INVESTSA Magazine November 2014 by COSA Media

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CONTENTS 06

Growing light shining over the Dark Continent

Information is key when trying to unlock investment potential in Africa

The hospitality industry and Africa: in or out?

Financial advice that matters

What is the best way to access commodities as an investment?

Exchange traded products industry review: Third quarter 2014

Profile: Nick Battersby, CEO of PPS Investments

The business of advice

insight into compulsory retirement contributions

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the editor We all know the only two certain things in this world are death and taxes. Another American president was even more straightforward on the unpleasant topic: “If it moves, tax it,” said Ronald Reagan. In South Africa, you don’t have to move to be taxed. When your mortal coil is laid to rest, the South African Revenue Services (SARS) will keep on taxing you. That’s why the decision by South African billionaire, Mark Shuttleworth, is admirable: to use the R250 million he was able to reclaim from the taxman, after going to the Supreme Court of Appeal, to fund other people fighting their own constitutional court cases over tax. Shuttleworth had to pay the R250 million to SARS as an ‘exit levy’ for moving his money out of the country. Disagreeable as it is, what concerns me more than paying tax is the question: what is my tax money used for? We are highly taxed in South Africa. Still, I accept that taxes have to be paid. But to be used on what? If it was going towards new schools, clinics and housing, I’d be quite happy. Instead, my tax money funds a more than R200 million upgrade for Number One’s Nkandla residence, and expensive first-class overseas air tickets and hotel bills for government ministers. It’s enough to make people protest. Though that might not be too well supported. While cast wide, the tax net is not very effective, or fair. “The hardest thing to understand in the world is income tax,” said Albert Einstein. If it puzzled one of the smartest people in the world, what chance have we got? We don’t have any direct articles on tax in this issue, but investing and making money is the other, more pleasant end of taxes. There’s plenty of good advice on the pages that follow. Meanwhile I’m lying low, following the advice of that great author Douglas Adams, who wrote: “I’m spending a year dead for tax reasons.”

Shaun Harris

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

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Growing light shining over

the dark continent

Once called the Heart of Darkness by writer Joseph Conrad in his famous novel published in 1902, Africa has become the land of light for investors across the world seeking higher returns from the continent’s fast growing economies and wealth of natural resources. But investing in Africa can be tricky for those who have not done their homework. By Shaun Harris

s international companies flock to the continent, there remains an element of mystery about Africa: there is still darkness clouding some of the 53 countries (it was 52 until the recent independence of South Sudan) that make up the rapidly emerging place. While perceptions are improving and investors are becoming more enlightened, a common mistake still being made is to view Africa as one place. Some investors still talk about investing in Africa as if they are investing in a single country, not 53 different states with very different cultures, political systems and investment and tax rules and regulations.

Thirdly and most importantly, Africa’s young population is better educated and growing wealthier through rapid urbanisation and better jobs and pay.

Dale Tomlinson, founder and CEO of top South African advertising agency The Hardy Boys, says his company has spent several years building a network in Africa. “We are doing work in Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria and Tanzania, and Malawi and Zimbabwe are on the cards.

There is still widespread poverty and unemployment, but the young population is making better money and in the process, becoming discerning buyers, looking for western products. It is estimated that there are about 200 million better educated young people between the ages of 15 to 24 in Africa.

“Big brands and clients represented in Africa by The Hardy Boys include Vaseline, Barclays, Diageo, Unilever, Omo, Sunlight, Royco and Knorr.” But Tomlinson adds that local knowledge, insight and experience are crucial. “You can look very foolish if you get the message wrong,” he says.

can work in and where profits can be repatriated; where there is less fear about fixed investments being confiscated or nationalised.

But why is there this new interest in Africa? There are three main reasons. From a land of haphazard economic planning dependent on aid from the rest of the world, most economies in Africa are now gaining momentum and growing strongly. Some economies in subSaharan Africa are the most rapidly growing in the world. Linked to this is the move of many African governments towards democracy. From a continent characterised by oppressive, often brutal dictatorships, post-independence political systems are becoming more democratic. This encourages investment as investors become more confident about a political system they

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An indication of how seriously Western governments are taking Africa came early in August when US President Barack Obama hosted the largest ever meeting of African government officials in Washington. The conference focused specifically on boosting business and investing opportunities in Africa, with President Obama announcing US$14 billion in commitments by American companies to invest in Africa, focusing on banking, construction, information technology and clean energy. Some of the large international companies of the more than 90 at the meeting included Chevron, Citigroup, Marriott International and Walmart. Africa’s natural wealth remains the big draw card for investors. It’s believed the continent holds more than half the gold in the world, more than 40 per cent of the word’s platinum, and large deposits of copper, diamonds and iron ore. Africa also has several oil and natural gas fields. The continent is, therefore, a big attraction for mining companies, like the proposed deal recently announced by Russian investors. However, China moved into Africa early and remains the largest fixed investment investor. Just looking at South Africa, the Chinese ambassador to South Africa, Tian Xuejun, says that for the past five years China has been South Africa’s largest trading partner, largest export market and largest source of imports. “More and more Chinese enterprises have invested in South Africa. The total amount of Chinese investments reached US$11 billion by the end of last year,” he says. This can have negative consequences for some industries in South Africa, like the domestic tyre manufacturers. Last month Apollo Tyres, subsidiary of the large Apollo Tyre Group based in India, applied for voluntary business rescue proceedings, blaming ‘cheap’ tyre imports from China. Apollo is the company that bought Dunlop Tyres SA in 2010. Dries Lottering, operations director at Bridgestone Tyres, says all the South African tyre companies are under threat from Chinese imports. “Imports of passenger car tyres have grown by 156 per cent since 2008. “But the sharp increases since 2010 came about because the US imposed tariff sanctions on tyre imports by China, so South Africa became a replacement market.” He adds that while tyre imports are increasing, exports by South African tyre makers are decreasing. Yet China remains the major investor in Africa. Garth Shelton, associate professor 8

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of international relations at the University of the Witwatersrand, says when Chinese premier Li Keqiang visited Africa earlier this year, he promised to expand annual two-way trade with the continent to US$400 billion and to increase Chinese foreign direct investment in Africa to US$100 billion over the next few years. “Numerous Chinese infrastructure projects in Africa have shown positive results, while Chinese road and rail building could open the continent to unprecedented levels of economic growth,” he says. South African enterprises have also moved into infrastructure development in Africa, especially railways linked to lowering the costs and making more efficient routes to the major ports in Africa for exports. Transnet has built thousands of kilometres of railway track in Africa, as has Grindrod, aimed at improving the time and efficiency of getting export products like iron ore to ports. Ryan Hoover, founder of Investing in Africa. net, says insurance and infrastructure are some of the best investing opportunities. “There’s huge demand for energy, roads and water. Any companies that have exposure to building, owning or operating power plants are seeing huge gains,” he says. We have already seen Russia constructing

nuclear plants on the continent, including the recent controversial proposed nuclear power station in South Africa. And South Africa’s largest life insurance company, Sanlam, has invested heavily in Africa. South Africa’s main banks and retailers are also dominant in many countries in Africa, taking advantage of the growing population and wealth of the rising middle class. Groups like Shoprite went into Africa some time ago, and today Shoprite earns more money from its stores in Africa than from retail operations in South Africa.

Remember that it’s only at the end of Joseph Conrad’s novel that the reader realises the true heart of darkness is not Africa but the colonising nation, Belgium. Belgium has grown up and become a kinder country but investing in Africa is a two-way process, with possible dangers on both sides.

Agriculture and the need for sustainable supplies of food also offer investment opportunities. The United Nations says Africa holds more than 60 per cent of the world’s uncultivated arable land, with only 10 per cent currently planted. The South African sugar groups have moved across the continent, especially Illovo Sugar, which has extensive operations, mainly in East Africa. TongaatHulett owns and operates two large estates in Zimbabwe, and even the smaller Crookes Brothers has a large sugar estate in Zambia. But while African governments can provide some obstacles to foreign investors, some Western countries pose a threat too.

The required standard of professionalism FISA introduced the registered professional designation FPSA®* in 2011. FPSA® indicates competency and professionalism in fiduciary matters, and FISA members are also subject to a Code of Ethics demanding utmost integrity and diligence. To earn the right to use the FPSA® designation, candidates in the fiduciary field must pass an examination and comply with educational and experience requirements. More information on the examinations in November 2014 is available on www.fidsa.org.za FISA membership is open to fiduciary practitioners, financial planners, lawyers, accountants and any professional who meets our membership criteria. FISA has signed a Memorandum of Understanding with the FPI, allowing each other’s members to earn CPD points for various activities and events. * Fiduciary Practitioner of South Africa®

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Information is key when trying to unlock

investment potential in Africa

By Vivienne Fouché

Given Africa’s sustained growth rate of over six per cent a year for the past 10 years, paired with slowdowns in some other emerging markets, global investors are paying more attention to Africa. There is a growing need for investors to understand whether the continent has a place in their portfolios and, if so, how they will access what the continent has to offer. 10 investsa

nswering these questions accurately depends on the availability of reliable data, a commodity that is sometimes in short supply. Rory Ord, head of private equity at RisCura, says that RisCura’s Bright Africa report, now in its second year, provides insights that help analysts and investors make informed decisions about both listed and private equity investments. Bright Africa 2014 shows that accessing Africa’s growth requires both types of investment to avoid missing out on important sectors and opportunities. Ord says, “While African markets develop, investors are using several channels to access African growth equity. Local listed markets give good access to financials, telecoms and consumer staples in certain countries, while private equity allows stronger exposure to consumer discretionary

as well as industrials and materials, and niche sectors such as healthcare and education.” He says certain other sectors such as some resources can be further accessed through foreign listed Africa focused companies. Brian Mugabe, head of research at Imara Africa Securities, a division of Imara SP Reid Stockbrokers, offers another useful information source on investing in Africa. He says, “Another factor influencing proxy plays is a perceived lack of Africa research. Such concerns need not be a deal-breaker. Quality data is available if you know where to look. For instance, the pan-African Imara financial services group has on-theground representation in many sub-Saharan markets. Its analysts maintain a steady flow of research. In jurisdictions where there is no grassroots presence, its professionals

of new private equity and equity funds with sub-Saharan exposure confirms continued Africa focus. Indeed, one recently closed SSA focused PE fund was substantially oversubscribed.” Ord says that on the whole, investors can access African markets at reasonable price to earnings multiples. ”Listed market price to earnings multiples (P/E) average a little below the emerging markets average and are significantly below the developed market average. The consumer staples sector is the highest priced sector on the continent on a P/E basis across most markets, while other sectors are at lower levels. Private equity transaction multiples are still below global levels and are well below multiples observed in the BRICs.” Ord says private equity has become increasingly easy to access, with over 200 regionally focused managers now active on the continent, providing on-the-ground knowledge. “Pan African and sub-Saharan funds provide for larger scale investment. Furthermore, African private equity deals use significantly less debt than other parts of the world.” Merger and acquisition (M&A) activity on the continent is also included in the Bright Africa 2014 report. M&A deals have reached pre-financial crisis levels, showing increased confidence in Africa; Asia has tripled its investment in M&A on the continent from 2007 to 2013.

conduct exhaustive site visits or data is provided by associates.” Mugabe comments that Africa is not one big market but that it does represent ‘one big investment opportunity’. He says, “There is no sign that investor interest is starting to wane. Many highly sophisticated investors see a stake in Africa as a stake in the future and often promote their African products as strategic instruments to leverage excellent value opportunities. “Most growth forecasts for sub-Saharan Africa (excluding South Africa) for 2014 and 2015 remain in the six per cent plus range, supporting continued demand for African securities and strong interest from European, US and South African investors, backed by recent commitments from the Middle East; specifically Qatar and Dubai. The opening

Ord continues, “Since the financial crisis, global flows of capital have been redirected to emerging markets on concerns over developed market growth. Africa has benefitted from these flows as improved capital availability has helped to fund high levels of growth through FDI and portfolio flows into listed and private equity. There are now eight African economies with GDP of over US$100 billion, and around 1 000 mergers and acquisitions reported each year at a value of US$30 billion in 2013.” Earlier this year RisCura researched investor attitudes on Africa in a separate report, titled The Search for Returns. Respondents expect African markets to be significantly greater recipients of global capital than in the past. Mugabe says, “Though the product mix remains limited, entry into African markets is becoming easier. Imara Africa Securities, for example, has established custodial arrangements across multiple African markets. Allied with our ability to trade across the continent, it is possible to place an order and complete a transaction with minimum administrative inconvenience.

“Some institutional investors have their own arrangements with on-the-ground brokers, but it is nearly impossible for small retail investors to transact in individual markets in the face of custodial issues and timeconsuming processes.” Mugabe says that Imara Africa Securities one interface removes the hassle from direct African market participation. “This may embolden more South African investment houses to introduce Africa-facing products. Some European and American investment companies have offered Africa funds for 30 years. South Africans were late starters. We have a lot of catching up to do,” he concludes.

Another source of information on investing in Africa is to be found in Rand Merchant Bank’s (RMB) fourth annual Where to Invest in Africa 2014/15 — A Guide to Corporate Investment. The 2014/2015 edition shows a less favourable year for Africa’s investment attractiveness ratings, with the continent’s overall investment attractiveness deteriorating and, in addition, 22 countries receiving lower scores than the previous year. A small part of the deterioration may be temporary, for example, due to the political upheaval in North Africa. However, the outcome emphasises that the continent still has a long way to go in terms of reforms if the recent economic boom is to be sustained. South Africa remains Africa’s foremost investment destination and has, in fact, extended its lead despite a GDP revision that transformed Nigeria into Africa’s largest economy. According to the report, the top 10 most attractive investment destinations in Africa are: South Africa, Nigeria, Ghana, Morocco, Tunisia, Egypt, Ethiopia, Algeria, Rwanda and Tanzania. East Africa is forecast to grow at an average of 6.3 per cent between 2014 and 2019 but could surpass this if oil and gas activities come to fruition sooner than anticipated. The latest edition focuses on cities. Some findings include cities like Algiers, Cairo, Casablanca, Johannesburg, Lagos, Luanda and Tunis and earmark them as significant contributors to Africa’s overall GDP.

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The hospitality industry and Africa

The JSE has never really been terribly accommodating of hospitality counters over the last few decades. Even now â&#x20AC;&#x201C; when tourism and travel are regarded as genuine sweet spots in the economy â&#x20AC;&#x201C; there is hardly a surfeit of hospitality listings on the JSE, and those that are attracting market attention have gaming/casino components that far outweigh the traditional hotel offering. By Marc Hasenfuss

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in or out?

here have been some stalwart hospitality listings on the JSE – the reassuringly consistent affordablestay model of City Lodge, the cashspinning appeal of Sun International and, more recently, the gargantuan glitz of South Africa’s biggest gaming and hotel hybrid, Tsogo Sun. The number of hospitality listings that have booked out of the JSE, however, makes for sad reading. In the nineties, Karos and Stocks Hotels & Resorts ran into trouble and shuffled off into the sunset. Cullinan Hotel & Leisure Group (not to be confused with Cullinan Holdings) opted to delist, and Pacific Holdings, a Malaysian company that owned the Cape Rendezvous Hotel, made a quiet exit from the JSE. More recently the Don Group – which owned and operated self-catering suite hotels – threw in the towel after many years of struggling for viability. Investment conglomerate Lonrho – which owned the Cardoso Hotel in Maputo and recently opened an easyHotel in downtown Johannesburg – was also delisted after a private equity buyout. There were also two outright hospitality disasters on the JSE that were directly linked to the euphoria surrounding the 2010 Soccer World Cup. These were Queensgate and Quantum (which developed the well-known 15 On Orange Hotel near the Company Gardens in Cape Town). Both took big punts ahead of the football frenzy but allowed ambitious expansion plans to cloud the trading realities of the local hospitality sector. As things stand today there are but a handful of hospitality stocks to choose from if allied listings like restaurants (Spur, Taste, GPI and Famous Brands) and travel/leisure companies like Cullinan Holdings and

Wilderness Holdings are left aside. Of late, local hotel groups have looked to mainly consolidate their positions in a tough and competitive market – especially for those owners of upmarket hotels, where a combination of accommodation downgrading by guests and an element of over-trading (especially in Cape Town) has resulted in vacancies sometimes dipping below the 50 per cent mark. Among the big three of Sun International, Tsogo Sun and City Lodge, there is currently an interesting pattern emerging regarding expansion into Africa, which, right now, is every investor’s favourite theme. But what is apparent is a divergence of views on Africa, with Sun International partially divesting from its African hotel operations, and City Lodge and Tsogo pressing ahead with some vigour to increase exposure to markets north of South Africa’s borders. Sun International recently clinched a deal with international hotel operator Minor International Public Company (MINT) Limited to sell off 80 per cent of its holdings in the Gaborone Sun in Botswana, Kalahari Sands in Namibia, the Lesotho Sun and Maseru Sun in Lesotho as well as Royal Swazi and Ezulwini Sun in Swaziland to MINT. Sun also sold half its stake in the Royal Livingstone and Zambezi Sun in Zambia to MINT, and is in discussions to reduce its holding on the Federal Palace in Lagos, Nigeria. The terms of this R664 million deal relegate Sun International to a role of sleeping partner in the hotels. That should suit Sun just fine as it will be allowed to continue managing the various casinos attached to the properties. The big upside is the cash flow enhancement to Sun. The company no longer bears

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in or out? responsibility for the regular (and costly) upkeep of these properties, but collects a management fee on the casino business. More importantly the MINT deal allows Sun International to intensify its focus on building a global casino presence – most notably Latin America, where the company already has a presence in Chile, Panama and Colombia.

touches to the R270 million expansion of Southern Sun Maputo on Mozambique – which includes adding 111 rooms, new conference facilities, expanding the existing restaurant and refurbishing the existing 158 rooms. Essentially this project took advantage of the hotel’s fantastic location, extending along the popular beachfront on the Avenida de Marginal.

While Sun International appears to be hastily checking out of the hotel business in Africa, its JSE counterpart, Tsogo Sun, is doing just the opposite. In 2013, Tsogo showed how serious it was about African expansion when it committed a not insubstantial $100 million towards expanding its interests in Africa.

Tsogo Sun operates hotels in seven African countries including South Africa, Mozambique, Zambia, Tanzania, Kenya, Nigeria and the Seychelles. The company’s annual report makes scant mention of the African forays, but Tsogo’s chances of becoming a leading hotel operator in Africa should perhaps not be discounted.

Last year, Tsogo Sun followed this up by completing the acquisition of a 75.5 per cent stake in Ikoyi Hotels Limited in Lagos, Nigeria, which cost the company $50.6 million (R550 million) along with a re-financing of $19.7 million (R220 million) debt in the business.

City Lodge – best known for its chain of mid-priced hotels catering mainly for the business traveller – is also making strong inroads into Africa.

This is familiar territory for Tsogo as the company previously managed the Ikoyi Hotels property. The Ikoyi hotel comprises 195 guest rooms and suites, a restaurant, business centre and meeting room facilities. Importantly for Tsogo Sun the hotel also has additional land available for future expansion, allowing the company to consolidate its presence in the fast growing Nigerian economy as well as providing a base from which to expand operations within the country. Tsogo also recently added the finishing

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The company now has three fully owned hotels in Kenya and Botswana. In the latest annual report, CEO Clifford Ross says City Lodge is making good progress towards expanding its footprint in east and southern Africa. Ross points out that in addition to completing the acquisition of the remaining 50 per cent of City Lodge’s Kenyan joint venture, the company had recently made significant progress in growing its presence in east Africa. City Lodge now owns 100 per cent of the Fairview and Country Lodge hotels. This gives City Lodge a strong springboard into east Africa.

In this regard, an agreement has been concluded for the purchase of land in Nairobi for the development of a 170-room City Lodge Hotel at a cost of $23 million (R240 million). This will be the first City Lodge branded hotel outside South Africa aside from the Road Lodge in Botswana. Construction is set to begin in the first quarter of 2015, and the hotel should open by the middle of 2016. In further African developments, City Lodge has also snagged a long-term land lease to develop a 147-room City Lodge Hotel in Dar es Salaam in Tanzania. This development will set City Lodge back another $22 million (R230 million) with construction set to commence in the first quarter of next year. Ross said City Lodge was keen to explore additional opportunities in Nairobi, as well as Kampala, Uganda. It is also understood that City Lodge is eyeing opportunities in Maputo, Windhoek and Lusaka in Zambia. Encouragingly, City Lodge has also reported that trading at its first ‘greenfield’ hotel development outside South Africa in Gaborone, Botswana, continues to improve as the hotel becomes betterknown in the capital. At last count, only R30 million of City Lodge’s turnover of over R1 billion is generated from African hotels, but in the next five years market watchers are expecting this number to inflate considerably.

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Financial advice

that matters By Vivienne FouchĂŠ

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Good financial planning can give peace of mind, help achieve personal goals and give individuals valuable choices that they might not otherwise have considered. Putting together a well-constructed plan with an accredited financial adviser will provide direction and meaning to financial decisions.

erry Sutherland, a senior financial consultant at Alexander Forbes Financial Planning Consultants, and James Carvalho, director at Chartered Wealth Solutions, offer some insight into what it means to be an accredited financial adviser and how good financial advice can add value to any client’s individual planning.

The Financial Planning Institute website, www.fpi.co.za, offers a list of accredited financial advisers.

What it takes to be a financial adviser

The broader aim of the announcement was to encourage South Africans to save in order to reduce their vulnerability, both before and after retirement. The 2012 overview paper was followed by a series of five technical discussion papers on different aspects of retirement reform, of which four papers were released during 2012 and the fifth in 2013. Broadly, the government wants to:

Advice from a trusted adviser is based on three pillars of qualification: education, experience and ethics. Sutherland explains, “Quality education lays the foundation for good advice. This is why it is so important for financial advisers to be Certified Financial Planners. As a CFP® professional, they would be exposed to ethics training to make sure they are fully qualified to work with an individual’s livelihood and ultimately help shape their financial future. “There are also certain values that a financial adviser should have such as honesty, being well-informed and being aware of an individual’s needs.” Carvalho endorses this, adding, “I believe all financial planners should carry the CFP® post-graduate qualification. Not only does it show that the planner has a level of professionalism, but it also shows a level of commitment that their client will receive the best or most appropriate advice. This qualification can be achieved in one year and is, usually, underpinned with some form of undergraduate study. “However, having the CFP® designation does not mean you are then qualified to give advice. Firstly, you will need to be appointed as a representative within an authorised financial services provider. Secondly, you will need to be under supervision for normally a year with a qualified adviser before you can give advice alone. This is also practice dependent and dependent upon when the key person thinks the representative is ready to go it alone. The more the adviser has been in business, the better the advice – you cannot discount experience.”

Retirement reform and financial advice The current emphasis on the savings and retirement reform process was first announced by the Minister of Finance in his 2012 Budget.

• Encourage employees to save for retirement to make sure they can retire comfortably and have income that lasts for their lives in retirement. • Encourage employers to provide retirement saving plans to their employees as part of the employment contract. • Make sure that employees receive good value for money for their retirement savings and are treated fairly, with their savings prudently and diligently managed, and that they are kept informed of their retirement savings. • Improve standards of retirement fund governance, including trustee knowledge and conduct and the protection of members’ interest. Sutherland clarifies, “An informed financial adviser should be aware of these proposals and legislation and give advice to clients accordingly. For example, legislation has been implemented regarding the maximum cash withdrawals at retirement. This will be implemented from March 2015. “Going forward, the government is proposing compulsory partial preservation only of new contributions that come into the retirement system after new legislation comes into effect. Limited withdrawals will be allowed, and accumulated savings on the date of implementation will not be affected. This legislation has not come into effect but it has been proposed. investsa

“An adviser who is up to date with the latest legal changes can add true value to a personal financial plan. The legal environment provides a framework to financial advisers that they can work within and plan for any changes that could affect an individual from a tax, investment or retirement perspective. The legal changes that are part of retirement reform will have implications on financial planning at an individual’s level.” Other legislation to consider Carvalho says legislation gives a planner a framework from which to work. “Working within this framework means the advice should be above board and in the client’s best interest. It’s done with a code of conduct which is deemed ethical and fair. “This also offers a fantastic business opportunity to stand out among those who continue to buck the current legislation and evolving legislation landscape. There is no doubt that the evolution of FAIS (the Financial Advisory and Intermediary Service Act) of 2002 has already had a significant effect on the industry.” The fifth retirement reform discussion paper, released in 2013, includes a discussion of charges and costs. This emphasis runs in parallel to other legislative proposals that look at costs, including the Retail Distribution Review (RDR). Carvalho comments, “With the advent of new legislation such as RDR, fees that advisers charge for services rendered will be in the spotlight. The aim of RDR is to increase the level of professionalism in the industry and to increase the level of transparency to the benefit of the client. “Other pending legislation which has been enacted but yet to be implemented is POPI (the Protection of Personal Information act 2013). This has been designed to protect personal information processed by private and public bodies. All this legislation is going to ensure that the client gets a fair chance at getting good advice if they have not already through FAIS.” And speaking of fees Sutherland believes good financial advice is worth the fee. She says, “When an individual considers the amount of products that you can choose from in the market and how to choose what is appropriate for their unique needs, then an advice fee becomes justifiable. It is the financial adviser’s responsibility to provide a service that is worth their advice fee. “This means doing their homework, regular assessments, communicating with clients in a way he or she prefers. The important thing is to be upfront and honest with financial advice fees. An individual should understand the fees and what they are paying it for.” Carvalho agrees, adding, “I believe the fairest way to charge a client is the fee system. That way the client knows up front what they are paying for. Charge a fee for the financial plan and don’t commit the client to the implementation process. 18 investsa

“This way you can prove your objectivity in that you don’t have to sell products to pay for your professional time. If the client then decides to implement, then quantify the fee that the client will pay for ongoing advice and service.”

Carvalho adds, “Budgeting is the cornerstone to financial planning. People think having a financial plan is for the rich and famous but it starts with a simple budget. Find out if clients are saving or spending more that they are earning.

Financial advice and the individual Both Sutherland and Carvalho acknowledge the importance of advising their clients through different ages and stages of their lives. Sutherland says that throughout the entire financial planning process, the needs of the individual should take centre stage and that the financial adviser needs to weigh short-term needs with long-term goals in a manner that is true to the individual’s overall financial plan. She comments, “I can definitely see a difference in financial awareness from those who have received financial advice in the past and those who have not. I find that those who have worked with an adviser are better equipped for their retirement because they are saving money wisely and are generally more aware of their financial options.”

“If so, guide them on steps that can be taken to rectify this pattern first. Next is to understand the assets and liabilities in one estate. Knowing how many assets they have accumulated and how much debt is held, is imperative. “Ascertain which assets can be used for retirement planning and, if there is debt, find out how long the term is and what the interest rates are. Then discuss the goals: short, medium and long-term. Lastly look at insuring the client if needed against death, loss of income and disability as well as retirement funding and investment for their goals.” Quality financial advice should be empowering and help an individual work towards their goals realistically and in a manner that will benefit them throughout their different life stages.

Allan Gray

Jeanette Marais, director: distribution and client service, Allan Gray

Look to corporates to

diversify your client base

While corporate retirement schemes have traditionally been the territory of occupational pension funds and asset consultants, group retirement annuities are often a better solution and open up doors for independent financial advisers (IFAs) to build longBenefits for employees term client relationships.

ndividually owned retirement annuity funds, managed on a group basis, are a great alternative for small- to medium-size business owners looking for a retirement savings solution for their employees. Because these ‘Group RAs’ are relatively new, many decision-makers may not be aware that this hassle-free solution exists. Benefits for employers

RA membership in a well-run fund has many benefits for individual members, including portability, making it a great long-term perk, which is likely to foster employee loyalty: individuals are usually heartened to learn that they are members of the RA in their own right. This means if they change jobs their RA can move with them. And if they are taking a break between jobs, or on maternity leave, they can stop contributions until they are earning again.

Business owners naturally look to their own financial advisers when they need help setting up a retirement savings arrangement for their employees. A Group RA requires very little administration and intervention from employers, who can do something good for their employees with minimal effort and without incurring liability, allowing them to get on with what they do best – running their businesses.

Unit trust-based RAs often offer individuals choice, allowing them to take responsibility for their retirement savings, instead of ‘outsourcing’ this responsibility, as is the case with occupational funds. Individuals have control over their investment, as they can select underlying unit trusts that meet their goals and suit their risk profile (within the confines of the retirement fund regulations), and they can switch between unit trusts as their needs change.

There are, of course, key differences between an RA and a traditional pension fund – particularly around accessing money before and at retirement. Employers need to be aware of these differences.

Because there is ownership responsibility with an RA, members often become more engaged with their savings in general. For many individuals, RA membership will be their first introduction to the world of investing and,

seeing the benefits, many will go on to make discretionary investments. Group savings presents many opportunities Tax-incentivised savings schemes will become a reality in March 2015. Corporates may consider offering their employees a discretionary group product alongside their compulsory schemes. While you may be put off by the scale of the administration involved when dealing with an intake of a large group of RA or discretionary clients, and advising on many individual portfolios, there are ways to manage this. Some platforms, such as Allan Gray’s, enable you to use model portfolios. Models allow you to group similar clients into defined strategies. This means you manage portfolios rather than individual fund allocations, which makes managing corporates that much easier. There is a need for good independent advice in the group savings space, especially among small and medium-sized businesses. At the same time, building long-term relationships with corporates could stand your business in good stead.

This page is sponsored by Allan Gray, an authorised financial services provider. The Allan Gray Retirement Annuity Fund is administered by Allan Gray Investment Services Proprietary Limited, an approved fund administrator. Allan Gray Investment Services Proprietary Limited is also an authorised administrative financial services provider. The underlying investment options of the Allan Gray retirement products are unit trusts. Collective Investment Schemes (unit trusts) are generally medium- to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/ scheme. Commission and incentives may be paid and if so, would be included in the overall costs. Some portfolios forward price while other portfolios price historically. Consult the company/scheme for details.

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Potentially vulnerable

nt e m e Retir of 2014 class 2015: and

to any possible market loss in the near term

20 investsa

Figure 1: Asset class real returns

17.0% 7.3%

-0.6%

6.2%

7.0% 1.2%

0.3%

-1.4%

1.2%

3.9% -1.1%

3.1%

1.9%

14.8%

16.3%

24.6% 14.1%

15.5%

26.1%

% 30

7.4%

We have been arguing for quite some time that given our lower long-term return expectations, investors in marketlinked income withdrawal plans (most often called living annuities) need to moderate their expectations about the level of income that can be sustained over a full retirement.

-5 SA EQUITY MARKET

Long term

SA BOND MARKET

Past 10 years

SA CASH

SA PROPERTY

MSCI INDEX

Past 5 years

Note: 114-year average real returns. Shorter history for MSCI (43 years) and property (34 years) Source: Triumph of the Optimists, Global Financial Data, I-Net Bridge, Coronation, MSCI

Past 1 year

Asset management

hile we continue to hold this view, in the current environment we would also argue for a more conservative asset allocation. This is particularly relevant to the retirement class of 2014/2015, who may be vulnerable to any possible market loss in the near term.

Figure 2: Industry cash flow trends % 100 Foreign

90 80

SA growth asset performance unlikely to be repeated Over the very long term, South African equities have delivered better returns than any other market in the world. Growth assets (local equities, foreign equities and local listed property) have delivered annualised real returns in excess of inflation of around six to seven per cent, while income assets (bonds and cash) produced around one to two per cent real per annum (see Figure 1). In the last 10 years, growth assets delivered real returns that were significantly ahead of their longterm averages. We don’t believe this is likely to be repeated.

Fixed Interest & Real Estate

70 60

SA Equity

50 40

Multi-Asset Growth

30 20 Income and Growth

10 0 2011

2012

2012 to 6.6 per cent in 2013 (source: 2013 Living Annuities Survey released by Asisa), the benign market environment also resulted in a significant number of retirement investors taking on additional risk.

Foreign assets appear comparatively cheaper. However, it should be noted that while the slumping rand bolstered returns from these investments in the past five years, this cannot be relied on year after year.

Living annuity portfolios that did not comply with Regulation 28 (those that have greaterthan-permitted exposure to risk assets) increased from 19 per cent in 2012 to 25 per cent last year.

In turn, income assets are also likely to deliver a weaker performance, with cash already yielding a negative real return. When bonds and preference shares are taken into account, inflation plus two per cent is the best return to be expected from an income investment for the foreseeable future. While equities may yield slightly more than that, we expect much greater volatility in returns.

This is consistent with the industry cash flow trends as illustrated in Figure 2, which shows that the multi-asset growth category (your typical balanced fund) has enjoyed a substantial share of inflows, while flows into fixed interest funds have dwindled. It therefore appears as though many investors have skipped the income and growth risk bracket.

Significant number of retirement investors taking on extra risk While the extraordinary returns delivered by growth assets in recent times have contributed to a welcome decline in the average living annuity drawdown rate – from 6.8 per cent in

2014

Source: Morningstar, ASISA, Coronation Research

At the time of writing, the domestic equity market is looking expensive, with the JSE’s price earnings ratio close to 17.4 times, compared to the past 55-year average of 12 times. Historical data shows that investors who bought the market at an average of more than 17.5 times commonly earned a negative return in the following year.

An expectation that local assets will again produce above-average performance over the next decade is, therefore, not a prudent basis for retirement income planning.

2013

balanced fund’s risk budget (in other words, the possibility of larger participation in market losses in future). In contrast, income and growth funds (lower-equity multi-asset funds) offer reduced volatility relative to traditional balanced funds. We believe this is the more appropriate consideration, particularly for those investors who are in the final stages of their retirement accumulation phase, or who have recently retired. Given the prospect of lower investment returns and increased volatility, these investors should consider funds that explicitly aim to reduce downside risk in the short term.

This, we believe, is worrying. Many of the top South African balanced funds performed particularly well during the 2008 financial crisis, which may have created a false sense of security among investors who expect these funds to repeat the same levels of performance during the next slump. As there is no commitment from the managers of these balanced funds that returns will be smoothed to manage volatility through bad years, it is crucial for investors to understand the potential consequences of a typical

Pieter Koekemoer, head of personal investments, Coronation

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Alternative investments

ignores five additional commodities available on the local exchange, most importantly yellow and white maize. It also uses foreign reference prices and offshore commodities which are less relevant to local conditions, for example West Texas Intermediary (WTI) instead of Brent for oil, when Brent is the price used for local petrol/ diesel prices. While investors can now get passive exposure to diversified bundles of commodities, this approach can also work against them. Commodity prices, unlike equity prices, don’t necessarily trend upwards. In the case of equities, weaker companies are winnowed out from the index but commodity prices simply fall.

What is the best way to access

commodities as an investment?

hen we analyse the returns on individual commodities, they are similar to equities in terms of their risk and return levels. More importantly, from an investment perspective, they are uncorrelated, thus providing great opportunities for diversification. Surprisingly, however, the use of commodities in a long-term investment portfolio designed to beat inflation is not very common. Why is this? Part of the reason is that for a long time it was difficult to trade commodities – not many people are equipped to hold physical quantities of oil or gold to benefit from changes in their prices. Furthermore, investors usually want to hold a diversified bundle of commodities, but it’s not clear exactly what the correct bundle should be. The development of commodity indices and the provision of passive investment products to track them have provided ways of dealing with these issues. Nowadays investors can get exposure to commodities’ price movements via Futures: exchange traded derivatives that are listed on multiple exchanges across the world. There are currently twelve different commodities that can

22 investsa

be traded via derivative instruments listed on the South African Futures Exchange (SAFEX). There are three well known international diversified commodity indices, namely the Commodities Research Bureau (CRB), S&P Goldman Sachs (GSCI) and Bloomberg (ex Dow Jones/UBS) commodity indices. The CRB index was created in 1957 and had a greater than two-thirds weighting to energy products, mainly oil. The liquidity of this index was questioned, and the S&P GSCI uses a liquidity filter on the underlying contracts in its index to correct for this, although it is also heavily weighted to energy. The Bloomberg (ex DJ/UBS) index addresses this concentration issue by designing its index to limit the exposure to any one commodity to between two and 15 per cent. It thus provides a more diversified index. Locally, the Standard Bank Commodities Index tracks the performance of seven commodities weighted by the production quantities on the African continent. The maximum and minimum limits also are set to avoid over-concentration to any single commodity. We believe this index is not optimal for South African investors as it

Secondly, earnings of companies, and thus their valuations, are generally correlated with inflation – but commodity prices can and do fall and remain low for long periods of time. While this means they offer good inflation hedging characteristics, they can perform badly from an investment perspective for long periods. Actively managed portfolios of commodities, on the other hand, offer the potential to achieve inflation protection when their prices go up but also avoid suffering from negative returns when their prices fall. This, however, is not a guaranteed outcome. Fortunately for investment managers, commodity prices tend to trend – either up or down. Thus, managers who are able to recognise these trends can benefit from the updrafts, and avoid the downdrafts. In summary then, investing in commodities offers inflation protection and good diversification potential. However, if you invest by buying a passive index tracking product, you risk exposing yourself to potentially extended periods of poor investment performance. This should not be a problem if you see your commodity investment as an inflation hedge. Lower commodity prices should mean lower inflation. However, if you are looking to maximise risk-adjusted returns from a commodities portfolio, you will have to look for an actively managed portfolio – most probably one that uses a trend identification approach.

Professor Evan Gilbert, head of asset consulting, MitonOptimal

Barometer

HOT

NOT

PPI slows more than estimated

Statistics SA producer price inflation (PPI), a measure of the change in the price of goods, slowed from 8 per cent in July to 7.2 per cent year-on-year in August. This figure is below economists’ expectations for the PPI to slow to 7.7 per cent year-on-year. The statement revealed that main contributors to the annual rate of 7.2 per cent were food products, beverages and tobacco products.

Household income weak

Six-year high for US home sales The United States housing recovery remains on course with the sales of new US single-family homes reaching their highest level in more than six years in August. Reporting a second straight monthly gain, new home sales increased 18 per cent to a seasonally adjusted annual rate of 504 000 units – the highest level since May 2008.

Africa CEOs optimistic about growth

The South African Reserve Bank’s (SARB) Quarterly Bulletin for the second quarter of 2014 revealed that growth of real household disposable income weakened for the fourth consecutive quarter of deceleration to 1.3 per cent from 1.7 per cent. Household spending growth slowed to 1.5 per cent in the second quarter, and spending on durable goods continued to grow at a slower pace, namely 1.4 per cent, down from 2.8 per cent in the first quarter.

Japan’s economy shrinks Japan, the world’s third largest economy, suffered its worst quarterly contraction since the 2011 earthquake disaster. Worse than forecast, the economy shrank 1.8 per cent in the period from April to June, with an annualised gross domestic product (GDP) rate of 7.1 per cent. The fall was attributed to drop in consumer spending due to the introduction of sales tax in April.

The Africa Business Agenda 2014 revealed that CEOs in Africa are optimistic about their companies’ prospects for revenue growth over the medium term, with 84 per cent remaining confident overall, and 40 per cent remaining ‘very confident’. The report compiles results from 260 CEOs in Africa and includes insights from business and public sector leaders from 18 countries.

SME owners remain resilient The 2014 Second Quarter Business Partners Limited SME Index (BPLSI), which measures attitudes and confidence levels among local small and medium enterprise owners, reported that business owners across various industries expressed average confidence levels of 75 per cent that their business will grow in the next 12 months, an increase of 2 per cent when compared to both the first quarter of 2014 and the second quarter in 2013.

s y a w e Sid

SA competitiveness drops but excels in pillars South Africa continued on its downward trend and fell from 53rd to 56th place in the 2014-2015 World Economic Forum Global Competitiveness Report. The country did well on measures such as intellectual property protection (22nd) and business sophistication (31st), but its performance in the macroeconomic environment remains at 89th, having dropped sharply in the previous year. South Africa’s strong links to advanced economies, especially the euro area, has made the country more vulnerable to the economic slowdown of these economies.

investsa

Exchange traded products industry review:

third quarter 2014 The positive one-year returns of the main indices still remain intact, but the market correction might still work through into the fourth quarter of 2014. Table 1

Third Quarter 2014 â&#x20AC;&#x201C; Main Index Review (Total returns with dividends reinvested) (period ended 30 September 2014) 3 Months

12 Months

FTSE/JSE SA Property (SAPY) Index

7.22%

15.13%

MSCI World Index (rands)

4.07%

22.76%

All Bond (ALBI) Index

2.21%

5.79%

FTSE/JSE Financial 15 Index

0.40%

22.77%

FTSE/JSE Industrial 25 Index

(1.05%)

17.14%

FTSE/JSE All Share Index

(2.13%)

15.44%

FTSE/JSE Top 40 Index

(2.87%)

15.24%

FTSE/JSE Resources 10 Index

(6.63%)

8.71%

Source: 24 investsa

JSE/Profile Data (30/9/2014)

etfsa.co.za

Table 2 Comparative Performances Index tracking unit trusts and ETFs (total return*) FTSE/JSE Top 40 Index Trackers

1 Year

3 Years

5 Years

(%Â p.a.)

ETFs

able 1 shows the performance of the major JSE indices in the third quarter of this year. The best performing indices were the Morgan Stanley Composite (MSCI) World index (in rands) and the SA Listed Property (SAPY) index. The Government (ALBI) Bond Index also showed positive returns. In contrast, most major local equity market indices fell during the past three months, reflecting some change in sentiment affecting local equity markets during the quarter. New capital raised Listing of new securities by ETF companies on the JSE slowed in the third quarter, but still a net R1 441.3 million was raised in new capital. Most prominent was the Standard Bank Palladium ETF, which issued R1 197.6 million in new securities, with the Absa Capital NewGold Palladium ETF also raising R258 million in new capital. Commoditybased ETFs, which are physically backed by 100 per cent holdings of bullion bars, are the most popular ETF products in the local market, increasingly being used by institutional investors as a means of gaining exposure to the resources asset class in preference to mining shares. Equity backed ETFs which raised further capital in the third quarter included the DBX Tracker USA ETF (R60.2 million) and DBX Tracker World ETF (R111.6 million). The Bettabeta EWT 40 ETF, which equally weights the top 40 shares on the JSE, attracted R153.2 million in new capital, much of it apparently from its secondary listing on the Botswana Stock Exchange. Some redemptions took place during the second quarter in the NewGold ETFs and NewGold Palladium ETFs, which reduced the net capital raised figure somewhat, but still an increase of R1.44 billion in capital indicates that the ETP industry, despite a difficult three-month period, is continuing to power ahead.

Satrix SWIX Top 40 ETF

16.87%

22.78%

18.11%

RMB Top 40 ETF

14.90%

22.04%

17.59%

Unit Trusts Kagiso Top 40 Tracker Fund

14.27%

21.38%

16.96%

Stanlib ALSI 40 Fund

14.68%

21.67%

16.67%

Total return with dividends reinvested

Source:

Profile Data/etfSA.co.za (30/9/2014)

For the year as a whole to end-September 2014, R31.5 billion in new capital has been raised by the ETP industry in South Africa, which means that it is increasingly competitive with the active management industry in attracting new business. Index Tracking ETFs versus Index Tracking Unit Trusts There has been renewed activity by the active asset management industry to enter the passive investment management field by issuing passive index tracking unit trusts over the past few quarters. Sanlam, for instance, using the Satrix brand, which is well known for its ETFs, has started four new passive unit trusts in the past few months and Sygnia has also introduced two new passive unit trust tracker funds. It is, of course, perfectly feasible to offer index tracking products under a unit trust licence, which enables the asset management company to piggyback on the established distribution networks and transaction platforms for their other actively managed unit trusts, so by-passing the need to develop any new infrastructure required to support exchange traded products. In more developed markets, such as the United States, some 70 per cent of new retail investment products are now flowing into index tracking mutual funds or ETFs, particularly ETFs. It therefore makes sense for the South African investment product providers to at least get their feet wet by exploring the index tracking market on a progressive basis.

Back in 2009, there were only seven index tracking unit trusts, and this has now risen to 19. The index tracking ETP industry has grown even faster, from 23 products at the end of 2009 to over 70 products today, and from R27 billion assets under management in 2009 to R100 billion at present. Table 2 shows the comparative performance of the best performing index tracking unit trusts and ETFs over periods of three and five years, where such products track the same index. The steady growth in the passive investment management industry in South Africa is good news for the investor. These products will lower overall costs, reduce standard deviation volatility, enhance simplicity in the industry and enable effective blending between active and passive investment mandates. The full Performance Survey of all 90 index tracking products is available on the etfSA.co.za website, www.etfsa.co.za.

Mike Brown, managing director, etfSA.co.za investsa

Economic commentary

Economic issues that can affect the

South African market

“

t was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”

– Charles Dickens, A Tale of Two Cities

These words of Charles Dickens, penned almost two hundred years ago, aptly describe the current South African economic environment. There is so much potential, but there is also much that could cause us to pause and experience grave concern. As an economy, we are creating a perfect storm of adverse circumstances that could be difficult to work through. The current ANC government is making the same mistake that previous national party governments made, namely that foreign perceptions do not matter. History has proved that no country, especially a small one such as South Africa, exists as an island. We have a very large current account deficit of six per cent of GDP. In 2007, foreigners owned 11 per cent of our government bonds. This had increased to 35 per cent by the end of 2013. The President’s secret deal with the Russians to spend a trillion rand on nuclear power stations will cause many foreign investors to be unwilling

26 investsa

to hold our bonds with this as our future trade flow profile. We need them to buy about two hundred billion rands’ worth of our bonds or equities per year to finance the current account. To date, foreigners have been net sellers of twelve billion rand – this is clearly not enough. To attract the investment flows that we need, South Africa must present itself as a model of sound economic management. Exacerbating this trend is the fact that international investors are generally negative towards the major emerging market commodity currencies. In September, the Australian Dollar and Brazilian Real saw similar declines to the rand. Investors are attracted to emerging markets if these markets have growth rates that are higher than the sometimes-pedestrian rates achieved in investors’ home markets. Currently, South African economic growth rates are too low to attract investors.

dollar, but the rand then appreciated back to about 7 to the dollar when the crisis abated. We can surmise from this that the currency always bounces back. However, if we dig a bit deeper, a more concerning picture develops. During the 2002 episode and subsequent bounce back there were no negative investment flows – this was purely a sentiment-driven event. The fall in 2008 and bounce back was, however, driven purely by investor flows. Likewise, the current weakness is being driven by flows as a result of the large current account deficit plus persistent investor selling of our bonds. This is unlikely to turn around soon and could see the rand weaken sharply, from its already fragile levels.

It is all about flow There are two recent exchange rate events that are helpful in understanding the future direction of the rand. In 2001, the currency collapsed from 8 to 12.4 to the dollar in one year. From 2002 until the end of 2004, the rand then appreciated to approximately 6 to the dollar. The next big rand blow-out was during the emerging market crisis in 2008, with the currency going from 7 to more than 12 to the

Rob Spanjaard, director, REZCO Asset Management

Global economic commentary

Global economic developments impacting on the

South African economy

he sluggish performance of the world economy in recent years has contributed to the decline in South Africa’s economic growth performance. For the better part of two decades, South Africa’s economic growth has by and large mimicked that of the world economy. Recovery in the US economy Recent news of the continued strong pace of job growth in the United States, the decline in the unemployment rate and solid growth in new home sales, should be well received by the global economy. However, as positive as favourable US data might appear to be for prospects for global economic growth, and through that for South Africa’s export potential, they do also have potential negative ramifications for the domestic economy. Should US data figures continue coming out so positively in coming months – on the back of loose monetary policy in the US finally appearing to have a positive influence on that economy – this might bring about an increase in US interest rates sooner than originally anticipated. This could cause a redirection of investment flows away from emerging markets into the US, resulting in the strengthening of the dollar, the depreciation of emerging market currencies, and increasing inflationary pressures in those economies. The most vulnerable in this regard would be countries running large current account deficits, like South Africa, which had been dependent upon asset purchases by foreign investors seeking high yields available on such currencies. Phasing out of US quantitative easing (QE) Through QE, the US Federal Reserve has been injecting large volumes of liquidity into the global financial system by purchasing bonds from the global banking sector. While the global liquidity created by QE is still in place, the pace of such liquidity injections is decelerating. As QE becomes completely phased out towards the end of the year, the bull run on global financial markets could normalise as less liquidity becomes available

to be channelled into financial assets. This, in turn, could have adverse consequences for emerging markets, such as South Africa, that are highly dependent on capital inflows and running large current account deficits. Fewer capital inflows into the financial markets of emerging economies (and/or more capital outflows) place pressure on their currencies to weaken and thereby increase inflationary and growth risks. If such a situation materialises, sustained currency depreciation might force the South African Reserve Bank to raise interest rates, which will place further strain on the country’s growth prospects. Slowdown in China’s growth Although still growing at high rates, there has been a general slowdown in China’s growth momentum. China has been undergoing a structural change in its economy away from being investment- and export-led, towards a more consumption-driven and serviceorientated economy. The sustainability of robust industrial production in China is also contingent on strong domestic and external demand growth, both of which remain relatively weak. Slower growth in China, in turn, implies weaker demand for commodities. With China being South Africa’s largest trading partner, a slacking of export demand will impact negatively on the country’s growth prospects, current account deficit and, as a result, the rand.

Declining oil price Interestingly, the oil price has been falling notwithstanding geopolitical tensions in the Middle East. The reduction in demand for crude oil, both in the US as a result of the development of energy from hydraulic fracturing, and in Europe and China due to sluggish economic growth, has been outweighing the interruption to oil supplies from the Middle East.

While the recent depreciation of the rand could cause fuel prices to rise substantially in the coming months, the international oil price has been even further depressed in recent weeks. Even with the rand at its current lows, any increase in prices over the next month or so should be relatively small.

Ilse Fieldgate, senior economist, Econometrix

investsa

Industry associations

Trustees trying to solve

‘the great retirement fund puzzle’

he IRFA 2014 conference, in its 26th year, was a gathering of retirement fund stakeholders which included government leaders, trustees, members, asset managers, fund administrators and pension lawyers. They came together to piece together the ‘great retirement fund puzzle’ and create a clearer picture of pending retirement reform, set for 1 March 2015, and try to solve the issue of sustainable comprehensive social security. The 1 400 retirement fund decision-makers in attendance at the Nkosi Albert Lithuli Conference Centre ICC heard from a line-up of top speakers that included Rosemary Hunter, Registrar of Pension Funds, and Pension Funds Adjudicator, Muvhango Lukhaimane. The overarching insight from the event was that the future of retirement funds and the hardearned savings of retirement funds members lies squarely in the hands of trustees. They need to be trained to be ‘competent and confident’ to deliver on the promise and purpose of the funds they represent. Retirement reform has been projected as an intricate web that has been tightly spun by the government, and yet the new structure is specifically built for the benefit of millions. The cynicism is not solely focused on the structure of the reform, but also on the practical reality of making it achievable, translating what it means for the average person – highlighting where the member will benefit more. In the words of Beatrie Gouws of KPMG, the member “needs to know what is happening with their money for their retirement – we need to show what is currently in place, and then explain what is going to

28 investsa

happen in March 2015. If we don’t, there will be fears, and that will be very concerning.” Lukhaimane provided a refreshingly simple shape to her presentation, spending the first half focusing on retirement fund complainants and their grudges, listed as: “Wanting what they paid for, getting what they rightfully deserve, with respect and dignity,” and then followed up with a crystal clear solution, “Collect contributions and allocate on time”. She went on to ask why this simple solution is so difficult to achieve. “It is true that governance standards have been slipping across government, society, the business sector and in retirement funds. It is true that, as a country, we are losing our moral compass. Why is it that things are going wrong if the government is trying to give all these concessions? Trustees need to go back to why the retirement fund was set up in the first place: What its purpose was. And deliver on that promise.” Anne Cabot-Alletzhauser, head of the Alexander Forbes Research Institute, proposed “We aren’t going to be able to wait for the government to get everything into place,” she said. “The reality is that the system of social protection has been outsourced to us. In not engaging with members we will miss out on the most significant opportunity of our generation to turn the tide on financial literacy. We have to serve them for the whole journey, not just the end game. You cannot get a country to save unless you teach them how not to spend.” Hunter opened the second day of the

conference in saying, “One of the major concerns for us is governance. The most worrying thing is the nature of the power that is being exercised – trustees either do not have the skills or experience or are simply bullied around by service providers. “With regard to retirement funds we need a greater level of simplicity. Many are incredibly complex, and you can’t understand where the money has gone, and what it has been used for. Nobody bothers to read the rules; not even all trustees read them. Let’s do things that make it easier for members and the board of trustees to comply with them.” Retirement funds represent the biggest investment for the average South African. We need to ensure that we all understand where this ‘asset’ fits into our overall financial plan. However, a review and consolidation of the South African social security system is crucial in allowing retirement fund benefits to take their proper place as an asset for retirement.

Wayne Hiller van Rensburg, director IRFA and 27four Individuals

Investment

Slow

puncture

The recent release of the World Economic Forum’s (WEF) Global Competitiveness Index reflected another drop in South Africa’s overall ranking.

outh Africa is now ranked as the 56th most competitive country out of 144 assessed, behind China (28th) and Russia (53rd) but ahead of Brazil (57th) and India (71st) amongst the BRICS countries. Eight years ago, South Africa was ranked 40th and first among the BRICS nations. In Africa, Mauritius, at 39th place, is well ahead of South Africa. The WEF’s ranking is based on multiple factors including financial market development, where South Africa fares well but poorly in labour and education. To be ranked behind Mauritius is an indictment on South Africa, as Mauritius has numerous embedded competitive disadvantages such as market size and relative isolation from global economic centres and trade routes. However, the WEF’s competitiveness ranking has its critics. All of these kinds of rankings can be criticised. However, the WEF has depth of research capacity, which is hard to dismiss. But, even if the WEF ranking is not accepted, other research units with different ranking criteria reflect similar results: South Africa is slowly slipping down in global comparisons. This includes the World Bank’s ‘Ease of Global Comparisons

Doing Business’ ranking; the Fraser Institute’s ‘Economic Freedom’ survey, and the decline in South Africa’s credit ratings. The different rankings by various research bodies reflect the same pattern – one of a slow deterioration. A slow puncture. And the economic measures reinforce what the think tanks are seeing. South Africa is one of the few emerging markets that have experienced an increase in unemployment since the 2008 Global Financial Crisis. It is also one of the few emerging markets where growth has halved rather than rebounded, and this on the back of an increase in debt, not experienced other than in the developed world. The clear underperformance of South Africa, especially since 2008, points to its problems originating internally rather than externally. This is both good news and bad news. Bad news if the current direction of economic policy remains unchanged. The triple mistakes of strikes, building an oppressive regulatory union and taxing capital formation and investment viability are the primary culprits. The good news is that the deterioration is reversible and within South Africa’s own grasp. Undo the mistakes and South Africa should thrive once 2003 Rank

2008 Rank

Latest Rank

WEF Competitiveness Index

42/102

45/131

56/144

Corruption Perception Index

48/133

54/180

72/177

Freedom of the Press

24/193

28/195

33/194

Economic Freedom

36/127

83/141

88/152 (2011)

Ease of Doing Business

n/a

35/181-

41/189 (2014)

S&P Credit Rating

BBB

BBB+

BBB-

Economic Measures

2003

2008

2014

GDP Growth (5-year average)

3.2%

5.0%

2.0%

General Govt Structural Balance (% GDP)

-1.3%

-0.8%

-4.1%

General Govt Gross Debt (% GDP)

36.9%

27.2%

47.3%

General Govt Expenditure (% GDP)

26.5%

30.1%

33.4%

Current Account Deficit (% GDP)

-1.2%

-6.1%

-6.2%

Unemployment

again. It remains a high potential economy that is merely underperforming. What economic model should be followed? The shift to a more centralised command economy over the past several years is clearly not working. This solution may work for China and India, where investors are prepared to climb over high hurdles due to the deep potential that lies behind those hurdles, but this is not the case for South Africa. Instead, South Africa should look to emulate countries like Mauritius and Chile. South Africa’s membership of the BRICS may well be a disadvantage in trying to be ‘big’. It is small in global terms even if big in African terms. This is why Mauritius and Chile have an economic strategy to try and be the easiest places in the world to do business. They are creating their own competitive advantages against circumstances where they have none. The economic strategies of both Mauritius and Chile have been highly successful. In 1980, both countries were less free than South Africa and also poorer. Both have overtaken South Africa while becoming much freer economies. At the same time, South Africa has become less free. The red carpet or the red tape for investors? The results are compelling.

Chris Hart, chief strategist, Investment Solutions

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Investment strategy

Watch for risk hidden in

offsh o retur re ns

The significant weakening of the rand against major currencies over the past two years has been a big driver of returns for South African investors invested offshore, and may even have masked poor investment allocation.

ow that the rand is close to fair value, the performance of the underlying offshore assets will be far more important for future returns. Further, with international markets now looking expensive, offshore exposure should be carefully managed. Over the past two years, having money invested in hard currencies has paid off for local investors, and it hasn’t really mattered how the money was invested. Moving assets into other currencies was a no-brainer two to three years ago when the rand was so clearly overvalued. With the rand depreciating 35 per cent over the last three years, it didn’t matter as much where you put your money: you would have in all likelihood seen a strong return in rand terms. Even if your investment actually lost 10 per cent over the period in the underlying investment, you still made 25 per cent thanks to the depreciation of the currency alone. However, with the rand now much closer to fair value, future returns will likely be

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more dependent on the performance of the underlying investment offshore. On a longterm purchase power parity basis, the rand is actually slightly undervalued right now, but not significantly so. There’s likely to be short-term volatility in the rand, but there’s no longer the strong swing factor of a currency set to weaken significantly. This means that offshore returns from this point will be much more closely linked to how the money has been invested than has recently been the case. Another challenge to prospective returns is the high current valuations of major international markets at the aggregate level. Given strong returns from global indices, many investors may be considering a passive index-tracking fund. But this approach is backward-looking – now is precisely the time to actively select global investments that still offer value and omit those investments which are now expensive and represent risk. A number of indicators suggest that international markets are overvalued. While price-to-earnings ratios of the major markets are sitting at the top end of their historical range, there are several other indicators also pointing to significant overvaluation. Prices are high compared to ten-year average earnings, and share buybacks have decreased significantly, which often indicates that management feel their shares may be overvalued. IPOs are on the rise, which tends to show the same thing. Share price volatility has fallen to very low levels, something that also happened just before the 2008 crisis. We’re not calling the top of the market. We have no idea what the market will do at the aggregate level, but then neither does anyone else. Equally, we don’t know where the rand will go in the short term. However, with the rand now trading at fair value, it’s unlikely to

be the big swing factor over the next three or four years that it was over the last two or three years. And with international markets looking pricey, investors need to think about where their money is invested offshore. Ideally, they should be in assets that can give them real capital growth over the long term while protecting against the risk of significant capital loss. RECM believes the best way to achieve this is through taking a bottom-up, value oriented approach, wherever in the world you invest. We don’t pretend to know what’s going to happen next with global markets or the rand. Our approach is to follow our convictions and focus on building in a margin of safety by buying good businesses when these are trading below our assessment of what they’re worth. By doing so, we not only stack the odds of generating real returns in the favour of the investor, but also reduce the risk of significant capital loss should markets correct.

Linda Eedes, senior analyst, RECM

Morningstar

Will passives become

too popular? I’ve twice been asked an interesting, yet puzzling question about the rise of passive investing in the past few weeks.

iven the growing popularity of passive investment products, such as exchange-traded funds and index trackers, at what point will they become so dominant that market inefficiencies arise, allowing more active fund managers to add value? I think this is a theoretical question to which there is no honest answer. For starters, an answer would imply that financial markets are fully efficient, and stocks have a fundamental value to which they always revert, but this is not the case. A valuation is just an opinion; the price a buyer is willing to pay and a seller is willing to receive. That said, it would be a mistake to downplay the impact of indexing on stock prices. Studies show that stocks tend to rise in price as a result of being included in an index and vice versa. Does this mean that a stock that is priced higher or lower due to its recent index inclusion or exclusion is mispriced? Not necessarily. In some cases, the price boost or decline will be corrected, with active investors stepping in to exploit the perceived anomaly. However, in other cases, it will not dissipate and the new price will become the ‘true value’. History tells us that active managers who

try to take advantage of potential market mispricing often must take a contrarian position – which is rather uncomfortable. For example, savvy value-orientated manager, Neil Woodford, saw the performance of his fund dive in the late nineties when he avoided technology stocks as these soared in value to account for a sizable percentage of the major market indices. This decision eventually paid off when the dotcom bubble burst and his fund shot to the top of the performance tables. But Woodford, never mind his fund holders, had to be patient and stick to his guns for a few years. So, is there a tipping point for the rise of passives? It seems logical that, as the proportion of passive investments grows, the opportunities for active managers to add value should rise.

informationally efficient – the story could be different. However, more research would need to be done. In summary, there is no denying that indexing creates exploitable opportunities, but they are certainly not easy to profit from. This makes me guess with confidence that 10 years from now – regardless of the proportion of money passively managed relative to the total money invested in the stock market – investors will still be faced with the same sad reality, namely that only a minority of active managers will consistently outperform their respective benchmarks.

But is the threshold 20 per cent, 50 per cent or 99 per cent? No one can truly say – and there may be different answers for different markets. Take the US, for instance. Passive instruments offering exposure to US equities have seen considerable growth in recent years, representing an estimated 30 to 35 per cent of the total money invested in the asset class. Yet, the rise in passives has not led to a rise in active manager outperformance. Indeed, the odds of finding an outperforming US equity manager remain slim. For other markets, such as European small caps or emerging markets – both considered less

Hortense Bioy, CFA, director of Passive Fund Research, Europe, Morningstar

investsa

the roundtable convergence of great minds

Four Momentum Asset Management roundtable discussions were held in October: in Cape Town, Centurion, Sandton, and Durban. Portfolio manager, Mishnah Seth, and senior equity investment analyst, Emmanuel Boakye, discussed the outlook for Africa as a viable investment destination, as well as the Momentum Africa Equity Fund.

Key speakers at the event Mishnah Seth Bachelor of Accounting (Honours), CFA Head of Frontier Strategies Mishnah heads up the Frontier Strategies discipline for Momentum Asset Management and is responsible for the management of the frontier team and, specifically, the Africa ex-SA Equity Fund. Mishnah joined Momentum Asset Management from Investec Asset Management’s Africa team, where she was an investment analyst and one of the founding members of their Africa strategy.

Emmanuel Boakye CA(SA), CAIA Equity Investment Analyst at Momentum Asset Management Emmanuel has five years’ experience in the Africa ex-SA market. He joined Momentum Asset Management from Fairtree Capital in March 2014, where he was an Africa ex-SA equity investment analyst and co-portfolio manager on the African fund. Prior to joining Fairtree Capital, Emmanuel was an auditor with PricewaterhouseCoopers SA and responsible for performing external client audits and supervising audit teams.

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Africa is now being labelled as the final frontier, with a number of international and South African corporates expanding into the continent. The aim of the roundtable was to help delegates better understand the longterm potential surrounding the consumer growth story in key African markets, as well as touch on sectors and companies that the Frontier Strategies discipline believe are best placed to benefit from it. In looking at the investment fundamentals, Seth pointed out that consumption growth is a key investment theme that is being supported across Africa by a rising middle class, with rising income levels on the back of strong GDP growth. She said, “A young and growing population, plus strong economic growth, translates into positive consumption growth. The story for Africa is one where we have a move from the lower to middle-income brackets, and we are, therefore, positioned to benefit from that. Africa is a 10 to 20-year story for us. Within Africa, we feel that Nigeria and Kenya look the most favourable, with the youth boom set to continue. “However, infrastructure is a key impediment as it currently stands, especially when looking at such variables as power, transportation and housing levels. Growth in infrastructure is required and this, in turn, can drive growth in particular sectors and help businesses grow by lowering their cost base.” Clarifying that the Momentum Africa Equity Fund invests only on listed stock exchanges, Seth commented, “We find opportunities, but have a strong focus on quality companies with a focus on the risk that they may present.

Momentum Asset Management

The consumer opportunity in Africa

We are style agnostic. When investing in Africa, we, therefore, focus on sustainable risk-adjusted returns. Currency risk is the biggest risk we consider and portfolio diversification helps us to manage this risk.”

and Kenya, will make it one of the largest cement producers in the long term. The company has the competitive advantage of being a low-cost producer and its margins are, therefore, higher than its competitors.”

Before going into detail on some of the specifics surrounding the fund’s stock picks, Boakye and Seth both highlighted the importance of understanding the consumer dynamics in Africa and partnering with companies that understand this and have strong management teams that are good allocators of capital. Strong distribution networks are required to tap into informal markets and build consumer trust.

Seth also commented on the fact that Africa is a leader in the mobile banking space, with Kenya being a key part of this. “The growth in mobile penetration has been a key consumer theme, with mobile phones enabling business. Mobile money has taken off and has ‘further legs’ available to it as a result of low financial penetration. We are seeing huge usage of M-Pesa versus a normal debit card. Sub-Saharan Africa accounts for 56 per cent of live mobile money services. You can save using M-Pesa, even if not formally employed.”

Seth clarified, “Africa presents a volatile operating environment, and it’s important to partner with solid management teams. You must ask yourself: ‘Do they deliver?’” She added, “For example, in Nigeria, brand loyalty is very important. With a limited disposable income, it’s important to consumers that they spend their income on the right product. We believe that sectors poised for growth included consumer staples, the brewery industry, cement and mobile and financial services. “In the brewery industry, brewers will benefit from the under-penetrated nature of the industry. Currently, the home brew market is estimated to be three times the size of the formal lager manufacturer market. Most of Africa is far below the level of developed markets when it comes to beer consumption. However, understanding the opportunity is key. The need for affordable beers will drive the market for reasonably priced products.”

She then gave an interesting investment case for Safaricom, Africa’s largest mobile player, with its innovative and strong management team and strong track record of delivery, as well as for CIB Egypt, a key player within the Egyptian banking landscape. In concluding, Seth clarified the presentation by saying, “To summarise, we believe that low penetration levels across industries, rising GDP per capita and an increasing spend on infrastructure development are supportive of the story. The operating environment can, however,

be challenging and it is, therefore, important to focus on quality of management and operations.”

Momentum Africa Equity Fund The fund aims to exploit opportunities in the inefficient, under-invested markets in Africa by investing on recognised stock exchanges across the continent, excluding South Africa. The Frontier Strategies team seeks to provide sustainable, risk-adjusted returns over the long term through the selection of stocks that trade below their intrinsic value. Active management and a disciplined process focused on risk management are core to the approach. Key facts

• Fund manager: Mishnah Seth • Benchmark: MSCI Emerging Frontier Markets Africa ex SA • Peer group: Regional – Equity – General • Fund size: R820 million • Annual management fee: 1.50 per cent + VAT • TER: 2.15 per cent • Maximum equity: 100 per cent • Offshore: 100 per cent Africa • Risk level: High • Inception date: 1 July 2009

Boakye said that cement consumption is well supported as part of an increasing drive to improve infrastructure, with growth set to remain robust. He presented an investment case for ARM Kenya, one of the fastestgrowing cement producers in the East African region. “A progressive management team, with shareholding in the company, as well as capacity expansion plans in Tanzania

investsa

Nick

Battersby CEO of PPS Investments

What would you describe as your major challenges in your role as CEO of PPS Investments? There is certainly never a dull day in leading the PPS Investments (PPSI) business. As a relative newcomer to the world of savings and investments, PPSI has enjoyed significant growth since launching in 2007 – operating as a product provider, an asset manager and a collective investment scheme manager. The typical challenges of managing a rapidly growing business have been present, namely maintaining the key focus and energy of the business while enjoying a period of sustained expansion. However, if I had to identify one particular aspect that I’d consider to be an ongoing challenge, it would be the communication challenge that we face on three fronts: • Firstly, the low level of financial literacy among investors – this is a challenge for our entire industry. • Secondly, as an industry we face the challenge of rebuilding investor confidence in savings and specifically retirement savings, following a legacy of expensive and inflexible products that have been dominant in the past. • Thirdly, the need to communicate the need for realistic expectations about future returns. Investors are beginning to take the recent years’ returns as the norm, and it is becoming hard not to sound like the ‘boy who cried wolf’ when we try to temper expectations.

What is it about your job that most excites you as you come to work every day? I try to start each day with some form of exercise, so that when I arrive at the office soon after seven I have the energy that the day requires and have had a chance to plan for the day ahead. At work, I value the diversity of my responsibilities, such as portfolio positioning, product design or building distribution

34 investsa

relationships – being very aware of their impact on the eventual client experience.

INVESTSA is not retirement savings and is not Regulation 28 dependent?

I am also excited about the opportunities for the future of PPS Investments and the PPS Group in general. We are continuing to grow our dominant share of the South African professional market and are well-positioned to build on the success of recent years.

I would invest it across two active multi-asset worldwide unit trusts – preferably with explicit real return performance objectives of at least four to five per cent above inflation per annum. At my age (46 years old), I have a long enough investment horizon to allow managers sufficient time to generate the level of returns needed and to not be concerned about near-term volatility. In those unit trusts, the managers have access to a broad range of asset classes both domestically and internationally, so I would benefit from their broad skills.

Our growth also provides us with numerous opportunities to bring young talent into the business. One of our core business values is to ignite potential. It is pleasing to see exceptional young people join the business, take on new responsibilities and grow through the experience.

What do you regard as your greatest business success to date? I consider the set-up and growth of PPS Investments to be my most successful business exercise to date. Eight years ago the business did not exist and now it has over 23 000 individual clients, a well-established investment brand and a strong performance track record. The team members, whom I am fortunate to lead, have largely been in place since the business launched. I believe this is as a result of the environment that we have created, where talented and strong individuals are happy and want to contribute to the business.

…and your greatest personal success to date? My wife and I have been married for 21 years and have been blessed with two children, who are now young adults at 18 and 16 years of age. The success of our family unit is absolutely a four-way project, but one that I am proud to have played my part in.

If you had R100 000 to invest (excluding through PPS Investments), what would you do with it? I assume that this R100 000 ‘gift’ from

As a multi-manager by profession, I would want to diversify between managers to reduce manager-specific risk, hence R50 000 into each of two unit trusts from different managers. Considering current volatilities, I would phase the investments in over a period of six months.

How do you strike a balance between your personal life and your work schedule? Because my schedule involves very regular travel, I make sure that when I have downtime it is spent with my family and close friends. Being a proud Capetonian family, we try to make the most of the boundless natural resources that are on our doorstep. Most weekends will be spent on one of the many beachfronts or a mountain path, with a favourite end-of-day being sundowners in Clifton or Camps Bay. I would classify myself as an enthusiastic, but casual, cyclist – either on the mountain or on the road. I have ridden a couple of three-day event rides, but baulk at anything longer than that! I also try to encourage my colleagues throughout the business to build into their weekly routine some diverse down-time with colleagues. Through the warmer and drier months, you will find the core team walking together on Lion’s Head before work on a Friday morning, as part of our company-wide Friday fitness programme.

Profile

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Practice management

The

business of advice We dedicate ourselves to enabling independent advice and work closely with independent financial advice practices. The question we are frequently asked is, “How do I change my practice to provide a platform for growth in future?”.

his question arises as a symptom of the traditional practice arrangement, where advisers tend most often to work for their personal accounts rather than a common business goal. We explore the implications of this from an alternative perspective and suggest a few ways to adapt for future growth. There appears to be a tough irony at the heart of an independent advice business: the advisers spend their days enabling their clients to retire with dignity, yet often struggle to translate their life’s work into a meaningful nest-egg for their own retirement. Why should a business with good inherent value struggle to realise this in practice? A contributor to this is the exceptional, often free, business support advisers get from financial service providers (like fund platforms). Many of the business processes are taken care of (invoicing, administration, reporting, debt collection). This enables them to run a business with one or two employees and also benefits their profit margin as they do not need to invest significantly in internal systems and processes. But this can also work against them because they can easily end up being sole proprietors, rather than business owners. By this we mean that an individual adviser often aims to maximise personal income, not business profit. The practice tends first to become introspective when individual capacity to service clients starts to reach a limit. As a client base grows, there is a corresponding reduction in time available to attract and service new clients. This brings

36 investsa

forward conversations about succession and hiring of colleagues to help free up the founder’s time and to start the transfer of some clients to the new colleagues. But this is hard to get right: the clients being transferred tend to be small or less profitable because the founders do not want to reduce their short-term earnings by much. We have seen many of these arrangements struggle, which often costs the business. In South Africa over the past 10 years or so, strong market growth has conveniently masked sub-par client growth. If the market is less favourable, these weaknesses will become more evident. We ask participants on the practice development programme we run about the notion of investing in their practices – foregoing today’s income to grow the business in future. For many of our clients, this is seldom done on any significant scale because we find that the adviser sees their income more as a salary than as a business revenue. There is, therefore, very little excess: any spend on the business is effectively a cut in salary.

advisers, we suggest a few areas centred on viewing themselves as a business, and not a practice. These tend to include: • Delinking expenses such as salaries from revenue and implementing a business budget. • Assign clear roles and responsibilities and remunerate accordingly. • Identify areas to invest in that will improve the ability to grow and service clients. This will cost upfront, and pay off over time. A business has substantially higher growth prospects than a practice, but this does not mean you have to compromise on providing good, independent advice to clients. Changes like this are by no means small: they require a carefully managed plan affecting all levels of a business. The upshot is that everyone benefits, including clients. Value is created at a business level, and it can be a positive step for the industry as a whole.

The knock-on effect of this is that any investment that could increase capacity (consulting, brand building, marketing, recruitment, for example), is viewed as a personal cost rather than a business investment. We, therefore, typically find that investment opportunities are foregone, and practices remain small and underdeveloped. What measures could be taken to adapt to this growth challenge? When consulting with

Ian Jones, director, Fundhouse

Regulatory development

group of countries set up a board to try and facilitate financial stability.

Useful regulatory updates from PPS training seminar By Vivienne Fouché

hile financial services regulation is ongoing, it seems that the industry in general is going through a phase in which regulatory changes are arriving – or are scheduled to arrive in the near future – at a relatively intensive rate. Mike Jackson, CEO of PPS, says, “A vast number of rules and regulations govern the different entities within the financial services sector, and the sector can become even more complex when service providers combine product features under one or more wrappers. The range of products available to the consumer is bewildering and protecting consumers in such a complex landscape requires complex legislation.” Jackson was introducing a PPS Financial Services Journalist Training Seminar held in October, at which key speakers on the regulatory development front included Jonathan Dixon, deputy executive officer: insurance at the Financial Services Board and Ingrid Goodspeed, chief director: financial sector development – tax & financial sector policy unit of the National Treasury.

ensuring that the reckless behaviour, irresponsible practices and misaligned incentives do not happen again, and ensuring a global financial system that serves the economy as a whole. “The financial regulatory system in South Africa is fragmented and it is not always clear who is responsible for what. South Africa’s challenge is to combine the necessary local responses with its G20 commitments. The inevitable result of regulatory reform is increased complexity and scope of regulation. There is much on the regulator’s watchlist.” Goodspeed referred attendees to the National Treasury’s website, www.treasury.gov.za, for those who wish to download the National Treasury’s policy document, known as the ‘red book’: A Safer Financial Sector to Serve South Africa Better. FSB update: market conduct regulation and the RDR

A National Treasury overview of the insurance/financial landscape in SA and globally

Jonathon Dixon’s presentation covered such topics as the Twin Peaks regulation, Treating Customers Fairly (TCF), Retail Distribution review (RDR) and key focus areas.

Goodspeed said that a predictable result of the Global Financial Crisis was an overhaul of the regulatory framework of the global financial system. “The focus of the global regulatory reform is stability; co-ordinating supervision within and between countries;

He commented, “We have come from a backward-looking, compliance-based approach that wasn’t risk-based. Much of the changes have come about due to international activity, especially since the Global Financial Crisis when the G20

We are also playing regulatory catch-up in South Africa from the past. It is critically important to ask, ‘Who’s the customer?’ and it must be remembered that the customer is not the intermediary. The customer should be at the top of the agenda, and everything should work around that.” Dixon said that the FSB was hoping to come out with a paper on RDR very soon and the direction of market conduct regulation in general, while the Twin Peaks regulation would allow the FSB – whose name will change – to become a dedicated market conduct regulator. He said the Retail Distribution Review is a prominent example of this new TCFinspired approach to market conduct supervision. “FAIS has raised standards of professionalism, but concerns about misselling and poor outcomes for customers still exist. TCF is a driving force in putting the client first across multiple industries. The RDR is TCF in action. The best place to start is the incentives underlying the behaviour. A commission-based approach is not ideal and can encourage mis-selling. Capping of commissions went a long way to fix this, but there are incentives (structural problems) that are not aligned with the best interests of the customer.” Dixon said customers in the financial services industry deserve a higher level of protection in general than other consumers. “When we look at ‘destination 2016’ we trust that Twin Peaks, SAM, TCF and RDR will all be implemented. We envisage a forward-looking, pre-emptive, risk-based and outcomes-focused regulation and supervision. We trust that firms will be customer-centric, with competition on a level playing field and enhanced enterprise risk management. We look forward to seeing financial advisers less compliance focused and more outcomes focus, while customers should start having the confidence and trust that they are dealing with firms that will treat them fairly.” investsa

Insight into compulsory

retirement contributions

Recent proposals by the National Treasury have strongly emphasised the government’s commitment to make more South Africans save for retirement.

uto-enrolment – an approach that would require employers to automatically enrol their employees into a workplace retirement fund – is one such measure available to cover the 6 million employed South Africans who do not have access to an employer-sponsored retirement fund. Such a fund could be offered by either the government, the employer or perhaps a combination of the two, and this type of offering – in different formats – exists in countries like the UK, the US and New Zealand. Old Mutual Corporate carried out independent research among consumers

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who are employed in some capacity but who do not currently belong to an employersponsored retirement fund.

financial well-being, it is good to have an understanding of people’s actual views. The specific aims were to look at:

The Old Mutual Corporate Auto Enrolment Research Report, released in October, surveyed more than 800 workers between the ages of 18 and 64 who were either employed full-time (68 per cent) or part-time (14 per cent), or else were self-employed (18 per cent). We believe that the sample was demographically useful when looking at factors such as age, gender, race, income levels and educational background.

• Government employer-sponsored pension funds: did consumers feel that all employees should be covered, how likely were they to join and who should manage the funds? • Employer-sponsored pension funds: would they join, what benefits would they want and who should manage the funds? • Gauging consumers’ satisfaction with current financial readiness. • Saving for retirement: how much could they contribute and how much did they feel they should contribute?

A fundamental premise of the research was that, if you are formulating policies for the nation to help improve its overall future

Retirement reform

Thereafter, the question was posed: “Suppose government makes it compulsory for every employee who does not currently belong to a pension fund to belong to this fund…. Do you think that employees should be allowed to opt out?”. The response was very even: 51 per cent of respondents believed employees should not be allowed to opt out of such a fund, while 49 per cent indicated they should be able to. When looking at the breakdown of reasons behind the answers, those respondents who selected the opt-out option were mainly driven by the principle of having the right to choose (55 per cent), followed by financial concerns (18 per cent). In comparison, only eight per cent cited a lack of trust in the government. Employer-sponsored pension funds Respondents were similarly asked: “How much do you like the idea of your current employer implementing such a pension fund?”. Here again, 67 per cent indicated they liked it either ‘very much’ or ‘somewhat’ – a very similar result to the 69 per cent willing to consider joining the government-sponsored pension fund, as outlined above. We believe this indicates a growing awareness of the need to save for retirement. However, the results also, unfortunately, showed a frequent disconnect between what people feel they should be saving towards their retirement years versus what they are practically able to set aside for this investment. Government-sponsored versus employer sponsored retirement fund? When asked which fund, of these two options offered, they would be more likely to join – importantly assuming the benefits were the same for both – 49 per cent of respondents selected an employer-sponsored pension fund, while only 15 per cent chose the governmentsponsored fund. Views on compulsory governmentsponsored pension fund The Old Mutual survey proposed the question: “How likely are you to choose to be part of such a (government sponsored pension) programme if it is introduced?”. In response, a combined 69 per cent said they were ‘completely likely’ or ‘very likely’ to choose to be part of the fund. This indicates that South Africans do see the benefits of being part of such a fund. Fulltime and part-time employed respondents were significantly more likely to choose to be part of the fund, while self-employed respondents were significantly less likely to do so.

We believe this results from people wanting to participate in their own investment decisionmaking processes, and that consumers may feel they are less able to influence a governmentsponsored fund than an employer-sponsored fund. Other sections of the report highlighted consumers’ strong interest in having a say and some control over their fund, with 66 per cent of respondents stating that the employee and employer should jointly decide on fund investments. South Africans not prepared for retirement Most respondents held a bleak outlook of their current financial situation, with 52 per

cent stating that they were not satisfied at all with their current retirement provision. Thirteen per cent were ‘slightly satisfied’ and 19 per cent felt ‘moderately satisfied’. Only seven per cent reported being completely satisfied, with a further nine per cent saying they were ‘very satisfied’. Almost one in five said they would try to supplement their retirement funds by looking for another job in retirement. Most respondents (70 per cent) reported having a formal savings product, of whom one in four of these have a retirement annuity, with the others holding products such as life assurance and funeral policies. A disconnect between retirement funding levels needed versus ability to save While one-third of customers claim they should be contributing more than 15 per cent of their salary to a pension fund, only 10 per cent said they could afford to contribute this amount. These findings indicated that some respondents do take action to increase their retirement savings, but many do not and are concerned about their ability to save for retirement.

In conclusion The government should work towards creating a retirement saving system that encourages all employees to save for retirement, whether through a government-sponsored plan or an employer-sponsored plan. Some decision-making participation in terms of fund investment offerings was important to the respondents surveyed, as well as an opt-out option. Ultimately, this would appear to be fairly similar to the retirement fund model offered in the UK, which overall has demonstrated low optout rates of 10 per cent and below.

Craig Aitchison, general manager corporate customer solutions, Old Mutual Corporate

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NEWS World Economic Forum (WEF) Global Competitiveness report – JSE maintains top position South Africa was ranked first out of 144 countries for the fifth consecutive year in the World Economic Forum (WEF) Global Competitiveness Report 2014-2015 for both the regulation of its securities exchange, and the auditing and reporting standards to which local companies must adhere. John Burke, director: issuer regulation at the JSE, says the JSE is honoured by this accolade. “As an exchange we continue to strive to provide investors and issuers with a safe and credible environment in which to trade, list and invest.”

Half Way There – an investor insight into the BRICS countries Two of South Africa’s top financial and economic commentators, Chris Hart and Glenn Silverman of Investment Solutions, have written and published Half Way There, a book that offers a comprehensive account of the five members of the BRICS countries (Brazil, Russia, India, China and South Africa) and their relationships with one another and with the rest of the world. It was written following a focused and detailed research trip to each of the five countries, to better understand the countries and to examine the investment potential of each. The book introduces five unique lenses on these countries: National Scars, National Transitions, Economic Value Chains, Capital Allocation and Political Economics. Half Way There captures just how far each of the respective BRICS countries have come, and

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the bloc as a whole, but also just how much further they still need to go. Fifty contributors, all experts within their fields, have added their perspectives on the BRICS countries to complement those of the authors. The book also includes comments on a subset of the many corporates that were visited. The selling price for the book is R390 including VAT and proceeds from the sale will be donated to fund the tertiary education of deserving beneficiaries. The book is published by COSA Media and distributed by Investment Solutions. It will be available in October 2014. For book enquiries, email halfwaythere@ishltd.co.za. To stand a chance of winning a copy signed by the authors, email investsa@comms.co.za.

The report also ranked South Africa third in the ability to raise finance through the local equity market, third in terms of the effectiveness of corporate boards and second in protecting the rights of minority shareholders. Burke says the country’s excellence in regulatory standards speaks of a sound working relationship between the JSE and its regulator, the Financial Services Board (FSB). “South Africa has a well-developed local investment community and high foreign participation in financial markets. Regulatory standards cannot be viewed as a set of rules to be drafted and then applied blindly in years to come. Regulation needs to be adjusted and updated constantly according to a changing environment. The JSE works hard to maintain high standards in both formulating and implementing the regulation of our exchange,” concludes Burke.

Business confidence improves in the third quarter The RMB/ BER Business Confidence Index (BCI) increased by five points to 46 in the third quarter. This is the first noticeable rise in over a year and it implies that just Ettienne le Roux shy of five in every 10 respondents rated prevailing business conditions as satisfactory, between 4 August and 2 September. The RMB/BER BCI was conducted among 2 300 firms, and the rise in the survey mirrors an improvement in sentiment in all the sectors making up the headline index, except for the new vehicle trade. Confidence among wholesalers increased by 15 index points. As for retailers, building contractors and manufacturers, the business mood improved by 11. 8 and three points respectively. By contrast,

sentiment among new vehicle dealers deteriorated by 15 points. After increasing from 39 to 49 in the second quarter, retailers’ confidence rose further to 60 index points. According to Ettienne le Roux, chief economist at Rand Merchant Bank (RMB), this is the first time in two and a half years that confidence is back in net positive terrain. The improvement in sentiment is notable as sales volumes did not increase across all categories — clothing and hardware rebounded strongly, while food and furniture sales volumes deteriorated. The third quarter increase in the RMB/BER BCI

Reinet Investments Manager SA and Reinet Fund Manager SA appoints new CEO Reinet Investments Manager SA and Reinet Fund Manager SA have announced that Alan Grieve, chief executive officer of both companies, has indicated his intention to retire with effect from 31 December 2014.

Wilhelm van Zyl

The role of chief executive officer for both companies will be taken over by Wilhelm van Zyl. Van Zyl has, until recently, been deputy chief executive of MMI Holdings Limited, and he

points to a further improvement in economic growth where the second half of the year should be better than the first. Le Roux states that this is encouraging, as only a short period ago some commentators were still worried about a possible recession: “The end of the labour unrest will in itself lead to a bounce-back in economic activity.” The small improvement in underlying manufacturing activity is indicative of more to come. “For example, the strike in the platinum sector might be over, but manufacturers supplying into this sector will only see the real benefit of increased output when platinum miners return to full operation in the fourth quarter and beyond,” says Le Roux.

had strategic responsibility for the investments, health, employee benefits and international divisions of MMI Holdings. He holds a BComm from the University of Stellenbosch in South Africa and is a Fellow Member of the Institute and Faculty of Actuaries in the United Kingdom. Johann Rupert, chairman of Reinet Investments Manager SA, says Van Zyl has a strong background in the financial services sector both in South Africa and internationally. “I am sure he will be a great addition to the team and we look forward to working with him.”

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Products

New investment boutique, Perpetua Investment Managers,

launches retail unit trust offering Boutique investment management firm, Perpetua Investment Managers, has launched its two core unit trust offerings to the investing public. Co-founded by Delphine Govender, who spent close to 11 years at Allan Gray Limited, Perpetua is a privatelyowned, independent firm that has been in operation for two years and with assets under management of more than R2.5 billion. Govender comments, “One of my key learnings this past decade has been that the narrowness of the South African universe has meant extreme deep value, contrarian investing is a subset of value investing that is very infrequently rewarded in our marketplace, which is especially important to recognise given the risks that are often taken on in pursuit of the style. “At Perpetua, we recognise that value investing operates along a continuum and that the reason shares can be purchased below our determination of their value could be due to a variety of investment theses, of which mean reversion (typically the basis for deep value shares) is just one. “We are equally comfortable owning out-offavour shares as we are comfortable owning quality shares with sustainable competitive

advantages. The most important determinant of returns will always be the price we pay for a share versus its worth. “To differentiate ourselves, we need to ensure we are able to consistently determine a share’s value more accurately than the average investment manager and, similarly, display conviction and a preparedness to not own popular shares, which we believe the market is overpricing. Our nimbleness and agility also mean we can include a wide range of shares within our investable universe.” By ensuring the firm’s team of experienced and diverse investment professionals concentrate the bulk of their efforts on uncovering investment ideas for clients, Perpetua has pursued an approach of outsourcing key administration and distribution arrangements. The Perpetua MET Equity Fund and Perpetua MET Balanced Fund have been co-branded with MET Collective Investments and included as part of the company’s MET Premium PartnersTM offering. The two Perpetua funds are available on the MET Collective Investments platform at www. metci.co.za or www.perpetua.co.za.

SATRIX launches Low Equity Balanced Index Fund Satrix has expanded its portfolio of index tracking unit trusts with the launch of the SATRIX Low Equity Balanced Index Fund. The fund is a low equity multi-asset class portfolio aimed at cautious investors who require income and capital growth in the medium to long term. The fund will track the performance of the SATRIX Low Equity Balanced Index (calculated by an independent third party). According to Helena Conradie, CEO at SATRIX, the portfolio is designed to give investors diversified exposure to all major asset classes, including offshore exposure. It aims to provide a reasonable level of income while seeking to preserve capital in real terms with lower volatility over the medium to long term. Because of its lower exposure to equity, the SATRIX Low Equity Balanced Index Fund is a more conservative portfolio than the SATRIX Balanced Index Fund launched in October 2013.

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“In line with our client-centric core approach, we wanted to ensure that SATRIX meets the expectations of all its clients. Certain clients, especially those who are close to retirement age, or those who don’t have a big appetite for risk, need a portfolio with cautious exposure. They don’t necessarily want a fixed interest or cash fund, but they also don’t want full equity risk exposure. The SATRIX Low Equity Balanced Index Fund is for them,” says Conradie. The asset class exposure of the SATRIX Low Equity Balanced Index Fund can be broken down as follows: • SA Equity (FTSE/JSE SWIX Index): 25 per cent • SA Listed Property (JSE SA Listed Property Index): 5 per cent • SA Nominal Bonds (BEASSA All Bond Index): 20 per cent • SA ILBs (Barclays BESA SA ILB Index): 10 per cent

• SA Cash (Cash Index – national): 20 per cent • International Equity (MSCI World Index USD): 10 per cent • International Bonds (Barclays Global Treasury Index – USD): 5 per cent • International Cash (International Cash Index – notional): 5 per cent SATRIX is 100 per cent owned by Sanlam since May 2012 with R40 billion in assets under management.

The world

SOUTH AFRICA, US, JAPAN, CHINA, MEXICO, EUROPE, SCOTLAND

South African employment figures rise despite weak economy Figures released in late September have shown that 155 000 new jobs were created during the second quarter this year. This is an overall increase of 1.8 per cent from previous years, according to the Stats SA Quarterly Employment Statistics report for June. Despite the encouraging general upward swing, the report also showed job losses in the traditional industries of manufacturing, transport, mining and electricity, with positive growth recorded in the formal non-agricultural sectors of the South African economy. Rising competitiveness in US and Japan Switzerland has been named the world’s top economy for the sixth year in a row by the World Economic Forum (WEF), according to its annual ranking published in Geneva. Singapore was in second place with the United States third. The US overtook Finland and Germany when compared to last year’s ranking, relegating them to fourth and fifth place respectively. The US came in third because of its innovative companies and strong institutions, said the WEF, also clarifying that improvements in the area of innovation was one of the reasons why Japan had climbed up three places this year from its sixth place position in 2013.

during the investigation, which started in April 2013. Deputy Head of SAFE, Wu Ruilin, said organisations ‘faked, forged and illegally re-used documents for imports and exports as this provided a channel for criminals to move funds.’ Mexico experiences fall in exports but rise in imports Mexico, one of the biggest economies in Latin America, experienced a decrease of 1.1 per cent in factory exports in August. However, although exports were short, imports for consumer products such as capital goods increased by 2.2 per cent in the same amount of time. Analysts have predicted that Mexico’s economy will increase by 2.5 per cent this year, compared to an increase of only 1.4 per cent in 2013. New plan to improve weakening European economy According to a first estimate by the European Union’s statistics office, slowing Eurozone inflation data of 0.3 per cent in September was in line with market forecasts, due to falling prices of unprocessed food and energy. The European Central Bank is looking towards new incentives that could improve the weakening economy. The bank wants to introduce quantitative easing and buy government bonds to meet its inflation target of nearly two per cent.

Chinese fraud unveiled

New shares for IAPF to raise funds

The State Administration of Foreign Exchange (SAFE) recently recognised fraudulent activity across China while a clampdown in trade practices took place across 24 cities. Almost $10 billion (R112 billion) was discovered

Since listing last year, the Investec Australia Property Fund (IAPF) has almost doubled in size. The company has been promoted as a great way for South Africans to experience

the investment opportunities in the Australian property sector. The IAPF plans to raise 120 million Australian Dollars (R1.2 billion) through a rights issue of 83.08 new shares for every 100 shares held at R10.70 a share. “Following the rights, the fund will once again be ungeared and will allow us to pursue attractive acquisition opportunities,” said CEO Graeme Katz. Scotland’s positive economic growth The Bank of Scotland’s Business Monitor report has recorded the country’s best results in seven years, with the economy now performing at pre-recession levels comparable to those of 2007. The report said a ‘surge’ in economic activity last year was maintained, suggesting the recovery will continue into 2015. Of the companies surveyed, 49 per cent reported that turnover had increased over the three months to August, as compared with 19 per cent of firms which had reported a decrease. SA ranked in top five at IIAG The Ibrahim Index of African Governance (IIAG) has announced that governance in African countries is improving at a slow rate and that economic assistance is not adding to the progress of each country. South Africa was named among the top five countries along with Mauritius, Cape Verde, Botswana and the Seychelles. As a reminder to the top five countries not to rest on their laurels, Mo Ibrahim, founder of the Ibrahim Foundation and a leading Sudanese businessman, said “Even among our best countries, the top five performers, while they continue to improve in general, slip up in certain categories.”

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They said

A collection of insights from industry leaders over the last month

“Loans written during the very high interest rate period have either defaulted completely or the ones that survived are now on good terms. Following the 2008 global financial crisis, South African banks significantly tightened their lending criteria. As a consequence, mortgage default rates had been exceptionally low.” Chief economist at Nedbank, Dennis Dykes, comments that the banks’ mortgage books were well positioned for the rising interest rate cycle and that more than 90 per cent of mortgage repayments in South Africa are up to date, a level last seen in 2007, before the global financial crisis. “We concluded that painful lessons had been learnt by the management team. But we were proved wrong.” Chief investment officer at Coronation, Karl Leinberger, comments that the company believed African Bank was a responsible lender within the industry and would be one of the few to come out of the current downturn.

“This country is facing a perfect storm and there seems to be absolutely no will by the government to do anything about it. They have reached the point where they can’t even guarantee loans for parastatals like Eskom because the fiscus is broke.” Investment strategist at Brenthurst Wealth Management, Mike Schüssler, predicts that consumers are in for hard times with middleand lower-income groups expected to suffer the most. “Government should therefore act to create a retirement saving system that encourages all employees to save for retirement, and offers them employer-sponsored plans with some form of decision-making participation in terms of fund offerings, as well as an opt-out option.” General Manager Corporate Customer Solutions at Old Mutual Corporate, Craig Aitchison, comments following the results of the Old Mutual Corporate Auto Enrolment Research Report, which indicated that a third of consumers said they should be contributing

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more than 15 per cent of their salary to a pension fund, while only 10 per cent felt they are in a financial position to make this commitment. “These initiatives have not benefited the population broadly enough. They have not been able to draw the youth into the labour market, for instance.” Chief economist at Stanlib, Kevin Lings, comments that South Africa had many initiatives aimed at redistribution such as black economic empowerment and affirmative action. But while these had been beneficial, the benefits had not been sufficiently broad-based. “The European Central Bank (ECB) rate decision is affecting global trade as investors are waiting to see the scope of ECB asset purchases” Portfolio Associate at ACM Gold & Forex Trading, Mabyanine Phiri, comments that the rand and various commodity currencies will be grossly affected as Europe is a key trading partner.

“The survey indicates that manufacturers see production growth accelerating in the fourth quarter, supported by stronger domestic demand and export growth.” Economist at the Bureau for Economic Research (BER), Lisette IJssel de Schepper, comments at business confidence levels among South African producers rose three index points to 28 in the third quarter from 25 in the second quarter according to the Bureau for Economic Research’s (BER) manufacturing survey. “South African hedge-fund assets rose more than 27 per cent in a year as equity-focused funds performed strongly. Assets under management increased by R10 billion ($890 million) to R53.6 billion in the 12 months through June. South Africa’s hedge fund industry is maturing, with a third of total assets overseen by managers with more than 10 years’ experience,” Portfolio manager at Novare Investments, Eugene Visagie, comments following the company's 11th annual study of the local industry. “The hotel and leisure industry in Africa continues to be a good choice for those looking to invest on the continent. There isn’t a question in my mind about that. Africa’s opened up, and it’s a whole different ball game. At one time it was very difficult,” hotel magnate, Sol Kerzner, comments following a report on Africa’s hospitality industry by advisory services group, PricewaterhouseCoopers (PwC).

You said

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

@ReutersJamie: “France, socalled ‘sick man of Europe’ blighted by stagnation, statism, and red tape, has Aa1 credit rating affirmed by Moody’s... same as UK.” Jamie McGeever – Chief Markets Correspondent, Europe, @Reuters, via Sao Paulo, Rio de Janeiro, Madrid, New York.

@brucebusiness: “The SA economy should be harvesting the benefit of the softer $ oil price. But no. Currency at 8 month lows means opportunity is lost.” Bruce Whitfield – The Money Show on 702 & Cape Talk. Share Shoot Out & Tonight with Bruce Whitfield on CNBC Africa. Business Times Columnist. Starfish Charity Patron.

@FinLifeFocus: “Money security, in most cases, is a choice.”

Michael Kay – Financial Life Planner, Psychology Today and Forbes contributor, author of The Business of Life. Passionate speaker on money mindset. Guitarist-in-training.

@ShaunMurison: “Bull takes the stairs, bear uses the window....” Shaun Murison – Cfte, Market Analyst @ IG South Africa, Trader, Technical Analysis, views expressed are independent from my employer.

@jasemurphy: “Bitcoin has lost almost 30 per cent of is value in the last 3 months. It is falling towards its post-excitement support around $400.” Jason Murphy – Blogger. Freelance writer. Economist. Melburnian. Skier. Cyclist. Word Nerd.

@MichaelJordaan: “Market does not understand that gradually rising rates are good for banks. Also good for savers.” Michael Jordaan – Venture capitalist and wine enthusiast.

@Investor_Quotes: "When buying shares, ask yourself, would you buy the whole company?" Rene Rivkin Investment Quotes – Quotable quotations from major investors for inspiration, motivation and insight.

@NWPCapital: “Just as with banks, excessive market share concentration among asset managers can pose risks to both clients and financial stability.” Will Slaughter – PM at Northwest Passage Capital Advisors, an asset manager

focused on emerging markets debt. Tweets reflect my opinions only and are not investment advice.

@iancassel: “Last night I had the same nightmare I had a few months ago. I was forced to invest in large liquid stocks..was awful.” Microcap Club – Full time #MicroCap investor. Husband of @amandacassel1, Founder of MicroCapClub, an exclusive forum for experienced microcap investors.

@modiba_tshepo: “Another sobering way of looking at Apple’s massive cash pile of $165bn is that their closest rival, Samsung’s, market cap is $190bn.” Tshepo Modiba – Co-founder Seriti Asset Management. Son, brother, malome, rangwani, numbers guy, investment guy and life’s student.

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And now for something completely different

Time is money

Investing in luxury and vintage watches

number of tech giants have introduced smart watches to appease the growing appetites of their consumers, including the recent launch of the Apple Watch. While many consumers have chosen to replace the use of a wrist watch for the clock on their mobile device, a luxury or vintage watch remains an excellent investment option. Watches are often designed as pieces of quality jewellery. Would-be investors should be aware of the possibilities of high-quality knock-offs and unoriginal components. Due to the wide array of choice, it is best to assess all aspects, rather than become distracted by the watch’s initial, exterior beauty. Things to consider

before buying a vintage or luxury watch include whether or not the timepiece comes with its original box and papers, its quality, originality and who is selling it. While fashion and styles evolve over the years, watches featuring ‘complications’ have proven to be a steadily desired type. The term complication refers to any feature in a timepiece beyond the simple display of hours, minutes and seconds. A typical date-display chronograph complication can contain up to 250 parts while a complex complication watch may have over one thousand parts. A good example of a complication watch worth investing in is the Patek Philippe 5070. The

Patek Philippe 5070 features the most popular complication, the chronograph, which is simply a stopwatch feature. When initially introduced, the Patek Philippe 5070 was only in production for two years. Considering its rarity, its value has continued to rise over the years. As with any collectable market, whether it is vintage art, automobiles or wines, there is only one substitute for knowledge and experience using the services of an expert. A watchmaker, dealer or watch enthusiast will be able to help you minimise the risks involved in entering the watch investment market.

The world’s most expensive timepieces 1

Breguet Grande Complication Marie-Antoinette $30 million

Ranked as the world’s most expensive watch in 2014, it is believed that the Breguet Grande Complication was commissioned for MarieAntoinette by Count Hans Axel von Fersen, an admirer and alleged lover of the French Queen. Created by Abraham-Louis Breguet, work began on the timepiece in 1782 and was finished four years after his death by his son in 1827. Marie Antoinette never lived to see the watch, as it was completed 34 years after she had been executed.

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Chopard 201-carat watch $25 million

With 874 rare diamonds, the Chopard 201-carat watch was sold in 2000 for a cool $25 million. The watch features three heart-shaped diamonds. The pink diamond weighs 15 carats, the blue 12 carats, and the white diamond weighs 11 carats. They are set in a bracelet encrusted with clusters of white pear-shaped diamonds arranged in flower motifs, with a yellow diamond standing up from the centre of each.

Patek Philippe – Henry Graves pocket watch $11 million

The watch was sold in 1999 for $11 million and, adjusted for inflation, it is estimated that the timepiece is now valued at around R15 million. Created in 1933 for banker Henry Graves by the legendary Patek Philippe himself, it took over five years to complete. It is also considered the most complicated and complex pocket watch in the world, with over 24 functions.

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FCB10016107JB/E

HOW MUCH IS ENOUGH TO GIVE YOUR DAUGHTER A DREAM WEDDING & STILL GROW YOUR INVESTMENTS LOCALLY & OFFSHORE? Let Old Mutual Investment Group deliver on your ‘enough’ by putting its 169 years of investment expertise to work.

The rand’s performance is up today, down tomorrow, but one thing that doesn’t change - your dreams and goals. Whatever the rand does, what you really need to know is how many rands invested is enough for your lifestyle, today and tomorrow? How much is enough? At Old Mutual, we’ll help you work out exactly how much is enough for you. Then Old Mutual Investment Group provides the investment solutions to deliver on those goals. Solutions like the Old Mutual Global Equity Fund – a consistent top quartile performer over all periods and since inception*. Speak to your Financial Adviser today about how this fund can help ensure you have enough to do great things.

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ADVICE I INVESTMENTS I WEALTH Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium to long-term investments. Past performance is no indication of future performance. 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. *Performance periods to 30 September 2014. Since inception 1994.

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