement million as an example again; if the fund can funds in property could consider four options. invest only in three properties that are worth R1 million each, how diversified can the 1. Property syndication (high return, portfolio be in terms of sector or region?

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high risk)

In boom times, property syndications have rewarded investors with high returns. However, the failure of many high profile property syndications confirms that the expected return does not always compensate for the risk. Property syndication failures occurred primarily because investors were invested in unsecured debentures, with only a small amount of that investment secured by property. Due to structure, property syndication is not recommended as a vehicle for retirement fund monies.

2. Buying physical property (a difficult approach)

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A listed property fund is vulnerable to market sentiment. The volatility of shares has a direct effect on listed property. As a result, it is vulnerable to market sentiment and thus fails to offer the stability of direct property fundamentals. Unfortunately, listed property does not follow property fundamentals, i.e. it does not show steady capital growth accompanied by ongoing rental income. Hence, trustees do not get the diversification from equities that they are looking for when investing in listed property.

4. Unlisted property portfolio An unlisted property portfolio on the other hand offers diversification from the equities market, as its performance is not linked to market sentiment. An unlisted property portfolio offers significant returns based on the property fundamentals – rental income and capital appreciation. The significance of this return is that as inflation escalates, so does the property rental price and the overall value of the property. An increase in inflation means an increase in an investor’s return. Ultimately, an unlisted property portfolio offers pension fund trustees a property investment without having to worry about the pitfalls of having to buy a property.

• Who manages the property? Before purchasing a property, you need to consider how the property and the maintenance of the property will be managed. What many investors don’t realise is that owning a property is similar to owning a business. It needs to be run effectively in order to generate return. Management can be easily outsourced. The difficulty comes in selecting the right managing agent. Whom you partner with will impact the future value of your property as well as your tenant experience, turnover and demand.

3. Investing in listed property (loss of property fundamentals)

Regulation 28 states that a fund may invest up to 15 per cent of its assets in immovable property. Retirement funds can invest in property portfolios To ensure diversification, it also states that no (and reap the benefits of the security provided 26

by property ownership) without directly managing or owning a property.

Scott Field Executive: Sales & Finance at FedGroup


Investing in property

MOMENTUM INVESTMENTS Listed property: steaming ahead or time to let off steam?

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isted property has been powering ahead for the last few years, outstrip-ping all other asset classes by a fair margin. The question now is whether or not this phenomenal run can be maintained? In order to make an informed decision on how to manage exposure to listed property, the attractiveness of this asset class needs to be assessed. Formulating a strategic view, i.e. what should an asset manager reasonably expect the listed property sector to achieve over the long term, as well as assessing the strategic drivers of return and forward-looking expectations, becomes necessary. A robust approach to determining a reasonable expected return for listed property involves using a discounted cash flow model. The main assumptions that underlie this analysis are a determination of expected property yield and growth rates. The green shaded section in table 1 indicates that the reasonable range of expected real returns from listed property would be between five and seven per cent. “It is clear that property remains a valuable return enhancer within a multi-asset class portfolio. It also provides a differentiated

source of return within an investment portfolio,” says Mike Adsetts, head of specialised investments at Momentum Manager of Managers. “Expected returns from a variety of asset classes form the base of a sound portfolio construction approach and, within a specific, goalbased framework, property remains a key component of a wellbalanced and diversified portfolio.” The expected return analysis is, however, a medium to long-term undertaking and does not assist with a here-and-now view. In order to assess the current market environment, the main drivers of return for listed property and their effects need to be considered. • Long-bond yields: a negative correlation. If yields move downwards, property values should increase. For the period in which South African-listed property returns have been available, bond yields have generally been declining, which has been supportive of listed property returns. The risk to property valuations is now that yields are in an increase cycle and that the yields increase relatively sharply. • Vacancy rates: negative correlation. Higher vacancy rates should result in lower expected returns. Vacancy rates have been increasing and there is therefore a risk that this could detract from property returns. • GDP growth: positive correlation. Economic

growth should result in higher expected returns. GDP growth should be positive for property as economic development translates into more businesses looking for premises. • New property developments: negative correlation. The greater the capacity being constructed, the lower the expected return from property. There is a fairly significant pipeline of new property developments that may depress returns through an excess of property-to-rent supply. • Valuation: the higher the valuation, the lower the expected growth going forward. Valuation metrics are mixed at the moment. Price earnings multiples appear relatively reasonable, which should be supportive of robust returns, whereas dividend yields are depressed relative to historic levels, which could result in a drag on returns. Strategically, listed property is a growth investment that offers the attractive characteristic of being cash generative (rental income and escalations). “From a valuation and return perspective, there is, however, no clear indication of the near-future expected returns from property and the most rational approach to managing this investment would therefore involve utilising the asset class judiciously and within a risk-controlled environment,” concludes Adsetts.

Table 1: Expected real returns from listed property over a five to 10-year period (implied property risk matrix). Implied property risk premium matrix Current yield

5.94

Exit yield

Income growth rates 3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

3.00%

11.69%

12.75%

13.81%

14.87%

15.93%

16.98%

18.04%

19.10%

4.00%

8.65%

9.71%

10.77%

11.83%

12.89%

13.95%

15.01%

16.07%

5.00%

6.36%

7.42%

8.47%

9.53%

10.59%

11.65%

12.71%

13.77%

6.00%

4.52%

5.58%

6.64%

7.70%

8.76%

9.81%

10.87%

11.93%

7.00%

2.99%

4.05%

5.11%

6.17%

7.23%

8.29%

9.35%

10.41%

8.00%

1.68%

2.74%

3.80%

4.86%

5.92%

6.98%

8.04%

9.10%

9.00%

0.55%

1.61%

2.67%

3.73%

4.79%

5.85%

6.90%

7.96%

10.00%

-0.46%

0.60%

1.66%

2.72%

3.78%

4.84%

5.90%

6.96%

Source: Momentum Manager of Managers (Pty) Ltd

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Mike Adsetts, Head: Specialised Investments at Momentum Manager of Managers


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Investing in property

REITs

The right structure for listed property

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outh African Real Estate Investment Trust (REIT) tax legislation became effective on 1 April this year. Property companies meeting the JSE’s REIT listing requirements now enjoy a globally recognised tax and regulatory framework for listed real estate investment vehicles. We believe this move is a very positive one for the sector and for local investors. A REIT is a listed company that invests in, and usually manages, a portfolio of income-producing property assets. Like any listed property company, they give investors exposure to growth in the value of commercial, industrial and residential property assets over time, plus the regular income streams they produce through rentals. Importantly, companies that qualify as REITs enjoy a special tax regime that is accepted globally. REITs have become increasingly sought-after investments globally in recent years, driven partly by investors’ need for a source of relatively safe, predictable and growing real income in the face of near-zero prevailing interest rates in most developed economies. In South Africa, listed property has also proved popular, with its market capitalisation almost tripling since June 2008 from R64.1 billion to around R183 billion currently. And returns have beaten most other asset classes: the sector has produced an average return of 26.0 per cent per annum over the past five years and 24.7 per cent per annum over 10 years (to end June 2013). However, previously our listed property funds were subject to inconsistent and relatively complex tax and regulatory regimes, which are believed to have deterred foreign investment. The new tax legislation, together with the listing requirements, provides tax and regulatory certainty. For example, JSE requirements for REITs can be seen to help safeguard the integrity of distributions, 30

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including that REITs must maintain a totaldebt-to-total-asset ratio (or gearing) of less than 60 per cent, and that at least 75 per cent of income must be rental income. South Africa is set to become the eighth largest REIT market in the world by market capitalisation (with a six per cent share), with Growthpoint the 40th largest REIT globally and the largest from an emerging market (research from Macquarie and Bloomberg shows). Local investors stand to benefit from better stock liquidity and best practice in corporate governance as our companies compete with their global peers for capital. We do, however, see some risk in the new REIT requirements, in that they lower the minimum percentage of income property companies must distribute to their shareholders. To date, property unit trusts have been required to distribute 100 per cent of their earnings to unit holders, and property loan stocks have also generally distributed close to 100 per cent of their earnings. Consequently there has been relatively high predictability around their distribution levels, as well as in escalations over time (since rental contracts include escalations linked to inflation). As a result, in South Africa the income (or yield) paid to shareholders from listed property has behaved very similarly to that of bonds, with little variation in expected distributions over time. This has meant that listed property yields have historically followed moves in longerdated government bond yields fairly closely. Under the REIT structure, the companies will be required to pay out at least 75 per cent of their distributable profits every year, so this potentially lowers distribution payments and introduces more variability into distribution levels over time. This could potentially make listed property a somewhat less reliable source of income for investors going forward, should REITs opt to retain more income (or a varying amount of income). It could also result in more of a disconnect between

listed property and government bond yield movements, reducing the correlation between the two asset classes. In effect, SA-listed property investments have historically behaved like bonds while delivering far superior returns. They have had a lower correlation with equities. For this reason, in managing multi-asset class funds, a high strategic allocation to property has been warranted. We are concerned that a possible reduction in the distribution payout ratio may increase listed property’s correlation with equities at the expense of that to bonds. A lower strategic allocation to property may then be warranted. Despite this potential drawback, our listed property sector should begin to more closely resemble those in other countries, becoming more transparent and attractive for offshore investors. We expect listed property to deliver respectable real returns over the next five years. Property returns should beat bonds and cash over this period but, in our view, fall short of equity market returns. Property’s diversification benefits and positive return outlook are reflected in our relatively high strategic allocation to the sector in the Prudential Inflation Plus Fund, for example.

Albert Arntz, Portfolio Manager and listed property analyst at Prudential


CONSISTENCY CAN BE THE DIFFERENCE BETWEEN SUCCESS AND FAILURE. To hear more about how we’ve consistently delivered superior investment returns, speak to your Financial Adviser or call Prudential on 0860 105775. prudential.co.za/our-funds

All things considered.

Prudential Portfolio Managers (South Africa) (Pty) Ltd is a licensed financial services provider. investsa 00


Investing in property

Volatility

support a wait-andsee approach to listed property

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fter offering South African investors phenomenal returns over the past 10 years, the SA Listed Property Index has danced to an interesting tune over the past six months. In May this year, it plummeted 11 per cent to its third worst monthly decline since its 2002 launch. It continued to extend its losses over the first three weeks of June, before posting a remarkable turnaround to end June at 4.4 per cent. Despite a sharp rebound in September, with returns of some 6.7 per cent, listed property was unable to recover the third quarter’s overall lacklustre returns, losing 1.3 per cent in value overall. Should investors take advantage of the hiccup in the SA Listed Property Index and increase their exposure to this asset class? Sanlam Multi Manager International (SMMI) currently holds on average two per cent in listed property across its multi-asset balanced funds and is in no rush to increase this exposure. Rafiq Taylor, a portfolio manager at SMMI, says the volatility can largely be attributed to movements in bond yields and the Rand. “We expect listed property to remain volatile in the short term due to its strong correlation with the bond market. We are prepared to wait out this market volatility before reassessing the weighting of listed property in our portfolios. If yields move nearer to 8.5 per cent from the current 8.0 per cent on the All Bond Index, we would review buying more nominal bonds and increasing our allocation to listed property. If we look at the relative value of property to bonds, historically property has traded at 0.9 times the current yield of bonds. At 0.84 times, it’s now trading below its historic average, signalling that property remains expensive.” Taylor points out that the total return

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generated from this asset class over the past decade has been substantially above the long-term average. “Foreign investors inflated domestic property prices in a market where there was already a shortage of domestic listed property. A rise in nominal bond prices also made property look more attractive on a relative basis.” Against this backdrop, the volatility exhibited in the listed property index over the last six months is a red flag for property investors. Taylor suggests a cautious approach until the market settles. Listed property is a unique asset class in that it exhibits characteristics of both equity and bond markets. Investors in a listed property fund benefit from the capital growth in the underlying property portfolio as well as their share of income. Unfortunately, listed property is not as liquid as the bond market and consequently some fund managers shy away from the sector. There are two fundamental principles asset managers consider when investing in listed property: the current interest rate cycle, as bond and property yields are highly correlated; and the potential growth in distributions for listed property.

a further R10.5 billion in June this year. The mild recovery of listed property in the last week of June was supported by net inflows of R6 billion to equity markets compared with just R630 million out of bonds. Over the third quarter of 2013, foreign inflows totalling R20 billion came into capital and equity markets, R14.4 billion of which has been into the bond market. This significant flow into the bond market came predominantly in September, when both bonds and consequently property returns were particularly good, but which could not offset the total negative impact on the property index over the third quarter. Taylor believes the soft property market could persist through 2013 and that bond yields could rise from here on out. And while bonds and listed property are showing some positive signs, a prudent asset manager should not ignore the risk of yields pushing higher from current levels. Another potential red flag is that South Africa is nearing another rising interest rate cycle. Taylor says although SMMI does not expect a hike in the first half of 2014, “We cannot totally discount the chance of a rate hike or the impact this would have on property yields and prices.”

Why the sudden decline in property prices? “The Rand has weakened significantly due to a combination of growing sovereign risk concerns, labour unrest, poorer than excepted GDP growth figures and a growing budget deficit,” says Taylor. The weaker Rand combined with negative foreign investor sentiment towards emerging markets to create a perfect storm over the local bond and property markets. As a result more than R3.7 billion of foreign investor capital exited our bond markets in May and

Rafiq Taylor, Portfolio Manager at Sanlam


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Rocky road

for listed property

but fundamentals remain strong

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hare prices in the listed property sector have been on a downward trend since May this year but property fundamentals remain strong and have shown improvements in some quarters, notably in the retail sector.

Laurence Rapp, CEO Vukile Property Fund

Bloomberg data from early September shows the market capitalisation of the South African listed property index has declined by around 17 per cent since its peak in mid-May. The decline represents nearly R40 billion on the sector’s market capitalisation. According to the South African Property

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Owners Association Investment Property Databank’s (SAPOA/IPD) South African Annual Property Index released in March this year, the listed property sector delivered a 15.2 per cent total return for the 2012 year. This is a notable improvement on the 10.3 per cent return generated by the sector in 2011 and represents the highest return on property since the recession. These figures testify to the resilience of property as an investment vehicle, particularly in the prevailing soft economic climate with continued low levels of business and consumer confidence. Most analysts agree,


Investing in property

however, that total returns from the sector are likely to slow in 2013. The bulk of the price weakness is external and due to declining bond yields. The volatility in the bond market is largely due to the anticipated move by the United States Federal Reserve Bank to reduce its quantitative easing bondbuying programme. The reduction in bond yields may also result in the Reserve Bank raising the interest rate, which is further bad news for listed property. Higher interest rates make it more expensive for companies to borrow money to fund their growth and existing properties are priced too high in the market at the moment. In this environment, listed property companies will look to take stock of their existing assets, maximise internal efficiencies and reduce costs wherever possible. However, price weakness in the listed sector will eventually filter down to the direct property market, which should make property prices more reasonable. General economic uncertainty continues to hinder the demand for office space. Weaknesses in the manufacturing sector coupled with ongoing mining sector strikes are likely to continue to place a constraint on the demand for industrial and in particular warehouse space. There was also a noticeable improvement in certain fundamentals over 2012. Overall vacancies reduced slightly from 6.8 per cent to 6.7 per cent and rental growth increased from 6.2 per cent to 7.2 per cent, while rising

Price weakness in the listed sector will eventually filter down to the direct property market, which should make property prices more reasonable. operating costs, particularly electricity, rates and taxes and municipal charges, continue to impede on income growth in the commercial property sector. Retail property once again proved itself as the best performer with the highest total return (17.1 per cent) of the three sectors and the highest capital growth for the fourth year running. Retail trading densities increased in Q4 2012 compared to the same period a year earlier, albeit to a lesser degree than in recent years, which is likely as a result of a slowdown in both retail sales growth and consumer confidence in 2012. Super regional and regional centres have outperformed the rest of the retail sector in terms of vacancies, rental growth and capital growth. Industrial property showed significant improvement, recording a 15.9 per cent total return compared to the 11.9 per cent recorded in 2011. Its income return of 10.6 per cent is the highest of all three sectors and is much more significant than its capital growth of just 4.8 per cent. Industrial vacancies remained the lowest of all three sectors at just 4.4 per cent which is, however, a slight increase from the vacancy of 4.2 per cent in 2011. The industrial

sector has been hard hit by a depressed manufacturing sector, which is the biggest hurdle to improved industrial rentals. In September 2012, the physical volume of manufacturing production contracted at a yearly rate of one per cent. An underperforming manufacturing sector as well as slowed growth in retail sales does not augur well for the industrial sector. Office property is still lagging quite considerably behind the other sectors with an 11.9 per cent total return. This total return marks a slight uptick from the 11.2 per cent total return recorded in 2011. The office sector remains suppressed partly due to weak labour market conditions and general economic uncertainties, and as such most of the sector has shown little to no growth. Vacancy rates are not improving and market rentals have registered a slight decline, with some growth seen here and there. According to SAPOA the national office vacancy rate rose by 35 basis points from 10.35 per cent in Q1 2012 to 10.7 per cent in Q1 2013. With a vacancy rate of just one per cent in Q1 2013, prime office space continues to outshine the rest of the office sector.

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Industry associations

Risk and financial advice Beware of unintended consequences

Profit margins have been squeezed by higher compliance costs and the need for advisers to spend more of their time on complex administrative tasks rather than selling. And there is a strong possibility that revenue proposals in the Financial Services Board’s Retail Distribution Review will further dent the bottom line.

Cutting adviser remuneration could leave financial services consumers high and dry

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outh Africa’s finance and risk advisers find themselves at a defining moment in the history of financial services provision. They are practising at a time when the definition of intermediation and financial advice, key components of their profession, are under close regulatory scrutiny. The remuneration model for financial advice is also being reconsidered. Proconsumer lobbyists and regulatory bodies are hell bent on reducing the cost of risk and investment products and have singled out advice fees, most notably commissions, as a starting point. The Financial Intermediaries Association of Southern Africa (FIA) is holding a watching brief for its risk and financial adviser members as issues such as feefor-service versus commission and wider access to financial products are unpacked. The organisation’s 2013 Spring Regional Conference was themed ‘Intermediation Redefined’ in acknowledgement of the dynamic financial services landscape. During his presentation at the conference, Jacques Coetzer, general manager of broker distribution at Sanlam Personal Finance, observed that risk and financial advisers were under considerable pressure. 36

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Coetzer believes that the best way for risk and financial advisers to ensure their shortterm survival and long-term sustainable growth is to place clients at the centre of their businesses: “If you do right by your clients and form strong lasting relationships with them, all stakeholders in the industry will benefit.” The big question is whether they will be able to service consumers adequately if their revenue remains under threat. “One of the ironies in the current round of consumer regulation is that steps introduced to protect consumers could be detrimental to them,” says Justus van Pletzen, CEO of the FIA. “Independent financial advice is pivotal in improving access to financial products and services, so any punitive actions that reduce intermediary remuneration – thereby impacting on the adviser’s ability to service existing and source new clients – should be carefully weighed up.” South Africa’s financial services providers and advisers are among the most regulated in the world thanks to the Financial Advisory and Intermediary Services (FAIS) Act of 2002 and its accompanying Codes of Conduct. “FIA members have wholeheartedly supported recent regulatory interventions including the requirement to sit regulatory exams,” notes Van Pletzen. “And we remain committed to negotiated pro-consumer improvements to the legislative environment.” The pending Treating Customers Fairly (TCF) legislation sits well with risk and financial advisers because they appreciate that the client is their most important asset. “The ongoing advice requirements introduced by TCF make common business sense,” says Coetzer. “To ensure our success we have always had to explain what the client is buying, ensure that the product and services

are appropriate for their needs and see to it that the product performs as promised.” The fair treatment of customers also requires that consumers are educated about the financial product they buy. Risk and financial advisers, who are at the heart of most insurance company distribution strategies, will play a major role in fulfilling this requirement. Financial planning has evolved over the past two decades. The so-called ‘cigarette packet’ salesman has been replaced with professional financial advisers who enjoy the support of large product suppliers and administrative teams. Nowadays, consumers’ needs are determined by way of a detailed risk analysis before being met from a range of complex risk and investment products. “Today’s complex risk and investment landscape is a double-edged sword,” notes Van Pletzen. “It is positive in that financial advisers can recommend suitable financial products for the toughest scenarios, but on the flipside it demands that consumers give more thought to whom they turn to for financial advice.” What should advisers do? “The foundation for a sustainable practice is to make regulatory change work for you. TCF will reinforce the good relationships you already have with your clients and assist you in building a sustainable and profitable financial advice practice – the trick is to find similar positives from other pending legislative interventions,” concludes Van Pletzen.

Justus van Pletzen, CEO, Financial Intermediaries Association of Southern Africa


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Investment strategy

Smart Beta 2.0:

Managing market-cap weighting deviation risks

S

mart beta strategies, or passivelyconstructed style portfolios, are cost-effective and follow rulesbased portfolio construction principles aimed at outperforming general market-cap indices. Utilising a mechanical investment strategy, Smart Beta 2.0 (developed by the EDHEC Risk Institute) deviates further and incorporates risk management aimed at better-controlling these divergences. Many factors over recent years have culminated in a shift in interest from active to passive investment management. Most notable has been the inability of active investment managers to generate significant and consistent alpha over the long term while continuing to charge high active management fees. Within the passive management framework, cap-weighted indices have been under attack. While they provide a good representation of the securities market, they do not necessarily constitute an efficient benchmark. “This has led to an increase in the number of smart or alternative beta offerings, ranging from style to alternatively weighted indices, which aim to provide some reward for the risk taken by investors investing in securities markets,” says Melissa Breda, head of portfolio construction at Momentum Manager of Managers.

Limitations associated with smart beta strategies, however, include that they focus solely on outperformance relative to capweighted indices over the long term, while care needs to be taken by the fund selector to ensure that a robust solution is created taking the risk exposures that are introduced into account. Fund selectors are required to understand the market conditions leading to underperformance over the short to medium term, the strategies’ sources of outperformance and the risks these strategies introduce. Smart beta strategies which deviate from the cap-weighted approach will, potentially, lead to equity risk exposures that differ from the reference indices (for example, smart beta strategies often demonstrate small-cap or value tilts). In addition to systematic risk, smart beta strategies are associated with strategyspecific risk (see table) in terms of the risk and return parameters used, which can be controlled as follows: • By compensating for the resultant systematic or strategy-specific risks through altering the weighting scheme. • By altering the share universe, i.e. share selection method. Existing smart beta indexing solutions also combine ‘selection’ and ‘weighting scheme’ decisions without necessarily

providing much justification for the respective choice. “Distinguishing the share selection methodology from the weighting methodology would allow for the testing of the risk and return associated with different practices, as well as the assessment of commercial strategy indices through the development of approaches with similar objectives and constraints,” adds Breda. Smart Beta 2.0 refers to a second generation of index offerings that deviate from the market capitalisation default solution and manage the risks associated with these variations. The approach involves: • Measurement and control of systematic risks. • Measurement and management of the risk associated with a specific weighting scheme (by assessing the risk of a lack of robustness of the weighting scheme). • Ex-ante control of potential deviations with respect to a cap-weighted reference index. In cases where smart beta is perceived as a means of achieving cap-weighted index outperformance, the risk of underperformance needs to be managed. The Smart Beta 2.0 approach is therefore based on careful analysis of the systematic risk factor exposure, strategy-specific and relative risk associated with deviating from a cap-weighted index (such as tracking error), which allows investors to choose their risk exposure areas. “There is a clear benefit to investing in smart beta strategies from a return and cost perspective as they provide differentiated strategies that are required for a well-diversified portfolio. They deliver on a risk-adjusted return basis, while the methodical construction leads to a very costeffective solution,” concludes Breda.

The factor exposure of some strategies

Annualised alpha Market beta Size beta Value beta Momentum beta Adjusted r-square

FTSE RAFI US 1000 Index

FTSE EDHEC Risk Efficient US Index

MSCI USA Minimum Volatility Index

S&P 500 Equal Weighted Index

2.0% 98.0% 15.7% 11.4% -14.0% 98.5%

3.3% 93.3% 40.2% -0.40% -5.4% 98.7%

3.0% 80.3% -4.8% 0.9% -3.6% 95.1%

2.8% 102.9% 41.2% -0.6% -8.5% 98.9%

Source: EDHEC Risk Institute The table shows risk factor exposures using the Carhart-4 factor model. The period of analysis is from 23 December 2002 to 31 December 2012 and betas significant at the one per cent confidence level are highlighted in bold. Reported alphas are geometrically averaged and are annualised.

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Melissa Breda, Head of Portfolio Construction at Momentum Manager of Managers


Morningstar

Bonds,

be gone (part 1)

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ill Bernstein has released his third paperback in his Investing for Adults series. As with the first two instalments of the series, this one is terrific. (At $5 for the Kindle version and $10 for print, the price is also perfect.) The book’s title is, Deep Risk: How History Informs Portfolio Design. That boggled my mind, too, but the concept is straightforward. Bernstein dispenses with volatilitybased asset allocation, advocating instead a different, long-term approach to building portfolios. Investment adults, he argues, are those who outgrow the stage of fussing over market movements. For assets that they intend to own for several decades, adults pay little attention to the shallow risk of investment volatility. They focus instead on avoiding the deep risk of permanent damages. There aren’t many investment adults. The industry’s science, after all, was built to address shallow risk. Research papers are written, and Nobel Prizes awarded, for demonstrating how to achieve the greatest amount of return for the least amount of standard deviation. Banks measure their portfolios via the shallow-risk calculation of value at risk. Financial advisers use tools (including those from Morningstar) that attempt to minimise monthly volatility and maximise returns. It’s a shallow-risk world.

Per Bernstein’s analysis, there are four deep risks that may strike: 1) hyperinflation; 2) severe deflation; 3) government confiscation; and 4) devastation/war. In recent history, the first, that of hyperinflation, has been the most common of the dangers, and in such cases bonds (aside from the new, inflation-protected variety) have been a complete disaster. Even moderate rather than hyperinflation can cause big problems for bonds. For US investors in the mid-20th century, Treasury bonds were truly terrible. From January 1941 through September 1981, per Bernstein’s figures, US Treasuries shed 67.3 per cent of their real value. That is, an investor who stashed $10 000 in early 1941 into US Treasury bonds, with instructions that all coupons be reinvested in additional bonds, found upon her return 40 years later that she owned $3 270 in inflation-adjusted terms.

Also, adulthood isn’t easy. Instinct and the media urge action, not staying the course. Plus, not everybody can afford to be patient. It’s all very well to adopt a measured, long-term attitude, but philosophy is scant consolation if circumstances force the investor to sell into a weak market. Warren Buffett can (and does) shrug off shallow risk; the principals at Long-Term Capital Management could not.

That performance is no better than the most spectacular stock market failure over the past 50 years, Japan post-1990. Bernstein cites a real loss of 58.2 per cent for Japan since January 1990, but that calculation runs through June of this year. Japan’s peak-to-trough numbers were worse and about in line with the US Treasury’s 40-year showing. To repeat: US Treasuries spent much of last century performing as badly as the worst developed-country stock market in recent memory.

For those who do become investment adults, the key lesson is more stocks, less bonds.

Bonds in countries that suffered hyperinflation, of course, did even worse, falling to zero. (It’s

hard to lose more than everything. In contrast, stocks in those countries did remarkably well. Yes, an unexpected spike in inflation damages stocks along with bonds. However, as inflation settles in, stocks adjust. Companies pay their costs in devaluing currency, raise their prices, and so on. As a general rule, businesses carry along through hyperinflation just as they were carrying on before. Bernstein reveals that even in the legendary Weimar Republic, stock investors profited. From 1920 through 1923, German stocks doubled in real terms, even as bondholders were wiped out. Next month I’ll discuss the three remaining risks that constitute Bill Bernstein’s Four Horsemen of Financial Disaster: government confiscation, devastation, war and severe deflation.

John Rekenthaler, Vice President of Research, Morningstar investsa

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Hywel

George

Director of Investments, Old Mutual Investment Group You were recently appointed as director of investments at Old Mutual Investment Group. What is your strategy in this new role? At Old Mutual Investment Group, we aspire to be globally recognised as Africa’s leading investment manager. As director of investments, it is my job to help get us there. As such, we need to deliver market-leading investment performance and world-class client service. We also need to establish a firm footprint across Africa and offer compelling African investment products to international investors. You previously worked at asset management firms in Europe and the Middle East. Are there lessons SA can learn from these markets? The asset management industry in South Africa is well developed with a mature suite of asset management firms serving a well-established retail client base, as well as institutional investors. Governance standards are generally robust and we operate within a strong regulatory environment.

We also need to establish a firm footprint across Africa and offer compelling African investment products to international investors. caused by over-leveraged balance sheets takes many years to resolve as interest rates are kept low to allow time for people to lower their debt levels. The response to this in the ensuing recovery is likely to be higher levels of personal saving, which over time will benefit the investment industry. What do you foresee as the biggest challenges for South African investors over the next 12 months?

Do you think the financial crisis has had any lasting changes on the investment industry or was it simply another cycle?

The South African investment markets are buffeted by the winds blown by the global macro-economic environment. As an emerging market still very dependent on its resource sector, the global movements of commodities and currencies, as well as investors’ general risk appetite, have a strong bearing on local outcomes.

The financial crisis and great recession found their root cause in overextended balance sheets, both personal and government. A recession

This is particularly the case given South Africa’s twin deficits across government and external trade. Assessing the movements of global

There are certainly specific areas where investors in Europe and the Middle East could learn from South Africa.

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macro forces will continue to be the main challenge facing local investors in South Africa. How do you wind down from the pressures of your position? Investment is an endlessly fascinating game, so my job brings great levels of intellectual stimulus (and occasional satisfaction) as well as stress. Together with family life and the joys of travel, a game of golf is always good for the soul, along with rugby as a spectator sport – either experienced live or on the television. How do you define success? For Old Mutual Investment Group, this would be to be globally recognised as Africa’s leading investment manager and for me professionally, to be associated with the achievement of that goal. Personally, success would be to see my children grow and prosper in an increasingly complex world. Finally, if you had R100 000 to invest, where would you put it? I would invest in a mix of equities and real assets in emerging markets. For example, China and certain markets in South East Asia are particularly cheap at present. The prospects for the continent of Africa are astonishing over the coming two decades; investing in long-term real assets, for example agriculture, will yield great returns for the patient investor.


Profile

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Practice management

The tale of a young girl and a

Giant

role. Looking back, it was the biggest leap I had to make in my career. Attending a funeral in a partly professional capacity is challenging. You are not expected to cry. Yet, losing this man who profoundly impacted my life, affected me deeply. As a financial adviser, I probably knew more about certain aspects of his life than even his close family members did. As I watched the video of his life, I regretted not having spent more time just talking to the man. I regretted not having known more about him as a person. I regretted not hearing more of his life story. I regretted not learning more from him. Of course, he was not the only demanding client, but he was a prototype.

I

attended the funeral of a long-standing client. Although it is always hard to say goodbye, it was good to celebrate a man who lived a full and worthy life. A life with a balance of work and family, wealth and compassion, love and money. It was wonderful to see his biggest legacy, a loving and close family, pull together during a sad time. He was a giant: both big in person and influence. He was an astute businessperson, at times impossible to please. In our office, everyone knew who he was. He had a presence. He demanded high standards and expressed his displeasure frankly, when mistakes were made. He was one of my first clients as a young portfolio manager and adviser. I realise that I owe him a great debt. Looking back, I am surprised that he even considered my advice. I was inexperienced and naive. His trust in me as a young professional built my confidence. As a young woman, raised in a paternalistic culture, I was socialised to revere people like him, especially older men. He was comparable to the schoolmasters and the ministers of my youth. In addition, 42

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As a financial adviser, I probably knew more about certain aspects of his life than even his close family members did. my people-pleasing personality secretly enjoyed the challenge of winning over such a demanding person. As a result, I excelled at client service and continued to improve my investment knowledge to impress the man. Later, I learnt that in order to get to know the man, I needed to lose my reverence. I had to lose my fear of anger in order to step into his life and provide meaningful advice. Meaningful advice can be given only when beliefs, thoughts and even emotions are challenged. Challenging is seldom met with approval or acceptance, at first. I had to stretch emotionally and mentally to step into this

The problem that we have as advisers is that we think we need to appear invincible and all-knowing. We feel the need to be in control and display our expertise. It is especially hard when our clients are older and wealthier. But, we miss out. We miss out on learning. We miss out on knowing another human. We miss out on achieving real meaning from our occupation. We get to decide whether we keep relationships on the surface or dig deeper into ourselves and ask our clients to dig deeper, too. As financial planners, we have the opportunity to change lives and be changed. I salute you, my giant client. You changed my life. May you rest in peace.

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


Regulatory developments

Disclosure are you doing the full monty?

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ith the spotlight on Treating Customers Fairly (TCF), the first step in achieving fair treatment is through transparent disclosure. Failure to disclose effectively can create an expectation gap, which can result in client dissatisfaction. Both locally and internationally there has been a seismic change in disclosures in that companies are urged to do away with contracts with too much legalese, and phrase their contracts in plain, understandable terms, making it fair and easy for all customers to fully understand exactly what they are signing up for. As most financial services providers should now be well aware, FAIS sets out a minimum level of disclosure within the subordinate General Code of Conduct for Authorised Financial Service Providers and Representatives. Sections 4, 5 and 7 specifically relate to the general and specific disclosures in respect of the financial service provider, the product supplier and the relevant product respectively. Are you adopting a tick box approach to these requirements on the assumption that the Regulator has thought to include everything in an agreement? Or are you doing the full monty, which means going beyond what the Regulator says and includes taking into consideration the spirit of TCF? Disclosures take place at all stages of the financial advisory transaction, commencing with basic contact stage disclosures that

according to the General Code should be made at the earliest reasonable opportunity and followed up in writing within 30 days to the client. The purpose is to ensure that the client knows with whom they are dealing and has some understanding as to key areas such as scope of licence authorisation, professional indemnity status and details of the ombud’s office. This is far from an exhaustive list which is contained in the FAIS General Code of Conduct and should be high on your reading list if you haven’t looked at it recently. Once the contact stage disclosures have been made, the adviser is free to engage in the fact-finding stage of the transaction. Here the onus of disclosure falls onto the client’s shoulders in that the adviser will be able to render advice based only upon the information offered up by the client. Advisers should leave clients in no doubt that the quality and appropriateness of advice will depend on the level of disclosure made.

disclosures are to be made in respect of the product supplier (Section 3 of the General Code). After this, the adviser can reflect on a process whereby the client has been engaged in an open manner and has been dealt with in a similar fashion, thereby reducing the risk of complaints significantly; it is my experience that contact/product uncertainty is the source of many complaints, i.e. problems occur when there is a large misunderstanding between the vendor of the product and the consumer of the product. The adviser who does not make sufficient effort to overcome that misunderstanding through disclosure and education runs the risk of complaint and, where it is shown that the adviser did not disclose correctly, they risk being found non-compliant with FAIS and facing sanctions as a result. The registrar will no doubt seek to establish levels of disclosure as a key part of the forthcoming TCF regime. Where disclosure is required, nothing but the full monty will do.

When the client has given information in respect of their financial circumstances, an analysis of some form is applied and suitability is tested with a product or selection of products being recommended. The adviser should then disclose the nature and form of the product (Section 6 of the General Code) and pay particular attention to the down-side risk of the product and as well as extolling its benefits and virtues. FAIS is strict and uncompromising in respect of cost disclosures, which should be unambiguous and understandable to the client.

Richard Rattue, MD, Compli-Serve SA

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NEWS Absa raises R1.16 billion for Sanlam The corporate and investment banking division of Absa Bank Limited, member of Barclays, has successfully raised R1.16 billion for insurance group Sanlam Life Insurance Ltd (Sanlam) through a subordinated bond issue. Absa acted as co-lead arranger for the subordinated bond, which represents the largest subordinated debt issuance for an insurer since 2006. The bond has been issued with a 10-year maturity, callable after a period of five years and is expected to pay a fixed coupon of 8.70 per cent semi-annually. The terms of the bond comply with the expected SAM guidelines that will come into effect in 2016. The transaction marks Sanlam’s return to the ZAR capital markets since its first issuance in 2006. Pieter Venter, head of the non-bank financial institutions, corporate and investment banking division of Absa, says that this transaction further consolidates Absa’s long-standing relationship with Sanlam, which has a strong reputation and brand in the market. “We are delighted to have taken them to the capital markets.” Sanlam achieved a high quality and diverse order book with R1.675 billion of orders, comprising a broad range of local investors, with about 95 per cent of them allocated in the bond. Sanlam achieved its targeted issue amount within price guidance. According to Prasanna Nana, head of debt capital markets at Absa, the company is very proud to have been selected by Sanlam to work with it on raising funds in the domestic ZAR bonds markets. “To raise an amount of this size at attractive pricing levels is a resounding success and comes on the back of our ability to effectively leverage both Barclays’ global and Absa’s domestic knowledge of relevant regulations and capital markets to structure tailored but market appropriate financing solutions,” concludes Nana.

Meyer Coetzee has been appointed as an investment specialist at Prescient Investment Management. Coetzee previously worked at Old Mutual’s Symmetry MultiManager business as head of product development and portfolio management. Prior to that, he was product development manager at Fairbairn Capital, also part of Old Mutual South Africa. Before joining Old Mutual, Coetzee held positions as an actuarial assistant at Alexander Forbes Consultants and Actuaries. He holds a bachelor of commerce (actuarial science) degree from the University of Pretoria. He is a Fellow of the Institute of Actuaries, a member of the ASISA Fund Management Committee and a chartered financial analyst. 44

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S&P Dow Jones Indices opens office in South Africa S&P Dow Jones Indices announced that it has opened an office in Johannesburg, South Africa. The Johannesburg office represents the first to be opened by S&P Dow Jones Indices in South Africa and 19th worldwide. Alex Matturri, CEO of S&P Dow Jones Indices, says that South Africa is a country of strategic importance to its long-term growth strategy in Africa. “With established, leading African indices such as the S&P Pan Africa index, the S&P Access Africa, Africa 40, and Nigeria Select, S&P Dow Jones Indices is well-positioned to offer greater index choices and robust investment solutions and research to a growing number of African investors and product providers. “In addition to the S&P Pan Africa index, the S&P Access Africa, Africa 40, and Nigeria Select, S&P Dow Jones Indices offerings in Africa also include the S&P South African Preference Share Index, S&P Africa Frontier Shari’ah, S&P GIVI South Africa, and the S&P Africa Frontier index. S&P Dow Jones Indices’ African index series is the most comprehensive index suite available with history dating back to 1988,” concludes Matturri.

Cannon Asset Managers has appointed Rynel Moodley as assistant fund manager. Moodley’s function as assistant fund manager involves supporting the senior fund managers in equity research, market analysis and implementing client portfolios. Prior to joining Cannon Asset Managers, Rynel worked at Peregrine Portfolio Innovation, a division of Peregrine that analysed and distributed hedge funds, where she carried out quantitative due diligence on hedge funds, and undertook performance reporting and interacted with clients. Rynel also served as a graduate intern at Bucyrus Africa Underground in the finance department. Moodley holds a BCom in economics and finance from the University of KwaZulu-Natal.

Redefine first SA property company to launch American Depositary Receipt Programme Redefine Properties, which became a REIT (real estate investment trust) on 1 September 2013, is the first property company in South Africa to launch a DR programme. The company launched its American Depositary Receipt (ADR) programme on the over-thecounter market in the United States through a sponsored ADR programme with BNY Mellon. Redefine has a growing international ownership base, which over the past five years has grown tenfold to just over 15 per cent. US-based investors represent just under half of these international investors, which by country, is the second-largest investor base. Andrew Konig, financial director of Redefine says that by establishing the DR programme, it hopes to make investing in Redefine accessible to more international (especially US) investors. “The REIT structure is an international benchmark for property ownership in a listed environment and is widely recognised as the worldwide industry standard. The DR programme is therefore an ideal platform to reach the anticipated growth in international interest and encourage international investment in Redefine. Redefine offers US investors sustained and growing income at an attractive income yield with a good prospect of capital appreciation, which is underpinned by diversified quality property assets managed by proven operators.” According to Lauren de Klerk, vice president of BNY Mellon’s depositary receipts business, on account of the REIT structure, they expect more DR activity in the property sector. “We’ll work closely with Redefine to enhance its profile among investors and broaden its outreach to the US investment community.”

STANLIB has appointed Marius Oberholzer as co-head of Absolute Return. His focus will be on local and global equity growth components and will provide input into strategic and tactical asset allocation decisions for the portfolios. Oberholzer joins STANLIB from Sarala Capital in Cape Town, where he was managing partner responsible for providing strategic direction. His role was focused on corporate finance solutions and spearheading the group’s unlisted investment activities. Between 2000 and 2012, he worked at TT International in London and Hong Kong where he focused primarily on managing TT’s Asian Opportunities Long Short Equity Hedge Fund. investsa

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Products

Improved opportunities for fixed income investors The international multi-family office Fleming Family and Partners, on behalf of its asset management clients, has provided the seed capital for the launch of the Investec Africa Fixed Income Opportunities fund. The fund is designed to offer investors stand-alone access to the continent’s hard and local currency sovereign debt markets and an entry point to the continent’s growth story. Investec worked closely with Fleming Family and Partners in structuring the fund. Antoon de Klerk and André Roux will be managing the strategy, supported by the well-established emerging market fixed income team at Investec Asset Management.

Franklin Templeton expands SA product offerings Franklin Templeton Investments announced that the Templeton Africa Fund and Templeton Global Aggregate Investment Grade Bond Fund – both sub-funds of its Luxembourg-registered SICAV range, Franklin Templeton Investment Funds (FTIF) – have received approval for distribution in South Africa from the Financial Services Board (FSB). The new registrations bring the total number of funds offered by Franklin Templeton in South Africa to 41, and provide additional offshore investment opportunities across equity and fixed income sectors for investors looking to diversify their portfolios. The Templeton Africa Fund, managed by Dr Mark Mobius, executive chairman of Templeton Emerging Markets Group, was launched in May 2012, and seeks long-term capital growth by investing in equity securities in African countries or in companies based elsewhere but who have their principal business activities in Africa. The fund offers investors a diversified portfolio of companies across countries and sectors, enabling them to access the rapid growth taking place across the African continent. Its geographic weightings include Nigeria (32 per cent), Egypt (12 per cent) and Kenya (nine per cent) with significant exposure also to Zimbabwe, Senegal, Mauritius and Botswana. The fund also has exposure to selected South African (28 per cent) companies that have operations or investments elsewhere on the continent. The Templeton Global Aggregate Investment Grade Bond Fund was launched in June 2012, and is managed by London-based John Beck and David Zahn, senior vice presidents and portfolio managers with Franklin Templeton Fixed Income Group. With a value-driven investment approach, this fund actively pursues diversified sources of alpha across global markets, sectors and securities, seeking to exploit market inefficiencies though top-down allocations and bottom-up security selection on a tactical, strategic basis. Jo-Anne Bailey, country manager, Africa at Franklin Templeton Investments, says that the registration of these funds marks an important step in bringing South African investors a wide range of offshore products to match their investment needs, and underlines the commitment to the South African market. “We are seeing a growing realisation among our clients of the benefits of investing offshore: greater diversification; access to interest rate opportunities and currency markets; exposure to a wider selection of asset classes and sectors; and the potential to benefit from attractive valuations and faster growth. We believe these funds will help us meet this growing demand.” 46

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The Guernsey-domiciled fund will capitalise on Investec’s deep experience in African capital markets, having the ability to access African public and private markets across all sectors with US$ exposure. This approach aims to provide high yields as well as lower volatility than other risk assets. Antoon de Klerk, co-portfolio manager, says that for several years Africa has been the best kept alpha secret in global emerging market fixed income portfolios. “The fund is first and foremost an acknowledgement of 10 years of broad-based African financial market development that goes beyond being a commodity or general emerging markets story. Key characteristics include relatively low correlation to global asset price volatility, limited interest rate risk, solid yields and the opportunity for broad diversification.” De Klerk also states that their research shows that growth in Africa is set to accelerate, as nations invest in infrastructure and as consumer spending grows. “In addition, we see improving governance, favourable demographics and abundant natural resources, all of which underpin fixed income returns. Currently, there is a general capital shortage, which holds back investment: this fund will help to plug the gap.” According to Daniel Axmer, investment manager at Fleming Family and Partners, they are attracted to investing in Africa as they are seeing high growth relative to other emerging markets, improving governance, and fiscal and monetary reforms. “African fixed income markets are very diverse, and offer plenty of investment opportunities for active managers. We decided to partner with Investec as it has a long history of investing in African fixed income markets as well as having an experienced investment team that employs a proven, rigorous investment process.”


The world

JAPAN, NIGERIA, FRANCE, PORTUGAL, SOUTH AFRICA, US, GREECE, CHINA, INDIA

Japanese GDP revised upwards The Japanese cabinet recently reported a surge in capital expenditure that drove the GDP up to 3.8 per cent, an increase from 2.6 per cent, which is as a result of Tokyo winning its bid to host the 2020 Summer Olympics. The boost in GDP is said to steer the nation’s economy into a speedy recovery. New oil refinery to be built in Nigeria Africa’s wealthiest man, Aliko Dangote, recently signed a multi-billion Dollar deal with banks to finance an oil refinery in Nigeria, which is said to bring multiple exporting opportunities to the nation. Dangote says that the refinery would be the largest in Africa, turning Nigeria into a major petroleum exporter. Indian markets rise as Rajan boosts confidence Following the appointment of the nation’s central bank chief, Raghuram Rajan, India’s Rupee has risen 2.3 per cent against the US Dollar, promising to enhance the country’s economic growth. After almost facing a crisis due to the decline in the Rupee, Rajan unveiled a series of measures aimed at improving the currency and liberalising the country’s banking sector. Surprise growth edges France out of recession The French economy is no longer in recession, as a result of the nation’s economic data growing by 0.5 per cent. Household consumption was one of the key contributors to the upturn, while fixed

investment remained stale. With growth much better than expected, Moody’s Analytics has forecast GDP to remain flat, but steady. Bail out review scheduled for Portugal Portugal’s current state of economy is being evaluated by the International Monetary Fund (IMF) and the European Union (EU) following a raft of reforms promised by Portugal’s leaders in return for its €78 billion bail out in May 2011. With the latest data showing an increase in the country’s exports, the Portuguese Government says it is on track to exit its bail out programme in June 2014. SA manufacturing production rising 5.4 per cent year on year South Africa’s manufacturing production rose to 5.4 per cent, beating expectations of a mere 0.4 per cent by analysts. This comes as result of higher production in the iron and steel, food and beverage as well as in the petroleum and motor vehicle industries, according to Statistics South Africa data, released in September 2013. Worst of Greece’s recession nearly over Greece’s Prime Minister Antonis Samaras is confident that the economy is slowly but surely regaining its competitiveness and is on track to recover from the nation’s longest recession. Recent figures show the economy contracted by 3.8 per cent, its smallest decline since the financial crisis, in the second quarter of 2013.

US unemployment decreases in July Unemployment in the US fell to 7.3 per cent in July, its lowest level in over four years, but the sluggish pace of the recovery of the economy has resulted in just 169 000 new jobs being added to the job market. According to Gus Faucher, senior economist at PNC Bank, the unemployment rate decreased for the wrong reasons, as it reveals that less people are partaking in the labour force. Fake economic data highlighted by the Chinese statistics bureau China’s National Bureau of Statistics has accused a county government in southern China of faking economic data. Twenty-eight local companies in southern China reported 6.34 billion Yuan of industrial output last year, while according to “initial calculations”, the true figure was half of that. Oil dispute results in South Sudan seeking financial assistance South Sudan has requested loan assistance from the International Monetary Fund (IMF) to the value of $50 million in a bid to help the nation’s economy recover its recent downfall. Foreign exchange in the country dwindled following the East African nations decision to cut off oil supplies to Sudan, due to transit fees and citizenship issues. The Central Bank Governor says, “it has been difficult without oil but the proceeds from the loan will be used to revive infrastructure projects.”

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They said

A collection of insights from industry leaders over the last month

However, preservation is vital, given increasing life expectancies all over the world, including in South Africa, combined with exponentially increasing medical costs.” Alexander Forbes’ umbrella funds head, Craig Chidrawi, comments on government’s proposed preservation of funds. “It’s not so much a question of which asset manager, but about constantly investing, being committed to the long run and to try and avoid switching often, because that is the surest way to lose money.” Absa Corporate and Investment Bank, head of investments, Dr Vladimir, explains that investing in the exchange traded products (ETP) market is about diversification and discipline. “South African investors and asset managers are sitting on a huge opportunity here.” Emergent Asset Management chief executive officer and chairperson, David Murrin, commented while addressing the audience at the 4th annual African Cup of Investment Management conference, held in Cape Town during September. The seminar revealed that Africa offers some of the best risk-adjusted returns available worldwide.

“We’re not a big player at the bottom end of the market; we have about four per cent of that market. Our primary focus is the mid to affluent part of the market. I feel you will be seeing a lot of regulation at the bottom end.” Liberty chief executive officer, Bruce Hemphill, comments that his company will be steering clear of the lower-end of the market as the company predicts an explosion of the unsecured lending bubble.

are not classic value stocks. We’re deeply disciplined on price, always looking for through-the-cycle earnings.” Coronation Fund Managers chief investment officer, Karl Leinberger, commenting on how the spectrum between growth and value investing is best explained by the degree to which investors are disciplined on price, mentioning that this hybrid approach has continuously worked the company.

“One good thing to look out for is how much of the company is owned by the CEO, the guy who runs it ... you want to know that his or her wealth is aligned to your wealth. The bigger the stake he has, the more likely it is he will run the company in a way that generates shared wealth for shareholders.” Stanlib small-cap analyst, Damon Bass, advises investors to do more research when considering investing in the small-cap sector.

“Our return on equity [has grown to] 23 per cent from 9.4 per cent in 2008. We have funds to grow and capacity for more debt; we have well-oiled machines of R92 billion in turnover with a refined business portfolio that positions us for good growth and we have maintained our entrepreneurial culture.” Imperial Holdings chief executive officer, Hubert Brody, comments on the success of the company over the past six years since his appointment in July 2007.

“For some, value means buying distressed, broken businesses. But the biggest holdings of [Warren] Buffett, considered by many to be one to the world’s greatest value investors, 48

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“Upon withdrawal [from a fund], people face the choice: should I preserve or get a cash payout? Most of the time the winner is cash.

“The track record of private equity delivering returns in excess of the JSE makes private equity attractive and provides an opportunity to boost returns and diversify portfolios.” Deloitte partner and head of private equity, Sean McPhee, comments that despite a decline in global investor confidence in emerging markets, confidence in home market investing remains high among South African private equity fund managers. “The ability of the sector to grow income over time on the back of fixed annual lease escalations is a key factor that differentiates listed property from cash and bonds. The income generated by cash and bonds is primarily fixed so they currently provide little or no protection against inflation.’’ Investec Property Equity Fund portfolio manager, Neil Stuart-Findlay, comments on how he believes that listed property is still a good bet for the long term. “The sector rallied in response to a stronger Rand and lower bond yields, both globally and in South Africa. Among the heavyweights, Capital, Hyprop, Redefine and Resilient gained more than six per cent last week.” Grindrod Asset Management, chief investment officer, Ian Anderson, comments that South Africa’s listed property sector increased five per cent during September, significantly outperforming both the equity and bond markets.


You said

A selection of some of the best tweets as mentioned by you over the last four weeks.

@ReutersJamie: “Gold’s $55 surge yesterday was its 5th biggest rise in dollar terms since 1980, and its 8th biggest rise EVER.” Jamie McGeever – Editor and presenter at Reuters TV, tweeting on markets and economics. Mostly. Formerly in New York, Madrid, Rio, Sao Paulo.

@devinshutte: “90% of economists polled got the Fed decision wrong.” Devin Shutte – Half broker, half human, all heart. MD of Newstrading.

@MichaelJordaan: “Market cap of FirstRand and Standard Bank both at R188bn. A draw. Like kissing your sister.” Michael Jordaan – Banker, economist and wine enthusiast.

@nicns: “The beauty of being invested in a great business

with bad mgmt. Announcement of Ballmer leaving MSFT sends shares up 9% pre-mkt. #valueunlock.” Nic Norman-Smith – Chief investment officer at Lentus Asset Management. Searching for value in South African and Global equity markets.

@brucebusiness: “BOOM! Records are shattered – the JSE surges through 44 000 and shares hit record levels.” Bruce Whitfield – Curious. Journalist. Radio host. TV Presenter. Writer. Facilitator. Speaker.

@finfocus: “Financial planning is NOT just about investing! Advisers who care only about your portfolio are not planners, they just want to invest ur $.” Michael Kay – Financial life planner, author of The Business of Life, adjunct professor NYU, Speaker, Learner.

@SimonPB: “Red shares in the Top40 .. zip .. nada .. zero .. #JSE.” Simon Brown – talker, investor, trader, photographer, writer and other things.

@commodityirl: “USD is a flawed currency – GOLD is the ultimate form of currency historically!” Peter Whelan – Commodities and equities specialist, published writer, technical analyst, strategist, motivational speaker, law and economics.

@idale: “When hairdressers tell you to buy shares, likely market’s gonna crash” - @WarrenIngram on managing asset allocation.” Dale Imerman – Communicator, marketer and autonomous raconteur. Travels in search of the phenomenal espresso.

@alechogg: “So QE at $85bn a month continues. Another

adrenaline shot for the ICU patient. Mr Market loves shortterm stimulant. But bad news long term.” Alec Hogg – Editor and publisher of Biznewz , financial writer and broadcaster, business keynote speaker.

@john_loos: “South Africans always seem to talk of moving ‘into Africa’ as opposed to ‘other parts of Africa’...as if SA isn’t really part of Africa.” John Loos – Economist, banker, household sector and property strategist. Social endurance sportsman, Blue Bulls fan from Johannesburg.

@RussLamberti: “Bernanke decides to keep printing lots and lots of money out of thin air.” Russell Lamberti – Economist, freedom-lover. Figuring out the world one cappuccino at a time. ETM Analytics | Co-founder Mises Institute South Africa.

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And now for something completely different

Stepping back in time with

action figure collecting

M

ost boys of yesteryear owned or once enjoyed playing with a collection of their favourite action figure characters. These consisted of superheroes, TV series action characters, cartoons, movie heroes and villains. Surprisingly, however, there is an avid market lurking behind the scenes where collectors are fighting their opponents off to grow their esteemed action figure collection with the potential of selling them at a high price. The best way to know what to buy and collect is to look at what action figures are in demand. Auction websites and others that specialise in action figures usually have the best updates and advice on the most desired characters being sought by other collectors. It might also help to go through your storage boxes to see if any of your childhood, or your children’s allies are on these lists. There are a few reasons why these action figures would be worth anything. An action figure will be valuable if it is both popular and rare and will affect how much someone is willing to pay you for that item when selling. Interestingly, it’s the 80s action figures that have made a sudden resurgence and are outpacing other collectibles like rare comic

books and magazines. Ninjas, Marvel and DC superheroes, GI Joe, Transformers, Go-Bots, Secret War Heroes, Masters of the Universe and Star Wars characters are just some examples of the most popular action figures currently in demand. The GI Joe action figures tend to lead the pack in fetching higher returns. However, those still in the box sell for exorbitant amounts, but they are hard to find. However, Transformers were generally more expensive than other toys and it was the larger forms that sold the least. Due to their bulkiness, fewer of these were made making them rarer than their smaller fast-selling counterparts and so tend to fetch higher resale prices. One of the best ways to choose which action figure will be worth more in the future is to buy the ‘bad guys’ as these usually sell the least. The heroes sell faster and in bigger numbers due to their popularity. The rule of thumb is to select the action figures that children aren't buying, and keep them in their original and unopened packaging. Check seller feedback

for negative comments and always look for ‘lots’, as these are generally of a much better value. Action figures can yield a good return if cared for properly. Store them in a dark place, but if you want to display them use a room with little or no sunlight. Also store them in acid-free plastic bags as ziplock bags and general plastics contain acids that can damage the packaging and the paint on the action figure. Avoid handling it too much if it is opened, and if it is battery operated, remove them to avert battery acid leaks. Some of these storage conditions are also good questions to consider when buying from a seller and negotiating a price. Graded action figures can fetch quite a bit more money when they are sold. The Action Figure Authority (AFA) will grade your action figures and, once graded, you will see a significant increase in resale value. Auctions without photos are also undervalued so always include a good quality photo when selling. Ever had one of the following action figures lying in your toy box?

C-9+ Painted J-Slot RocketFiring Boba Fett – estimated $25 000 Don Levine's original G.I. Joe prototype in July 2003 – $200 000 This original GI Joe prototype was created by Don Levine in 1963. It was sold to Stephen A Geppi for $200 000 in 2003 during an auction by Heritage Comics Auctions of Dallas, Texas. The toy soldier measures nearly 30 centimetres and has 21 moveable parts. It has a hand-stitched sergeant’s uniform. It is also listed as one of the most valuable toys in the world.

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Vintage Star Wars Jawa figurine – £12 000 ($20 000) One of only two known Jawa figures was sold on eBay for £11 300 in early 2013. It is speculated that the original was bought in 1978 for only 99 pence. Palitoy, the British manufacturer at the time, lost the licence to sell Star Wars memorabilia. As a result, these items rarely come to the surface. The Jawa, still in its original packaging and complete with vinyl cape, is expected to fetch around £12 000 when it goes on auction in 2013.

Boba Fett made a brief appearance in the horrible and ill-planned 1978 Star Wars Christmas Special and his brief scene caused a huge surge of interest, earning him a massive group of fans that snatched up any collectible that they put on the shelves. To meet this demand, a Boba Fett with a rocket arm (nicknamed Rocket Fett) that shot a plastic missile was produced. At the same time Mattel was forced to recall a missile-firing Battlestar Galactica toy after a child swallowed one of the missiles and died. The Rocket Fett used the same firing mechanism and production ceased. However, some prototypes made it out and an authentic prototype is expected to reach around $25 000 today.


you are the only one in the world not having fun. The only one stuck wrestling with Pythagoras and Newton’s Law of ‘Where Will I Ever Use This In Real Life?’ while everyone else is out there. You try to focus, add, multiply but the only real maths that’s happening is your attention being divided by the sound of laughter and soccer balls. It’s called distraction. And it’s the enemy. That is why, for the last 39 years we’ve ignored it. We pay no attention to trends, hype or popular opinion and stick to our tried and tested investment philosophy. And it has worked very well for our clients. Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

Allan Gray Proprietary Limited is an authorised financial services provider.

kingjames 27511

W e’ve all been there. That familiar feeling that


HOW MAILOS NOBELA REAPED 40 YEARS OF BENEFITS

“I was 25 when I first thought about retirement. That day I immediately invested R400 in the Old Mutual Investorsʼ Fund. Now, 40 years later, my investment is worth *R372 683 (18.6% return p.a.), which helped contribute to my retirement.”

GREAT THINGS HAPPEN TOMORROW

WHEN YOU START INVESTING TODAY

Make Old Mutual Investment Group your investment partner today. Contact your Old Mutual Financial Adviser or your broker, call 0860 INVEST (468378) or visit www.omut.co.za

*Based on average customer experience but actual investment returns; returns quoted before inflation; distributions reinvested. Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium- to long-term investments. Past performance is no indication of future growth. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fundʼs TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio.

10010306JB/E

I INVESTED IN TIME

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The increasing complexity and range of investment products service providers in South Africa, along with stricter intermediary engagement gu...

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