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R37,50 | May 2013

Alternative investments private equity vs hedge funds

The Price of bulk exports Sugar industry faces bitter export markets

PROFILE: Steven Kilfoil - Grant Thornton

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2013/02/07 9:43 AM

Alternative investments private equity vs hedge funds

The Price of bulk exports Sugar industry faces bitter export markets

PROFILE: Steven Kilfoil - Grant Thornton

letter from the

editor I

nvestors should know; they have been told by numerous investment professionals, including in articles in earlier issues of INVESTSA, that equity returns will probably not be great this year. That’s of course a qualified statement. Not great, in comparison to the outstanding equity returns of preceding years, is not all that bad. And the warning has been made before, only to be proved wrong by the ever-unpredictable Mr Market. But there seem to be enough macro factors, not least of all the low GDP growth projections for South Africa, to suggest that this time the professionals are right. That’s not to suggest that investors should disregard shares, whether on the local JSE or offshore (see the asset management feature on why offshore equities are the place to be this year). Any sensible, balanced investment portfolio must include equities, for diversification and often superior returns.

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

That said, however, the somewhat dim outlook for equities may have investors thinking about alternative investments. This class of investments is probably more difficult to find but very rewarding if the right alternative investments are made. That would be a worthy exercise for financial advisers; analysing client portfolios to see if and what alternative investments should be made. Much of Africa, particularly private equity, is an alternative, potentially rewarding investment. Africa expert Rory Ord, head of RisCura Fundamentals, summarises the group’s inaugural publication Bright Africa. Hedge funds are an alternative investment that will reduce volatility and offer protection against sharp market downturns, explains Carla de Waal of Novare Investments. So, too, is the demographic dividend a factor that is often overlooked, says Merina Willemse, economist at the Efficient Group. Commodities is another subject we tackle in this issue, and what a time to broach this subject, as mining houses, particularly the gold miners, have been hit by a declining gold price and a year of trouble and strife. But as investors well know, troubled times can present the best buying opportunities. Steven Kilfoil, mining advisory and corporate finance director at Grant Thornton, points investors towards mining services companies. Read the Profile section to find out why. The global sugar price is probably the most artificial price around, to the prejudice of the local sugar industry, but it is trying to overcome this. I examine this finding a bit further.

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

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

There’s much more inside that I don’t have the space to mention; in all it offers insights into new fields of investment.

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Happy reading and all the best until next time.

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All ports of call

When the Transnet National Ports Authority (TNPA) suggested a “radical reworking” of port tariff structures earlier this year, few in the shipping industry could have guessed just how radical the reworking would be. Among other proposals, the TNPA wanted tariffs for cargo owners of manufactured and beneficiated goods to be reduced by 47 per cent.


hat is a sound incentive for exporters of beneficiated cargo, but as if to offset this sharp reduction the TNPA wanted charges for exporters of bulk commodities to be increased by 68 per cent. At the suggested rate, some businesses may have been forced out of business and bulk commodity exports would in many cases have become uneconomical. Most at threat were the mining companies. At the proposed rate on bulk commodities, exports of raw materials like coal would become uncompetitive, says Andre Boje, CEO of Wescoal. Transnet CEO Brian Molefe was uncompromising, saying the proposed shift in tariffs was to align exporters with government’s manufacturing growth strategy. He added that the mining sector had been hugely subsidised by a tariff structure weighted in favour of raw exports, 6


at the expense of the manufacturing and agricultural sectors. That might have been so but some commodities, like coal and iron ore, can only really be exported in the raw form. Few would argue against beneficiation. It does seem that not enough effort goes into beneficiating goods before shipping them off to foreign countries, only to import and buy back the beneficiated product. For example, it’s amazing to see huge blocks of granite being lined up in the harbours for export, presumably for Italy from where we will buy back the finished product, mainly tombstones, about six months later. Are there not stone masons in this country who could do as good a job? Exporting raw granite, which cannot be shipping-friendly cargo, and then buying it back seems like an incredible waste of money and effort.

However, the proposed tariff hikes on raw commodities would not only have hurt mining companies, but ship owners transporting the goods as well. For instance, Grindrod, South Africa’s major shipping and logistics group, employs the majority of its fleet of more than 40 vessels on break bulk exports, much of it coal and iron ore destined for China and India. The higher tariffs could have crippled this part of the business, taking much of the profit margin out of break bulk exports. Fortunately the TNPA has to get its proposed restructured tariffs through the Ports Regulator, an independent body. It brought some sanity back to the suggested radical reworking of the tariff structure, basically throwing out the more extreme increases in tariffs on raw commodities. The Ports Regulator decided that tariffs would be retained at the same level as in the 2012/13 tariff year, with the following

exemptions: full export container cargo dues to be reduced by 43.2 per cent; full import container cargo dues to be reduced by 14.3 per cent; and motor vehicle exports, as cargo in the speciality Ro-Ro vessels, to be reduced by 21.1 per cent. It seems like a sensible outcome. Industries that make goods for export, as well as the shippers transporting the goods, will be incentivised to do more. Reduced tariffs will add to the margins on these businesses. Raw material exports, especially the mining houses, are not being incentivised but at least they are offered some protection. The past year has been a difficult period for the mining industry with strikes and missed production targets. Many of the companies are under pressure and some recent financial results confirm this. An exorbitant increase in export tariffs might just have pushed some over the edge. The reduction in tariffs for motor vehicle exports is also significant. Already Toyota in KwaZulu-Natal and Mercedes-Benz in the Eastern Cape export a fair proportion of the vehicles they make. The lower tariffs could encourage more motor vehicle exports, a substantial source of foreign income for the country. Sea transport is by far the dominant form of transport for exports and imports. According to the Minister of Transport, Dikobe

Martins, more than 90 per cent of exports and imports are moved by sea. Yet moving goods in and out of the ports along the South African coast is not efficient. A study by the Ports Regulator indicates that port tariffs are 874 per cent higher than the global average for containers and 744 per cent above the global average for automotive cargo. That makes South Africa’s ports, most already pushed for capacity, very expensive. Molefe, never short on words, has an answer. He says he has a problem with the Port Regulator’s methodology because it results in comparing apples with pears. His argument is that costs at South African ports are compared to some of the smaller ports in other parts of the world, some of which are owned by municipalities or other levels of government and therefore subsidised. “We are not getting a cent from National Treasury,” he says. “We have to raise two-thirds of our capital expenditure from operations.” Well, that’s how business in the private sector works. And some groups, like Grindrod, are firmly behind investing in port infrastructure. While it falls outside the ambit of Transnet, Grindrod and the Maputo Port Development Company plan to invest about R15 billion over the next five years to upgrade ports in Mozambique. That will benefit not only

Grindrod, but many others who export bulk commodities from Mozambique. Similar plans are in place to extend infrastructure at the Richards Bay Coal Terminal, backed by investors from China. With export-encouraging tariffs in place, how can investors benefit? Direct investments could be made in JSE-listed groups like Grindrod or some of the other listed logistics and freight-forwarding companies. Otherwise the route is probably through private equity companies. Many of these funds are no doubt already looking at the implications of the new tariff structure and where and how they can invest to take benefit. Despite lower economic growth projections from China, it remains the main destination for many of South Africa’s exports. Investing in a hedge fund or unit trust funds that focus on China is another alternative. Listed group Bidvest could also be a good investment option. Bidvest has a significant presence in the Chinese food market, a target for fruit and vegetable exporters in South Africa. Transnet itself has long-term plans for substantial investment, around R300 billion, over the next five years. This could be a good exercise for financial advisers. Identifying possible investments, both equities and private equity, could make sound investments for clients. investsa




Finding certainty in part bonds FedGroup CEO and Part Bond expert, John Field discusses the history of Part Bonds and why, after almost 50 years, it is still one of the best alternative investment options.




ince its debut almost five decades ago, Participation Mortgage Bonds (Part Bonds) have been amongst the most sought after investment products in the industry. Even after having its popularity disturbed in the early 1990’s, Part Bonds have remained on the investment radar as a secure and interest bearing investment option.

Complimenting its low risk is the attractive level of income provided by a Part Bond. The interest income (or return) has a history of being highly competitive with other regulated investments. According to Field, this enables Part Bonds to offer a more stable return compared withother debt instruments such as money market funds and with greater security.

Part Bonds were first formalised in 1964. They gained popularity in the 1980’s as a secure investment vehicle, promising conservative investors like pensioners a consistency of interest paid monthly and a certainty of capital preservation. Their reputation was soon damaged by the Masterbond scandal, which in the early 1990’s, burnt the fingers of more than 22 000 Pensioners. Considered one of the biggest corporate collapses and fraud schemes in South African history, the Masterbond debacle saw Part Bonds’ reputation become synonymous with the term “high risk”. FedBond did offer to take over Masterbond, in which case it would have been unlikely that any investor would have lost any capital or interest. FedBond’s take over of Fidelity Part Bonds and Supreme Part Bonds add substance to this belief, explains Field.

Unlike an unregulated and unsecured debenture, as offered by property syndications, a Part Bond is a regulated and secure investment vehicle. Through Part Bonds, investors can enjoy a certainty of capital preservation, coupled with a consistency of interest and the security of property. It is unfortunate that so many Part Bond managers were taken over by the banks and closed down. They were seen as competition to the banks. Closure cannot in the interest of the investing public. Part Bonds have an important role in investments for individuals and the financial services industry. They should not be overlooked, concludes Field.

He points out that overlooked with regards to this scandal was the fact that Masterbond offered two investment vehicles - a Part Bond offering and an unsecured debenture that financed major property developments. The interpretation that took place linked the lost savings to a Part Bond scam, when the unsecured debentures were to blame. Part Bonds took the blame and property syndications took the money. The closure of Masterbond lead to the growth of unregulated property syndications.

John Field, CEO of FedGroup

“A Part Bond investment is a debt instrument which holds a fixed rand value. The debt instrument is secured, with property acting as its security held in a nominee company on behalf of the investors.

Hedge funds and long-term investment returns


or retail investors, the advantage of hedge funds lies in reducing the volatility of portfolio returns on the journey to a specified goal.

It is a well-known fact that human behaviour leads investors to buy and sell at the most inopportune times, in the process destroying wealth and compromising long-term investment objectives like retirement. Using hedge funds in the overall portfolio construction may, however, play an important role in reducing the volatility of the total portfolio so that investors can counteract these inherent behavioural traits in implementing their investment programme. The problem is that many investors have shied away from hedge funds because their strategies, which are designed to extract value from markets in ways that are not possible with long-only investing, are often still poorly understood. Investors and their advisers should take the trouble to properly understand the opportunities and

Part Bonds are still unfairly associated with the scandal and property syndication”, says Field. He explains though, that the structure of a Part Bond couldn’t be further from that of a property syndication. “A Part Bond investment is a debt instrument which holds a fixed rand value. The debt instrument is secured, with property acting as its security held in a nominee company on behalf of the investors. Capital value is thus preserved and protected by law.” Field asserts that the low risk is further minimised through strict regulation. Part Bonds are governed by rules that assure stability and security and are regulated in terms of the Collective Investment Schemes Control Act of 2002 of the Financial Services Board. The Act stipulates that no more than 75 per cent of the value of the property to be mortgaged may be lent out. This rule ensures the property owner has a minimum of 25 per cent of his own money invested. Risk is further reduced by spreading the investment across a pool of properties. There are a large number of properties within a portfolio, limiting the exposure of an investor capital in the event a borrower defaulting on a loan.



challenges that are inherent in hedge funds, which help to cushion the prudent investor’s portfolio against major bumps. They facilitate wealth creation over the long term by avoiding the large drawdowns prevalent in markets from time to time. With advances having been made in terms of regulating hedge fund products, access is being simplified, and for investors looking to complement other assets like unit trusts, now is a good time to consider hedge funds for their portfolio. South Africa’s hedge fund industry has historically been dominated by large institutional investors such as pension funds. However, once hedge funds become legislated under the Collective Investment Schemes Control Act (CISCA), hedge fund managers are expected to introduce products specifically for the retail market.

When markets are falling, they are able to limit their participation in the downturn by quickly reducing exposure. This means that individuals will be able to easily invest directly in hedge funds (in much the same way as they currently invest in unit trusts) and, like institutional investors over the past decade, benefit from the positive and pivotal role they can play in helping achieve long-term investment objectives. Most institutional investors use hedge funds to reduce downside risk in the overall portfolio. These risks come from investments in equities, bonds and property that could take a knock when markets fall. Hedge funds, on the other hand, utilise investment strategies like short selling that are designed to make profits when markets fall or remain flat. Hedge funds also tend to make extensive use of derivatives to optimise capital utilisation, and to build protection into portfolios to benefit investors in the event of a severe market downturn. Many hedge funds trade actively to raise or reduce their exposure to market risk. When markets are falling, they are able to limit their participation in the downturn by quickly reducing exposure. Trading activity could thus be viewed as an important risk management strategy, as opposed to being speculative. The result of these approaches is often lower volatility in returns. The investor enjoys a smoother ride from one economic cycle to the next, and the overall portfolio benefits from steadier returns and more consistent, positive compounding over time. This ultimately puts savers, whether pension funds or individuals, in a better position to reach their investment objectives.

Bright Africa – new report by RisCura A new report, Bright Africa, provides a uniquely comprehensive look at transaction multiples across the continent.


ompiled by RisCura Fundamentals, Africa’s leading provider of independent valuation services, the report covers the areas of Africa showing growth and compares this growth to other emerging markets.

Individual African markets remain small in comparison to the large emerging markets making up the BRICS. However, when aggregated, Africa’s place alongside these fast-developing countries is better understood. While the individual African economies are certainly not homogenous, grouping the 54 individual countries is useful for comparative purposes. Africa’s GDP grew by an impressive 57 per cent on a purchasing power parity basis (PPP) between 2005 and 2012, slightly ahead of Brazil and Russia at approximately 50 per cent, but behind China and India which doubled the size of their economies over this period. In contrast, the US and Japan, two of the world’s most developed economies, grew only around 20 per cent over this period and consequently lost a significant share of global GDP.

Carla de Waal, Head of Alternative Investment Solutions, Novare Investments



The Bright Africa report also compares listed and private equity market and transaction multiples by looking at the ratio of the total value of an enterprise (EV) to its operating profit, proxied by EBITDA (earnings before interest, tax, depreciation and amortisation). “While this ratio is more commonly used in private rather than listed equity analysis, it applies across both asset classes, providing a way to compare them,” says Rory Ord, head of RisCura Fundamentals. The report highlights the challenges of listed equity markets in Africa, in particular the fact that, apart from South Africa, the majority of African stock exchanges do not closely represent the economic sectors that contribute to their countries’ GDPs.

In many cases, the main drivers of GDP are barely present on the listed market. In Nigeria, the energy sector makes up 40 per cent of the country’s annual GDP, but is not a significant component of the listed market. “Ultimately, this demonstrates that broad exposure to the African growth story cannot be fully accessed without considering private equity,” says Ord. “While private equity has its own shortcomings, it has the great advantage of being able to access companies outside of the narrow confines of listed markets.” Despite its relatively early stage, African private equity has been growing and a strong core of practitioners has emerged capable of managing institutional capital on the continent. The Bright Africa report analyses 158 private equity deals collected by RisCura Fundamentals as part of its work with African private equity funds. Based on the deals in the RisCura Fundamentals database, the report shows that private equity deals in Africa are taking place at lower multiples than deals globally, across all deal sizes. However, deal multiples in Africa outside of South Africa are, on average, higher than South African deal multiples. Further, private equity deal multiples in African private equity are generally lower than listed market multiples. There are also much lower levels of debt

in African PE transactions than is the case globally. African deals on average use only half the levels of debt compared to global private equity, and only a third of the debt used in an average US private equity deal.

Ultimately, this demonstrates that broad exposure to the African growth story cannot be fully accessed without considering private equity. An analysis of the number of private equity deals falling into deal multiple groupings shows interesting results when compared to global private equity deals. Almost half of global deals take place in the 5-7.5x EV/EBITDA grouping, and a quarter in the greater than 7.5x grouping, leaving only 20 per cent happening at below 5x. In contrast, African PE deals predominantly take place in two groupings namely 2.5-5x and above 7.5x. This leaves only 20 per cent of deals taking place in the bucket where almost half of global deals take place. “One reason for this appears to be the number

of high-growth, medium-sized companies that fall into the 7.5x category, to add to the leverage buy-out transactions already in this category,” Ord says. Many more deals happen at lower multiples in Africa than is the case globally, which may be a result of the higher risk assessment of investing on the continent and the higher required rate of return. Ord says that in practice, investors use a combination of listed and private equity investments to fill their African equity allocations. “This is expected to continue for the foreseeable future as an effective way to gain exposure to Africa’s growth potential.”

Rory Ord, Head of RisCura Fundamentals

The Bright Africa report analyses 158 private equity deals collected by RisCura Fundamentals as part of its work with African private equity funds.



Opportunity is found in the most unusual places.

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Asset Management

Head to head

Managing Director

Agri-Vie Investment Advisors H erman 1. Can alternative investments play a role in a retail investment portfolio or are they suitable only for institutional investors? They can certainly play a role in retail portfolios. Minimum commitments may present a challenge for smaller investors though, but some platforms aggregate smaller commitments into larger units. Alternative investments such as private equity can play a valuable role in a diversified investment portfolio. 2. Have you seen an increase in appetite for alternative investments with the promulgation of Regulation 28? Yes, to an extent, although the pension fund environment is still in the process of stepping up to this opportunity. The revised Regulation 28 creates more flexibility for retirement funds as to their choice of asset classes. As a consequence, there is more scope for investing prudently into alternative categories such as private equity and hedge funds. However, the South African institutional investment environment (particularly pension funds) is not as experienced with alternative investment strategies as their peers in Europe, the UK or the USA. Several are in the process of improving their knowledge base through appointing advisers, internal capacity development and other avenues. 3. Do you believe private equity is misinterpreted in the South African investment space? Less so than in previous periods and it is steadily gaining acceptance as a proven 14


M arais

asset class. Sometimes private equity is seen as an aggressive type of instrument backing hostile buy-out initiatives and involving risky debt structures. The true picture is quite different in that the core role of private equity is as a long-term equity partner for businesses with above-average potential to grow and develop. Private equity provides a patient form of capital of which the business consistently works on its long-term success unperturbed by quarter-toquarter events.

consistently by more than five per cent per annum. There is a groundswell of consumer demand building up, fuelled by urbanisation, aspirational demand and higher disposable income levels. However, knowledge about growth businesses in this environment is unevenly distributed which creates an ideal environment for private equity transactions.

Investing in businesses helps them grow, provides better products and services in order to become more profitable.

PE Funds: Funds of funds. Investors should discuss channels towards alternative investments with their investment advisers. In the case of private equity, their advisers should be able to provide guidance on qualficying PE funds and funds of funds. Investors should, however, be mindful of the typically illiquid nature of PE investment – money remains tied up for around five years.

4. What role does private equity play in the wider financial markets?

7. How do you measure the performance of your fund/s?

Private equity plays an important role in the development of a country’s economy; It funds new businesses, helps produce strong companies, promotes innovation and enhances job growth. Investing in businesses helps them grow, provides better products and services in order to become more profitable. This leads to expansion and more opportunity for more people.

Gross and Net IRR, realised and unrealised – compared with listed and unlisted benchmarks. Published performance data shows that PE investment consistently outperformed listed equities.

5. In which sectors in the alternative investment arena do you see value?

Advisers should be knowledgable on alternative investment considerations, channels, opportunities and risks and should guide their clients in a balanced manner, customised to the risk profile of their client.

Africa: consumer-driven sectors, resources, infrastructure. The sub-Saharan African economies outside of South Africa are growing

6. How should investors incorporate these product sets into their portfolio?

8. What role do you think an adviser should play in recommending these investments?


Caveo Fund Solutions B yron

1. Can alternative investments play a role in a retail investment portfolio or are they suitable only for institutional investors? Although they historically have not featured in retail portfolios other than among high net worth individuals, the diversification and alternate return stream that they offer can significantly enhance the risk and return profile of a retail investor. The level of protection that hedge funds do offer in a volatile capital market environment makes them quite suitable for the retail investor seeking this specific type of return profile. 2. Have you seen an increase in appetite for alternative investments with the promulgation of Regulation 28? There is certainly an increase in interest. Both retail and institutional investors are enquiring about the asset class. However, this has not resulted in any significant inflows as yet. The majority of the current inflows have been from offshore investors and not the local market. I believe the reason why we’ve not seen an increase in inflows could be because the decision-making process around many of these types of investments is quite extensive and the time line is quite long. I think a lot of the decision-making is still in process. Hopefully in the near future we’ll see an upward trend with regard to investors taking up some alternative investments. There is also the issue of a lack of a suitable structure which has been a hindrance. The access points into hedge funds are not that easy and it certainly is difficult to access an alternative investment especially when you are a retail investor. However, there are advanced discussions between the industry regulation body, the FSB and Treasury to look at incorporating

G reen

hedge funds into collective investment scheme structures to try and overcome the accessibility challenge.

African context, there are also opportunities in the trade finance space as well as the agricultural sector.

3. Do you believe hedge funds are misinterpreted in the South African investment space?

6. How should investors incorporate these product sets into their portfolio?

No, I don’t, but I do think that that the level of knowledge and understanding of hedge funds is low. They are seen as a fairly complex investment option and, as a result, many people tend to shy away. Those who do take the time to fully understand what they can offer do grasp the advantages that an inclusion of alternative investment can have on their portfolios.

I think a lot of the decision-making is still in process. Hopefully in the near future we’ll see an upward trend with regard to investors taking up some alternative investments. 4. What role do hedge funds play in the wider financial markets? Hedge funds in South Africa are small when compared to capital markets in general, but they do serve to provide an element of liquidity. 5. What sectors in the alternative investment arena do you see value? There is value in a number of areas, particularly hedge funds, private equity and the infrastructure area. In a broader

Obviously we need to be mindful of the restrictive structures around Regulation 28 that limit the allocation we can make in the case of non-discretionary assets. Alternative investments should be used to provide diversification; a different return stream to the traditional bond, equity and cash exposure that an investor traditionally is exposed to. When investing in these products, investors need to ensure that they fully understand the nature of the fund and their specific strategies, the return strategies and, most importantly, the risk characteristics of the fund. 7. How do you measure the performance of your fund/s? Typically they are assessed against the CPI or a cash-related benchmark. We measure ourselves on a rolling three-year basis against CPI benchmarks. however, we do offer a solution that has a composite benchmark that includes both equities and cash. 8. What role do you think an adviser should play in recommending these investments? The adviser’s role is absolutely critical due to the perceptions of the asset class and the complexities around liquidity. These portfolios can contribute to creating better risk-adjusted returns, but the types of risks taken on need to be fully understood particularly those around individual alternative providers.





Sugar industry – seeking a sweet pill to swallow bitter export markets

As one of the world’s major soft commodities, there’s little sweet to be said about sugar, especially the price. Shoppers will complain about what they are paying for sugar on grocery stores shelves, farmers will complain about the price they receive for sugar crops, and organised industry bemoans the distorted global price of sugar and its effects on exports. 16



ugar is a contentious subject, and it always has been. It’s one of the few agricultural products supported by an Act of Parliament, the Sugar Act, and the industry and politics have always been intertwined. Though transparency has improved much over recent years, aspects of the industry were often cloaked in secrecy in the past. Yet despite this, it remains an important industry, providing hundreds of thousands of jobs and generating about R12 billion annually, around 40 per cent of which is exported and earns foreign exchange for the country. Another reason that sugar is contentious is because it’s a protected industry, both in South Africa and even more so in some foreign sugar-producing countries, especially in Europe. This is one reason, as the South African Sugar Association (SASA) frequently points out, that the global price of sugar is being distorted and exports from South Africa are consequently being compromised. “Despite its comparative production efficiencies, the South African sugar industry finds it difficult at times to export profitably to the world market, as the global sugar price is severely eroded by subsidy-induced over production in some major sugar-producing countries,” SASA says on its website. There’s little doubt that the official global price of sugar bears little resemblance to trade prices. The price is often referred to as the dump price of sugar. It is set on a limited number of trades in world markets. At best it is a reference point; yet, despite the artificial nature of the global sugar price, it has a significant, often detrimental effect on both local sugar prices and exports. The dilemma for the sugar industry in South Africa at present is trying to secure import tariffs to try and limit the roughly 240 000 tons of sugar arriving in the country a year; and to open access to the more lucrative European Union for sugar exports. Trix Trikam, executive director of SASA, says increased exports to European markets could add about R1 billion to export proceeds and aid what he calls the industry’s inconsistent and struggling revenue growth. “If we were able to export to the European Union, we would get a preferential price,” he says, adding that if what he calls “cheap imports” were halved, the industry would benefit by R300 million.

export agreements with the European Union at higher prices. The problem for SASA is that its control of the sugar industry is limited to within the borders of South Africa. It therefore cannot get the higher export prices some of its members in other African countries are able to receive.

We are now spending R21 million on training and support programmes to assist claimants who have taken ownership of their land and where production has collapsed. . At the same time, SASA is trying to get sugar producers in South Africa to raise additional income through supplying electricity to the national grid. With Eskom battling to meet demand and the country being subjected to frequent power black-outs, supplying electricity from an alternative source could be a useful way for the sugar industry to generate money. Sugar mills in the country generate their own energy, or electricity, through burning a by-product of sugar cane production known as bagasse. At most mills there are additional amounts of this green energy left over that can be plugged into the national grid and sold to Eskom. Trikam says the 14 sugar mills in the country would bid to generate electricity for sale. “We can add 1 000 megawatts to the national grid already,” he says. Another problem facing the local sugar industry is unresolved land claims. Anwhar Madhanpall, head of SASA’s land reform office, says 39 per cent of sugar farmland is wrapped up in unresolved land claims. “This has led to little or no investment in farms and collapsed production,” he says. However, Madhanpall adds that SASA is intervening to ensure production levels remain consistent to retain economic sustainability. “We have spent the past six months completing our own audit of all land claims in the industry. We are now spending R21 million on training and support programmes to assist claimants who have taken ownership of their land and where production has collapsed.”

Land reform will feature in Parliament later this year under the new Expropriation Bill. It has caused concern among some opposition politicians, but Jeremy Cronin, Deputy Minister of Public Works, says the bill will help speed up land restitution and reform. Land reform has so far not been a very successful process. Nick Vink, professor of agricultural economics at the University of Stellenbosch, says despite R69 billion being spent on land reform since 1994, only about eight per cent of land has been redistributed. The sugar industry is ahead of the curve here, earning praise from Gugile Nkwinti, Minister of Rural Development and Land Reform, for increasing sugar cane land under freehold title to black ownership to 21 per cent. SASA’s concerns are valid, despite a little niggle that it sometimes complains too much. As the industry watchdog, that’s probably what it is meant to do. But sugar producers, the groups with large amounts of money invested in the industry, have similar concerns. John du Plessis, CEO of TSB, was recently quoted in the Financial Mail as saying he believed the government has an obligation to protect the local industry. “We are costeffective producers but we also carry huge overheads in the form of land-reform costs and equity costs in support of government policies that foreign producers do not have to bear.” He says the industry is not asking for government assistance, but simply for protection from unfair foreign trade. In that context, there is some understanding of the seemingly unfair prices paid for sugar. It’s an industry with complicated regulations up against complicated systems of subsidisation in foreign markets. It might well need tariff protection and more equitable export arrangements.

The preferential price Trikam refers to is the price paid for exports by a number of African states, classed as poor and developing countries. Exports by the industry in South Africa do not enjoy these prices, instead having exports based on the generally lower world sugar price. Yet all the main sugarproducing groups based in South Africa, including Illovo Sugar, Tongaat Hulett and Crookes Brothers, have a presence in other Africa, countries which have contracted





We need to know how the needs of all stakeholders can be addressed in the quickest and most cost-effective way, so that we can not only learn from what was a great tragedy, but also bring back stability and vision to the sector.

1. You have been involved in the mining industry for five years. Are you concerned about the impact of recent events in the sector? We all have to be concerned about issues such as the Marikana tragedy and the continued labour unrest currently being experienced in South Africa, which has spread in recent months from platinum to other commodities. The real issue is that there doesn’t seem to be a concerted and co-ordinated approach to addressing all the issues. While government certainly did the right thing by appointing the Farlam commission to understand what happened at Marikana, we actually need more. We need to know how the needs of all stakeholders can be addressed in the quickest and most cost-effective way, so that we can not only learn from what was a great tragedy, but also bring back stability and vision to the sector. 2. Do you expect such events to impact on the investment potential of SA based mining stocks? Without a doubt, investors (both foreign and local) are becoming more and more hesitant to support an industry that comes with a plethora of complications. Investors have become more risk averse post the global financial crisis and every event or comment by a person in a leadership position that casts doubt on the industry or gives the investors a hint that the risk profile may increase, will have a direct impact our mining stocks. The real impact will probably not be felt as badly at the blue chip level, but rather this effect will be felt by smaller-cap companies when attempting to access capital and by those in the earlier stages of developing their assets.



3. Has there been a shift in perception from investors about the mining and commodities sector?

I do not believe so. Mining and commodities are both risky assets and have always been that way. The depth of the risk is probably viewed as being at a peak at the moment, and perhaps that is a perception we have to change. 4. What can be done to build investor confidence? Without a doubt the biggest thing we need to do is bring stability and order back to the industry. South Africans have been crying out for what they call a “Codesa 3� to look at the state of the economy as a whole, but perhaps mining needs to take the lead and address these challenges with all of their stakeholders. Mining is a long-term industry, and the only way businesses can hope to succeed in the long term is if the interests of government, industry and labour are aligned. I believe the time is right to do this. 5. How do you expect the mining and resources sectors to perform over the next year? Despite all its challenges, I believe that the future is bright. In a recent survey which Grant Thornton International performed, research indicated that over 49 per cent of South African Junior miners and 34 per cent worldwide believed that profitability will increase in the next 12 months, despite expected increases in labour and power costs. If we can realign our objectives and prepare for the inevitable uptick in the world economy, the future of mining has to be strong.

6. How do you wind down from the pressures of your position? Like most South Africans, I am much more relaxed when the Boks, Proteas and Bafana are doing well. I enjoy a round of golf, a day on the bowls green, a quiet braai, or just spending time with my wife Olivia and my daughters Jordynne (4) and Paige (15 months).

Without a doubt, investors (both foreign and local) are becoming more and more hesitant to support an industry that comes with a plethora of complications. 7. Finally, if you had R100 000 to invest, where would you put it? Right now I would probably look at the mining services companies, being those supplying equipment and key services to the mining industry. For one, they are less reliant on the geography of their assets and they are able to move and supply across a broader area. Secondly, they are less likely to be directly impacted by short-term shocks that hit us from time to time, as they mostly are not commodity dependent. The third and probably most important reason is that their cash flows are much easier to predict than companies which are directly involved in mining operations.

Steven Kilfoil mining advisory and corporate finance director at G rant T hornton





Offshore equities the name of the game for 2013


lmost midway through 2013, investors are taking the opportunity to review their investment positions and to assess the success and performance of the asset classes into which they have placed their hard-earned money. Local asset managers, however, remain steadfast in their view that for 2013, offshore is the place to be invested for the remainder of 2013. Ursula Maritz, chief investment officer at Southern Charter, says the economic trends of 2012 – such as quantitative easing in Europe and the US – will continue to support the markets, making offshore equities particularly attractive. Meanwhile, she says local equities present pockets of opportunities for stock pickers as long as risks are managed through appropriately diversified portfolios. Maritz warns investors that the local market is vulnerable to some weak fundamentals that investors need to bear in mind by. “The 6.5 per cent current account deficit, the 5.1 per cent budget deficit and labour unrest is an ongoing concern. Given that foreigners hold a third of local bonds, the Rand is susceptible to any shifts in international investor sentiment,” she says. As such, investors should look to protect themselves with Rand hedges and welldiversified portfolios. “Asset allocation is the key in this environment, and we expect



to see continued growth in flows into asset allocation funds through the course of the year,” says Maritz. Peter Brookes, head of MacroSolutions at Old Mutual Investment Group SA (OMIGSA), seconds the view that global equities still offer the best return prospects among offshore assets, primarily due to their higher yields relative to bonds and cash. He expects policymakers to have a quieter year as they maintain their current policies, which means the global cost of capital should stabilise. “We can’t see good real returns from global cash and bonds for the rest of 2013; we are forecasting -1.5 per cent and -1.0 per cent pa, respectively (in US Dollars), over the next five years,” he says. “We are also taking advantage of the pockets of higher yield to be found in emerging market debt, international property and higher-yielding international shares to enhance returns in our funds.” Turning to South African assets, Brooke adds that investors would be lucky to beat inflation over the medium term and that no real returns are expected from cash over the next five years. Adding his voice, John Kinsley, MD of Prudential Unit Trusts, said global companies are significantly more attractive than global fixed-interest or cash and any South African asset class. “Developed Europe is more attractive from a straight valuation perspective. Although the potential break-up of

the EU still remains an issue and a long period of debt reduction still lies ahead, the patient investor may be well-rewarded,” he says.

We can’t see good real returns from global cash and bonds for the rest of 2013; we are forecasting -1.5 per cent and -1.0 per cent pa, respectively (in US Dollars), over the next five years. Maritz also believes there are lots of opportunities in global large cap stocks as well as global properties as a favoured asset class. “We like global properties at the moment and consider it to be very well diversified. If you look at it in terms of current capitalisation rates, or the levels of income we could expect from property, yields across most countries are looking very attractive relative to bonds. Furthermore, balance sheets have been restored and debt is affordable at the moment. Earnings in this sector are set to improve as global growth gets more traction, particularly towards yearend when growth in the US could gain pace.” Be it equities or properties or large cap stocks, the message from asset managers is clear. Offshore is where it’s all at for investors in 2013.



Investing in BRICS Chris Hart | Chief Strategist, Investment Solutions

The BRICS conference in Durban earlier this year showcased the rising influence of key emerging markets on the world stage. China is now clearly the second-biggest economy after the US and is set to eclipse it within the next few decades. Brazil has overtaken the UK and probably France in sheer economic size, with India and Russia not far behind, measured by official exchange rates. On a PPP basis, India is the thirdbiggest economy, eclipsing even Japan.


he emergence of these economies is an important geopolitical development and shift. The inclusion of SA in this grouping is more in recognition of its stature within the African context than its economic muscle. This BRICS conference, the fifth, spotlighted the rising importance of these emerging markets. However, the BRIC concept was really born a decade ago to describe the reality of the shift of the global centre of economic gravity already in motion during the 1990s.

Where there are contiguous borders, these countries have border disputes that have led to war on occasion. However, it can be argued the same applied to bodies such as the G7 and the European Union when they were formed. The EU managed to establish common economic and business interests quite quickly, which has underpinned its longevity. This is what the BRICS grouping needs to do, so that it shifts from being a political construct to an organisation that facilitates trade, investment and identifiable common economic interests.

The BRICS nations are quite diverse, without a strong reason to exist as a formal grouping, which begs the question: was the conference of economic and political relevance or merely an exercise in political theatre? In many ways, the BRICS countries are more natural rivals than economies with easily identifiable common interests.

At the moment, BRICS is not really a compelling investable concept. For legacy and political reasons, much financial repression is embedded within the individual countries. That the politicians have established a formal grouping does not mean business opportunities or investment will naturally follow. From an SA investor’s

point of view, it is still easier to access other countries for trade, investment and business reasons. There is no obvious advantage to pursuing a specific BRICS investment and business strategy. In this regard, SA has key advantages over its BRICS counterparts. Its financial markets are better developed and managed; and SA is rated more competitive and an easier place to do business. Brazil, Russia, India and China are all among the worst rated in this regard, as measured by global competitiveness rankings. Corruption is also a major problem in these countries, while SA is rated as relatively clean in comparison. However, a key lesson that can be gained from the BRICS nations is that India, China and Brazil are attracting large amounts of foreign investment despite the corruption and redtape obstacles. The sheer size and long-term potential of these countries mean investment is able to scale the high hurdle rates placed in the way. Also, the internal trends are towards freer economic dispensations as reforms creak through political complexity. SA, a much smaller country, does not have this advantage. While the business and economic conditions are more favourable, the long-term trend is towards greater restriction. The reality is that SA is not attracting investment. Being comparable is not enough in SA’s case. It must try much harder to be an attractive investment destination.





Exploiting the demographic dividend The demographic structure is often overlooked as an economic indicator of a country. Typically, economists will focus on economic growth, inflation, interest rates and other major macroeconomic indicators when analysing an economy. The structures of demographics (population, ageing, fertility and the number of dependants) play a very important role in an economy and are often underestimated.


emographics determine and affect all economic aggregates and trends. Therefore, understanding demographics, and their changes, is of the utmost importance for identifying the correct and applicable economic policies to enhance positive trend changes in the populations that will, in turn, affect the demographic trends. But first, what is meant by a demographic dividend? It is a dynamic process that is initiated when populations experience a drop in their fertility rate with a simultaneous increase in life expectancy. A number of factors contribute to the generation of a demographic dividend. These factors include rising living standards, education, urbanisation, improvements in technology and better access to health, particularly contraceptives. Of particular importance is the education and employment of women. Over time, women have become more educated and more motivated to work, resulting in them having fewer children. This evolution in populations occurs naturally but the correct policies can enhance these trends. Usually, in poorer countries, having many dependants (children) is associated with poverty, low levels of education and high levels of child mortality. Some governments understand this and promote programmes and policies such as family planning to limit population growth. This is brought about when advances in technology allow progress in healthcare, resulting in increased life expectancy; allowing babies a better chance to survive and people to live longer. Urbanisation is another important factor that affects population growth. Urbanisation provides for better job opportunities, health services, education and the like. For these



reasons, a policy that actively promotes urbanisation is likely to contribute to a demographic dividend.

look much like the demographic structure of a country like Japan – a country that experienced their demographic dividend some years ago.

Typically the number of dependants (children and the elderly) relative to the number of workers would decrease resulting in a bulge in demographic distribution. The result of this is characteristically a spike in disposable income and eventually economic growth with even more capacity for further human development.

In South Africa, we may also be experiencing the benefits of a large demographic dividend in future. However, this may only realise in 50 years’ time, depending on the socio-economic policies we implement today. Our population age structure is similar to that of most developing countries’. We have many children, fewer adults and even fewer older people. At this point there is no sign of a potential wave, i.e. a large number of workers relative to dependants. History shows that our fertility rate has declined over the past 50 years, but it may take another generation or two before a wave will be generated.

Over time, women have become more educated and more motivated to work, resulting in them having fewer children. A good example of a past economic dividend occurred in China. Despite China’s slow start in the late 1950s under the communist rule of Mao Zedong, the new Chinese leader in 1978, Deng Xiaoping, liberalised the Chinese economy which gave the country a huge economic boost. At that time, people didn’t live long and there was a movement towards the one child policy in 1979 that lowered China’s dependency ratio considerably. It should be noted that a population wave was naturally developing in China but was enhanced by their one child policy. Communist ideology, unlike the Chinese traditional values, actively promoted equal education opportunities for women, which boosted their workforce tremendously. This resulted in a massive Chinese demographic dividend and equally impressive economic growth. An important note to remember though is that, as in any evolutionary process, the Chinese population will grow older eventually and

An important policy emphasis to contribute to the development of a demographic dividend similar to that of China, which will boost our economy, is to educate our youth – and more specifically – educate young girls. Despite all the efforts and money that has already gone into education, our country has a long way to go to ensure good, quality education and skills development. Let’s hope for significant progress in the efficiency of our education system soon.

Merina Willemse, Economist at Efficient Group Ltd


Passive investing: coming into its own Cost-efficiency resulting in very attractive cost savings for the investor makes for another compelling argument to consider passive investment. No performance fees are charged and standard management fees are also significantly lower than those charged for active management. The cost argument is a significant consideration in the current low return environment.


assive investing is fast gathering steam in South Africa following the strong worldwide trend. According to Helena Conradie, CIO, Satrix, the combination of cost-effectiveness, solid performance and simplicity provide passive products with a compelling investment case. The passive investment space – which comprises exchange traded products and index unit trusts – differs from active management in that it tracks the performance of a specific market index rather than taking active views relative to such an index. Here Conradie answers our questions about these investment products:

What is bolstering the transition to passive investing? There are a few factors supporting the strong migration from active to passive funds such as index unit trusts and exchange traded funds. Firstly, active managers have been struggling to beat the market, in other words the vanilla market-cap weighted index, over the last couple of years. Fund managers are competing against a market that is getting smarter all the time. The emerging smarter passive funds such as Dividend Plus, Equally Weighted and Rafi are capturing elements of performance that previously have been the sole domain of the active manager. The excellent performance and growing awareness of these funds are further challenging the active management space.

On top of these two compelling factors passive funds also offer simplicity, transparency and a very effective way of getting exposure to different segments of the market.

What do advisers and financial planners need to know about this product? Although not a new phenomenon, passive products such as index unit trusts and exchange traded funds represent a definite trend – it is not merely a fad – and they should form part of any diversified portfolio. They simply cannot be ignored. Selecting between different index products is anything but passive and results in different exposures and performances. The investment choice has grown from the vanilla marketcap weighted all share fund to a wide variety of products that track several indices such as the dividend plus, equally weighted, property, bond, preference share, international, commodity and balanced fund indices. With all these choices available the investor can gain exposure to several segments of the market – locally as well as globally – in a quick and efficient manner.

Although he will not only be choosing active fund managers, he will still actively choose an intended market exposure through selecting a specific index fund. In order to make an informed decision at all times, financial advisers should educate themselves as well as their clients with regard to all these new choices.

With all these choices available the investor can gain exposure to several segments of the market – locally as well as globally – in a quick and efficient manner. What should advisers be telling their clients? The time spent with the client to understand all the aspects of his objectives and requirements should be seen as the essential first step in the process and a prerequisite to any advice or portfolio suggestions to the client. Only after gaining full insight into the client’s situation should the adviser start constructing the portfolio. At this stage the adviser should inform the client of all the choices available, and products beyond the traditional active management space. The client should be aware of the benefits of combining active and passive options into an efficient and diversified total portfolio with regard to cost, risk exposures and expected returns.

Finally, the range of products available has also broadened the possible performance outcomes. Investing in a fund that tracks a different index such as the dividend plus index will result in a performance that significantly differs from the average market performance. No longer should the financial adviser shy away from passive options because he is of the view that he can’t justify his fee.

Helena Conradie, CIO, Satrix


23 Exchange traded products – State of the Industry Review – First Quarter 2013 Mike Brown | Managing Director |

Market capitalisation and net capital raised


he exchange traded product industry realised solid growth in the first quarter of this year. Market capitalisation of all 62 ETPs listed on the JSE grew by 2.8 per cent from R47 770 billion at the end of 2012 to R49.09 billion at 28 March 2013. Only one new ETF was issued, the STANLIB Property ETF, which tracks the FTSE/JSE SA Listed Property Index (SAPY). This product now joins the Proptrax SAPY ETF and Proptrax Ten ETF, bringing to three the number of property-based ETFs, reflecting the growing

acceptance of listed property as a core component of any portfolio. During the first quarter, there was a net redemption of capital by ETP issuers on the JSE. Exchange traded products are openended, so the issuers can create or redeem units at any stage to cater for large new investments or disinvestments. NewGold, which issued R300 million NewGold ETFs in January, followed up with a major redemption of close to R500 million in February. Deutsche Bank delisted R265 million of its DBX World ETF securities, only partially offset by a listing of R41 million of the DBX

USA ETFs. Satrix 40 also delisted R108 million of its securities, but there was a net listing of R125 million new Satrix INDI ETFs during the quarter. The overall result was a net redemption of capital of R155.8 million in listed ETPs over the firstthree months of 2013. There are currently nine issuers of exchange traded products, licensed by the FSB to provide such ETF products, under the Collective Investment Scheme legislation. To date, these FSB Manco issuers have also listed all the ETNs available on the JSE. The table below summarises the current ETP issuers on the JSE.

Exchange Traded Product Issuing Company (as at end March 2013) Issuer


No of ETFs




No of ETNs

Total Market Capitalisation (R million) 21 963.1






12 972.3

Deutsche Bank

DBX Tracker



5 541.7

Standard Liberty




2 751.2

Rand Merchant Bank




2 048.6

Investec Bank




1 779.9

Standard Bank

Standard Bank



1 362.6

Grindrod Bank

Proptrax and PrefEx




Nedbank Capital








49 089.2

Source:; JSE; Profile Data (28 March 2013).

First quarter investment performance Rand hedge ETPs dominated the first quarter total return performance data. In particular, the DBX Tracker ETFs, covering the USA, Japan and World markets provided returns of 21.27 per cent, 20.42 per cent and 17.22 per cent for the three-month period. Commodity-based ETNs, such as the Standard Bank Platinum, Palladium, Oil and Corn linker ETNs, also performed extremely well, as shown below in the top 10 24


performance table for the first three months of 2013. Offshore-based ETPs listed on the JSE are classified as ‘inward investments’ for foreign exchange control and listing regulation purposes. This means that, although they provide direct exposure to foreign equities or other foreign asset classes, they are traded rand on the JSE and do not impinge on foreign exchange allowances

for individual investors. Also, no asset swap capacity is involved and all asset management, administration fees and foreign exchange costs are contained within the 0.4 per cent to 1.0 per cent per annum total expense ratio of such offshore ETPs. These costs are significantly cheaper than equivalent foreign unit trusts or taking money offshore, not to mention hassle free as exchange control/tax clearance, etc. issues are avoided.

Top 10 ETPs (Total return with dividends reinvested)* 3 Months

1 Year



Standard Bank Corn ETN


DBX Tracker MSCI Japan ETF


Standard Bank Platinum Linker ETN


Standard Bank Palladium Linker ETN


Satrix INDI 25 ETF


DBX Tracker MSCI World ETF


NewFunds eRAFI FINI 15 ETF


Standard Bank Oil ETN




Standard Bank Corn ETN


Proptrax SAPY ETF




DBX Tracker MSCI World ETF


Standard Bank Platinum Linker ETN


NewFunds NewSA ETF


DBX Tracker FTSE 100 ETF


Proptrax Ten ETF


Proptrax SAPY ETF


NewFunds Equity Momentum ETF


FTSE/JSE All Share Index


FTSE/JSE All Share Index






Satrix INDI 25 ETF


Satrix INDI 25 ETF


Proptrax SAPY ETF


Proptrax SAPY ETF




NewGold ETF


NewFunds eRAFI FINI 15 ETF


NewFunds eRAFI INDI 25 ETF


Satrix FINI 15 ETF




NewGold ETF


NewFunds eRAFI FINI 15 ETF


DBX Tracker MSCI World ETF


Satrix FINI 15 ETF


Standard Bank Gold Linker ETN


Nedbank BettaBeta EWT 40 ETF


NewFunds eRAFI INDI 25 ETF


Satrix DIVI Plus ETF


DBX Tracker FTSE 100 ETF


DBX Tracker FTSE 100 ETF


FTSE/JSE All Share Index


FTSE/JSE All Share Index


2 Years

3 Years

Source: / Profile Data – Monthly Performance Survey (28 March 2013).

A number of the DBX Tracker offshore ETFs, also feature in the long-term top performance figures. The DBX Tracker MSCI USA ETF, which invests in the top 600 listed companies in the US, through the MSCI 600 index, appears in the top five performers for one year, two years and three years, with annual total returns of 34.28 per cent, 27.48 per cent and 19.28 per cent respectively over these three periods. Other consistent performers in this area are the DBX Tracker MSCI World ETF and DBX Tracker FTSE 100 ETF. With many local investors now looking for offshore exposures in their portfolios for hedging and investment performance purposes, inward invested ETFs, conveniently listed on the JSE in Rand, with full transparency and low costs, are clearly products that should be taken into account.

Other consistent performers over periods of more than one year, have been the Satrix INDI 25 ETF, which is a portfolio of industrial shares, 70 per cent weighted towards companies that are global multinationals and with no volatile mining or financial shares in its portfolio. Proptrax SAPY ETF is also a consistent performer, providing returns well in excess of the All Share Index over all periods measured. The financial sector in South Africa has recovered steadily, particularly insurance companies, and the NewFunds eRAFI FINI ETF and Satrix FINI 15 ETF are now among the top 10 performers over two and three years. For a more broad market exposure to the top 40 companies on the JSE, the Nedbank BettaBeta EWT 40 ETF, which equally weights funds among the top 40 shares on the JSE, has been the best performer among a dozen index tracking

ETFs and unit trusts that follow the top 40 index. For broad market exposure, the BettaBeta EWT 40 ETF is gaining credibility as the least volatile and most consistent performer in this area. Over all time periods reviewed, it is clear that a consistent number of ETPs, available to the investment public in South Africa, are providing performance well in excess of the All Share Index, which is the typical market benchmark. This large variety of ETPs, covering different asset classes and market sectors, enables the construction of portfolios, balanced to meet different risk and performance objectives, and enabling above-average market returns. Passive investment products offer solutions to most investment objectives, as they now give exposure to all asset classes and markets, with not only low costs, but also above market performance in many cases. investsa



associations If ETFs are the answer to some investors, are they

asking the right



uch has been said to encourage investors to chase the next great investment product, exchange traded funds (ETF). Proponents refer to fees in South Africa of 0.5 per cent, compared to more than one per cent for unit trust funds. This is argued to be a logical reason for outperformance. They also refer to an ETF as a readymade investment theme basket, as well as to the ease of buying and selling ETFs on the JSE; and to the popularity of ETFs in the USA and Europe. Ja, well, no fine. The right question, as for any investment, should be: what am I really buying? After all, you want to know what is in your shopping basket don’t you? What is the real cost of an investment basket that averages and maybe diversifies the goodies and baddies too much? How is the upside and downside affected? Does the weighting of counters in the index that the ETF is linked to really reflect what and how much of that you want to be invested in? How is risk managed? Does this ETF make the investment strategy more likely to succeed, or is the ETF label just a feel good factor? Most important, is an ETF an appropriate investment for you? What are the costs of buying and selling; and are those costs really material to the result? ETFs can be useful in a good investment strategy, but let’s not get too breathless before we get answers to those awkward questions. Costs, ease of buying and selling and readymade baskets don’t sufficiently or solely decide the success of an investment. Valuations and combinations of investments make the biggest contribution to returns. ETFs are not magic wands. Bad eggs in baskets stay bad eggs. ETFs all too often underperform the basket they seek to replicate. 26


Aside from ‘pure’ commodity-linked ETFs, an ETF is a fund that typically markets itself as a low-cost way to invest in a well-diversified basket of quality underlying investments, such as the same shares that make up published indices, e.g. the top 40 shares on the JSE, or resources, or financial or industrial sector shares, or high dividend payers. Notice that ETFs tend to be composed of baskets of financial instruments that are convenient for the ETF providers to track (e.g. large cap, liquid shares such as the top 40). There are no ETFs for mid-cap growth or small cap value shares, or domestic corporate bonds. And yet over the last while, mid-cap and small cap sectors have outperformed the market. Another problem is that an ETF index tracker can actually be distorted by fast runners that go to ludicrous valuations. The story of DiData is a useful reminder: ignoring valuations can lead to exposure to bubbly trading activity, such as shares at absurd multiples. Dimension Data briefly traded on an earnings multiple of around 100 times, a patently unsustainable valuation, yet passive funds such as ETFs would have been compelled to buy it anyway. When DiData entered London’s FTSE100 index, it attracted aggressive buying from indiscriminate ETFs and other index trackers, notwithstanding a PE multiple of about 75 times. Its price surged 49 per cent (from £6.70 to £10), but sanity began to prevail and within days the price had slumped back to £6.88. Inclusion into an index cannot change the intrinsic value of a company’s shares. No right thinking person could have thought that DiData’s future earnings prospects had leaped by 49 per cent, yet this did not prevent ETFs from applying their stringent rules.

We have to question whether simply buying an index via an ETF is the laziest way of buying past performance and hoping that the future will be the same. We all know we shouldn’t buy last year’s winner, unless we have reason to believe it will be this year’s winner as well. One of the really awkward problems that a good fund manager can solve quite well is how much to diversify between various shares and asset classes. Watering down the winners may in fact cause prejudice, even though the motivation may be lower risk and a shrug that the index invested in reflects its components based on price action. That brings us back to the old problem – is price action or valuation more important? Where an ETF is useful is if its components are what you want to be invested in. Use it accordingly, in the context of your portfolio. My vote would be for a good fund manager to do the security and asset selection, as well as handle downside risk along the way, rather than hope for index or theme direction.

Janet Hugo, CFP® Director Hugo Capital Wealth Managers and Chairperson of the FPI Investment Industry Sector Group


South African household wealth to rocket by 2020 Gross household wealth, including non-profit institutions serving households (NPISH), among South Africans is set for a steady rise and is expected to almost triple to R20 trillion, new research reveals. As of 2012, gross household wealth in South Africa stood at R7.8 trillion, while an average household’s wealth was R670 000.


ut according to projections by CoreData Research, based on data from the South African Reserve Bank on gross household wealth and gross household debt, an average household’s wealth is estimated to increase to R1 080 000 by 2020. Saving among South African households has been on a slow upward trend from a difficult financial period during which most households were spending beyond their means. However, the savings landscape of South African households is looking considerably different for 2015 and 2020. Income levels are on the rise, according to CoreData’s calculations and by 2020, an average salary is expected to more than double to R168 300 from R72 000 in 2011. In the next eight years, people will be moving into higher bands of wealth, creating a pool of disposable income that can be saved or invested; meanwhile saving will also become more feasible for those who haven’t been able to put money aside in the past. The level of wealth among South Africans aged 31–45 (accumulators) and 46–60 (pre-retirees) in particular is set to increase dramatically by 2015 and by 2020

and the appetite for short and long-term savings products, securities investments and mortgages will grow as a result. • C oreData forecasts an average growth of 12.5 per cent in household wealth over the next eight years. By 2020, more people will have some level of disposable income to save or invest. • I n 2011, individuals between the ages of 31–45 (accumulators) gathered a pot of savings that includes pension, stokvels and insurance contributions worth R385 billion. • T otal accumulated savings by South African pre-retirees alone was R720 billion in 2011. By 2020, this pot of wealth will grow to R1.5 trillion. While people aged 31–45 will have gathered a pot of savings worth R541 billion in 2015 and by 2020, this same age group will have saved R945 billion. • T he increase in the savings pot of South Africans under 30 (incubators) by 2015 is R20 billion. By 2020, incubators will have saved R100 billion. These first-time investors may look to savings products

such as tax-exempt short- and mediumterm savings products that will be introduced by the South African Treasury in 2015. • C urrently pension funds and long-term insurance are the highest portion of gross household wealth, followed by nonfinancial assets such as property, then other financial assets including securities and assets with monetary institutions. • B y 2020, interest in pension funds and insurance should remain the highest portion of gross household wealth. • H owever, the portion of wealth in financial assets such as securities will become larger, implying investors will take more of an interest in securities investments over the next few years. • A s with savings, the liabilities of households are also shifting and secured debt is estimated to form the majority of gross household debt by 2020 suggesting that the appetite for mortgages is likely to pick up in the next seven years.

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Morningstar’s Annual Global Fund Flows Report

Synopsis of Morningstar’s inaugural report on worldwide fund flows which examines where fund investors across the globe are putting their money


e recently published our first report on worldwide fund flows. To our knowledge, this report is the first of its kind. The data driving this report are based on assets reported by almost 2 400 fund groups across 71 domiciles (including South Africa). In total, more than 53 000 fund portfolios encompassing over 171 000 share classes are represented. What follows is a brief except from the full report.

(US$672 billion) in the pantheon of all-time great years. Long-term open-end fund assets reached US$17.1 trillion in 2012, reaching a new high from its nadir of US$9.3 trillion in 2008. More than any other factor, low interest rates have driven investors to seek income and, to a lesser degree, embrace riskier asset classes than they would in a normal rate environment. The perceived safety of bonds relative to stocks should not be underestimated as a contributing factor.

The global fund management industry appears to be in rude health, having grown at a 3.9 per cent organic growth rate in 2012 despite ongoing worldwide economic uncertainty. Total long-term flows were US$565 billion. When ETFs are added, the total rises to US$809 billion.

The prevailing trend today, therefore, is investor hunger for yield and the quest for the perceived safety of fixed-income funds. Worldwide, these funds gathered US$535 billion in 2012, or nearly 95 per cent of long-term net flows.

The asset levels and flow figures, however, belie underlying cyclical and secular factors that have shaken the foundation of the asset management industry. The quest for fixed income and apparent permanent preference for less expensive funds – typically exemplified by the movement of assets to passive products – have transformed the economics of the industry. While AUM increased by 39 per cent between the end of 2007 and the end of 2012, management fee revenue increased only by about 24 per cent. The largest 50 non-money market funds worldwide gathered about $9.7 billion in management fees in 2007 and the largest 50 in 2012 took in only $8.3 billion, all while managing $1.2 trillion, or 32 per cent, more AUM than the largest 50 funds in 2007. Despite the enormous inflows of 2012, it still ranks behind 2009 (US$746 billion) and 2010 28


While 78 per cent of worldwide mutual fund and ETF AUM still resides in actively managed funds, passive products captured 41 per cent of estimated net flows – US$355 billion – in 2012. With the exception of Oceania, index funds grew faster than actively managed ones in every geographic region in 2012. The United States is leading the way in its appetite for low-cost, passive strategies growing at a greater than 10 per cent rate in 2012. Passive funds in Canada, cross-border, and Asia are growing at double-digit rates. Meanwhile lower growth rates are being seen in Europe and passive funds in Oceania are experiencing negative growth. Other notable global trends included the blistering growth rate of alternative strategies which attracted net flows of US$24 billion in 2012 and the breathtaking successes of

Vanguard and PIMCO. These two giants captured 16 per cent and 18 per cent, respectively, of worldwide long-term fund flows in 2012. One other interesting trend to note is that funds without Morningstar Ratings – for the most part funds with less than a three-year track record – captured a stunning 87 per cent of worldwide flows in 2012; a trend which started with the beginning of the financial crisis. Presumably these unrated funds benefited from having track records free from the late 2007 and early 2008 market losses. This ratio of flows into unrated funds is nearly the mirror image of where the assets lie: 18.5 per cent unrated to 81.5 per cent rated. The full report can be viewed by visiting

David O’Leary, CFA, MBA | Director of Fund Research, South Africa | Morningstar South Africa



Listed property provides a growing income


he listed property sector has grown tremendously over the last 10 years. The market capitalisation was just over R10 billion in 2003 and is now almost R250 billion. This was driven by unit price growth, which in turn has been driven by distribution growth, lower interest rates and falling bond yields over time. The other drivers have been new listings and property acquisitions partly funded by issuing equity. Totals returns (income and capital) over this period have exceeded 1 000 per cent or about 26 per cent annualised. in 2012, the listed property sector delivered total returns of just over 36 per cent. Year-to-date total returns are about 10 per cent already, making the listed property, again, the best performing asset class. We believe that listed property can achieve annualised total returns of 10 per cent to 12 per cent over the next five years. These numbers may not sound as exciting as before but we believe that they are still good given that the listed property sector is coming off a high base. Vacancies are not as high as before and neither are interest rates, i.e. they have both fallen over time. Instead of owning one or two buildings (direct property), there are more advantages in

investing in listed property such as liquidity, more transparent valuation, diversification across different management styles, sectors, location and markets. One can leave the rental collection, maintenance and repairs to listed property companies. There is room for direct property only on a larger scale. One disadvantage with listed property is unit (share) price volatility. The unit price can go up or down on a daily basis depending on local and global market conditions.

We believe that listed property can achieve annualised total returns of 10 per cent to 12 per cent per year over the next five years. The sectors that we like the most are the industrial and retail sectors. The office market has higher vacancies largely from oversupply from two to three years ago which has been worsened by low economic growth.

There is a space for listed property in balanced portfolios. Listed property has not only helped to boost returns in balanced portfolios, but has also helped to reduce risk (volatility). The overall outcome of this is better risk-adjusted returns. Listed property has a low correlation (weak relationship) with equities. Listed property earnings can be predicted with reasonable certainty compared to that of equities. Listed property has a higher correlation to bonds due to its income-generating ability. However, listed property provides a growing income whereas bonds (and cash) do not.

Keillen Ndlovu, Stanlib Head of Listed Property Funds





Clean fees an important step towards greater transparency in savings industry


or the average investor, the South African retail investment market place has been difficult to navigate. Complex product choices and opaque fee structures have not only made it tricky to understand costs, but also near impossible to compare products and services from one provider to the next. These issues are not unique to South Africa and there are moves afoot globally to address concerns around transparency. In the UK, for example, the financial services industry is preparing itself for the implementation of the Retail Distribution Review (RDR). One of the issues the RDR will aim to address is transparency with respect to fees and charges levied within the UK retail investment industry. In all likelihood, many of the principles embodied in the RDR will find their way into other jurisdictions, including South Africa. In particular, we expect to see the banning of rebates by fund providers implemented locally. Rebates are payments made by fund providers to distributors of their funds. In the past, these rebates where not disclosed to investors and as a result where open to abuse. While for the most part these rebates are now passed onto clients to reduce their overall cost, there are unfortunately still some instances where providers of funds – be they platforms or financial advisers – keep these rebates as a source of revenue, impairing their ability to act independently. Even where rebates are passed onto clients, it serves to distort the various elements in the cost chain. These costs can be broken down into advice, product administration and fund management costs. Fund rebates can make it difficult for investors to understand what they are paying for in each element of the cost chain. For example, a product administrator typically receives a rebate from the fund



manager and uses this to offset the cost of administration. So, while the client receives the benefit of the rebate, the perception that is created is one of low product administration costs. In reality, all that has happened is that the fund manager has provided a discount. However, offsetting this discount against the administration costs artificially inflates the cost of fund management and is reflected in a higher total expense ratio (TER) on the fund providing the rebate. In certain cases, the rebate may even exceed the cost of administration, resulting in clients effectively receiving cash back. This may sound enticing to an investor but merely distorts what the investor pays for each of the services received.

Many fund managers in South Africa have recently launched clean classes in anticipation of similar legislation being implemented in South Africa. The banning of rebates in the UK market has led to an explosion of clean classes being offered by fund management companies. Clean classes can be thought of as accurately priced fund fees where the total cost accrues to the fund manager. This means that clients get the benefit of the rebate through a lower priced fund fee, allowing them to accurately compare fund management costs from one provider to the next. Importantly, it also allows them to accurately gauge what they are paying for product administration and advice, since none of these costs are being subsidised by the fund management rebate. Many fund managers in South Africa have recently launched clean classes in anticipation

of similar legislation being implemented in South Africa. Even in the absence of legislation, they believe that clean classes are ultimately more transparent and easier for clients to understand. It also negates the scope for rebates to lead to potential conflicts of interest. Some platforms (LISPS) are following suit by offering clean-priced platforms, where the product administration and advice costs are charged explicitly, thereby negating the need for a rebate since the saving is already reflected in a lower priced fund cost. Investec Asset Management’s investment platform, Investec IMS, has supported the initiative of clean pricing and will be doing away with rebates on the funds offered in its iSelect fund range. We are one of the first platforms to fully embrace the clean-pricing philosophy by implementing it across our most popular platform, iSelect. We are confident that this will result in improved transparency and simplicity for clients and advisers. Other platforms are likely to do the same; the question is whether they will take the initiative to help empower investors to make more informed investment decisions or wait for legislation to show the way.

Daryll Welsh, head of product, Investec IMS



Beyond all expectations: A case for socially responsible investing South Africa’s life and pension fund savings pool has grown to more than R3 trillion. Of this savings pool, less than one per cent is currently invested into socially responsible investing (SRI) or high impact unlisted credit.


ompared to the US, where approximately 10 per cent of life and pension fund savings is in broad SRI investments, South Africa is lagging. South Africa’s significant under-allocation of savings to SRI compared to the US is ironic considering the multitude of social imbalances that need to be addressed; high levels of unemployment, infrastructure backlogs, a desperate need for affordable and subsidy housing and financially sustainable SMEs that struggle to access the capital needed to expand – just to name a few. In the middle of these two extremes is a sophisticated financial sector that encompasses the role players necessary to unlock this pool of savings. These role players represent new sources of capital that could be directed into sustainable and commercial initiatives that could start to address these imbalances in a sustainable and commercially viable manner. Regulatory changes, specifically in the form of the Pension Funds Act (Regulation 28), have opened up the opportunity for unlisted credit as a stand-alone asset class. Carron Howard, portfolio manager of the Cadiz Protected High Impact Fund (CPHIF) and the Cadiz Enterprise Development Fund, states, “Our approach to high impact investing is based on the

fundamental belief that it is possible to mobilise capital, not only for the creation of wealth in the form of investment returns, but also for the creation of initiatives that deliver high social impact. We therefore go well beyond the traditional SRI guidelines around ‘doing no harm’ and proactively seek investments that create opportunities for lower income groups to access the economy mostly through job creation, entrepreneurship or access to capital. Within this context, these funds identify and invest in organisations that are able to deliver sustainable and scalable business models that generate competitive commercial returns and a measurable social impact.” The recent five-year track record in the CPHIF shows how it is possible to achieve the joint imperative of generating commercial returns as well as high social impact. The investment return delivered by the fund has outperformed the All Bond Index, Prime and CPI plus three per cent over the five-year period to 28 February 2013. We have demonstrated how our SRI unlisted credit offering has delivered compelling risk adjusted returns. In time, this asset class will become a building block in most of our balanced fund mandates.

themselves into financially sustainable and scalable businesses. By mitigating investor’s fear of capital loss Cadiz Asset Management firmly believes that this will ultimately catalyse the allocation of capital into this asset class. To this end, Cadiz Asset Management and the United States Agency for International Development (USAID) have entered into a ground-breaking risksharing agreement in terms of which USAID has provided a $20 million first loss capital guarantee to the fund. With this unique mechanism, the fund is now in the position to structure a capital guarantee of up to 50 per cent into any loan advanced to an organisation. This guarantee together with conventional transaction security will dramatically reduce the perceived risk of capital loss in the portfolio. Cadiz believes therefore that this initiative has addressed one of the fundamental hurdles preventing investors from embracing this asset class at scale. In the words of Nelson Mandela, “The time is always right to do right,” Cadiz Asset Management is committed to continue pushing the envelope in creating mechanisms to draw investors into this asset class in a meaningful way.

In addition to the obvious financial benefits, the fund has impacted 44 137 direct beneficiaries, 244 507 indirect beneficiaries; it has funded 41 072 SMEs and created 48 337 jobs. One of the challenges often faced when interacting with institutional investors, is the perception that organisations that are structured to deliver high social impact represent higher risk than the more traditional business models that investors are familiar with. However, Cadiz’s experience is quite the contrary – the underlying investments within the fund have demonstrated a 100 per cent repayment profile and, in general over the term of the loans advanced to them, have transformed

Carron Howard, Portfolio Manager at Cadiz Asset Management





On climbing trees and the definition of risk


or a few hours of fun, I took my team out to a tree top obstacle course in our city. This course is made up of zip lines, Tarzan swings, nets, bridges and other obstacles, designed to get you from tree to tree. I have watched my kids do this before - it looks much easier from the ground. I quickly realised that it was quite different hanging several metres off the ground on a pulley, having to trust the safety clips designed to save you, should you slip. I don’t like taking risk. Even as a child I didn’t like fun rides or anything that involved an adrenalin rush. It is both my personality and the fact that I’m a woman. It is a wonder that I have pursued a career managing clients’ investment risk. This experience reminded me of what our clients must feel like, whose retirement savings and investments we manage. It was terrifying having to trust that pulley; it was frightening having to zip line even a short distance not too far above the ground, not to mention having to jump from a platform and zip line 200 metres up in the tree tops. Many people get the opportunity to invest large amounts of money for the first time near retirement, some only at retirement. We often deal with clients who have to trust us with their life savings, the proceeds from the sale of their business, or a large inheritance. For them, it is very similar to jumping off a platform, trusting the safety clips will work if something goes wrong. We can never take this trust for granted. We need to admire and respect it. Looking at our young and agile guide, who could almost run across the daunting obstacle course, I could see that he had little fear. Through daily practice he knew every trick that made the challenging parts easier. 32


Despite his ease with which he coasted through the course, he vigilantly reminded us of the safety procedures. Rule number one: never take both safety clips off the rails at the same time. Surprisingly, I forgot this rule a few times and had to be reminded of the safety procedures. As financial planners, it is also our role to help our clients where they have become complacent when it comes to investment risk. The most recent market returns (almost 30 per cent from the South African share market in 2012 and 18 per cent per year over the past 10 years) can easily lull investors into forgetting that markets can be volatile. It is not unlikely to experience market declines of 15 per cent in any given year or even larger during extreme downturns. During these moments, we need those safety procedures to kick in. Appropriate risk analysis and asset allocation will help clients survive these times. Diversification is almost always needed when you least expect it. I found that it was easier to deal with the challenges of our course by looking at the destination and even the scenery, rather than concentrating on the distance to the ground and the danger. This reminded me of an investment principle: it is better not to focus on the day-to-day challenge; rather we should focus on the end result and the progress it takes to get there. Research has shown that investors who measure their portfolios more frequently tend to perform worse partly because they are tempted to make short-term changes. I recently spotted a billboard ad for South African retail bonds, stating that they were risk-free investments. I was surprised

by this statement. There are always risks involved in investments, even in South African retail bonds. Ask any investor in Greek government bonds. Even if there is very little chance of the South African Government defaulting, there are other risks. What happens if inflation and interest rates dramatically increase over the period of your investment into these ‘guaranteed investments’? Or alternatively what happens if interest rates decline even further and you have to find alternative investments at the end of your investment period? Before anyone condemns me as an Afro-sceptic risk-obsessed person, let me be clear. The risk of losing your capital should not be elevated above important risks such as inflation risk and re-investment risk. Investors should be educated about all risks, so that they can make informed decisions about which risks they are willing and able to take.

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


Mauritius FDI rises


Official central bank data showed that Mauritius’ foreign direct investment (FDI) grew by 33.9 per cent to 12.66 billion Rupees ($408.06 million) in 2012.

South Africa’s Top 40 Index to rise in 2013 A Reuters poll predicted that the Johannesburg Stock Exchange (JSE) Top 40 index will rise almost nine per cent by year end thanks to support from investment banks with exposure to fast-growing African markets. Weakness in the Rand is likely to benefit the index’s heavyweight shares.

Forbes’ 2013 list reveals a record number of billionaires Forbes’ 2013 list of the world’s richest people included a record number of 1 426 billionaires. The total net worth was valued at $5.4 trillion, an increase from $4.6 trillion in the previous ranking.

Slow economic growth rates but situation is improving South African banks expanding in Africa could enhance growth and earnings in the long term as developing a pan-African franchise would compensate for the locally subdued credit growth according to a report by rating agency Fitch. However, Fitch warned that the drive to expand into Africa had to be carefully calculated by SA banks as it could ruin credit profiles if they expanded too aggressively.



Ratings agency affirms SA’s rating

Leadership confidence levels low

Dip in business confidence

Ratings agency Standard and Poor’s affirmed SA’s sovereign credit rating at BBB with a negative outlook as external imbalances, recent lacklustre economic performance, and potentially resurging labour tensions could affect South Africa’s macroeconomic policy framework.

The 2013 Tomorrow’s Leaders Leadership Survey (TLLS) revealed average confidence levels of 52 per cent among respondents when questioned about the current leadership levels within South Africa.

According to the South African Chamber of Commerce and Industry (SACCI), business confidence fell in February 2013, reflecting both real economic activity and the failure of the financial environment to support a sustained improvement in business confidence. SACCI’s business confidence index (BCI) subsided to 93 from 94 in January, with seven of its 13 components negative on a monthly basis.






Wealth and asset management group Peregrine Holdings announced that Jonathan Hertz has been appointed as the new group CEO following the resignation of CEO, Jan van Niekerk. Hertz, an actuary, originally joined the Peregrine group in August 2000, serving as an executive director and the group’s chief operating officer until October 2005. He is also founder and CEO of South Africa Alpha Capital Management, a Bermuda-based platform that allows investors to make investments into Southern African Alternative Investment Funds.

CADIZ ZAR OPPORTUNITIES FUND AWARDED The Cadiz ZAR Opportunities Fund was recently named as the winner of the South African MultiStrategy Hedge Fund Award at the HedgeNews Africa Awards 2012 ceremony. The Cadiz ZAR Opportunities Fund is a multi-asset, multi-strategy hedge fund that targets absolute returns in a risk-controlled environment. To achieve its objective, the fund invests both long and short, in all types of South African financial assets and derivatives, and Rand-denominated opportunities. It is this focus on downside protection that contributed to the Cadiz ZAR Opportunities Fund receiving this award, as the award is given to the South African multi-strategy hedge fund with the best riskadjusted returns. According to Francois Finlay, portfolio manager, equity markets reflect



Dawie de Villiers has been appointed as chief executive officer of Sanlam Employee Benefits to provide strategic leadership to the business and its five key units. De Villiers has a deep understanding of both the investments and employee benefits industries and a strong grasp of the markets in which Sanlam operates. He is an actuary who joined Sanlam in January 1993 and has held various positions in the investment, life insurance, investment banking and employee benefits areas of the organisation. De Villiers holds a BSc in statistics from the University of Stellenbosch and is a Fellow of the Institute of Actuaries.

unprecedented American and European monetary intervention on a scale never seen before in times of peace. “Risk assets continue upwards on a combination of momentum and low international interest rates. It is uncertain when this upward trend will come to an end. As a result, we see higher volatility going forward. Therefore while we remain defensively positioned and well hedged, we are attempting to take advantage of the current market momentum using hedged equity positions.” As an asset management company focused on enriching lives through investment excellence, we are committed to deliver investment results that outperform the benchmarks and peer groups set for us by our investors, says Frank Cadiz, chief executive officer of Cadiz Asset Management. “We are therefore extremely gratified to have received this further public validation of the enormous effort being made by the investment team at Cadiz Asset Management to deliver on this mandate.”

PSG Asset Management has appointed Anet Ahern as its chief executive officer. Ahern joins PSG with extensive experience in the asset management industry. During her 27year career, she has been involved in the management of assets and companies in the local and global fund management industry in both the primary and multi-management fields. Before joining PSG Asset Management, Ahern was a member of Sanlam Investment’s executive committee as well as chief executive officer of BOE Asset Management. She has also had extensive experience running portfolios as an investment manager.

ABSA ETF RECEIVES MORNINGSTAR FUND AWARD The corporate and investment banking division of Absa Bank Limited, member of Barclays, was awarded the Morningstar South Africa Fund Award for Best Sector Equity Fund, for its NewFunds eRAFI Financial 15 ETF at the 2013 Morningstar Awards. This is the first time in the five-year history of the annual Morningstar Awards that honours were awarded to an exchange traded fund (ETF). The Morningstar Awards cited that ETFs benefited from their meaningful fee advantages versus variable open-ended units trust fees, while their expansion globally, and their adoption by investors, is becoming a far more common place. The NewFunds eRAFI Financial 15 Index, which the award-winning ETF tracks, follows the eRAFI fundamental indexation methodology devised by the US indexation company Research Associates. It comprises securities in 15 companies with the largest fundamental value, selected from a universe of financial-sector JSE-listed companies. Dr Vladimir Nedeljkovic, head of investments at Absa’s corporate and investment banking division, says that the award recognises the fund’s performance as well as the firm’s innovative approach. “Absa was the first exchange traded product provider to introduce the eRAFI investment methodology to the South African ETF market. “This award demonstrates too that exchange traded funds are being recognised in the South African investment market not only as low cost investments, but also for their overall performance.”

The NewFunds eRAFI Financial 15 Index, which the award-winning ETF tracks, follows the eRAFI fundamental indexation methodology devised by the US indexation company Research Associates.

SENIOR MANAGEMENT TO ACQUIRE 15 PER CENT SHAREHOLDLING IN INVESTEC ASSET MANAGEMENT The board of directors of Investec announced that it has reached an agreement with Forty Two Point Two (NewCo) and the senior management team, compromising 40 senior management and employees, of Investec Asset Management Limited and Investec Asset Management Holdings Pty Limited (together Investec Asset Management), to acquire an initial 15 per cent shareholding in Investec Asset Management for £180 million in cash. NewCo has also been granted the option to acquire up to a further five per cent of Investec Asset Management equity over the next seven years to provide an opportunity for wider participation amongst Investec Asset Management employees. Hendrik du Toit, chief executive officer of Investec Asset Management said that this transaction aligns its interests even more with the long-term interests of its clients and allows Investec to continue to build on sustainably into the future. “The firm seeks to create a profitable partnership between clients, shareholders and employees and this transaction allows us to do just that,” Du Toit adds. The completion of the transaction is expected to take place by the end of July 2013.




BRICS dialogue 2013 – india Investment Solutions hosted the India BRICS Dialogue 2013 in Cape Town, Johannesburg and Durban during the month of March. The BRICS Dialogue looks at the major developing economies of the BRICS countries and their effects on the South African and global economy.




lenn Silverman, CIO, and Chris Hart, chief strategist, both at Investment Solutions, returned from India to discuss insights gained and lessons learnt that are relevant to South Africa from an investment and policy perspective. The BRICS group of countries are by definition linked by their similar stages of economic growth and are some of the world’s fastest-growing economies, responsible for 55 per cent of global economic growth since 2009. However, there is disagreement that South Africa, due to its smaller population and economy, should not form part of BRICS. Some foreign policy experts suggest that countries like China are using South Africa as a strategic

move to gain better access into Africa, while others argue that the country is no longer regarded as the gateway into Africa and countries like China are not dependent on route-toaccess via South Africa. Chris Hart states, “The inclusion of SA in this grouping is more in recognition of its stature within the African context than its economic muscle.” Whatever the case, critics suggest that the country needs greater emphasis on fixing internal problems.

Investment Solutions found that the Indian perspective indicated a similar viewpoint to the latter, but due to South Africa’s strong financial and business infrastructure, the country is highly regarded as a thought leader on the continent. Despite this, South Africa is losing out on investment to other African

qualifications annually and feeding these skills back into the economy. With this highly skilled workforce, a number of Indian companies are expanding globally established businesses in thriving markets. In fact, around 67 per cent of companies doing business in India plan to expand their businesses in rural markets.

countries; and as the African markets become competitive, the drive towards attracting foreign investment and growing the economy within becomes paramount. As part of its national development plan, India’s 12th Five-year Plan aims to meet a targeted growth rate of nine per cent by 2017 with a strong focus on growth outside of India, and a view in mind to reduce poverty estimates by two per cent annually on a sustainable basis. The rate of decline in poverty doubled during the 11th Plan. A variety of factors have contributed towards India’s strong growth including the thousands of students obtaining highly skilled

Despite the disparity between rich and poor, 60 per cent of the Indian labour force is employed in the agricultural sector, making it a huge player in food production. However, the agriculture industry, while still expected to expand, is falling short of growth in sectors such as energy and manufacturing. India’s informal sector is linked into the economy with informal settlements forming part of these industrial and manufacturing industries. With a strong drive to build infrastructure, mainly led by the private sector, and with urbanisation developing at a fast rate, job creation is providing additional cash flow and growing the economy. The expanse of urbanisation and rapid infrastructure development has enabled the Indian Government to mobilise a high savings rate to pay for expenses, enabling the country to expand. In contrast, South Africa’s savings rate hovers around 15 per cent. Fortunately, South Africa’s National Development Plan (NDP) is pushing infrastructure growth and government is driving a need to increase the

savings rate. While the effect on the economy remains to be seen, the ideological shift towards building infrastructure and increasing the savings rate bodes well for South Africa’s economic future. Silverman and Hart argue that despite South Africa’s many challenges, they are challenges that can be met. In India, many SMEs stay within the informal sector in order to avoid corruption and red tape. As a result, India’s tax base is concentrated on the formal sector despite the slums being thriving industrial hubs – it is this untaxed sector that remains a challenge for the Indian Government. In South Africa, however, the informal sector is more of a labour force. It is growing, but government’s hands are tied while it seeks ways to collect more tax from households as well as encouraging savings. Despite perceptions, South Africa’s corruption rate also fares better than its BRICS counterparts and business conditions are often more favourable. South Africa has many competitive advantages to its BRICS counterparts. The country is adept at implementing regulatory frameworks and has one of the most stable banking sectors in the world. Growth in the SME sector will be crucial, however, as a cornerstone to bolster the economy and create jobs. investsa



itrade launches

facebook fantasy league


or off. They will effectively be the portfolio managers for that time and manage the portfolio by ‘liking’ or ‘unliking’ a share. The 90 shares have been selected as the biggest stocks in the financial, industrial, retail and resources sectors.”

Gerhard Lampen, head of Sanlam iTrade, said that the fans will initially be given a basket of 90 shares to choose from, “Fans will vote to reduce these picks to the top 20 and the additional shares will be voted on

Lampen notes, “The main driver for the competition was education around online share trading. Online trading is a wonderful, empowering do-it-yourself form of investing which is compelling and lots of fun, but unfortunately many prospective investors find it intimidating because they lack knowledge. By watching the portfolio perform over the coming months, fans will learn about the

he Sanlam online trading platform iTrade, has launched a first-of-itskind Facebook app and competition aimed at exposing social media users to the vibrant world of online share trading. The iTrade Fantasy League will see Facebook fans voting for their favourite stock picks over a nine-month period and Sanlam iTrade investing a full R1 million in the top stocks share portfolio.

PRESCIENT LAUNCHES EMH PRESCIENT MONEY MARKET FUND EMH Prescient Investment Management has announced that it has launched a money market solution in the form of the EMH Prescient Money Market Fund. In a volatile market environment, the fund invests in cash and high quality capital market instruments and is structured to minimise the risk of not meeting the benchmark.



Farzana Bayat, portfolio manager at EMH Prescient Investment Management, says the fund is managed actively using quantitative techniques. “Returns achieved above the benchmark are used in specialist strategies designed to enhance yield. Further valueadds can be included by using duration positions, credit exposure, sweeteners and derivatives, while the fund can also invest in nominal and real instruments as well as structured notes. According to Bayat, the fund looks at a broad universe of investments that are

JSE and the fundamentals of stock broking. Every month we will focus on a different share in the portfolio and offer deep information on that share. Fans will be able to learn more about the share, predict its month-end value and win prizes based on these predictions. “Fans who accurately predict the actual profit of the portfolio at the end of the league in November 2013 will share in the profit of the portfolio, with 60 per cent of the profit going to the fan whose guess was closest to the value, 20 per cent to second closest, 10 per cent to third closest and the final 10 per cent to charity,” concludes Lampen.

chosen to fit within the mandate, such as Jibar/prime-linked notes, creditlinked notes, inflation-linked notes, short bonds, interest rate swaps and structured products. The team looks at money market scenario analyses where it models the returns of the universe of interestbearing assets under different interest rate scenarios. Each instrument is considered on its valuation and the investment risk and return under different rate scenarios. Only those instruments that offer better return opportunities that won’t increase risk will be considered for investment.


world germany, france, egypt, kenya, sudan, asia, europe, angola

Germany approves 2014 budget German Economic Minister Philipp Roesler has approved the 2014 draft budget with the lowest deficit in 40 years. Roesler sees the new and revised budget as a step towards alleviating the nation’s debt battles. With economists foreseeing a better economic term for Germany next year, potential international investors will now be watching the nation’s progress.

over the country, amidst political and external funding volatility. Offering a diverse range of opportunities, Egypt’s financial data continues to remain unsteady with reserves decreasing to $13.6 billion at the end of January 2013, accounting for a 60 per cent fall in two years. While the nation’s borrowing costs also continue to rise, President Morsi was quoted as saying that the economy would grow by 5.5 per cent next year and up to eight per cent in 2015.

Gold to take preference over international currencies

New Kenyan president to boost country’s ailing economy

Gold allocation has been given preference over international currencies such as the Chinese Yuan, Australian Dollar and Canadian Dollar by central banks due to the latter’s small market size and access constraints. According to a report by the World Gold Council (WGC), gold is seen as more favourable by investors over their paper counterparts due to investors looking to diversify away from the US Dollar and the Euro.

President Uhuru Kenyatta became the new leader of Kenya winning the election by 8 000 votes, which carried him over the 50 per cent threshold. The new election will determine the course of the nation and its economy. Although inflation has been declining steadily since the beginning of this year, the prevalent high interest rates are slowing down activity, as the World Bank’s forecast on economic growth this year is 4.3 per cent.

Annual French inflation rate strongest in more than three years

Oil flow to resume as Sudanese governments reach agreement

The French inflation rate is at its lowest in more than three years, presenting a small but notable increase in consumers’ purchasing power. Consumer prices rose 0.3 per cent in February from the previous month according to data published by the International Institute of Statistics and Economic Studies (INSEE), the global official statistics agency. Falling slightly short of economists’ average predictions, the French inflation rate is expected to remain steady for the coming months at 1.4 per cent.

The reopening of oil pipelines between Sudan and South Sudan will be implemented within the next month. The oil deal is worth between $1 billion and $1.5 billion annually in transit fees and other payments for Sudan, an international economist has estimated. Billions more would reach South Sudan from its oil exports. The pact marks a potential turning point for the world’s newest nation, said Endre Stiansen, senior Sudan adviser and special envoy to Norway’s foreign affairs ministry. “Overnight, the economic prospects of South Sudan have gone from terrible to promising,” he said.

External funding woes hit growth in Egypt External funding issues are affecting Egypt with asset managers acknowledging that many investors still maintain a watchful eye

Asian economies showing steady climb after years of strain Asian currencies compared favourably

among other major markets following close examination of the nation’s annual financial statements, including fiscal balances, growth rates and healthy balance sheets studied by the Federal Reserve. The interest rate differential makes Asian currencies attractive. European Central Bank says Eurozone crisis is far from over Despite the recent claim on financial markets, the Eurozone crisis is far from over, according to the European Central Banks policymaking governing council. According to government officials, the nation has to tackle the root of the problem which lies in troubles with reforms. Bundesbank chief, Jens Weidmann, adds, “France’s reform drive hasn’t remained at a steady enough pace, showing signs of irregularity.” Angola invests $555 million on Mozambique coal venture One of the world’s largest metallurgy companies, Anglo American, is spending $555 million in a bid to buy a majority stake in a coal project in Mozambique. The new coal venture has attracted some of the world’s largest resources companies, such as Vale and Rio Tinto. The new coal basin will start with production only in September 2014; however, the project is said to attract vital investor potential both locally and internationally. Sub-custody survey reveals Middle East moving forward economically The recent Global Investor survey has found Bahrain, a small island country situated near the western shores of the Persian Gulf in the Middle East, is moving forward economically following the establishment of the county’s first multi-asset exchange policy. With the mutual fund industry being one of the fastest-growing segments in the world, the industry has been growing at an annual rate of 15 per cent. investsa




They said “The government does not create jobs ... but it can create a context and facilitate partnerships that attract investment, especially from global brands, as we have seen with this facility, which expands businesses and thus creates job.” Helen Zille, Western Cape Premier, spoke at the reopening of a refurbished business in the Western Cape. “The company is in such a good shape that it is difficult to see what more can be done to fix it.” Chris Gilmour, analyst at Absa Asset Management’s Private Clients, commenting on investment holding firm, Bidvest Group’s consistency of outperforming its competitor, logistics company Imperial Holdings. “The rate at which consumers opted for RAs last year shows that there is a renewed appreciation for the benefits that these products offer. This is encouraging given the country’s poor savings rate.” Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), commenting on the concerted effort by government, the media and the savings and investment industry to highlight the importance of retirement savings. “It’s not because the Galaxy S4 failed to meet expectations. It’s just that investors feel technical smartphone upgrades are flattening out.” Bae Seung-Young, Hyundai



Securities, told AFP after shares in Samsung Electronics fell 2.63 per cent in Seoul, following the launch of the smartphone in New York City. “Our view is that sub-Saharan Africa is a growth market. We see it as a long-term investment.” Gus Attridge, deputy CE at Aspen, commented on the plans of the pharmaceutical company positioning itself as the leading generics player in emerging markets (BRICS). “Our foreign policy is becoming increasingly economic. Treasury is becoming much more involved.” Catherine Grant, programme director at South Africa Institute of International Affairs, commented on government’s plans on placing increasing importance on cementing trade and investment ties in the region and with the BRICS bloc to drive economic growth. “We expect ... that many opportunities will be taken up by the business community of our country in particular, to promote investments into our beautiful country. Our BRICS partners do appreciate our youth employment and empowerment drive.” President Jacob Zuma, commented on how the BRICS summit, which took place in Durban, will help promote youth development within South Africa.

“Africa has a vast untapped market with an abundance of investment opportunities across many different sectors and industries.” Louise Robinson, marketing director of Database 360, commented on the International Monetary Fund (IMF) World Economic Outlook report that Africa is world’s fastest-growing economy. “Without fail, all of the South African assets currently considered ‘one-decision, must-own’ were the dogs of yesteryear – all within the past 10 to 15 years and in many cases more than once. Frankly, from the perspective of a long-term investor or saver, that’s not a long time.” Daniel Malan, Investment director at RE:CM, on how in investment markets the mistakes of the past are virtually guaranteed to be repeated. “While the South African market is probably one of the few exceptions, most stock markets are not expensive. On both a forward PE and price-to-book basis, global markets are trading well below recent historic averages. It is true that corporate profits and margins are at somewhat elevated levels; however, low price-to-book multiples seem to indicate that markets are of reasonable value nonetheless.” Matthew de Wet, head of investments at Nedgroup Investments commenting on the value of global stock markets.



u o Y id sa ets e w t st e t b s a e l h f t er the o e som you ov f o tion ned by eeks. c e l A se mentio four w as @themotleyfool: “Macro trends can be fascinating to follow – but they shouldn’t steer your investments. @AlyceLomax explains why: .” The Motley Fool – Helping the world invest – better. Have a question or comment? Tweet@katrinachan from our social media team, or @alisonsouthwick for PR inquiries. Fool on! @GTalevi: “Don’t want to gush but Sasfin’s results look pretty tidy. Oh: their shares are up almost 10%! Not too shabby...” Giulietta Talevi – Business broadcaster. SENS stalker. Occasionally apoplectic. Interested. Johannesburg @hiltontarrant: “For every 10c the Rand weakens against the Dollar, Sasol gains R861 million in operating profit.” Hilton Tarrant – Radio anchor and financial journalist at Moneyweb. Nationwide on the SAfm Market Update at 6pm weekdays. Obsessed about business, mobile, tech, telecoms. Joburg @DeonGouws_Credo: “Only 7% of UK public trusts politicians – but that’s still better than the 5% which applies to fund managers!

(BlackRock ‘12 survey #fund13)” Deon Gouws – Chief investment officer at Credo Group UK Limited. Ultra-marathon runner and Arsenal fan (proving that investing is not the only painful activity that I enjoy.) London @GrantsPub: “The capitalists caught on to the China bubble before the communists did. But have the capitalists exploited every short on China trade?” Jim Grant – Editor of Grant’s Interest Rate Observer, an independent, value-orientated and contrary-minded journal of the financial markets. New York @WilhelmHertzog: “20 times forward earnings for HJ Heinz? Not so sure that’s a bargain in my books Mr Buffett. $HNZ #WarrenBuffett” Wilhelm Hertzog – Full-time value investor and father. Part-time golfer, wakeboarder, snowboarder, motocross rider, fly-fisherman and petrolhead. Cape Town @MoniqueVanek: “Honestly why does Standard Bank need to appoint two CEOs to replace Jacko Maree? It didn’t work out at Comair.” Monique Vanek – Media thinker, public

relations strategist, mentor, editor, content creator. South Africa @mobivangelist: ““What Wall Street did to us in 1999 pales in comparison to what they did to the country in 2008. (via @ parislemon) …” Peter Matthaei – Head of @Mxit Black Ops. Formers co-founder World of Avatar. Dreamer. Gamer. Sir Stir-a-lot. Zookeeper of 1 wife, 2 boys, 2 dogs, 1 hamster & 0 goats. Stellenbosch @valueinvesttips: ““It’s not supposed to be easy. Anyone who finds it easy is stupid.” Charlie Munger #ValueInvesting.” Value Investing Tips – have been enjoying earning about value investing and so set up a blog to write about what I learn so others can enjoy too! @MarcHasenfuss: “Senior management buying 15% stake in Investec Asset Management. Precursor to an unbundling or sale, and separate listing in next few years?” Marc Hasenfuss – Financial journo, whose real passions are Henry Miller, Frank Zappa and watching his kids destroy things



And now for something

completely different

Reading into book collecting as an investment


n the digital age, paperbacks and novels are slowly being replaced by eBooks and, as a result, the appetite for printed books may be on the decline. However, the shift to digital platforms highlights the lucrative returns original paperbacks offer as a viable investment.

from the early years of an author’s career before they became prominent writers. Few original copies have survived having been lost or damaged through the course of history. Those that remain, and those that are still in good condition, are indeed very rare.

The value of owning a rare first edition from a famous author or a unique manuscript from an important moment in history endures, unlike the various digital versions which have no rarity and very little originality. Investing in first edition publications is driven by its limited supply. First editions were often printed in small numbers, especially those

Historical manuscripts are a collector’s dream and are equally rare. These manuscripts, such as royal documents from the Tudor period or letters written by great politicians and war heroes, tend to be exceptionally rare. This ensures they are extremely desirable to collectors, and very hard to come by.

Magna Carta – $21.3 million

the Codex Leicester by Leonardo da Vinci – $30.8 million Published in the 1500s, this is the most expensive book sold to date. The Codex Leicester is a collection of scientific writings providing observations and theories on astronomy, properties of water, rocks, fossils, air and celestial light. Interestingly, it is owned by the second-richest man in the world who took many images from the book to use as screensavers in his operating software program, Microsoft. Bill Gates purchased the book for $30.8 million in 1994 and now freely loans the book to cities around the world for exhibition.



The Magna Carta, which is Latin for ‘Great Charter’, is an Angevin charter drawn up by a group of subjects during the reign of King John of England in an attempt to limit his powers by law and protect their privileges. The charter was originally issued in 1215 and amended versions were later reissued in the 13th century. The $21 million Magna Carta, sold by Sotheby’s in December 2007, is actually a copy made in 1297. In fact, it is widely known to actually be a copy of a copy, with errors and emendations introduced along the way. Sotheby’s reckons that 17 original exemplars from the 13th century survive today, most preserved in England’s libraries and cathedrals. Hundreds more have been lost to rats, fire or neglect.

According to Emotional Asset Research and Management, rare books offer nine per cent per annum returns over 20 years. With relatively low volatility and standard deviation known to be less than five per cent, rare books offer a safe investment option and can be financially rewarding if the necessary expertise, diligence, care and patience is presented. With the desire among collectors to own rare first editions and unique documents from history’s most important events and people, their value is further increased. Here are a few examples of the most valuable publications sold to date.

The St Cuthbert Gospel – $14.3 million The St Cuthbert Gospel is a seventh century gospel book written in Latin and is the oldest intact European book known to exist. The manuscript, produced in the northeast of England, was buried with the early English Christian leader, Saint Cuthbert, on Lindisfarne in about 698. It was later rediscovered at Durham Cathedral in 1104 after the coffin was moved to escape Viking raids. The book, beautifully decorated with a red leather cover is a wonderful example of Anglo-Saxon leather work, and the inside is astonishingly well preserved. Purchased by the British Library in April 2012, the book is set to remain in the UK on display at the library and a copy of it is available online in digitised form for everyone to read.


take a Photo – of your new house

Quit your job – start your own business

set a date, say ‘i do’, live haPPily ever after

Promise them the world, deliver

At Old Mutual Unit Trusts, we know long-term investing is one of the best ways to plan for life’s events. Which is why our Classic Five Investment Collection will help simplify your investment choice. From income funds to maximum growth portfolios – we have the investment solution for everyone at every life stage. And when circumstances change, you can change your funds to meet these new goals. The Classic Five Investment Collection is brought to you by the same investment team behind our award-winning Global Equity Fund. So if it’s keeping your pinkie promise of a holiday, or giving the thumbs up to a life-changing


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Old Mutual Investment Group (South Africa) (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 fund’s 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.