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R37,50 | October 2013



R37,50 | October 2013

CONTENTS 12 months for only R450

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At home and abroad


Offshore investing


An update on the incoming twin peaks model of financial regulation


Head to head: Louis Stassen, senior portfolio manager, Coronation Fund ManagerS and Carolyn Levin, portfolio manager, Foord Global Equity Fund


The private equity experience


private equity


Profile: Ben Kodisang, managing director, Asset Management, Stanlib


Sector report: Mining, where is the investment value?



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the editor Investing should not be mysterious but sometimes it can be. And that might not be a bad thing. It’s better than feeling overconfident about an investment decision. That sort of over familiarity can lead to investors ignoring the basics, not getting the advice they might need, and making a financially painful mistake. The concept of ‘no brainers’ is a myth; an invitation to get it wrong. Even the simplest investment decision needs respect, and if a bit of mystery engenders that respect, that’s good. On that basis this is a double mystery issue. The two main themes are offshore investing and private equity; both are subjects that, in finer detail, will not be that well known to investors and financial advisers. Both have caused a lot of grief in the past simply because investors thought they knew it all. Remember what happened to so many investors who rushed offshore after 2004? Some are still recovering. And private equity is not just about private companies not listed on a stock exchange. A private equity investment can be far more complex than that. Put the two together – private equity investments outside South Africa and the mystery deepens, as does the respect required to make an informed investment decision. We have the bases covered in this issue with a lot of expert advice on the related topics. As always I don’t have the space to mention all the great articles, so will highlight just a few. Allan Gray COO Rob Dower advises on what you probably didn’t know about offshore investing in Africa. And Investec’s Daryll Welsh discusses why it makes sense to use local managers to go offshore. Linda van Tonder at Investment Solutions tells us how to choose managers (always a difficult topic) to invest in emerging markets, while David Crosoer at PPS offers help on how to be objective about offshore investing. In a well-written and easy-to-understand piece, Marc Hasenfuss tells of the private equity experience, with examples of private equity investments. One feature that I particularly enjoyed was Clayton Lautenberg and David Kop voicing the FPI’s concerns on the incoming twin peaks model of financial regulation. Those of you who have been around as long as I have might remember an enthralling show on TV years ago called Twin Peaks. With little overt violence, it managed to capture the horror of the unknown, of the mysterious. We do the opposite here, take the potential investment horror out of the mystery. Just so you can sleep better at night.

Shaun Harris



Editor Shaun Harris | Publisher Andy Mark Managing editor Nicky Mark Feature writers Shaun Harris Marc Hasenfuss Art director Herman Dorfling Editorial head office Ground floor Manhattan Towers Esplanade Road Century City 7441 phone: 021-555 3577 fax: 086 6183906

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

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

* P in n th a in

HOW CONFIDENT ARE WE IN OUR FUNDS? OUR RETIREMENT SAVINGS ARE INVESTED IN THEM. Our Equity Fund, Dividend Maximiser Fund, Inflation Plus Fund and Global Bond Fund of Funds have all performed in the top quartile over five and ten year periods*. If you’d like to benefit from our longstanding philosophy of prudence and consistency, speak to your Financial Adviser or visit

All things considered.

*Source: Morningstar to 31 July 2013. Prudential Portfolio Managers (South Africa) Pty Ltd [PPM SA’S] is an authorised discretionary financial services provider. Collective investment schemes (unit trusts) are generally medium to long term investments. The investment portfolios are market-linked and no guarantees are given. Market fluctuations, changes in rates of exchange or taxation and market trading costs may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. A fund of funds unit trust may only invest in other unit trusts, which could result in a higher fee structure for these portfolios. investsa


At home and


By Shaun Harris


nvestors are well aware of the importance of investing offshore. If for no other reason than extending diversification of an investment portfolio buying assets in overseas markets makes sense. This is particularly true for South African investors. As sophisticated as the JSE is, South Africa is an emerging market and a portfolio of local emerging market shares needs to be offset by investments in other markets. But investing offshore can entail risk, especially if done indiscriminately or if too much of a portfolio is placed offshore without considering the possible consequences. Many investors were burnt in the early 2000s in what was a hasty flight offshore, spurred by the early relaxation of foreign exchange allowances that previously had kept South African investors virtual investment prisoners in their own country. Like so many other aspects of investing going offshore entails long cycles. For a long time the cycle was against going too heavily offshore. But as some investment professionals argue below, the cycle now seems to have swung in favour of investing offshore. Evidence of this can be seen in the recent performance of global equity unit trust funds. They are currently providing far higher returns than local JSE-based equity unit trust funds. The stellar performance of the top

global equity funds, for the year ending June 2013, is summarised in the table below. No investor would argue with returns like these, and while it must be noted that the rate of performance is likely to slow, there are many reasons to believe that it is not yet over. Rand weakness over the past year has also played its part in this good performance of offshore assets and is attracting investors to investing offshore. But as Wilhelm Hertzog, portfolio manager at RE:CM, argues, investing offshore should not be based on a currency decision but on the wider pool of opportunities available. “In a bigger market or in a bigger pool of assets you are more likely to find the better opportunities, it’s just a mathematical fact,” he says. Global unit trust funds are one way, and perhaps the easiest way, of accessing offshore investments. There are other ways, and one option that could be lower cost is packaged foreign index tracking funds. GinsGlobal offers a range of these funds that South African director Lisa Segall says have total expense ratios below actively managed global unit trust funds. It’s a cheaper option and also offers a less risky vehicle into offshore exposure, tracking various global indices rather than individual company shares. But Segall says it offers the



R9.02 billion

68 per cent

Nedgroup Investments Global Equity Feeder Fund

R4.46 billion

79 per cent

Old Mutual Global Equity Fund

R2.49 billion

79 per cent

Coronation World Equity Fund of Funds

R2.15 billion

65 per cent

FUND Allan Gray Orbis Global Equity Feeder Fund



products through various linked investment service provider (LISP) channels, and this could add to the total cost to the investor. LISPs are usually only favourable for HNW individual investors committing significant capital to a fund.

Once an investor has decided, for the right reasons, to invest offshore or increase offshore exposure, the next big question is how much of the overall investment portfolio should be committed to offshore assets. The answer will vary: from as much as you possibly can to the standard 25 per cent of a portfolio. It all really depends on the investor’s risk profile, time horizon and investment objectives. However, it’s worth noting that many institutional investors, the fund managers, are sitting at their fund’s mandated maximum offshore exposure and are pushing for more. One is Sam Houlie, head of unconstrained strategies at Momentum Asset Management. He says that due to the distortion in the local market, there are few shares or sectors that meet his fund’s criteria for investing. Therefore he would like to go higher than the threshold of 25 per cent, perhaps even as high as 50 per cent, to find the investment ideas offshore.

Shaun le Roux, manager of the PSG Equity Fund, is also increasing offshore investments for similar reasons. “Our view is that offshore one can still buy quality names at attractive prices and the quality names on the JSE to us have been quite expensive for a while, and in fact look overpriced.” He adds that by including offshore blue chips in a portfolio is the potential of better returns plus a lower risk portfolio. The problem for local investors and their advisers is identifying those foreign blue chips that are available at an attractive price. We all know the names of the global blue chips – Nestlé, Microsoft, Coca-Cola – but how much do we actually know about the companies, compared to what we know about companies, many also global, listed on the JSE. There is no simple answer to how much of an investor’s portfolio should be offshore, says Geoff Blount, CEO of Cannon Asset Managers. Much depends on the investor’s specific circumstances. But after analysing charts of 10-year returns in Rand and US Dollars, one conclusion he draws is that “the great returns of SA equities of the last decade are unlikely to repeat themselves, and the poor returns of global equities are unlikely to repeat themselves”. Decisions by an investor to go offshore should be based on the advantages of diversification

rather than on expected currency moves, Blount says. He also warns against investing all assets in overseas equities. “Investors who live in South Africa have their liabilities or living expenses mostly in Rand. Putting all their assets overseas means they get poorer in periods of Rand strength.” Investors who decide to go the direct route and invest in shares should ask themselves whether it’s better to invest in those wellknown overseas companies that they or their financial advisers may not know that much about, or to invest in global companies on the JSE. Many of the companies in the top 20 index, like SABMiller, Anglo American, Sasol and Aspen, are global companies. But being South Africa-based, investors might find it easier to find out information about them. The answer probably comes down to valuations. Many investment professionals say the offshore blue chips are more attractively priced, while their counterparts on the JSE, mainly those big dual-listed groups, are overpriced. It comes down to the information that can be sourced. If the financial adviser cannot get the relevant information to make informed investment decisions on companies, go to the asset managers.

Johan Steyn, portfolio manager at Prescient Investment Management, says while valuation levels are similar to their counterparts in South Africa and the developed world, African markets offer superior prospects for growth. His fund, the Prescient Africa Equity Fund, was the top performing unit trust in 2012 with a return of 48.5 per cent. “Africa has higher expected GDP growth rates compared with most regions. This will mostly be consumer-driven growth, accompanied by lower levels of government debt as well as the benefits of positive demographics.” Investors wanting to combine emerging and developed markets, as well as some more obscure investments, could look at the funds run by Kokkie Kooyman, head of Sanlam Investment Management Global who was again selected investor of the year. Kooyman and his team do real primary research by visiting the companies he’s thinking about investing in all around the world. Offshore investments are an important component of a portfolio, especially now with the local market looking overpriced. But the decision should not be rushed and investors should not commit too much investment capital offshore. And if buying foreign equities, beware of overpaying.

And having decided to go offshore, investors look at developed or emerging markets.




Offshore investing

The importance of

diversifying your portfolio


iversifying your investment portfolio allows you to take individual risks, for example investments in a country, a class of assets or even a share, that would otherwise not be palatable, since they don’t impact the whole of your portfolio. Being able to take on risk, in turn, means the potential for better returns. Rob Dower, chief operating officer of Allan Gray, says big businesses that operate in South Africa face risks that are not very diversified. “For example, many of our retailers, retail banks and insurers serve the same communities of consumers and therefore have in common the risk that their customers may have overstretched themselves in the recent boom in unsecured lending,” he says. Allocating a portion of your investment offshore spreads your risk across different economies and geographic regions and opens up the possibility of earning returns under different conditions. It also provides the potential to increase returns by offering access to industries and companies that may not be available locally, or that may be performing differently. Different sectors can present opportunities at different times; as you broaden your investment universe, so these opportunities also increase. Diversified opportunities in Africa There is a lot of hype right now about the potential for investment and economic growth 8


in Africa. “It is easy to see why. We have always had an embarrassing wealth of minerals,” says Dower. Now, with some progress in bringing these to market and a huge backlog of unmet basic consumer and infrastructure needs, the old problems of political uncertainty, fragmented markets, corrupt bureaucracy and weak governance no longer seem so daunting to commentators.

Different sectors can present opportunities at different times “Despite this hype, our analysts are finding opportunities to invest in African markets and these are frequently better priced than their equivalents in South Africa. Almost as importantly, the underlying risks these businesses face are very diverse.”

Be aware of the context in which you invest Regardless of geography, when looking for shares to buy, Allan Gray looks at company-specific attributes, such as the competitive environment and the sustainability of earnings, and forms a view on what a fair price would be to pay for a company’s normal earnings. It then compares its estimate of fair value to the company’s market price to determine its attractiveness as an investment. “This emphasis on philosophy ensures we remain focused and not easily distracted by outside noise. However, we acknowledge that it is important to be mindful of the drivers that influence market prices,” Dower concludes.

For example, it is unlikely that the political and economic risks in Nigeria, Egypt, Kenya or Morocco will coincide. In the short term, the prices of their shares may move up or down at the same time according to global fashion. However, for patient investors who have done their homework on the drivers of value and risk in the operations of these companies, correlated short-term price fluctuations represent opportunities and not undiversified risk.

Rob Dower, Chief Operating Officer of Allan Gray

T T Y N t n e v t g c y Th o m t s t o T o o

Co m is cu co


(iv) (i)

(iii) (ii)

THE FURTHER YOU TRAVEL, THE MORE OPPORTUNITIES YOU’LL FIND. Nothing stops the caribou when it’s on the move. Not snow, not lakes and rivers, not even mating. After all, when you only eat grass and lichen, you make sure it’s the very best grass and lichen, even if you have to travel 5000km to get to it. Allan Gray and our global asset management partner Orbis share the caribou’s philosophy. We know that the further you go, the greater your investment prospects. That to be a successful investor you have to access opportunities beyond the 1% of the global equity market represented by South Africa. We realise that the choices out there can be overwhelming, so we’ve narrowed down the options to what we think are the most fertile offshore investment opportunities, in the Orbis Global Equity Fund. To be more like the caribou call Allan Gray on 0860 000 654 or your financial adviser, or visit


Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. Commission and incentives may be paid by investors to third-party intermediaries and, if so, would be included in those investors’ overall costs in investing in the Fund. Subscriptions are only valid if made on the basis of the current prospectus, which is available upon request from Allan Gray Unit Trust Management (RF) Proprietary Limited, a member of the Association for Savings & Investment SA (ASISA). A schedule of fees and charges and maximum commissions is also available on request. Allan Gray Proprietary Limited is an authorised financial services provider.

Offshore investing

Investors prefer SA managers to look after offshore investments


s advisers are increasingly starting to convince their clients to take advantage of their foreign allowance to invest offshore, it is South African investment managers with offshore operations who are capturing the bulk of these flows, at the expense of global investment managers. These are some of the findings of a survey undertaken with independent financial advisers by Investec IMS, the investment platform of Investec Asset Management. The survey covered a wide range of funds offered by both local and offshore managers, some of which are now offered on IMS’s offshore investment platform, Investec GlobalSelect. According to Daryll Welsh, head of product at Investec IMS, the survey revealed that South African firms received 62 per cent of the support. “This wasn’t unexpected, given that many of these domestic firms are household names and investors are comfortable with the brands.

allocation, multi-asset funds are by far the most popular. According to the survey, global balanced funds attracted 82 per cent of the vote versus global equity funds, which came in a distant second with only 12 per cent support. “With negative real interest rates in the developed world, it is hardly surprising that cash funds received only one per cent support and fixed income funds only two per cent,” Welsh said. Hedge funds received three per cent support. According to Welsh, these trends are indicative of how offshore investment has matured in South Africa. “Between 1997 and 2004, exchange controls were gradually lifted from R200 000 to R750 000 and there was a novelty factor to investing offshore. We saw wide takeup across the market, but a lot of this investment was into opaque products with little domestic support. Many investors were left without a clear understanding of their offshore investments.”

More importantly,” Welsh pointed out, “while IFAs on the whole are not opposed to supporting foreign investment managers, it is imperative that they offer some support locally, be that a staffed office in South Africa or regular scheduled visits.” Global managers with no local representation therefore received only five per cent support in the survey.

From 2004 to 2010, despite the foreign allowance increasing to R2 million, offshore investment became a niche activity, Welsh says. “Strong currency appreciation and a bull market locally meant that there were more attractive investment opportunities here.”

Given the prevailing uncertainty globally, it comes as little surprise that in terms of the mandates the end investors are selecting for their offshore

From 2011, exchange controls have effectively been scrapped for the majority of South Africans and the need to diversify offshore is widely


acknowledged. Most of the investments going offshore are being channelled through investment platforms like Investec IMS. “The key benefit for investors and their advisers is that we offer an integrated administration and custody platform and a local point of access for all information. More importantly, we are able to offer them a holistic and consolidated view of how their investments are performing – be they local or offshore. The tools we’ve developed, for example, can provide an overall and at-aglance view of the investor’s asset allocation across their various individual investments, here and abroad.”

Daryll Welsh, Head of Product at Investec Investment Management Services (IMS)



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Offshore Investments

2013/09/16 11:59 AM

Offshore investing

Investing in

emerging markets large houses like Aberdeen, and some in between such as Martin Currie and Coronation. Investment Solutions prefers those with employee ownership, lower assets under management and which are specialists in their fields, but they can often be complemented by large firms with wellresourced investment teams.”


ith anaemic economic growth in developed nations and governments burdened with debt, investors turned to emerging markets (EM) in search of yield and growth. But as history has proven, healthy economic growth is a weak indicator of future market returns and the MSCI EM Index has underperformed the MSCI World Index by over 20 per cent in 2013. Recent disappointing returns have led to critical questions: why augment a portfolio with EM exposure? And if so, who should manage this exposure? For SA investors, the benefit of EM exposure is diversification away from the local market. The typical middle-aged investor saving for retirement has 75 per cent of their assets exposed to one country with unique risks and a volatile currency in the Rand. Although the local market is sophisticated and world class, only about 150 stocks are regularly traded.

China, South Korea and Brazil hold the largest number at 15 per cent each. SA comprises eight per cent of this index. Qatar and the United Arab Emirates was recently upgraded from frontier to EMs. • The MSCI All Countries World Index is a composite of the two indices above. The EM component of this index has grown from five per cent in the early 2000s to 13 per cent this year. Although EMs have recently underperformed, the developed index has lagged behind the MSCI EM Index by five per cent per annum over the last 10 years. EM valuations are now trading at a discount to developed nations, with some expensive exceptions such as SA. To benefit from the diversity in EMs, an active manager can select stocks with attractive valuation and growth potential and not just track the group as a whole.

Classified as an EM and BRICS member, SA lacks attractive traits such as low unemployment, large population and a positive budget account, and is mired in labour unrest. SA acts like a hybrid between developed and EMs.

Typically global equity managers have the mandate to invest in all markets, but home bias is strong and stocks are often concentrated in the US, Europe and Japan. Funds that invest in EMs only are often required to augment offshore equity exposure.

Just how limited SA stock market opportunities are, is illustrated by some facts about global index trackers: • The MSCI World Index represent 1 600 stocks from 24 developed countries with, roughly, the US (50 per cent), Europe (25 per cent) and Japan (10 per cent) the largest. Inclusion is reviewed regularly and Greece was recently cut to an EM. • The MSCI EM Index represents 800 stocks from 21 emerging countries, of which

Cara Olsen, head of Investment Solutions’ research team in London, says well over 100 EM funds are available globally. Her team met and narrowed the list to 40 quality managers. “We met EM fund managers from Cape Town, London, New York, Norway, Singapore and Hong Kong, although most are based in the UK and the US east coast. Business DNA, a term used to analyse organisational and team structures, ranges from specialist boutiques such as Comgest,



Olsen says that with EMs it is easy to argue that vast coverage is required to scour for opportunities. Firms geared for this are First State and Aberdeen, which manage billions in EM assets. “But while a team of 50 analysts has proven successful for some, it’s not a necessity and, unless managed well, can introduce complexities. Some of the highly rated teams have four to 10 analysts.” She says Investment Solutions cautions against excessive assets under management. Capacity is a constraint in EMs, where liquidity is tighter. “The team found that some managers are disciplined in managing their capacity levels and closing their products at appropriate times. Others are relaxed and revise their capacity levels up while making slight changes to their investment approach to accommodate this – and these are managers we typically avoid.” A common criticism of managers is how active they really are and that many are closet benchmark huggers. This highlights the need to investigate and question their approach to investing. The qualitative assessment is tested against statistical analysis of their portfolio holdings over time. Sophisticated systems help Investment Solutions match evidence of accounting measures such as free cash flow and book-to-price ratios to a manager’s style label. Value, growth and quality styles are the most common.

Linda van Tonder, Global Portfolio Manager, Investment Solutions

Search for greener pastures, or stick to the green, green grass of home?


uestions on offshore investing can be very difficult to answer objectively, and often leave the protagonists with even more entrenched views on the merits of their particular argument. We are all familiar with the conversation: investors scarred by the experience of more than a decade of sub-par returns from offshore assets are now convinced that investing offshore was similar to investing in Betamax – buying a technology that not only lost the war to VHS, but has become obsolete. Can we take an objective view on offshore investing? How should we attempt to gauge its merits? For a South African investor, the Rand often seems to be the crucial issue. However, this may be misleading. One metric that potentially turns the question on its head is to consider how attractive South Africa appears to foreign investors. All else being equal, they should not have stubborn local biases when it comes to assessing our country’s merits, as these investors compare South Africa to a broad spectrum of opportunities. They’re also less preoccupied with the local currency. Foreigners were net purchasers of South African equities for much of the past decade, especially in the early 2000s when many South Africans were favouring expensive international assets over cheap local ones. Over the past two years, however, foreign net inflows into our equity market have been

largely static. We can surmise that this partly reflects less attractive valuations of our equity market.

At the time of writing, it was above R10. Is this still a comfortable level to be buying international assets?

In contrast, the last two years have been characterised by significant net flows into our bond market. This might surprise local investors who typically have limited exposure to South African bonds.

Our purchasing power parity (PPP) models, which give an indication of the relative value of the Rand when compared to foreign currencies, no longer suggest that the Rand is overvalued. However, we know that it can depreciate significantly beyond what we would regard as fair value, just as it stayed stubbornly strong for longer than many expected.

However, foreign investors have been willing to take on the duration risk embedded in our local bonds (i.e. the risk of capital loss should interest rates increase) because of the significant yield pick-up that South African bonds have offered over cash when compared to many other international markets. We’re not suggesting that retail investors should be purchasing South African bonds. In fact, the global search for yield has driven down our bond yields to levels that are hardly sufficient to compensate investors for taking on their duration risk. Rather, investors should take note of the fact that, in terms of equities, foreigners have not been net buyers of our market for the past 18 months.

South African investors need to be dispassionate when they evaluate international opportunities as it’s all too easy to extrapolate the past into the future. In these difficult times, investors should partner with quality managers regardless of where they are domiciled.

This suggests that despite the market reaching new highs, foreign investors are of the view that there are more attractive opportunities elsewhere. But what about the Rand? It’s very difficult to talk about offshore investing without bringing this up. Not so long ago (1 September 2011), the Rand was trading below R7 to the Dollar.

David Crosoer, Executive: Research and Investments at PPS Investments



Diversify offshore


Offshore investing

to guard against the volatility that lies ahead for financial markets

Developed markets are doing well, but global sentiment towards the BRICS countries is very low. Indicative of this is that China is trading at almost half the value of the US, with a P:E ratio of around 10 versus 19 for the US. Both markets have experienced flat earnings growth over the last 18 months. Looking at asset classes, Du favours equities over bonds and cash for now. That, however, was starting to change with bonds catching up. On the home front, foreign investors hold a high percentage of SA bonds and equities (around 40 per cent compared with between 20 and 30 per cent in other emerging markets), domestic markets will remain vulnerable to the whims of foreign investors.


ith quantitative easing and ultraaccommodative monetary policy to be wound down at some point, investors should expect an increase in financial market volatility. Liang Du, head of asset allocation at Prescient Investment Management, notes that policy changes inevitably introduce volatility to markets, adding that the winding down of monetary policy programmes would be a good thing since the step would be intended to allow real economic demand to replace quantitative easing. This would mean that economies were showing signs of cyclical recovery. “With regard to monetary policy, the Federal Reserve has been consistent in its approach, always maintaining that it will do what’s determined by the economic data. Risks in the US economy have diminished and there are signs of recovery, particularly in the housing market. The leading indicators are pointing the right way,” says Du. He adds that Europe, having scored an own goal with austerity, was



also starting to move towards growth-orientated policies. A recovery in the US would help the Eurozone. On China, he said a change in mindset was required. China was likely to achieve a growth target of around seven per cent this year but investors should get used to lower growth over the next decade.

However the Rand is on the cheap side, being one of the weakest currencies in the past year compared to its peers. Although over the near term, weak country fundamentals make the Rand susceptible to a crisis, asset allocation over the long term should not count on the Rand depreciating at the rate it has recently. “But we continue to consider offshore investments a good idea due to the opportunity they present for diversification. Investors should invest offshore directly to avoid an extra one per cent a year in fees due to the extra layer represented by the convenience of feeder funds,” advises Du.

“In future, the Chinese economy will be driven less by demand from European and US consumers and more by Chinese consumption. As the country moves away from being an export machine, growth is likely to slow. However, even at four per cent, growth current valuations mean China is a great investment opportunity.” Where global equities are concerned, Du says the low inflation environment and low interest rates should support prices. “However, valuations are on the expensive side, but not screamingly so. Valuations have definitely gone past neutral and there is not as much fear in the market.”

Liang Du, Head of Asset Allocation at Prescient Investment Management

*Coro Sour

not ne measu

8016216 CO


TRUST IS EARNED. Top Performing Equity Fund Top Performing Balanced Fund Top Performing Retirement Income Fund Top Performing Immediate Income Fund Over 5 years and 10 years.*

Financial Mail Top Companies

Overall Winner

*Coronation Top 20, Balanced Plus, Capital Plus and Strategic Income Funds 1st Quartile over 5 years and 10 years in their respective ASISA fund categories to 31 July 2013. Source: Morningstar. Coronation Asset Management (Pty) Ltd is an authorised financial services provider. Unit trusts are generally medium to long-term investments. The value of units may go up as well as down. Past performance is not necessarily an indication of the future. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Fund valuations take place at approximately 15H00 each business day and forward pricing is used. Performance is measured on NAV prices with income distribution reinvested & quoted after deduction of all costs incurred within the fund. Coronation is a full member of the Association for Savings & Investment SA. Trust is EarnedTM.

8016216 CORONTN EndAug 297x210 E.indd 1

2013/08/22 10:56 AM

Alternative investments

Responsible private equity investment in sub-Saharan Africa


old, ivory and slaves were believed to be what European powers saw when they looked at Africa in the 15th century.

At the Berlin conference of 1884, Prussian Chancellor Otto von Bismarck brought all of the European powers together to discuss the future of Africa and the continent was effectively divided up among those at the table. No regard was given to Africans, but most left satisfied that their own populations would benefit from the cheap import of raw goods with little capital expenditure. Following the rise of African political independence after the Second World War, new governments had to deal with a lack of capital and experience, as well as artificial borders and an unfair global trading regime. Politically, they found themselves caught between new international superpowers, the US and the USSR. However, Africa has been able to rise above these circumstances and, today, many see the continent as one of the most promising in terms of economic growth. This is based predominantly on four pillars of continued and robust GDP growth, positive demographics, the rise of the middle class and an improving political climate. The attention being shown in Africa by the international investor community comes from the traditional developed economies and the BRIC countries. The presence of Chinese organisations, both state-owned and private, is particularly evident. The Chinese 16


Government, for example, paid for the new headquarters of the African Union is Addis Ababa at a cost of some US$200 million. Given poor liquidity in many African markets, as well as the interest shown by global institutional investors in the riches of the continent, private equity has come to the fore as one of the preferred vehicles in which to invest in Africa. The Public Investment Corporation (PIC), manager of the Government Employees Pension Fund, has noted that it also sees private equity as one of the best vehicles through which to partake in the African growth story. With an increased appetite for the continent’s potential, investors should ensure that they go about their business in a responsible manner, taking into consideration accepted environmental, social and governance (ESG) issues.

like pension funds, may be removed from the underlying investments in private equity funds, and increasingly seek the reassurance that their fund manager subscribes to ESG principles. This was seen in the PwC survey as a bigger factor motivating adherence to the Principles for Responsible Investment than regulatory pressure. While the Principles for Responsible Investment are not forced upon funds, there is a growing belief in their positive contribution to underlying performance. The evolving discipline of environmental, social and governance standards is still in its early phases, especially in terms of implementation. However, adherence to the guidelines will help ensure that private equity funds investing in Africa do so for the benefit of the people and the environment they’re investing in, as well as the providers of their capital.

In 2005, the United Nations launched the Principles for Responsible Investment, a set of guidelines for investment organisations. In a survey done by PwC on ESG factors in 2012, 94 per cent of private equity companies said they expected to realise substantial benefits from incorporating these principles into their investment decision-making, reporting and policy development. Raising capital for private equity funds has become more competitive globally, especially since the financial crisis of 2008. Investors, particularly the bigger players

Pieter de Wet, Head of Research at Novare Equity Partners

Asset management

MSCI Emerging Markets NDR Index has now underperformed its developed market equivalent over one, three and five years. “In the first half of 2013, the underperformance was 18 per cent. EPFR fund data shows US$31.5 billion of outflows from emerging market equity funds in the second quarter and US$17.7 billion outflows from emerging market debt funds in June and July.”

The end of US

Fund outflows increased the downward pressure on currencies, further aggravating the sell-off of assets. Multiple causes are blamed: the reminder by the Fed that QE would be scaled back, the weakness of commodity prices, economic stress in China, unsustainably low bond yields in some countries, political uncertainty, civic unrest, current and fiscal account deficits, persistent inflation, excess credit and faltering growth. “In financial markets, and especially in emerging markets, bad news feeds on itself. In due course, pessimism becomes extreme and valuations become compelling. At that point, brave investors might close their eyes and buy,” Saunders says.

and what it means for emerging markets

Spanjaard says South Africa’s trade and financial outflows are currently greater than its inflows by about R200 billion per year. “We have been heavily dependent on foreigners buying local shares and bonds in order to make up this imbalance. As these flows begin to slow, the Rand will come under pressure, which will have a consequent impact on inflation and interest rates.

QE programme


uropean investors are concerned about how the end of the Fed’s quantitative easing will affect liquidity for emerging markets, according to the latest Fitch Ratings quarterly investor survey. Two-thirds of those polled expect concerns over the timing of QE reduction to drive volatility in the amount of cash flowing into and out of emerging market bond funds for the remainder of the year. A further 21 per cent said the flows into emerging market funds will decrease due to greater concerns over political risk. Rob Spanjaard, investment director at Rezco Asset Management, says the announcement has already had a significant impact on global markets. However, he predicts when

the quantitative easing programme is brought to a halt, the impact will be even more severe. “The impact of the end of quantitative easing will cause interest rates to increase worldwide. Furthermore, we are likely to see a withdrawal of money from emerging markets. Currently, investment firms have been seeking higher interest rates in emerging markets such as South Africa. This trend will change with the money returning home to developed markets, thereby increasing the pressure on both the Rand and equities listed on the JSE,” he says. Philip Saunders, of Investec Asset management, also believes that the scaling back of QE will have a negative effect on emerging markets; however, he says this is just one factor of many. He notes the

“A quantitative easing programme on this scale is not sustainable forever and we would expect it to stop by the end of the year. When the programme does end, it will have to be replaced with a normal world where governments that want to spend more than they collect in tax will be required to borrow the difference,” he says. Saunders meanwhile says in the short term, emerging markets could continue to be difficult. However, he says a replay of the late 1990’s crisis looks extremely unlikely, but the pain may not be over yet. “This does not mean that emerging market equities or debt should be avoided, given the opportunity for adding value from stock and credit selection. In equities, the recent sell-off has made quality companies look cheap,” he says. In short, it seems being a selective early buyer prepared to be patient makes sense.

investsa 17




Investors fear emerging markets could suffer

According to Fitch Ratings quarterly investor survey, European investors fear emerging markets, such as South Africa, could suffer volatility in liquidity once the US Federal Reserve begins to reduce the amount of money it is pushing into markets; presently at $58 billion a month. Two-thirds of respondents expected increased volatility, while 21 per cent expected a decrease of flow into emerging markets funds due to greater concerns over political risk.

Local property market drab outlook

Business flows between China and Africa to strengthen The Bank of China and South Africa’s Nedbank have signed a strategic business co-operation agreement to grow business flows between Africa and China. The agreement will also support investors as they look to grow and invest in South Africa and the rest of Africa.

Uganda economic growth accelerates Uganda’s economic growth could accelerate from a projected five per cent for 2013, to 6.5 per cent in 2014 according to the World Bank. This increase has been attributed to macroeconomic stability and increased public investments. The World Bank also reported that the country has the potential of becoming a middle-income economy by 2040 should the government ensure economic stability to support the implementation of long-term fiscal and structural policies.

The latest Rode Report on the South African property market revealed a bleak view of the state of the two major segments of the commercial property market. Posing the biggest threat to industrial rentals was weak office demand, which continued to hamper rentals, and the poorly performing manufacturing sector.

SA one of slowest-growing countries in Africa The African Development Bank (AfDB) placed South Africa among the 10 slowestgrowing countries in Africa in its 2013 African Economic outlook survey. AfDB predicted the country’s growth to remain below three per cent in 2013, placing South Africa’s growth rate on par with Sudan.

Africans chasing growth in Africa Ernst & Young reported that between 2003 and 2011, intraAfrican investment into new foreign direct investment (FDI) in Africa grew at a 23 per cent annual compounded rate and that, since 2007, that rate has increased to 32.5 per cent, more than double the growth in investment from non-African emerging markets and nearly four times fast than FDI from developed countries.

s y a w Side 18


SA business confidence remains low despite rise SA Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI) revealed that despite a slight rise of 0.5 in July to 90.7 from 90.2 in June, the index remained at a low level.

Chris Hart

Chris Hart, Chief Strategist, Investment Solutions


to beat inflation


he SA consumer inflation rate for July 2013 jumped to 6.3 per cent year on year from 5.5 per cent in June 2013. Not only is it above the six per cent inflation target ceiling, it is at the highest level in almost four years. Some contributing factors are easy to identify. Middle East tensions helped to push up international crude oil prices, and risk aversion to some emerging markets, including SA, led to currency weakness, with the Rand falling to over the R10/$ mark. With indications of a degree of jitteriness in global financial markets, further Rand weakness is possible. From a cyclical point of view, inflation is in an upward trend and is expected to peak later in 2013 or early 2014. But the inflation is relentless. Whether in an upward or downward trend, prices are still rising at a higher or lower pace. Whatever the reason, the effects on households, individuals and businesses are ever present. According to the CPI, the July 2013 index value was 104.0, a doubling over the past 12 years. Graphically, this means the R200 note has the same purchasing power now as the R100 note had 12 years ago. If the price of milk is R10 a litre now, it was R5 a litre 12 years ago. Critical to understanding this phenomenon is that the milk has not changed. What has changed

is that the purchasing power of money has been eroded, although not quite as badly as in the 1980s, when prices were doubling every five years. Over the past 12 years, the inflation rate averaged 5.9 per cent compared with 15.6 per cent from 1985 to 1990. Implementing inflation targeting has helped, as has an improvement in the overall macroeconomic management of the country. Inflation has come down structurally, but this downward adjustment may well have come to an end. Inflation will continue to erode the ability of the currency to hold value. For investors, this is a major challenge. Inflation is also the biggest risk for longterm investors, especially those investing for retirement or who have already retired. Here the critical factor is for income growth to be sufficient to keep up with inflation. Already, the retiree faces the challenge of not having saved sufficiently. Often fixed annuities are purchased because they give a higher initial nominal income. But this only compounds the problem very quickly if the retiree starts off with pension income distress. This is where a proper risk assessment is required. Too often, the risk focus is on volatility, which is an important short-term risk, but here the long term needs to be taken into account. Volatility recedes as a risk factor the longer the time frame. Conversely, inflation risk is enhanced the

longer the time frame and is less important over shorter periods. Too often, volatility dominates any risk assessment. The bottom line is that different asset characteristics protect against different risks. Cash and bonds protect against volatility risk but not against inflation risk. Listed property and equities offer far better protection against inflation, but this is where volatility risk in financial markets is embedded. To build an investment that provides an income able to beat inflation, the investor must concentrate on increasing exposure to blue-chip equities and listed property. Cash and bonds are useful in protecting against short-term volatility but detract from any long-term strategy of building an inflationproof income. In addition to the focus on asset classes, jurisdiction also must play a part. The Rand is a currency that has eroded in value faster than others such as the US Dollar and Euro. This may change over time, especially with the highly inflationary policies pursued by central banks these days. But it is also important to consider building income across different currencies as well. This is more apparent when the Rand is weakening. However, a better time is when the currency is strong and has better buying power.

investsa 19

Economic commentary

SA economic growth e v i t c e p s r e p in Statistics SA recently released its estimate for SA’s economic growth (GDP or gross domestic product) for the second quarter; and it looked good.


he widely reported statistic by media and the general public stated that the economy expanded at 3.0 per cent on the quarter. The contributors to this increase in economic activity for the second quarter were the manufacturing industry (1.7 percentage points); finance, real estate and business services (0.8 of a percentage point); and the wholesale, retail and motor trade, catering and accommodation industry (0.4 of a percentage point). Negative contributions by other industries included the mining and quarrying industry (-0.3 of a percentage point) and the agriculture, forestry and fishing industry (-0.1 of a percentage point). On face value, this 3.0 per cent reflected positively compared to the previous quarter’s growth of only 0.9 per cent, suggesting a significant improvement in growth during this last quarter and perhaps even a chance of an improved growth outlook for the year as a whole. However, it is quite easy to interpret this latest statistic as a substantial improvement if you don’t understand the technical calculations that created it. Both the figures as stated above (the 3.0 per cent and 0.9 per cent) are calculated by firstly adjusting GDP for inflation. Secondly, GDP is adjusted for seasonality and annualised. Thirdly, these growth rates are determined from the previous quarter. Other methodologies for calculating growth also exist. For instance, we can use inflation20


adjusted and annualised data, but calculate growth of the current quarter from the same quarter one year ago. Using this method, results look quite different: Growth for the first quarter of this year is estimated at 1.9 per cent, but the pace of growth actually declined to 1.8 per cent in the second quarter. This way, the statistics actually suggest a slightly slower economic expansion and might even point to a loss in momentum. There are, of course, even more methods available to explain how the economy is expanding. What to do now? Do these statistics tell us whether or not we should be more or less positive (or negative, for that matter) about SA’s prospective economic growth this year? One way of telling how well SA is fairing is by comparing our growth (or perhaps momentum in growth) with a few other countries around the world. Let’s take the BRIC (Brazil, Russia, India and China) countries for instance. When using the latter estimation method (yearly change in the same quarter) that is comparable to SA’s 1.8 per cent from 1.9 per cent, both China (7.5 per cent from 7.7 per cent) and India (2.4 per cent from 3.0 per cent) experienced a slower pace of expansion during the second quarter from the first quarter of this year. Brazil, on the contrary, experienced a substantial economic expansion (3.3 per cent from 1.9 per cent) during this period. Russia’s first quarter GDP estimate (1.8 per cent) reflected rates similar to that of Brazil’s during this period, while its second quarter figure is yet to be released. Looking at these countries using the locally more popular estimation method that compares this quarter to the previous,

(comparing to SA’s 3.0 per cent from 0.9 per cent), the data tells a different story. For instance, Brazil recorded a sharp contraction in GDP of 10.4 per cent during the first quarter whereafter it bounced back to 23.0 per cent in the second quarter. India’s economy expanded by 22.2 per cent in the first quarter only to dive down to -38.3 per cent in the second quarter. Russia’s first quarter estimate showed declining growth of -0.3 per cent. On the developed market side the statistics are improving. The United States grew 2.5 per cent in the second quarter from 1.1 per cent in the first quarter using the same method. The United Kingdom fared roughly the same. The European Union contracted during the first quarter (-0.2 per cent) but recovered to 1.4 per cent in the second quarter mainly due to a sizable contribution from Germany (expanding 2.9 per cent in the second quarter from no growth in the previous quarter). The message is clear. Looking at SA’s economic growth from the 3.0 per cent perspective tells only half the story. There is a lot of base effect involved in calculating GDP this way. SA might see a much weaker economic statistic below 2.5 per cent in the third quarter due to this estimation method. If we add some structural problems to the mix (for example, more severe industrial action that has started to become a seasonal component in the third quarters of late) that impacts negatively on growth as a result of work stoppages and a drop in productivity, the figure might be even weaker. So, don’t be too shocked when you don’t hear of another 3.0 per cent (or more) jump in the next two quarters. Try to find the real answers in a more expanded explanation of SA’s growth statistics and don’t forget: most of the emerging economies around the globe are also growing at a slower pace this year, with SA performing in line with most of the BRICS (excluding China, of course).

Merina Willemse, Economist at Efficient Group Ltd

Global economic commentary

Global outlook G

lobal equity markets enjoyed a very positive month in July. Fears of the Federal Reserve’s ‘tapering’ being withdrawn were put to rest. By the end of July, US equity markets had again reached new all-time highs. For now it appears that the Fed’s Bernanke is in no rush to withdraw from its massive $85 billion monthly bond buying programme, until more robust economic growth figures and lower unemployment numbers are recorded. That said, markets are predicting tapering to begin by year end, with a smaller bond buying programme in the offing. The consensus appears that until monthly jobs data consistently hits over 200 000 jobs, the Fed will continue with its stimulus programme in various ways. Recent jobs data including June’s figures (195 000) and July (162 000) remains well below this level. Unemployment remains stubbornly at 7.4 per cent – well above Bernanke’s 6.5 per cent target level for no further Fed bond buying stimulus (QE3). The US economy is still leading the rest of the world out of its deep malaise since the 2008 crisis. Sentiment is very much against emerging markets currently with their currencies taking major strain. Year to date, the MSCI emerging markets index is down almost 10 per cent but we expect developing markets to slowly recoup such losses after Fed uncertainty is put to rest. The global equity market rally that stalled in June recovered in July. The MSCI World Index gained 5.3 per cent in July following June’s 2.5 per cent retreat. It remains up 14.1 per cent for the year. The benchmark is up a total of 23.2 per cent over the past year. The global Consumer Staples sector gained 4.0 per cent in July, and is now up 15.0 per cent in 2013, and 17.9 per cent over the past 12 months.

The US markets measured by the broader MSCI US Index gained 5.2 per cent in July, after losing 1.4 per cent in June. US equities are now up 19.3 per cent year to date and 24.5 per cent over the past year. By comparison, Europe posted impressive 6.3 per cent gains (MSCI EMU in Euros), and is up 9.3 per cent for the year and 23.2 per cent over the past 12 months. Interestingly, Europe is trading at 12 times earnings, while the US trades at close to 16 times earnings – as measured by the broader MSCI US Index. The MSCI World Index minus US stocks has a dividend yield of 3.1 per cent. That is almost 50 per cent higher than the 2.1 per cent dividend yield of the S&P 500. Among the highest yields can be found in Australia (average of 4.5 per cent), France (3.7 per cent), and the UK (3.6 per cent). Increased talk of Fed tapering (i.e. reducing its monthly $85 billion bond buying binge) has clearly unsettled markets during August with equity markets are off close to four per cent over the past 10 days. Given that yearto-date returns for the US, Europe and many sector funds were well into double digits, a retreat is not wildly unexpected and may be a healthy move as the market consolidates impressive gains over the past few months. Over 12 months, the broad MSCI World, MSCI US and MSCI EMU indices are each up approximately 20 per cent. The MSCI emerging markets index after giving back 6.4 per cent in June rose just 1.1 per cent in July, and is now down 8.6 per cent for the year to date. Over the past 12 months, the index achieved just a 2.0 per cent growth rate. With PE ratios trading at low levels of just 10 times earnings and a price to book ratio of 1.5X. Emerging markets arguably have suffered from excessive investor pessimism and overshot on the downside based on slowdown fears in China and India. Making matters worse has been the weakening of many emerging market

currencies including the Brazilian Real, South African Rand and Indian Rupee – now at an all-time low of almost 64 to the US Dollar. The 10-year Treasury is inching its way back to three per cent which will cause 30-year mortgage rates to spike to their highest levels in years. Despite weak GDP figures, the bond market is pricing in steadily increasing yields. Between May and early August, 10-year Treasury bonds have lost almost 10 per cent in value. By contrast, Global government bonds are off 4.4 per cent for the year – and in fact gained 1.4 per cent in July. European government bonds are up 0.8 per cent for the year in Euro terms. The US property market has certainly enjoyed a robust past 12 months, with prices up across the country – on average 10 per cent to 12 per cent in residential properties. However, there are fears that a big spike in mortgage rates could dramatically reduce housing activity and reduce economic growth prospects. The US Property Index (REIT) benchmark gained 0.8 per cent and is up 6.5 per cent now year to date. By comparison, the European Citigroup BMI Property Index gained 3.8 per cent in July and is up just 2.1 per cent in Euro terms for the year.

Anthony Ginsberg Director GinsGlobal Index Funds



Industry associations

An update on the incoming

Twin Peaks model of financial regulation


n the July 2013 issue of BankIndaba, Unathi Kamlana, head of the Office of the Reserve Bank Deputy Governor, discusses the background and implementation of the incoming Twin Peaks model of regulation of the financial sector in South Africa. In 2007, National Treasury launched a review of South Africa’s financial sector, and in February 2013, Treasury released its Twin Peaks Implementation Document, setting forth the principles of the Twin Peaks model. Kamlana explains that this regulatory model has been adopted in a number of jurisdictions internationally and conforms to international standards. What will change with the implementation of the Twin Peaks model? It is important to remember that traditionally, the Reserve Bank has broadly been responsible for regulation and supervision of banks in South Africa, while the Financial Services Board (FSB) has been responsible for supervision and regulation of insurers in general. Kamlana describes how the new model aims to regulate the financial industry in a more efficient manner: The new model sees the consolidation of the prudential regulation and supervision of banks and insurers within the Prudential Regulation of the Reserve Bank, while conduct of business regulation and supervision of the financial sector will be consolidated within the FSB. The prudential regulator’s (Reserve Bank) objective will be to maintain and enhance the safety and soundness of regulated financial institutions, taking into account factors such as risk and continued financial health of regulated institutions. The market conduct regulator’s (FSB) objective will be to protect consumers of financial services and promote confidence in South Africa’s financial system. The FSB’s main roles will in future be to ensure that consumers are treated fairly throughout the value chain



where they interact with or consume financial products. The Reserve Bank will furthermore play a leading role in promoting financial system stability by becoming the systemic regulator. Under the new model, recommendations can be made to the Financial Stability Oversight Committee (FSOC) in fulfilling this role. The FSB also has a role to play in ensuring financial market stability and, in this regard, it will be included as a member of the FSOC. National Treasury will serve as an observer. It seems the FSB’s focus will remain on the successful introduction and implementation of the Treating Customers Fairly (TCF) campaign, which should be integral in the FSB achieving its mandate and responsibilities in terms of its new role as market conduct regulator. Under the new system, co-ordination and a working relationship between the two regulators will be essential in the successful implementation of the new model. Kamlana ends his report by advising that the supporting legislation required to enable the prudential and market conduct regulators to act in their new roles, will most likely be drafted during the course of 2013/2014, and thereafter tabled to Parliament. The Financial Planning Institute (FPI) is broadly supportive of the proposed model of regulation that has been presented in the consultation paper. Nonetheless we believe that industry can still play an active role going forward. The FPI has thus urged the Financial Regulatory Reform Steering Committee (FRSSC) to consult further with industry, and to ensure they do not work in isolation. We have made certain submissions to the FRSSC, detailing some of the concerns we have and these are briefly as follows: Retirement funds A point of concern for FPI relates to the supervision of retirement funds, which are, in our view, undeniably, social insurance vehicles.

From this point of view, we fail to understand how retirement funds will be classified within the market conduct paradigm exclusively. Conflict of interest We detailed our unease regarding the Minister of Finance’s power of appointment with regard to the executive management team, as we feel this may create the potential for a conflict of interest. We believe that an independent board may be required to appoint management and have suggested that neither the board nor the management team should be appointed by the minister. FPI has noted that the issue of regulatory independence has not been addressed in the discussion document. We have submitted that a lack of independence represents a source of systemic risk, and should be addressed. Costs FPI noted concerns regarding the cost of implementation of the new model, which could be more than “relatively modest”. Additional costs will have an impact on the amount available to consumers to save.

Clayton Lautenberg (LLB, LLM), FPI Policy Advisor

David Kop CFPR, FPI Senior Manager Policy and Research

Head To Head Offshore investing

Senior Portfolio Manager, Coronation Fund Managers

L ouis

What are the biggest risks to investors of investing offshore? One of the biggest risks when investing offshore is the fact that you, as an investor, are essentially dealing with the unknown; you are playing an away game in a space where there have been many failures and broken promises in the past. Another risk is that people often invest offshore for the wrong reason; for example, objectivity is currently being blurred by the level of the currency. We don’t believe it’s possible to time currency moves and don’t believe it should form part of your motivation to invest offshore. When investing offshore, investors should, with the assistance of their financial adviser, decide on an appropriate level of exposure and implement according to their time horizon and risk tolerance. Should investors look at diversifying their offshore asset classes or stick with equities? Where should they be looking? Investing purely in equities doesn’t suit every investor’s risk profile and so diversification across the various offshore assets classes may better match an individual investor’s needs. In terms of where investors should be looking to access such assets, we believe that a good multi-asset fund with a strong track record of producing risk-adjusted returns is the most suitable to meet the majority of investors’ needs. A number of asset managers have said that it is becoming increasingly difficult to find good quality, under-priced stocks. Do you agree? Yes. Compared to two years ago, the margin of safety and potential upside available in global markets have been somewhat reduced. We have also seen some of the good quality defensive, cash-generative businesses re-rate over the past three years; although in the last 24


S tassen

couple of months, there has been some selloff in response to weaker than anticipated top-line growth. That said, the beauty of the global universe is that there will always be attractive opportunities for stock pickers to identify. What do you look for when choosing where to invest offshore? Essentially, we always look to invest in undervalued assets. The same investment philosophy that we apply in the South African market is how we construct our global portfolios. When selecting an offshore asset, we pay close attention to where a company is registered and under which political jurisdiction and tax dispensation it operates. Given that emerging markets are more risky (than developed markets) due to the potential for political interference and instability, we try to avoid having concentration risk in our emerging market portfolios. Instead, we aim to construct a portfolio that is more balanced across the emerging market spectrum and can withstand bad news in any particular geography. In a developed market portfolio, we are also cognisant of these risks, but geography is most definitely less of an issue. We also place a high premium on good corporate governance. Again in developed markets, governance risk tends to be lower thanks to regular reporting and the timely dissemination of information. Is it generally more expensive to take your money offshore? Yes, due to the complexity of doing business in international markets. However, the process of externalising assets has been simplified in recent years and, as a result, has become less cumbersome and expensive.

What’s the best way to access offshore markets? We believe the best approach is to invest in a multi-asset class portfolio (depending on your risk profile) offered by a manager whom you trust, with proven capabilities across the globe. Multi-asset class funds offer the fund manager more tools with which to mitigate risk and diversify the portfolio, and to enhance returns. Do you prefer developed rather than emerging markets? Over the past 12 months (ending August), emerging markets have underperformed developed markets by 20 per cent in US Dollar terms. This underperformance coincided with concerns regarding the sustainability of economic growth in China as well as a renewed focus on some of the structural issues facing larger emerging markets such as India and Brazil. We think these fears have been overplayed and continue to believe that over time emerging economies will outperform developed economies, supported by the growth drivers of, for example, an emerging middle class, young populations and lower levels of consumption of goods. What do you think investors can expect for the year ahead? We believe that the search-for-yield era has come to an end. Over the next 12 months, we expect markets to be impacted by further sentiment changes around the anticipated normalisation of interest rates in the developed world. We believe that global bond markets will continue to be impacted by capital flowing back from the higher yielding markets to their home (developed market) bases. Income-generating assets will therefore continue to remain under pressure, although a large portion of the derating has already taken place. Against this backdrop, global equities remain our first choice.

Portfolio Manager, Foord Global Equity Fund

C arolyn

What are the biggest risks to investors of investing offshore? For South African investors, the sheer size of the investment universe with all of its various products, asset classes and service providers can be overwhelming. A risk for South African investors must be an incorrectly predicated investment strategy: if the motivation for offshore investing is merely a negative view on the local currency, then this is unlikely to provide a sustainably satisfactory outcome. The currency risk is a factor that needs to be given careful consideration. South Africans tend to become fearful when the Rand blows out and choose this as the time to send their money offshore. However, many investors have been burnt this way and it is best to invest offshore when the currency is strong or stable. Should investors look at diversifying their offshore asset classes, or stick with equities? Where should they be looking? The selection of an asset class is a question of value and conviction; this mindset does not alter whether investing locally or offshore. A diversified portfolio should be considered in aggregate and not on a geographical basis. The selection of assets in a portfolio is also a function of an investor’s risk appetite and particular requirements. However, in the current low interest environment with poor medium-term prospects for bonds, equities remain the asset class of choice. A number of asset managers have said that it is becoming increasingly difficult to find good quality, under-priced stocks. Do you agree? The equity markets have had a good run this year; the S&P is up 15 per cent year to date.

However, the recent turmoil in emerging markets has seen certain markets plummeting 20 per cent in the past few months, even more when we take the related currency depreciation into account. This creates opportunities in certain markets. Nevertheless, we believe that it is far more preferable to buy a good company at a fair price than a bad company at a bargain. What do you look for when choosing where to invest offshore? It seems trite to say so, but the question remains one of value and conviction. Where we see particular value, and we can assess that value with a high degree of conviction, our portfolios will reflect those holdings. Our investment process is a marriage of our view on macroeconomic indicators and prospective scenarios, as well as asset fundamentals. Where the results of those two perspectives show opportunities, we will direct our efforts accordingly. Is it generally more expensive to take your money offshore? For South African investors, the most expensive aspect seems to be the considerable bid-ask spread by the banks for exchanging currency. The size of the international investment arena probably makes for more competitive pricing on asset management fees. What’s the best way to access offshore markets? We believe, given the plethora of international choice, investors wanting direct offshore exposure should consider the offshore offerings of local fund managers that they have come to know and trust. There are two main ways of using local fund managers to invest offshore, depending on the size of the investment. For

L evin

smaller amounts, South African investors might do well to access offshore markets via a local feeder fund or via a global asset allocation fund. Foord offers both the Foord International Feeder Fund and the Foord Flexible Fund of Funds. Any money invested in this manner does not form part of an individual’s offshore allowance. For large sums, investors can obtain a SARS tax clearance certificate and invest directly in the offshore fund, in foreign currency. Foord offers two US Dollar-denominated funds – the Foord International Trust and the Foord Global Equity Fund. Do you prefer developed, rather than emerging markets? We are not market specific; we buy quality companies at good valuations for our clients. What do you think investors can expect for the year ahead? Offshore assets (as part of a diversified overall portfolio), and particularly equities, are likely to remain an asset class of choice for South African investors. Global interest rates can be expected to rise, which will be negative for bonds. Political uncertainty in South Africa is likely to continue to underpin Rand weakness. Globally, a lot depends on the timing and extent of US stimulus tapering. We expect volatility to continue until there is clarity on this.

South Africans tend to become fearful when the Rand blows out and choose this as the time to send their money offshore investsa


the roundtable convergence of great minds

Investing in African markets need not be a scary prospect when you have the right partner to help you through it. This was the key message that was delivered at the latest Momentum Collective Investments roundtable discussion.

Key speaker at the event Fungai Tarirah BCom Finance (Hons), Institute of Bankers diploma

Fungai Tarirah Head of Africa investments at Momentum Asset Management



Fungai joined RMB Asset Management from African Alliance, where he was the portfolio manager responsible for West African investments, in 2008, as a portfolio manager on the Africa equity funds. Prior to that, he was chief investment officer at Imara Asset Management, which is part of a Botswana-listed Southern and East African financial services business, where he was responsible for the overall investment function of the business. He joined Imara from African Banking Corp Asset Management, where he was a portfolio manager responsible for institutional equity portfolios. He started his career in 2001 as an equity trader at Fleming Asset Management in Zimbabwe.

Fungai Tarirah, head of Africa investments at Momentum Asset Management, says that although Africa’s needs are dire, therein lies the investment opportunity. “Africa has shown robust real GDP growth, which is likely to continue.” He makes reference to the average annual GDP growth in five years of a few African countries from 2008 to 2013, most of which reflect strong growth, and future growth will be driven by a few socio-economic factors: • Africa’s population is growing fast and is expected to grow to 22 per cent of the world’s population by 2050. It currently hovers above 15 per cent. • Africa is nearly as urbanised as China and has as many cities of one million people as Europe. • The continent increasingly has more money to spend thanks to improved business conditions, which pose significant opportunity for companies operating in Africa.

Momentum Collective Investments

These growth demographics, coupled with a burgeoning middle class, mean that spending power on the continent has increased exponentially. Improved stewardship of, and governance within, African economies and an enhanced political environment are also creating a backdrop for wealth creation. Governments are exercising more judicious use of their abundant commodity wealth and citizens are demanding a greater voice in the running of their countries. The net effects of these developments are economies that are generating significant internal demand and robust GDP growth. Long-term investors in African equities stand to benefit from these secular trends with inefficient markets providing the opportunity for investment in mispriced assets. In addition, African equities provide diversification benefits to investors as they have low correlations to developed and emerging markets, including South Africa. Fragile political systems and misbehaving corporates pose risk for investors, while corruption is widespread, but this is also common to other regions, including Asia. However, the resilience of Africa’s economies is shining through and the defensive economies are proving to be attractive.

Investing in Africa

Africa remains a frontier market and riskreturn proposition remains favourable.

Momentum Africa Equity Fund

Comment from a delegate

The Momentum Africa Equity Fund is a Rand-denominated fund that aims to exploit opportunities in the inefficient, underinvested markets on the African continent by investing on recognised stock exchanges across the continent, excluding South Africa.

“An epistle to thank and commend you for the suave and debonair organisation of the Momentum Africa Equity Fund event.

Africa equities have relatively low correlations with developed and emerging equity markets, including South Africa, offering diversification benefits. The fund offers investors the potential for significant long-term capital growth.

I will certainly recommend the fund to my clients and will start by switching some of my own retirement money into the Momentum Africa Equity fund.”

The objective of the fund is to generate competitive, risk-adjusted returns on a consistent basis through a full market cycle by investing in the most liquid African markets while being cognisant of levels of risk within each country. The medium- to long-term objective is to maximise capital growth.

Isaac Lakhi, CAIB (SA) CFP® Cert.Dir Independent Financial Planner

The portfolio is positioned to find quality businesses with robust cash generating ability. It seeks low multiples and looks for downside protection. The team reviews each country and each company on a regular basis. Stock selection is likely to beat country selection in the medium term, but short-term country factors are taken seriously. However, cherry picking stocks remain essential to the fund’s success. Last year was an excellent one for Africa equity, with the MSCI EFM Africa ex-SA Index returning 43.5 per cent in Rand terms. The Momentum Africa Equity Fund has a focus on low beta, high-earnings quality companies and managed a 29.3 per cent return. Focus on downside risk management has kept the fund in good stead, allowing it an annualised 12.6 per cent return since inception (against just 3.1 per cent in the benchmark). investsa



The problem with

management teams

If it is not yet clear, we don’t think this is in the best interest of current or prospective fund holders. Indeed, we believe manager disclosure is extremely important. So much so that Morningstar fought long ago on behalf of fund holders to make such disclosure a requirement in the US.


here isn’t a problem with management teams per se. A team-managed approach can make every bit as much sense for a fund, or more, as a one- or two-manager set-up. Indeed, some of our research analysts’ favourite funds, including many of the Aberdeen offerings, are managed by sizable teams. The issue occurs when funds decline to identify in documentation accessible to investors the individuals who compose the teams (which is, sadly, all too frequent). In these cases, ‘management team’ gives the fund a sheen of disclosure without anything backing it up. The team might include one manager or 100; it might have had no turnover in the last 10 years; or all of the managers might have departed and been replaced within the last six months. Manager tenure, stability and the relevance of experience therefore become impossible to measure meaningfully. In short, investors receive little or no information on key variables that are likely to affect their investment decision. 28


This requirement has now been in place in that market since 1993, and was amended in 2004 to include the condition that the names of each management team member be disclosed, along with salient information about their level of investment in the funds they run, other funds managed and the structure of their incentive pay. The basic premise is clear: we think investors have a right and a need to know who is running their money if they are to make informed choices, regardless of which market they sit in. Regulators demand such disclosure for management of listed companies (imagine if MTN said it was team managed and declined to name the individuals responsible for running the company). However, for reasons that slightly befuddle me – though I expect they reflect in part regulatory competition to grow assets domiciled in a given market and a lack of clout among small investors – regulators too often do not require the same of funds, as we noted in our recently released Global Fund Investor Experience Report. We think regulators could go further in requiring disclosure of managers’ investments in the funds they run and incentive structures, but just having manager names and kick-off dates would be a good start.

In the absence of any such requirement, we’re taking steps to improve the situation. We have long collected portfolio manager names and made this freely available on our Morningstar websites and in other products, but a subset of funds has simply stated they are team managed without providing names of team members. As a first initiative, Morningstar is working with those fund providers who cite a team approach instead of listing individual managers to gather the names and start dates of everyone on a given fund’s management team. For those that don’t supply the information, we plan to flag the manager as ‘not disclosed’ since this is the actual situation faced by investors. Manager tenures will also be adjusted to reflect the lack of available information; if we cannot determine an accurate longest or average tenure based on team members’ start dates, for example, we will make this clear. To the extent that manager tenure is a relevant selection criterion for investors, this should help them focus their efforts on reliable information.

Christopher Traulsen, European Director of Fund Research, Morningstar

Practice management

Is investing offshore patriotic? Is there a case for prescribed assets?


any years ago I was introduced to the principle of enlightened self-interest. Wikipedia describes enlightened self-interest as “a philosophy in ethics which states that persons who act to further the interests of others (or the interests of the group or groups to which they belong), ultimately serve their own self-interest�. A wonderful way to look at all the selfish things we do is to see if we can somehow turn them to the advantage of those around us and perhaps more so to the less privileged. When we invest offshore as South Africans, are we in some way pursuing a venture which may be enlightened self-interest? In the justification by trustees of retirement funds when they invest offshore, we hear: our sole task is to optimise returns for our pensioners and secure them the best pension we can, if that involves putting funds into offshore investments, so be it. The enlightened self-interest principle would say that investing offshore and perhaps directly or indirectly denying capital to business in South Africa is justified by the fact that our retirement fund members will be richer in retirement and that will in some way be to the greater good of all South Africans.

53 per cent in government and parastatal stocks. The likes of Eskom, Transnet and the government directly were provided with cheaper funding because of the large artificial market for their bonds. Arguably, this enabled the beleaguered apartheid government to pursue the task of rolling out capital infrastructure: roads, railways, airports, harbours and telephone networks. This infrastructure is arguably what sets South Africa apart in terms of development in Africa. Roll forward again and imagine the controversial toll roads, the digital TV migration, public transport or the taxi recapitalisation programme being funded with cheap prescribed assets. Would our pensioners not equally benefit from better state services and infrastructure in their retirement years? So enlightened self-interest would advise to sacrifice a bit off the top of your retirement benefits in exchange for an enhanced infrastructure from which you will benefit when you retire. Look at the demonstrable multiplier effect of the Gautrain development; the knock-on effect on property development, retail and industry has been significant if localised.

On the other side of the coin, in South Africa, we have had the opportunity to see the benefits of being forced to invest within the borders of the country. Pre-1994 sanctions denied us and our companies the opportunity of investing offshore; in addition, our government, starved of capital, subjected pension funds and life companies to enforced or prescribed assets.

On the other hand, if retirement funds are forced to invest in prescribed assets, they will be forced to direct their investment away from other, possibly more productive, sectors of the South African investment universe. These businesses, presumably listed, will be starved of capital and if prescribed assets were brought in overnight, we could see a forced sell-off of these assets by retirement funds and the broader market would be starved of capital.

From 1960 to 1980, pension funds, RAs and endowments were required to be backed by holdings of between 30 and

How then is South African business in this new globalised world pursuing wealth generation for their shareholders? Can

we search for any enlightened self-interest among our listed giants? Are they building an infrastructure that will support the job creation that, in turn, will support our pensioners in their old age? Superficially the answer is no. All the big banks and insurers are wooing their shareholders with their growth-in-the-rest-of-Africa story. Our retailers are crowing about the number of outlets being opened in Africa and beyond. Construction companies gloat about their offshore order book. It is estimated that upwards of 60 per cent of the earnings of our listed companies are based offshore. The retirement fund members’ enhanced yields are not being earned from the fruits of a growing South African infrastructure or services base. Travel through the industrial suburbs to the south and west of Johannesburg and you can see the factories that have been converted into wholesale outlets for globally produced goods. Maybe there is a case for prescribed assets; we have to believe that enlightened self-interest will deliver the long-term rewards.

Gavin Came BComm LLB CFPR, Consultant, Sasfin Financial Advisory Services






private equity experience Private equity, notwithstanding the well-documented debt squeezes at some large leveraged buyouts, still has the potential to outperform listed equities over the long term.

Marc Hasenfuss


inancial service boutique RisCura’s South African private equity report for the quarter to end March 2013 shows a nifty average annual pooled internal rate of return (IRR) of 22.1 per cent over a 10-year period.

There are a few private equity participation funds which allow retail investment (Old Mutual and Momentum spring to mind) but a pukka private equity investment venture will require an entry ticket of at least between R10 million to R20 million.

With this in mind, it’s surprising private equity is not being pursued by the retail investment masses. But therein lies the rub; private equity, at this juncture, is still rather an exclusive club, effectively limited to the well-heeled individual and institutional investors.

The official definition of private equity would probably be along the lines of “an asset class offering a combination of equity and debt in underlying companies that are not listed on a stock exchange”. Private equity investments usually mature after five to seven years, although in some

circumstances these holding periods may be shorter or longer. What global private equity practitioners do is facilitate a leveraged buyout of a business with the aim of using the gearing (i.e. borrowings) to drive a return over a three to five-year period (the average life span of a private equity investment before it is exited via listing or sale). In Africa, a much lower level of gearing is typically used, with private equity practitioners focusing on growing the operating earnings of the business to drive the returns. investsa


Rory Ord, head of valuation specialists RisCura Fundamentals, stresses private equity follows a very set way of investing. “This has its advantages; having a set date for exiting an investment can bring a lot of discipline to the investment process.” Ord notes growth in new investment into private equity funds has been slow in past few years, but has still been positive. RisCura’s latest quarterly report points out that funds starting in or after 2005 have been negatively impacted by the downturn in the economy. This is especially the case with funds making investments in 2007 and 2008 – when world economies wobbled badly as the financial crisis unfolded. RisCura reckons part of the reason for the current poor results of the most recent vintage grouping is that these funds are still in the J-curve, where management fees play a significant part in determining fund returns and the investments made by these funds still need to be enhanced by the private equity fund manager. The performance figures are quite startling. Pre-2000, the IRR averaged out at around 32.5 per cent, while from 2000 to 2004 (the period when the mega leveraged buyouts 32


transpired internationally), the average IRR was 30 per cent. But between 2005 and 2008, this had fallen off markedly to under 10 per cent. RisCura’s analysis also shows that smaller private equity funds have historically managed better returns than big funds. RisCura believes this strong performance may be due to smaller funds investing in the high growth mid-market companies that have performed well under generally good economic conditions. Funds holding investments of less than R500 million have managed a 45 per cent return, while those ranging in size between R500 million to R1 billion showed 19 per cent; and those over R1 billion, about 20 per cent. Ord says it is important to note, however, that larger funds are likely to have been in

existence more recently (and therefore part of the poorer vintage-year groupings). He contends that large struggling private equity investments like casino group Peermont Global and retail conglomerate Edcon are exceptions rather than the rule. “Neither are bad companies, but there was a time ahead of the financial crisis where very high levels of debt were used.” He doubts massively geared private equity investments like Peermont and Edcon are likely to be seen again. “I doubt we’ll see anything like Peermont and Edcon again. The private equity sector has now entered a period of much more conservatism; there are sensible levels of debt.” Currently private equity investment in SA looks fairly healthy with a roughly R115 billion in

I doubt we’ll see anything like Peermont and Edcon again. The private equity sector has now entered a period of much more conservatism; there are sensible levels of debt

committed capital. This figure should not be terribly surprising. It is a smidgen of the collective value of the JSE, and in that regard it’s worth remembering (in terms of potential private equity transaction flow), there are many more unlisted companies in SA than listed counters. Perhaps what is more surprising is RisCura’s estimate that private equity ventures in Africa collectively top $15 billion (more than R150 billion) in value. A recent study by Ernst & Young confirms a burgeoning, yet viable, private equity market has emerged in Africa. The study, which includes SA, argues: “Although the market is in its infancy, key themes are already developing, including more robust exit activity than many might expect.” Ernst & Young pointed out that despite a misperception that exits are hard to achieve in Africa, a 118 exits by private equity firms was achieved between 2007 and 2012. The performance has been exemplary. Ernst & Young gathered returns data on 62 exits, which shows that strategic and operational improvements generated returns almost double that of the JSE. It was also encouraging that private equity exits were relatively strong across all regions and not centred predominantly in the more developed SA market. In fact, Ernst & Young indicated that the more mature SA market witnessed relatively fewer deals sourced this way, while other regions saw relatively more. The overriding sense might well be that ordinary investors – without recourse to the

Although the market is in its infancy, key themes are already developing, including more robust exit activity than many might expect

There is, however, a way for ordinary investors to participate in private equity on the JSE. Under the JSE’s broader investment counters category, there are more than a handful of companies that are effectively dabbling extensively in private equity.

investors access to quality unlisted companies like fashion retailing conglomerate Pepkor and Premier Foods. Sabvest has a valuable holding in specialist industrial supplier SA Bias Industries as well as holdings in Set Point Group, Flowmax and Sunspray Foods; while RECM & Calibre recently took significant stakes in unlisted retailers Dischem and Safari & Outdoor as well as liquor group KWV.

A number of listed investment-styled counters hold interests in a portfolio of mainly unlisted investments. And although these investments may run longer than the traditional five to seven-year investment period, the form and function is similar to private equity.

Empowerment investment counters GPI and Sekunjalo have their respective value underpins in limited payout machine ventures like Grandslots, Kingdom Slots and Premier Fishing and a variety of cash-spinning technology ventures.

Investment giants like Remgro, Brimstone and Hosken Consolidated Investments (HCI) hold an array of unlisted investments. But the truth is that the bulk of their value lies in interests that are already listed on the JSE. To emulate the private equity experience counters like Brait, Sabvest, Grand Parade Investments, Sekunjalo, and RECM & Calibre offer entry points to some attractive unlisted businesses.

Some of these listed JSE private equity counters also trade at prices that offer a substantial discount to the fair value of the investments in the portfolio.

odd R10 million or R20 million – might be missing out on a sprightly investment genre.

Brait, which a few years ago adapted its traditional private equity model to encompass a long-term investment strategy, offers

Of course, not all listed private equity ventures have yielded sterling returns. In the nineties, there were a number of disappointing ventures like Vestacor, Cycad and Capestar. In this regard, it is critical for prospective investors to gauge the track record of the management team and the underlying investment style.



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Private equity

A new approach to

private equity investments

a ‘nice to have’ when it comes to selecting a suitable private equity partner but a necessity.


one are the days that shareholders in longestablished, privately owned businesses will consider a purely financial, passive private equity investment. This is particularly true of families and management who control the ‘pick of the bunch’ – leading South African-based private businesses that generate sufficient cash flows to accommodate a private equity investor, the management team and leave a portion of equity for the founding shareholders. Private equity investors, in turn, will rarely consider investing in privately held businesses that require an injection of cash to maintain operations. Clearly, more than just capital is typically required in cash-strapped businesses and your typical private equity investor won’t have the resources to actively manage an investment back to a cash flow positive position. Family shareholder groups and management teams commonly require that the private equity investor offers far more than just a cheque book when deciding on whether to conclude a transaction or not. Synergies such as bolt-on opportunities for existing portfolio companies, new market penetration (Africa being the buzzword), enhanced corporate governance, more advanced IT systems, better capital structuring, access to skilled human resources, foreign exposure and BBBEE (all hopefully leading to an improvement in margins) are no longer 34


Private equity firms looking to find their way into these tightly held family controlled large businesses can no longer rely on squash club memberships and golfing partnerships to secure the transaction but need to look at the value they can unlock for the acquired company and ensure this message is not only communicated effectively, but also implemented. Investors into private equity funds (limited partners) should be encouraged that fund managers (general partners) now need to earn their 2-and-20 fee structure (two per cent management fee and 20 per cent of the carry) through cleverly investing into value-enhancing businesses. These limited partners should look at the strength of the general partner by looking at the current deal portfolio, the geographic reach of the team and the possible enhancements their strategic relationships may have to any acquired business. Luckily in South Africa, we have a plethora of exceptional general partners who are able to manufacture good transactions that has allowed many private equity investment vehicles to generate substantial returns for its limited partners. This, though, has meant the competition to conclude a private equity deal with the ‘best of breed’ privately held companies is severe, especially with the amount of capital sloshing around the market looking for these desired returns. And with the change in pension fund legislation, further money is looking for a home in the alternative asset class where private equity finds itself. Private equity investors now not only have to compete with other South African private equity investors but with large trade players

(both listed and privately held), overseas private equity players and ultra-high net worth individuals adding further credence to the need to bring more than just capital to execute transactions. Further to the competition to conclude transactions sit the assets already owned by South Africa’s savviest private equity houses, who, better than anyone, know the value of the business they own and beyond this already know the buyer who gives them the most enhanced return upon exit. The most likely private equity partner for any business is the one that is able to build a solid relationship with management, across all tiers; understands the current shareholder’s requirements; and offers valid synergies to the business that provides more value than a higher price earnings multiple. The years ahead will see more private equity players looking to enhance their offering to secure pole position to execute the reasonably limited number of good private equity transactions South Africa has to offer.

Bernard Sellmeyer, Executive Director, Oakmont

Private equity offers

attractive return and diversification opportunities

Why invest in private equity Private equity has historically delivered higher returns than the conventional equity market. According to the Riscura SAVCA performance survey, the South African private equity industry posted an average net internal rate of return (IRR) of 12 per cent for the five years to the end of March 2013, compared to 6.7 per cent for the FTSE/JSE All Share Index (ALSI). Over the long term, the outperformance is similar with a 22.7 per cent IRR for private equity versus 13.5 per cent from the ALSI over the 10 years to end March. The strong appeal of this asset class is above-average return potential. Private equity involves investing equity capital into companies that are not listed on a public stock exchange. These businesses are bought, held for a reasonably long time, which is typically five to seven years, and then sold again. The objective during this period is almost exclusively to enhance the value of the business. Private equity firms are successful in building better quality businesses because of an alignment of interest between investors, private equity managers and management. Shareholders also sit on the management boards and are actively involved in the running of these businesses. The inclusion of private equity in a portfolio is also an excellent diversifier. Local and international experience has shown that private equity has a low correlation to the listed equity market. This should then add equity-like returns to a portfolio, but at lower volatility than the listed equity markets. Statistical evidence in the US has shown that private equity funds have, on average, 60 per cent of the volatility of the S&P 500. Reasons for these lower levels of volatility include a preference for businesses with defensive and predictable cash flows, limitations on overly aggressive expansion strategies by management (given the already

managers, which include Actis, Ethos and Capitalworks, as well as two of Old Mutual’s direct funds. Managers are selected based on their proven track records, unique investment strategies and depth of experience. Investors gain exposure to over 40 companies across a wide variety of industries, geographies, investment vintages and manager styles − making it a uniquely diversified investment solution for investors wanting to take advantage of the benefits of private equity.

higher leverage) and a strong focus on delivering to the shareholder. Appreciation for private equity has been increasing both globally and locally in recent years. We anticipate this appeal to continue as more high net worth investors recognise the diversification and performance benefits of private equity. In addition, with the 2011 changes to Regulation 28-governed products, pension funds are now placing more of their assets in private equity. Market demand and a strong performance track record led to the launch of Old Mutual Investment Group’s fourth private equity fund of funds. The fund gives high net worth individuals and institutions access to a selection of South Africa’s leading private equity managers. Affordable access to this appealing asset class Institutional investors were traditionally the main stakeholders investing in private equity – as one typically needs around R100 million to invest in a single manager. However, pooled investors’ capital within an innovative fund-offunds structure, allows investors the ability to access a diverse portfolio of equity funds for as little as R100 000.

SA Private Equity Survey Annualised returns to 31 March 2013 30%

Private Equity Industry


Old Mutual Private Equity * 25%








10% 6,7% 5% 0% 5 Year

10 Year

Source: Riscura SA PE Performance Report *The returns quoted for private equity funds is the internal rate of return to investors, net of costs and fees to 31 March 2013.


While private equity is a long-term investment, typically 10 years, the Old Mutual MultiManager Private Equity Fund is underwritten by Old Mutual, which offers individual clients the option to access their investment early. However, investors are advised that there is an exit fee and they are strongly advised to consider this asset class as a long-term hold. The Old Mutual Multi-Manager Private Equity Fund 3 is the third multi-manager fund from Old Mutual Private Equity and is aimed at both individual and institutional investors. The fund invests in five underlying private equity

Jacci Myburgh, Head of Old Mutual Private Equity




Kodisang Managing Director: Asset Management, STANLIB

You originally started your career at STANLIB as an industrial sector analyst in 1996. What was your reason for rejoining STANLIB in August 2012? I was drawn to the STANLIB vision of being a leading asset manager both locally and in the emerging markets where we operate (including Swaziland, Namibia, Lesotho, Botswana, Kenya and Uganda). STANLIB’s investment brand also held appeal. The opportunity to lead its franchise model and work with talented investment professionals, some of whom I’d known and respected for years, was a compelling reason to rejoin the group. I have great respect for these individuals who are talented and in dedicated pursuit of our goals. The people factor was a huge drawcard for me – I thrive on working with quality people. What differentiates STANLIB from other asset management firms? What truly stood out for me is the company’s energy. Our environment – and open plan office – allows us to feed off each other’s energy and interact with ease. The working environment is fantastic, and we are a young organisation with a can-do attitude, which contributes to the overall energy of the company. I believe what really sets an asset manager apart is how we get things done and how people relate to each other. We have bright people with the right attitude.

gives us the challenge of effectively migrating money market clients up the yield curve into higher yielding products. Another challenge is the cost of rendering financial services to South Africans. We need to make financial services more affordable and accessible. The opportunity lies in how we manage this trend and respond as an industry, especially in terms of fees and making back office operations more efficient and scalable. Where do you intend to lead STANLIB during your tenure? My goal is to increase our assets under management to a trillion Rand, which means doubling our asset base. Our game plan will be to attract further global and continental assets, as well as to gather more local institutional third party and retail assets outside of Group channels, while growing our exposure to the group. What advice would you have for financial advisers in the current environment? Continue to get the business-as-usual basics right. Of vital importance is to understand the needs of each client, which requires getting to know them and their individual needs. Do your homework – understand the industry and its products. This will allow you to match them most appropriately to your clients’ needs.

What are the major challenges you are facing in this space during this time?

I would advise against following the fads in terms of directing clients to those managers who are the flavour of the month, or focusing too much on short-term gains.

Increasing regulation and the impact that it is likely to have on our business is always a challenge. Basel III, for example, increases our level of competition with banks and

Matching client needs with what the industry has to offer requires a deep level of understanding of the industry. Investing is about diversification, so continue to



diversify across asset classes and don’t put all your eggs into one basket. Invest time in partnering with a service provider that will help make your life easier and ultimately enable you to better deliver value to your clients (things like admin, legalities and compliance can be taken care of by the right service provider). Choose an asset manager that you can partner with to help build your practice over the long term. What do you think is the biggest concern for South African investors at the moment? The scaling back of quantitative easing out of the US is a global concern because it is going to affect money flows in all markets. Its impact on emerging markets will be felt and could potentially dry up flows as investors seek more risk opportunities outside of emerging markets. How do you wind down from the pressures of your position? My middle name is Monaheng, which means ‘he of nature’. My spirit is liberated when I am in nature. I love the bush and escape to it at least once a year. I also love my Harley and the freedom of the open road. Riding allows me to be social and have my own head-space. I am also an adrenaline junkie, so jumping off bridges or planes is my thing. I also enjoy my solitude by the sea. I’m not a beach person but I love the sea. Finally, if you had R100 000 to invest, where would you put it? I would invest in a balanced fund as it provides exposure to a range of asset classes within a single portfolio, making it a welldiversified investment proposition.





Regulatory development

Retirement reform

Proposed changes you need to know about


e have known for some time that Treasury seeks to address some of the many shortcomings of our retirement savings culture and the latest paper on the subject explains some of the proposals it wishes to implement. While these are only proposals, it is imperative to understand the direction we are moving in to enable our clients to make informed decisions. The proposed date for these changes to become effective is expected in or after 2015. For ease of reference, we have summarised the proposal document into the following topics: • Tax deductibility of retirement fund contributions. • Preservation of withdrawal benefits. • Annuitisation of provident fund benefits. • Introduction of default annuity product. • New tax incentivised non-retirement fund savings product. Tax deductibility of retirement fund contributions Currently there are different tax deductions for pension funds and retirement annuity funds without any deductions for provident funds. Government seeks to simplify this by introducing one calculation which will apply to all approved retirement funds (pension, retirement annuity and provident funds). Deductions of up to 27.5 per cent of the greater of remuneration or taxable income will be allowed, regardless of which type of retirement fund one contributes towards – up to an annual maximum monetary cap of R350 000. This means an increase in tax deductibility for those earning up to R1 272 727 per annum and contributing up to R29 167 per month towards an approved retirement fund. Since most South Africans fall well within these parameters, this proposal will in effect mean an increase in tax deductibility of retirement fund contributions on our current tax regime. Preservation of withdrawal benefits Government wants to end the option of



cashing in one’s entire retirement fund value on resignation and has proposed that the member’s benefit must be placed into a preservation fund on withdrawal as well as when a non-member spouse is awarded a pension interest on divorce. The member or spouse can thereafter elect to transfer their benefit into a preservation fund of their choice. The member will be allowed one withdrawal from the fund each year, with a limit of the greater of 10 per cent of the initial value or the state old age grant at the time. Given the current old age grant, the proposed annual withdrawal allowance amounts to a preservation-free withdrawal allowance of R15 120 per year. The 10 per cent of the initial value will become relevant for contributions in excess of R150 000 per annum (10 per cent of an annual contribution of R150 000 being roughly equal to the state old age grant). Any withdrawal not taken in a year will be carried forward to the next year. Annuitisation of provident fund benefits Members can currently commute the full fund value of their provident funds at retirement. The proposal is to limit provident fund members at retirement to the same options as members in pension funds and retirement annuities. This will mean that provident fund members will have access to only up to one-third of the fund value in cash and the remainder must be used to purchase an annuity. Again, Treasury has indicated that the members vested rights will be protected. This means that all funds accumulated in a provident fund prior to the proposed implementation date will be fully accessible at retirement. Funds accumulated thereafter will be subject to the proposed legislation. Members over the age of 55 at the date of implementation will also not be subject to the new legislation. Introduction of default annuity product Treasury’s proposal requires that all funds

must have a default annuity product open to its fund members to encourage them to purchase an annuity instead of commuting. Members will thereafter have the option to purchase an annuity of their choice. Treasury has also mentioned that they plan on changing the de minimus amount for commuting a retirement fund from R75 000 to R150 000. This will mean that any fund value under the amount of R150 000 will be able to be fully commuted instead of the usual one-third/two-thirds option at retirement. New tax incentivised non-retirement fund savings product In its latest paper, Treasury points out that the new tax incentivised non-retirement fund savings product will be in addition to the interest exemption. The interest exemption will, however, remain static, so where applicable, additional contributions should be made into the new tax-incentivised vehicle. The proposal enables the creation of a pool of assets for an individual for immediate access in a financial emergency. It is suggested that the vehicle will function as a wrapper, exempting all investment returns from income, dividend and capital gains taxes. The contribution limits suggested will be R30 000 per annum and R500 000 in a person’s lifetime. These limits will be adjusted for inflation on a regular basis.

“I w p r

W F y


Liezel Momberg, Head of Legal Services, at Nedgroup Investments






“I’ve always seen myself owning a game lodge when I retire. There’s nothing more rewarding than waking up to a family of wildebeest grazing on your front lawn every morning. Old Mutual made it possible for me to learn how a real game lodge works for a few days to let me experience my dream retirement, 40 years before it happens. I’m glad I started planning for my retirement at 23.” We all have dreams. The only way of making them real is by planning for them. Contact your Old Mutual Financial Adviser or your broker, or call 0860 60 60 60 to get advice on your retirement plan. Let us join you through every stage in your life journey, from today. Quintin Mulwitsky – Old Mutual Customer

Old Mutual is a Licensed Financial Services Provider.

MINING where is the investment value Peter Major, Cadiz Corporate Solutions



Sector report


ining officially took off in South Africa with the listing of Okiep Copper Mines on the London Stock Exchange in 1852. Fifteen years after Okiep, the boom in diamond and coal mining in South Africa began. The gold mining boom began 35 years later; iron ore mining followed 63 years after; and the platinum boom began only 76 years after Okiep. But it wasn’t until 1954, over 100 years after Okiep Copper’s formation – that South Africa’s uranium and ‘oil from coal’ boom took off. So what is the next promising commodity boom for South Africa? Rare earths? Unlikely. Mining has been South Africa’s largest foreign exchange earner for well over 100 years. And despite being only 5.4 per cent of South Africa’s GDP, mining today still generates over 50 per cent of this country’s exports. Despite the huge fall in mining shares around the world over past two years, especially in SA, mining and resource stocks account for 34 per cent of the JSE’s ALSI 40 Index. The JSE’s Mining and Resource Index has averaged nearly a 13 per cent total rate of return per annum in Dollars from 1960 till today. Yet this same index has lost 38 per cent in Dollars over the past two-and-a-half years. Could it mean its great days of return are all in the past now or is this an opportunity from just another volatile downward leg – as we’ve seen many times before – that will have its rebound in the coming year or two? Currently, this is a very difficult question to answer.

Decades ago, the gold index alone was more than half of the All Share Index’s market cap. And it was nearly all, 100 per cent, South African based. Today, the RESI 10 is only a third of the ALSI 40’s market cap. And of that 33 per cent, nearly 22 per cent is based offhore. Billiton alone is 44 per cent of the RESI 10 but 95 per cent of its assets and earnings comes from offshore. Anglo’s is 22 per cent of the RESI 10 and Sasol 18 per cent. Both have over 40 per cent of their assets outside South Africa today. Goldfields and Anglogold, the only two gold shares in the RESI 10, are only six per cent of its total make-up. But the majority of their gold production now comes from outside South Africa. Other important characteristics are the RESI 10 which is only 20 per cent in gold, diamonds and platinum (PGM), whereas only a few decades ago these precious metals were over 80 per cent of the RESI Index. The RESI 10’s largest components today are iron ore (22 per cent of the index) and oil (22 per cent) with coal at 13 per cent and copper at 12 per cent. Platinum is about 9 per cent and gold and diamonds at about six per cent each. What this means is that we are going to need higher iron ore, oil, coal, copper and platinum prices if we expect the RESI 10 to really start performing. However, this is hardly likely or feasible. Iron Ore’s 100-year average ‘real’ price is $66 ton. It’s currently near $140 ton. Oil’s 150year average is $40 barrel and its 50-year average is only $50 barrel. Yet it continues to hold at $115 barrel even though shale gas production is escalating over much of the world. Even copper’s current $7 000 ton seems high compared to its real price average is $4 850 ton of the past 50 and 100 years. What this means is that because the RESI Index has changed so much over the past few decades, long-term graphs and traditional reversion to the mean expectations must be treated very carefully. Sure, on a price-relative basis, the RESI 10 looks way oversold relative to the ALSI and INDI. But on a PE basis, the RESI 10’s 18 PE is not nearly as attractive as



the FINI 15’s 14 PE, though the INDI 25 PE of 22 looks downright spooky. Remember, the long-term average PEs of all these main indices is 12. And just as scary, the PE of our ALSI relative to the SP 500 has averaged 0.71 for 50 years and is now at 1.02. But there is some good news to all this with regard to the RESI 10. Because its 18 PE is based on trough earnings that are down 60 per cent from a year ago in Dollar terms, the INDI 25’s 22 PE is based on Dollar earnings that are very near all-time highs. So the RESI 10 definitely looks the better investment of the two. Speaking of the INDI/INDI 25, in some ways the INDI 25 is eerily similar to the RESI 10 in that over 65 per cent of the INDI 25 is essentially offshore shares/assets/earnings. So if the Rand loses 10 per cent, the INDI 25 today has nearly as much offshore/Rand hedge protection as does the RESI 10. A very different situation than 20 years ago, let alone 40 and 50 years back. The South African mines, especially the gold, platinum and coal mines, still have their large local Rand cost advantage which, when coupled with their low profit margins at present, gives them huge financial gearing to a weak Rand or increase in their commodity price. These components offer a definite ‘kicker’ to the RESI 10 that the INDI 20 will never have. But we still need to be fairly

confident that gold, platinum and diamonds are going to go up in Dollar terms before buying these particular South African equities because their local cost increases and flat to down production profiles preclude most of them from gaining any advantage from a depreciating Rand alone. So, where is the investment value in today’s mining and resource shares on the JSE? First of all, what is your view on the commodity price? Investing in Mining Shares 101 states “mining shares follow commodity prices”. If gold falls, then gold shares fall. If gold rises, so do the shares. If you’re buying South African gold shares then you are obviously more protected to a falling Dollar gold price than a foreign gold share with a Dollar cost base. But you are also way more exposed to difficult labour, large political and governmental influence and rising costs across the board: electricity, supplies, depth, inflation, environmental and much more. An investment (some would call it ‘a bet’) on the RESI 10 today can be a belief in any number of factors: a global uptick on the iron ore, oil, copper and other mineral prices; a general re-rating in mining shares worldwide; or a rapidly depreciating Rand. A hedge fund may just say “Short Resi 25 and Long Resi 10” – for a reversion to the mean play – and nothing else.

South Africa’s rigidly controlled cost base (below inflation) and rising production profile of most of its mines in the 1950s through 70s gave it a powerful investment edge over much of the world during those years. And the depreciating Rand helped the industry to survive through most of the 1980s and 90s. The fantastic commodities boom since 2002 helped save most of our mining industry in the new millennium from the ravages of out of control costs and political, governmental and union interference, coupled with a lot of management who lost their way. But with so many of these negative factors now firmly entrenched in South Africa’s mining industry today, it will take huge and consistent effort from all parties to insure that our RESI 10 once again returns to its 13 per cent per annum return for investors. Further rises in the already stretched majority of commodity prices are unlikely to be enough if, in fact, they can even happen in this overgeared, over-stretched, over-stimulated and over-developed world of ours.

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The years ahead for the whole world’s mining industry look much more likely to be a repeat of the 80s and 90s, than a continuation of the 2000s. But we would all be so happy if this scenario proved wrong.

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2012/04/25 3:59 PM

news Tower Property Fund first to list on the JSE under REIT Structure

The Tower Property Fund (JSE: TWR), launched by Spire Property Group, is the first property fund to list on the JSE under the Real Estate Investment Trust (REIT) structure. The JSE’s listed property sector has seen 16 companies come to the market in the past three years including international fund GoGlobal, which listed in May this year. Although other funds have converted to the new REIT structure, Tower Property Fund was the first new fund to list as a REIT. Marc Edwards, CEO of the Tower Property Fund, says that the executives of Tower Property Fund are very excited to list on the JSE’s main board. “We offer investors a sustainable, growing source of income and aim to differentiate the fund from its peers through an active strategy of ‘greening’ properties over time. This focus will initially be on reducing energy costs and will make our buildings more competitive. We believe that green initiatives such as Green Building Council accreditation will become increasingly more important to the marketplace.” According to Zeona Jacobs, director of issuer and investor relations at the JSE, the company was very pleased to welcome another established property player, Tower Property Fund, onto the JSE. “This is a sector that has enjoyed tremendous growth in the past 10 years and is one that South African investors understand well.” The property sector has grown from R61 billion at the end of first half of 2003 to R328 billion at end of June 2013. “The JSE now boasts 45 listed property companies accounting for 3.8 per cent of overall JSE market capitalisation. A regulatory change in April 2013 which saw South Africa adopt the globally understood REIT structure further positions the exchange as a venue for property listings. More than 25 countries make use of the REIT model including the United States, United Kingdom, Australia, France, Belgium, Hong Kong and Singapore,” concludes Edwards.

Investec Asset Management has appointed Nazmeera Moola as economist and strategist in the emerging markets fixed income team. Moola will be responsible for macroeconomic research in South Africa and other emerging markets. Moola joins Investec Asset Management from Macquarie First South where she was head of macro strategy prior to jointly heading up the sales team. She started her career of 13 years at Merrill Lynch where she gained experience in both South African economic research, as well as emerging markets strategy.



Nedbank Momentum Retail and Asset Green Management Namibia wins Savings Bonds Investment Management generate R8 billion in Award savings

Momentum Asset Management Namibia was recently awarded the 2013 accolade for Best Investment Management Company Namibia at the World Finance Investment Management Awards.

The awards celebrate success and innovation in the investment management industry worldwide. The awards recognise industry leaders, eminent individuals, exemplary teams and distinguished organisations representing the benchmark of achievement and best practice. Winners are selected by an independent, expert panel of judges in tandem with World Finance readers participating with their votes. Lesley Rukoro, CEO of Momentum Asset Management Namibia, says the company is extremely honoured to receive such a prestigious international award, which was presented in recognition of its significant market growth over the past few years and the performance consistency of its well-known portfolios.

iShares, the exchange traded funds (ETF) platform of BlackRock Inc. has appointed Tom Fekete as head of product development in Europe, the Middle East and Africa (EMEA). Fekete is responsible for driving the expansion of iShares’ innovative product range and continuing to develop and deliver high quality products to meet investors’ evolving needs. Fekete joins from Barclays Wealth where he was EMEA head of investment products and global head of FX Advisory, a role he held from 2009 onwards.

Nedbank revealed that its innovative retail and green savings bonds had generated savings of R8 billion in just over two years. This follows the announcement of the Nedbank Group interim results for the six months ended 30 June 2013, which saw its retail business generating headline earnings of R1.1 billion. The Nedbank Green Savings Bond, launched in 2012, was the first bond to enable South Africans to contribute towards the creation and development of the green economy, while saving for their future. As such, the capital raised from this bond is channelled towards the financing of renewable projects in South Africa – at no cost to the investors. Anton de Wet, managing executive of client engagement at Nedbank, says the company is delighted to see the growth in Nedbank green and retail savings bonds. “These recent innovations allow our clients additional savings opportunities, contributing towards increased awareness of the importance of savings. Getting on top of our individual financial affairs is so important. It is something we are

committed to helping our clients with.” True to its accolades of sustainability, the Green Savings Bond has championed a new path to saving while helping preserve the environment, and indirectly injecting growth to the SMEs operating in this sector. De Wet stated that the bond reflects Nedbank’s ethos of ‘doing good and giving back’ as the bank continues on its more than 20-year journey in caring for the environment. According to Mike Peo, head of infrastructure, energy and telecoms at Nedbank Capital, the Green Savings Bond presents a hard investment case in that investors now have the opportunity to play a significant role in not only lowering the risk of climate change, but also investing in a sustainable solution. “In South Africa, the green bond universe is still in its infancy and the government has enthusiastically adopted renewable energy as a platform, both to meet its international commitments to reduce greenhouse gas emissions as well as a way of developing a sustainable energy policy.”

Ian Scott has been appointed as head of the fixed interest team at PSG Asset Management. Scott began his career in 1996 when he joined Sasol Oil as a forex trader, before moving to Guardbank (now Stanlib Wealth Management). In 1999, Scott joined SCMB Asset Management as a money market dealer, trading in money market instruments and various structured cash products before joining the fixed interest team in 2003, and since 2007 was a senior manager of this highly regarded Stanlib fixed interest team with assets under management in excess of R70 billion.




Nedbank launches PocketPOS for secure mobile payments Nedbank has launched the first fully certified mobile card acceptance solution in South Africa known as PocketPOS. This was a landmark occasion for the payments industry in South Africa and an important step towards accelerating the growth of businesses, allowing business clients to accept card payments through their smartphones and tablets. By reducing the need for cash transactions, which come with security risks, theft and reconciliation issues, and electronic payments which often result in payment delays and additional administration

burden, PocketPOS provides a payment alternative, especially for mobile businesses. Nedbank further announced a strategic partnership with the iStore to make Nedbank PocketPOS available as an off-the-shelf product in all 14 of the South African iStore locations. Business owners can now walk into any iStore and purchase a secure card acceptance device, in much the same way as they would purchase an iPad or an iPhone. Sydney Gericke, managing executive of Nedbank card and retail payments, says

that Nedbank realised that by offering the PocketPOS device, together with a choice of phones and tablets, useful business apps and the relevant data packages, we can satisfy a growing need for business owners to run their business using cost-effective, innovative mobile solutions.” Nedbank customers can apply in any branch or online through for the PocketPOS service or get it from their nearest iStore. Getting started is as simple as purchasing a PocketPOS device, completing the application form and merchant agreement, and downloading the app. Connecting the PocketPOS device to a phone or tablet is highly intuitive and allows a business to start accepting card payments through their mobile device within minutes. According to Ingrid Johnson, group managing executive of Nedbank retail and business, the company has seen great interest not only from small businesses, but also from larger corporates with mobile sales forces. “As both consumers and business get more familiar with the solution and explore the full range of potential applications, we expect demand to increase in line with US and European trends. “What’s more, PocketPOS provides us with a fantastic platform from which to innovate further and adds to the strong line-up of innovative offerings already delivered. Nedbank has achieved more innovation in the past 14 months than in the preceding five years as we are unleashing the power of a client-centred innovation culture.” Nedbank PocketPOS is another exciting milestone in Nedbank’s efforts to bring world-class, innovative solutions to the South African financial services industry, and core to its strategy of enabling business growth for South Africa.

Online Virtual Trader launched on the JSE In a bid to grow public participation, the Johannesburg Stock Exchange launched the JSE Virtual Trader, an online trading simulator, which will allow aspirant traders to test a range of JSE products, in a risk-free environment. This simulated trading platform is hosted on the JSE’s website and registered users are able to trade any of the JSE’s suite of products, on a real-time basis. Utilising virtual cash and a 15-minute delayed price feed, members of the public can now experience the world of trading through investing, hedging and speculating. Traders can test their investment strategies and track a virtual portfolio created from any of the JSE asset classes. The user will have the benefit of experiencing how various products on the exchange are priced, traded, risk-managed and settled on a daily basis, all within a risk-free environment. Anthony Leibrandt, manager of bonds and financial derivatives at the JSE, says the JSE Virtual Trader is aimed at individuals who understand the basics of investing but who have not yet opened a trading account and those who want to expand the product range that they use. “For example, investors interested in derivatives can practise their trading strategies here before committing any capital. The JSE Virtual Trader is open to all members of the public at no cost.”



The world


EGYPT’S CURRENT STATE OF EMERGENCY THREATENS ITS $260 BILLION ECONOMY Following the ousting of Egypt’s former president Hosni Mubarak by the Egyptian military, actions have been taken by the interim government in an attempt to salvage direct foreign investment, which has fallen substantially in the first eight months of the fiscal year. The nation’s growing $2.3 billion trade deficit will continue to fall, as long as there is no political solution in Egypt. BANK DEPOSITS TO BE TAXED IN AUSTRALIA Australian banks recently took a dive, after plans to tax banks emerged. Treasurer Chris Bowen says that the levy comes as a recommendation by the Reserve Bank of Australia, the International Monetary Fund and the Australian Prudential Regulation Authority, as a measure to boost the country’s coffers and to prevent a bank collapse. MEXICO WELCOMES PRIVATE INVESTMENTS INTO OIL INDUSTRY Mexico plans to open up the state-run oil industry to private investors as a reform to encourage foreign and domestic investment. Foreign oil companies, including BP and Exxon Mobil, are waiting to see the details of the reforms to see exactly what investments will be allowed. According to Mexican President Enrique Pena Nieto, Mexicans will remain the sole beneficiaries of the country’s oil profits. SOUTH AFRICAN INVESTMENTS BEAT THE GLOBAL AVERAGE South African investments have performed remarkably, beating the global average, according to recent research conducted by Credit Suisse in 21

countries. The report reveals that some of the highest returns on capital have been generated by the South African stock market in the last financial quarter, among the world’s listed industrial and service companies. The nation’s JSE-listed companies generated a cash-flow return of 10 per cent, outperforming developed nations such as the US, Sweden and Japan. GREEK YOUTH UNEMPLOYMENT DAMPENS SPIRIT Having soared to 64.9 per cent, the Greek youth unemployment rate has come under immense pressure as the country’s downward economic spiral continues. Latest data from the Greek Statistics Agency reveals that the overall job-loss rate was at 27.6 per cent at the first half of 2013. EU Chief Economist Olli Rehn says Greek austerity is “difficult but necessary” in order to generate economic improvement. MOROCCO CANCELS 2013 ECONOMIC GROWTH BID Morocco has cut its economic growth forecast to 4.4 per cent, down from 4.8 per cent, after industrial output from overseas exports showed signs of slow growth during the first half of the year. With growth in tourism consistently sluggish at 21 per cent, the North-African nation has decided to adjust its economic forecast according to slower output results. INVESTMENT LAWS ALTERED IN CHINA China’s State Council aims to suspend laws and regulations governing both foreign-owned companies and joint ventures between Chinese and foreign companies in free trade zones. Foreign direct investment in China slowed in

2012 but reversed its decline in the first quarter of this year as confidence improved. Shanghai, will test Yuan convertibility and cross-border capital flows in the free trade zone pilot programme. FORMER IMF ECONOMIST TO RUN INDIA’S CENTRAL BANK Former International Monetary Fund economist, Raghuram Rajan, has been called to run India’s government, following the dismal state of the nation’s economy. Rajan will take over the Reserve Bank of India during the peak of the country’s financial crisis and the immediate aftermath of the stagflation that it has suffered. GERMAN ECONOMY ‘RECOVERING’ According to forecasting done by the BundesBank, the German economy will return to normal in the forthcoming months. According to the German Central Bank, economic data is likely to return to normal. The bank also noted, however, that domestic investment is unlikely to pick up until there is long-term improvement with regard to the economic uncertainty surrounding its neighbouring countries. SHARP DECLINE IN CHINA’S ECONOMY AS UNEMPLOYMENT RISES China’s manufacturing industry has lost momentum following a dip in unemployment recorded over the third quarter of the year 2013. The world’s second-largest economy took a knock as the nation’s consumer-driven economy fell considerably from 10 to seven per cent in the past year. Yasuo Yamamoto, a senior economist at Mizuho Research Institute, has warned that China’s economic slowdown is starting to become more dangerous.



You said

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

@TradersCorner: “One AngloGold share would have bought you 33 litres of petrol in 2001. Today one share will buy you eight litres of petrol. Value destruction!!”

@paul_vestact: “If you bought Richemont shares in late 2008 when they threw out the tobacco interests, your investment has grown in value by five times.”

Garth Mackenzie – Promoting proper trading principles. Traders Corner helps traders to successfully navigate the endless opportunities presented by the stock market.

Paul Theron – CEO of Vestact, equities asset manager Johannesburg/New York. Business Blunders on Radio702 on Fridays. ‘Resident expert’ on Hot Stoxx on CNBCAfrica daily.

#@NiekerTrade: “Feels like Friday the 13th, just bad luck on every trade.”

@ritholtz: “A strategist is someone who is wrong about the future. An economist is someone who is wrong about the past.”

NiekerTrade – ALSI40 Price Action Trader, everything we want is on the other side of fear.

Barry Ritholtz – Director of Cognitive Dissonance.

@hiltontarrant: “Today, Discovery stores in excess of a petabyte of data.” CIO John Robertson [That’s 1 000 terabytes or 1 million GB].” Hilton Tarrant – Radio anchor and financial journalist at Moneyweb. Nationwide on the SAfm Market Update at 6pm weekdays. Obsessed about business, mobile, tech, telecoms.



@MichaelJordaan: “Stat from FNB research: 78% of those who start saving before they turn 30 were taught to do so by their parents. Teach your child to save!” Michael Jordaan – Banker, economist and wine enthusiast.

@MarcoOlevano: “Interesting. Telkom up yet again today. If you had bought @ around the R12 lows in May, today you would be up roughly 90%.” Marco Olevano – Trader and broker @ Courtney Capital. CFA Level 2 candidate. Passionate about financial markets. Views/ opinions expressed are solely my own.

@WilhelmHertzog: “Amazing that six years after implementation of the NCA, unsecured lenders still typically price at the interest rate ceiling.” Wilhelm Hertzog – Full-time value investor and father. Part-time golfer, wakeboarder, snowboarder, motocross rider, flyfisherman and petrolhead.

@ PeterLBrandt: “Traders, go by the rule that your worst drawdown is the one that has not happened yet. This will help you leverage properly.” Peter Brandt – Peter L Brandt. Commodity chart trader since 1980. CEO Factor LLC. Author, #1 book Diary of a Professional Commodity Trader.

@MoniqueVanek: “SA is one of the only countries in the world with seven business shows and yet so few invest.” Monique Vanek – Media thinker, CNBC Africa’s content editor, social media strategist.

They said

“The performance of private equity in the three-, five- and 10-year horizon has outperformed listed equity. So it is an attractive option for portfolio managers like institutional investors who are looking for long-term investments.” Chief executive at South African Venture Capital and Private Equity Association (SAVCA) Erika van der Merwe, discussing the success of private equity fund, Capitalworks, in raising more than R2.7 billion under its second fund in a rapid time of six months, predominantly from international investors.

“The proposed listing is an exciting step forward for Delta. Our portfolio will offer investors stable, resilient cash flows and value creation potential. Management has a longterm view on the business and will manage it for capital growth and the delivery of superior shareholder returns.”

A collection of insights from industry leaders over the last month. “What we can conclude is that in a low growth, low interest rate environment where economic growth and corporate earnings will be muted, conservative investors should consider moving their capital up the risk spectrum to take advantage of the relatively superior returns from equity investments and longer duration fixed interest assets. We hope this is the case and not investors de-risking.”

Head of retail at Sanlam Investment Management (SIM), Candice Paine, comments on Association for Savings and Investment South Africa (ASISA) quarter two unit trust statistics.

“Any individual can invest in the stock market, but it is important to consider what your investment goals entail (do you want to save for your children’s education or retirement) and what your risk profile is. This is necessary because it will determine where you will invest your money.” Market development analyst at the Johannesburg Stock Exchange (JSE), Adèle Hattingh, comments that recently shares have proved itself as an asset class that will outperform inflation in the long run. Yet, only a small portion of South Africans invests directly in the stock market, due to the risks involved and the difficulty in determining where and how to invest.

“We often see that thematic investors chase themes that are already correctly priced by the market. Examples of these include ageing populations, nanotechnology and green energy. Sometimes investing in unloved companies that operate in sectors where competition is limited yields much better long-term returns.” Chief investment officer at SYmmETRY, Roland Grabé, discussing why investment decisions should be grounded by a valuation discipline.

“We think the accumulation of assets at reasonable prices will result in superior returns for our clients regardless of what the future brings.”

Portfolio manager at Allan Gray, Sandy McGregor, comments that the company does not put a lot of weight on investment predictions in making investment decisions, but rather focuses on the current pricing of assets.

“In the last 10 years it has doubled to its best ever.”

Chief executive officer at Association for Savings and Investment South Africa (ASISA), Leon Campher, commenting on the fact that unit trusts have attracted four consecutive quarters of unprecedented net inflows as investors seek higher returns than those offered by the money market.

Chief executive officer at DELTA Property Fund, Sandile Nomvete, commented after the company indicated that it intends to list on the Johannesburg Stock Exchange (JSE) Real Estate Holdings and Development sector before the end 2013.

“So why do we want to be this guy (a value investor)? Over the long term it works. Value investing outperforms, because you get some of the upside with a lot less of the downside.”

Chairman and founder of RE:CM, Piet Viljoen, commented that despite coming under fire for underperformance in some of its funds, the company is sticking to its guns on value investing.

“We are delighted to see the growth in Nedbank green and retail savings bonds. These recent innovations allow our clients additional savings opportunities, contributing towards increased awareness of the importance of savings. Getting on top of our individual financial affairs is so important. It is something we are committed to helping our clients with.”

Managing executive of client engagement at Nedbank, Anton de Wet, comments after the company’s innovative retail and green savings bonds had generated savings of R8 billion in just over two years.

“If you’re an investor in Africa, you’re not going to get the return from the leverage that you would if you were investing in private equity in other countries. You have to rely on real growth in earnings to drive the increase in a company’s value when you finally sell.” Head of valuation services provider RisCura Fundamentals, Rory Ord, discussing what investors should expect when investing on the African continent.



And now for something completely different

Investing in

liquid gold W

hisky is commonly referred to as the ‘gentleman’s drink’, but is enjoyed by millions of men and women around the world. It is becoming the new wine due to investors seeking different and unique ways of investing. The distilled alcoholic beverage is made from fermented grain mash and different types of grains are used for different varieties. These include barley, malted barley, rye, malted rye, wheat and corn. The fermentation of grains and the distillation process contribute to the characteristics that give whiskies their uniqueness, but it is the ageing process that is the essential part of making whisky. Whisky is typically aged in charred wooden oak barrels, which gives it its caramel colour and subtle flavours. There are a few factors to take into consideration when purchasing whisky as an investment. Firstly, the reputation of the brand is crucial – if there is a long, solid established reputation, it is likely to be a worthwhile investment. Another important factor is that the price of whisky tends to increase exponentially with its age. However, the price isn’t

Macallan 1926 – $75 000 Part of the Fine and Rare collection of Macallan, this 1926 example is the oldest in the collection. Even though it was distilled in 1926, it was only bottled in 1986 and a mere 40 bottles were produced. The single malt blend is dry and concentrated as no water has been added. With a so-called liquorice taste, the colour reflects that of the old barrel in which it was fermented. It was sold to a businessman from South Korea at a Christie’s auction in 2007.


Macallan 1946 – $460 000 A bottle of 64-year-old Macallan Cire Perdue, the oldest existing expression of the Macallan single malt, packaged in a special one-of-a-kind Lalique crystal decanter was sold in November 2010 by Sotheby’s auction house in New York. The bottle of whisky fetched $460 000 with the proceeds going to charity. This whisky is unusual in that it was made with peated malt because of the thenprohibitive prices of coal that shot up during World War II. This is a classic Macallan and one of the best ever released.

always just an effect of ageing. Rarity plays a huge factor in determining its value. According to experts, Whisky Highland, the value and quantity of rare whiskies is on the rise making it a sought-after asset with some whiskies increasing in value by over 500 per cent. For example, a whisky produced from a quality distillery, which may have closed down, may result in an extraordinary leap in value. The best way to determine the value and potential fetching price is to obtain recent sales of the product from past auction results, private sales or private collectors’ opinions. Perhaps a bit of a paradox, collecting whisky requires a palate for savouring the spirit. However, the return on investment will amount to zero should the investor not be able to keep their lips off the oak-aged drink as an opened bottle is worthless to other investors. Furthermore, the less the bottle appears to have been tampered with, the higher the value. Here are a few examples of the most valuable whiskies ever sold, reminding whisky lovers of the need to resist all temptation when purchasing a bottle as an investment.

Glenfiddich Janet Sheed Roberts Reserve 1955 – $94 000 When Janet Sheed Roberts, the granddaughter of Glenfiddich’s founder William Grant, passed away at the ripe old age of 110 in 2012, the company decided to honour her by making 15 bottles from a barrel of Scotch whisky the company had been ageing since New Year’s Eve of 1955. Four were kept by the family while the rest were auctioned off. A whisky connoisseur from Atlanta bought one of them for $94 000 at a private auction in California


39 Liberty E



39 Liberty Evolve Trade Print 1

2013/09/06 2:09 PM


“As a self-made businessman and entrepreneur, Iʼve worked tirelessly for years to ensure I can retire early. Seven years ago I invested R250 000 in the Old Mutual Private Equity Fund of Funds and thanks to a return of 24.2% p.a. my investment is worth *R1 181 304.58. Now I can fulfil my dream of opening an orphanage in Limpopo. This is how Iʼll spend my retirement, working to help others.”


WHEN YOU START INVESTING TODAY Make Old Mutual Investment Group your investment partner today. Call 0860 999 199 or contact your Old Mutual Financial Adviser or your broker.

*Based on average customer experience. Actual investment returns quoted before inflation (total returns). Old Mutual Investment Group (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers ( to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. The investment portfolios are market-linked. Products may either be policy based or unitised in collective investment schemes. Investorsʼ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. Contractual rights and obligations of investors in these funds are subject to contract. Private Equity investments have short-term to long-term liquidity risks and there are no guarantees on the investment capital nor performance. The value of the investment may fluctuate as the value of the underlying investments change. Old Mutual Private Equity Fund of Funds Inception Date: 1 May 2006 to 30 June 2013.



InvestSA Magazine October 2013  
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