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R37,50 | June 2013

Profile:

Leon Campher ASISA

Fixed interest

Making meanings of income


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Contents O6 New meanings of income in the new normal

S U B SCRI P TIONS

08 Head to head: Wikus Furstenberg, Portfolio Manager, Futuregrowth Asset Management and Henk Viljoen, Head of Fixed Interest, Stanlib

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Risks in fixed income R37,50 | June 2013

14 RESPONSIBLE INVESTING - Starting to make an impact 16

PROFILE: Leon Campher, Chief Executive Officer, ASISA

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News

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Fixed inteRest

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Making Meanings of incoMe

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letter from the

editor A

s we hit mid-year, it’s a good time to reflect on what a year it has been so far. The second half will probably get ‘even more interesting’; dangerous term that has become. More than ever we are living through a period that will go down in history.

A few top financial commentators have made this point more elegantly. One was along the lines of: we don’t really understand what we are going through, but years into the future we will look back and realise the large paradigm shift that took place. Yet even if we don’t fully understand the times we are going through, we all have a sense of it - Of change, disruption, and innovation. Among many investors this causes anxiety, even fear. Emotions, as you all know, should not come into investment decision-making, especially an emotion as strong as fear. But it’s happening and we all, in particular financial advisers, have to look out for it.

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

That is partly why many investors are rushing into the perceived safety of fixedinterest investments, which might not be that safe at all. This issue of INVESTSA explores this further. Read about the risks in fixed income from Albert Botha of Atlantic Asset Management, and why no volatility in a fixed-income instrument can potentially mean a great risk. Wikus Furstenberg from Futuregrowth points out the risks in fixed-interest investments in the Head to Head section; and in the opposite corner is Henk Viljoen who explains why fixed-interest investments are a good choice. There is much about responsible investing, a growing trend in the investment industry and virtually a standard overseas. It will be discussed at the upcoming G8 summit and is likely to result in governments around the world becoming more involved in responsible investing and its new child, impact investing. Financial advisers will have much to mull over in the diverse, thoughtprovoking articles by Sunél Veldtman, Brian van Flymen of the FIA, and Paul Kruger of Moonstone Information Refinery; the latter is a well-written piece on how regulatory changes aren’t causing the expected changes in advisers. Time and space are the dimensions we live in. Regarding space, there’s not enough here, as always, to individually mention all the great contributions we have. So go and explore. Time is the dimension that gets me, but I love these interesting, dangerous times. As one of my favourite American writers, Kurt Vonnegut, said: “Here we are, trapped in the amber of the moment. There is no why.”

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,

I don’t know why, but I won’t stop trying.

resulting from the use of any service or product advertised in this publication.

Here’s to the second half.

this magazine, its officers, employees and servants for any demand, action,

Shaun Harris 4

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Readers of this publication indemnify and hold harmless the publishers of 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.


Shaun

Harris

New meanings of income in the new normal

In normal financial and economic conditions, fixed interest investments are usually an excellent investment for the prudent investor who wants to protect capital and earn income. But conditions, globally and even in South Africa, are far from normal. With interest rates at the lowest point they have been at in about 16 years, and the repo and prime interest rates (the latter after tax) lower than the rate of inflation, earning a real return from a conventional fixed-interest vehicle is not easy.

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hat puts the fixed interest investor in a difficult position, particularly those who are in retirement. They can accept the lower interest rates and face the very real threat of their investment portfolio being eroded away by inflation. Or they can decide to draw less income from the fixed-interest investment and accordingly adjust their lifestyle down. Or, in a quest to try and beat inflation, they can move part of the portfolio into riskier assets. None of the above is a terribly pleasant option but something has to be done. Right now it’s a problem that many fixed interest investors are facing. And that many more will face judging by the amount of retail money that is flowing into fixed interest unit trust funds. According to the latest numbers from the Association for Savings and Investment South Africa (ASISA), R9 billion went into the SA Interest Bearing – Short-term category (formerly Domestic Fixed Interest Income under the old classification system) over the first three months of the year, making it the second most popular category after the SA Multi Asset – Low Equity category, which pulled in R12 billion. Another indication of the popularity of fixedincome funds is the amount of money the new Imara Income Fund attracted in its first week of opening in mid-April, more than R70 million, according to senior fund manager Chris Botha. He says the new fund is conservatively positioned with the twin aims of capital protection and superior income levels that is a real return above cash. Botha accurately sums up the quandary that fixed interest investors are in. “Low interest rates for a prolonged period and stubbornly high inflation of around six per cent give added urgency to the search for safe income. The aftertax return on bank deposits could be as low as 2.5 to three per cent, which means the investor is losing massively against inflation.”

Low interest rates for a prolonged period and stubbornly high inflation of around six per cent give added urgency to the search for safe income.

CPI plus three per cent, a return that most income investors would be happy to get. It is interesting to note that Lawrenz also uses equities in the fund. It’s a point that INVESTSA has made many times. Even conservative investment portfolios need an element of equities to provide real growth. But Lawrenz is very focused in the equities that he selects, looking for their connection to the drivers of inflation in South Africa. Typically these would be shares in food companies, energy and rand hedge stocks. What are unlikely to make the list are banks and technology shares. So the question is not whether fixed interest investments are good investment vehicles – those provided by the reputable fund managers are – but whether investors should be holding these investments. In many cases the answer to this question will lie with financial advisers. Many have probably made the right decision to advise their clients to invest in fixed interest. But for some advisers it’s the easy cop out. Put your clients into an enhanced income fund and there can be no complaints if the returns they earn are higher than inflation. But perhaps some of these clients – depending on the usual risk profile and investment time horizon – should have a slightly more aggressive portfolio. Some of the income funds are quite aggressive but maybe the client needs more growth assets. The risk of not doing this is that, while the client may be earning a real return, they could comfortably be earning an ever higher return. Over time this can make a big difference to an investment portfolio. And for investors in retirement, who need the income from their portfolio to support their lifestyle, looking at higher risk alternative assets might be necessary. Even if this involves using some capital in the portfolio, which most investors are very reluctant to do. Wilhelm Hertzog, portfolio manager at RE:CM, has a contentious view on this subject. “The combination of a low interest rate environment

and an ingrained reluctance among investors to finance consumption out of capital is resulting in many South Africans searching for yield producing investments in order to fund their lifestyles. This tactic is dangerous, as chasing yield brings about significant risk for investors.” He says that due to behavioural reasons, many savers are reluctant to finance consumption out of capital. The old adage of “consume income, not capital” is a dangerous rule of thumb if followed blindly, Hertzog explains. “While the rule may have served investors well in the past, we fear that it is currently having two very negative effects. Firstly, those investors who stick to the traditional income-generating investment options are being forced into gradually lowering their standard of living in an effort to make ends meet from their income. Secondly, those who wish to maintain their standard of living while not spending their capital are taking on undue risk in an effort to do so.” His advice is that investors who have expenditure needs greater than the income payments can generate the cash required by selling part of the investment. His overall point is that under current circumstances capital, and the consumption thereof, is not the sacred cow it used to be. This raises a final, perhaps emotionally challenging point, that all retired investors need to consider. The capital in your investment portfolio is yours – use it for yourself. Most would have done the best they could for their children – a good, secure home, the best education they could afford. And that really is the best you can do. Armed with this, they enter the business world on their own. Many retired investors want to preserve their capital to hand down to their children or other family members. Why? You worked hard for it and planned your retirement correctly, so enjoy the capital. Go on a world cruise or go skiing in the Swiss Alps. You owe it to yourself.

Imara Asset Management, which specialises in equity investing, is partnering with Atlantic Asset Management, fixed interest fund managers with a number of enhanced income funds designed to beat inflation and provide a real return. This it does by actively managing the funds to meet benchmarks higher than inflation. Here’s an example of how one of the funds, the Atlantic Real Income Fund, works. “The approach we follow in this fund to providing income protection is unique and there are three steps in this investment process,” says Arno Lawrenz, chief investment officer at Atlantic Asset Management. “First is the use of fixed income instruments to provide a high level of stability in the portfolio, typically 65 per cent of the fund. Second is the use of inflation-linked bonds to provide a hedge against inflation. And third is the inclusion of a specialist equity component to provide further inflation hedging characteristics.” The target is investsa

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Head to head

Portfolio Manager

Futuregrowth Asset Management Wikus

1. Are fixed interest (FI) investments a good choice in the current economy? We have to take care not to focus too much on economic cycles when deciding on asset allocation. Although the case for asset allocation changes is clear, investing in interest-bearing assets adds relative stability as well as diversity to a balanced portfolio over time. This is particularly true when considering the various options offered by the broader income-paying asset class. Investors these days are offered a choice between fixed rate, variable rate as well as inflation-linked bonds. Of course, the growth of the corporate bond market also presents an opportunity to earn additional yield. Nonetheless, investors should note that interest rates globally and locally are currently offered at multi-decade lows that increase the risk of capital loss if and when the trend reverses. As a result, a large investment in fixed rate bonds at current levels presents a risk. 2.Aren’t they more suited to older investors who can’t tolerate risk? Risks related to the investment in interestbearing instruments are multiple. Default by a borrower and the impact of inflation are arguably the two main risks. Potential investors tend to ignore the latter despite the fact that a low real return can have a devastating effect on disposable income. Clearly, an older investor would prefer access to stable, inflation-adjusted income with the lowest possible risk of default by the borrower. Of all the alternatives in

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this space, inflation-linked bonds issued by the South African Government offer an excellent fit.

Investors should note that interest rates globally and locally are currently offered at multi-decade lows that increase the risk of capital loss if and when the trend reverses. 3. Would you recommend FI investments to younger investors? Younger investors have more time to allow for long-term capital growth. therefore, they are better able to deal with the emotional stress of short-term market volatility that characterises investments in asset classes such as equity (which implies that they should demonstrate a patient and focused approach to longterm investing). However, this does not necessarily mean a zero need for some fund stability and regular, stable income, which ideally should be reinvested and not utilised to fund excessive consumption. Once again, some exposure to inflationlinked bonds will add value to younger investors’ portfolios.

4. H  ow much of a portfolio should be geared towards FI investments? We should ignore generic answers to this important question. The only way to address the issue is to obtain the advice of a wellqualified and accredited financial adviser who will conduct a detailed analysis of your financial situation and specific needs. 5. W  hat are the risks investors need to be aware of in order for them to get the best out of their return? The eroding effect of inflation, whom you lend your money to and fixing your investment in interest-bearing instruments for long periods. More importantly, be careful when taking advice and avoid investments that offer returns that are suspiciously high. If it is too good to be true, it is probably not true. We have many examples of recent financial disasters – take care not to repeat the mistakes others have made. 6. Are there any common misconceptions about FI investments? That it is risk-free; this is simply not true.


Head of Fixed Interest

Stanlib H e n k

V i l j o e n

1. Are fixed interest (FI) investments a good choice in the current economy?

asset allocation to fixed interest assets as a component of their total portfolio.

Yes. Due to a number of global developments, including ongoing quantitative easing by monetary authorities in the US, as well as the recently announced monitory stimulus by the bank of Japan, interest rate markets are expected to remain supported for the foreseeable future.

3. Would you recommend FI investments to younger investors?

Although interest rates are at historically low levels leading us to believe that the market is currently expensive, making it difficult to fundamentally justify rates going lower, the current environment leans towards at least some sideways trending or possible further lowering of rates in fixed interest markets. If we take Europe as an example, the fiscal problems that it is facing within the monetary union is likely to lead to very low interest rates for several years to come. 2. Is Europe not more suited to older investors who can’t tolerate risk? Fixed interest-type investments deserve a place in every diversified portfolio, regardless of age. Typically as we grow older it has always been perceived to be prudent to have a larger portion of investments in assets that have a more stable form of income and less risk as a result of the return of principle at maturity, such as fixed interest instruments. However, one of the challenges we are facing today is the dilemma of earning a real return on investments. It is therefore important for both older and younger investors to be cognisant of the exposure they are taking in the market to any asset class, relative to the time horizon they are investing in to ensure they will be earning a return above inflation over time. Fixed interest investments are therefore not necessarily suitable only for older investors. The investor’s time horizon and return characteristics required should determine the

One of the lessons that young investors should not ignore is the benefit of compound interest. An investment in fixed income, particularly one that is non-taxable (like an annuity) can greatly benefit from the compounding effect of being invested over a period of time. Although younger investors should have a larger component of their investment portfolio in riskier assets, they should not exclude fixed interest investments as part of a long-term strategy to achieve sustainable wealth creation.

Given the recent global turmoil, capital and income certainty has proved to be a very valuable attribute from an investment perspective. 4. How much of a portfolio should be geared towards FI investments? An investor’s allocation to fixed interest is dependent on two factors. As the investor ages, their portfolio should in turn become more conservative with a higher fixed interest exposure, or a combination of fixed interest and property. Secondly, their asset allocation will be dependent on risk/reward demands they require from their investments. Therefore more conservative investors who cannot tolerate a lot of capital movement in their asset base should have a higher exposure to fixed interest investments.

5. What are the risks investors need to be aware of in order for them to get the best out of their return? The simple rule of investments is the more return you want to receive, the more risk you typically have to take on. Assuming not all assets are allocated to a high risk bucket, an allocation to a low risk bucket should mean all investors should have at least some allocation to fixed interest instruments. The important advantage is that someone with a high risk appetite should always have cash available to give them the opportunity to make further investments if the market offers an opportunity, or to be able to protect a portion of their capital should the markets not perform according to expectations. And lastly, diversification, diversification, diversification! 6. Are there any common misconceptions about FI investments? Although fixed interest investments typically attract tax in a normal environment, utilising them in a non-taxable environment certainly has very strong long-term compounding benefits. Although fixed interest investments might feel like a lesser performing asset class in times when other markets are performing, they do provide the investor with certainty of returns. Given the recent global turmoil, capital and income certainty has proved to be a very valuable attribute from an investment perspective. You can buy assets cheaply only when markets have corrected if you have had an appropriate allocation to fixed interest, therefore given where markets are today and the recovery we have seen in world markets up to this point, an allocation to fixed interest certainly should form part of any investment portfolio. investsa

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the roundtable convergence of great minds

The key theme that emerged from the Momentum Collective Investments roundtable discussion in Cape Town in April drew attention to the current low interest rate environment, where the debate continues to rage about the case for fixed interest investments.

Paul Crawford BScEng (Elec), MBA, CFA Senior portfolio manager Fairtree Capital

Key speakers at the event

Active management

Paul Crawford

Richard Klotnick, portfolio manager at Momentum Asset Management, says that alpha generation is a function of three variables: the fund manager’s skill; the number of opportunities in the market; and the correlation between these opportunities. However, he highlights the importance of active management, which utilises as many investment views as possible.

After graduating, Paul spent five years working for Eskom in the engineering field, initially working for Load Research and then setting protection to ensure power system stability. He then moved into the financial sector, working first for SCMB’s interest rate products division for two years and then at two asset management companies. After five years at Momentum Asset Management, Paul moved on to the newlyformed Momentum Alternative Investments business unit, where he managed numerous hedge funds, the Momentum Income Plus Fund and a few specialised segregated mandates. Paul joined Fairtree Capital on 1 February 2013 as a senior portfolio manager after a successful 10-year term with Momentum. His responsibilities include the management of various portfolios, as well as setting investment strategy for the credit unit, and he will continue his partnership with Momentum Investments by co-managing the Momentum Income Plus Fund with Conrad Wood.

Richard Klotnick

Richard Klotnick BCom (Hons), CFA Portfolio manager Momentum Asset Management

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Klotnick joined the fixed interest team at Momentum Asset Management in 2009 and was employed as a fund manager. He commenced his career at Global Credit Ratings in 2004 as a credit ratings analyst, rating companies across various sectors. He then moved to Nedbank Capital in 2006, working in credit research and ratings advisory in the debt capital market. Klotnick has been appointed as a portfolio manager at Momentum Asset Management.

“Corporate bonds are less risky than equity investments while money markets still carry risks.” Active management and active asset allocation allows the manager to add risk to different investment categories to achieve consistent returns and maximise risk-adjusted performance. When inflation spikes, linked portfolios are protected because there is more spread through diversification, thereby delivering consistent performance in all market conditions. With this in mind, he says that fixed interest investments can achieve consistent, sustainable returns throughout market cycles.


Momentum Collective Investments

fixed interest

Momentum Inflation-linked Bond Fund

securities, non-equity securities, money market instruments and assets in liquid form.

With inflation expected to average 6.3 percent in the third quarter of 2013, and hover between three percent to six percent, the South African Reserve Bank has not responded by raising inflation. Klotnick says that the market is primed for investments into fixed interest funds, provided that active management strategies are employed.

Momentum Income Plus Fund

With real yields and bonds at record lows and continuing to rally, some may wonder if there is any value to be had in fixed interest funds. Klotnick states that the US is expected to keep interest rates flat until 2015 and, with the global market remaining stable, it is likely that low interest rates are on the cards for a further two years in South Africa. A further rate cut is possible with expected softening in oil and food prices. Klotnick says that many asset classes are expensive and will remain so under the current global economy. Inflation-linked bonds (ILBs) are set to outperform cash, and the credit market is also expected to outperform. ILBs performed well in the first quarter of 2013, with the Barclays ILBI index delivering a total return of 1.87 per cent, which beat both cash (STeFI 1.25 per cent) and bonds (ALBI 0.94 per cent) over the period. The Momentum Inflation-linked Bond Fund is a gilt portfolio which seeks to provide investors with an inflation beating total return. In order to achieve this objective, the investments include a mix of inflationlinked bonds, corporate bonds, government and other bonds, other interest-bearing

Paul Crawford, senior portfolio manager at FairTree Capital and co-fund manager of the Momentum Income Plus Fund, says that corporate bonds are less risky than equity investments while money markets still carry risks. Functionally, the Momentum Income Plus fund hedges forex risk by buying denominated assets, buying Euros for example, and then selling these forward. Crawford says there is a misconception that forex hedging is expensive. ”Hedging actually removes the risk associated with forex movements, so there is no concept of cheap or expensive, as there is no cost to hedge other than the actual trading cost.”

“Fixed interest investments can achieve consistent, sustainable returns throughout market cycles.” Although equities have performed strongly, on a rolling 12-month Sharpe Ratio, the Momentum Income Plus fund dominates the other indices. The fund provides excellent risk-adjusted returns and performs well using realistic assumptions of a client’s running income requirements. “The fund is a well-diversified and equally weighted portfolio investing with 50 global sub investment grade European names, ensuring that it avoids catastrophic loss.

The fund has benefited from global credit performances.” Crawford expects excellent returns going forward. The Momentum Income Plus Fund aims to provide investors with regular income and will suit a lower risk profile. The portfolio will move between underlying securities to maximise yield while maintaining relatively low volatility of returns.

Comments from delegates “We found the content to be very interesting and both Richard and Paul clearly know their subjects.” Ingrid Farmer, managing director, Foster Wealth Management

“Very informative and prefer to attend in future again.” Johan de Villiers, CIO, Simplisiti Fund of Funds

Very interesting. I really enjoyed the fact that it was a small group and we had the opportunity to ask questions and to interact with the managers during lunch. Thank you very much. Robyn Laubscher, marketing adviser, Momentum Specialist Investments

Momentum Investments is a division of MMI Holdings. investsa

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fixed

interest

Risks in fixed income Investors in South Africa have become preoccupied with volatility as a risk measure. This is completely understandable. Our primary focus tends to be on managing the riskiest asset in our portfolio. In general this leans towards equities and for that, your volatility-related measures are acceptable. It is when they are used in fixed income that the wheels start coming off; quickly, with sometimes tragic circumstances. What do we look at?

Why? And what does this mean?

One of the oldest and most widely used measures when analysing financial risk, is the comparison of standard deviation (SD) vs return. This has become so prominent and widely used, that most people do not refer to SD. Rather they just talk about the risk/ return chart.

One of the primary building blocks of the South African fixed income portfolio is the government bond. These are debt issues with the full faith of the SA Government. As such they have almost zero risk of default. When you buy it, if you hold it to maturity, you know with certainty what return you will get. It has no credit risk and over the long term, no return risk. As such, viewing the volatility of these bonds as risk, or indicative of risk is an error.

SD is at its core a statistical measure and its use is to measure variability. For example, if a fund returns one per cent a month, every month, without fail, then the SD is zero per cent. That is because the return every month is the same. The average is the same. There is no variation. The calculation is done by comparing every month’s return over the period against the average return of that period. This calculation is often used to show how a fund has a low variability compared to the benchmark or other types of funds. For equity and asset allocation funds, this is entirely accurate and reasonable. For fixed income funds it is not. In the equity and asset allocation space, risk calculations are carried out in various other ways. They have impressive names and in general they can be used to add value. The Sharpe Ratio, the Sortino Ratio and Skewness – and those are just the measures starting with S. The problem with most of these is that at least in part they are based on some form of variability in the underlying fund or instrument. In fixed income, volatility is often not indicative of the underlying risks and an instrument with almost no volatility could carry great risk. 12

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The calculation is done by comparing every month’s return over the period against the average return of that period. The converse is also true. In South Africa, our credit market has a couple of peculiarities. Among them is the almost total lack of trade and liquidity. Investors buy the credit and they usually hold it to maturity. This is not always a bad thing, as it encourages investors to better inspect a company to make sure it will last – and in doing so often prevents overly risky companies from entering the capital markets. On the downside, it does mean that there is often no change in price and interest rate on the instruments in the market, even when companies or a sector may be struggling. This translates to instruments with almost zero volatility, even when their issuing companies are dancing close to the line of default. This is not the only case of hidden risks. Instruments may be structured in such as

way as to not show any deviation in price or interest rate, until a default event occurs, or if the equity price of the company falls below a certain level. As such, it is entirely possible for an instrument or fund to have no volatility or obvious indication of risk until an event occurs and there is a loss. When writing about risks, it often comes across as a supplication to avoid all risks, yet that couldn’t be further from the truth. Almost every risk has a price and a matched investor. Many of these funds and instruments are appropriate for investors, but it is vital that they realise what risks they are exposing themselves to, so that potential losses are not unexpected. This means that financial intermediaries need to be intimately familiar with the fixed income funds that they use as well as establishing a relationship with the managers so that they can understand their style. In this way you can match up clients with funds and managers who best suit their individual situation and risk profile.

Albert Botha, Portfolio Manager and Quantitative Analyst, Atlantic Asset Management


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There are probably as many definitions as there are asset managers, but to simplify the definition and put it in a local context, we should probably look no further than the JSE.


Profile

LC

Established in 2008, the Association for Savings and Investment South Africa (ASISA) represents the majority of South Africa’s asset managers, collective investment scheme management companies, linked investment service providers, multi-managers and life insurance companies. ASISA is empowered by a mandate from an industry that manages assets of more than R4 trillion. This industry is considered the custodian of the nation’s savings and is recognised as one of the country’s biggest contributors to the national GDP.

1. You were appointed CEO of ASISA in 2008 and, since that time, ASISA has grown to be a prominent partner with national government. What was your vision at the time of appointment?

It wasn’t only my vision, but that of the industry leaders collectively. The ‘captains’ of the industry wanted to establish a unified industry body, strategically driven without bias at the highest level. For this reason, ASISA membership can be attained only at the highest appropriate level in a company’s corporate structure. In addition, members must be represented on the ASISA board by their most senior representative. The aim is to ensure that high level strategic thinking, not productaligned agendas, shapes the future of the financial services industry. The ASISA board drives its strategic direction, taking into consideration the priorities of our country, as well as international direction. The strategy is executed by seven board committees, chaired by a board member and supported by a team of subject matter experts from within ASISA as well as member companies. With this approach, we have managed to achieve a lot in a tough economic climate. ASISA applies the principle where a full member has one vote. This means that the big conglomerates have the same vote as a small independent company. The ASISA founding statement commits ASISA and its members to the principle that the consumer’s best interest will govern all decision-making. At the same time, the importance of minority views will be recognised, processed and presented together with the majority view.

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2. What challenges have you encountered along the way?

ASISA had hardly been formed in October 2008 when the global financial crisis happened. While this was sheer coincidence, the timing could not have been better; never before had there been such an urgent need for the savings and investment industry to work together as one. I firmly believe that if our industry had still been segmented by the time the global financial crisis started flushing inefficiencies and weaknesses out of financial services industries around the world, we would be operating in a very different environment today. Over the past four years, we established solid partnerships based on trust and mutual respect with National Treasury, the Financial Services Board (FSB), the South African Reserve Bank (SARB) and other key stakeholders. In my view this presents a significant achievement in a short period of time. 3. Have revisions of the old fund classification standard inherited from the Association of Collective Investments (ACI) in 2008 been well received by the industry? The fundamental difference is that this time the fund classification system was driven by investment people and not by marketing teams. But yes, internally it has been well received because everyone participated in the classification process. More importantly, however, it has also been very well received by the media and the public.

4. What role does ASISA play when it comes to implementing and enforcing regulations and how difficult is it to ensure that companies comply? We can’t enforce regulations. This is the job of the FSB. While ASISA members have to comply with the law as enforced by the FSB, we also have standards in place that prescribe best practice to members. These are not binding for now, because of the Competition Commission. We are, however, working with National Treasury and the FSB to find a solution to this problem and hope to find a way to introduce binding standards without falling foul of Competition Commission rules. 5. Do you believe the industry is fully prepared for incoming legislation such as Treating Customers Fairly? And are you ready for the FSB’s Retail Distribution Review (RDR)? We are as ready as we can be. ASISA is engaging with the FSB with regard to TCF as well as RDR. It’s a very open process and ASISA is represented on the various FSB working groups. 6. Finally, if you had R100 000 to invest, where would you put it? One thing I have realised is that if you are not in the business, don’t try and manage the money yourself. South Africa is blessed with many excellent fund managers, so I would consider investing in a multi-asset class unit trust, and leave it to the fund manager to decide on the asset allocation.


L e o n C amph e r Chief Executive O f f i c e r , ASISA

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Alternative

investments

Section 12J

Venture Capital Companies offer significant tax advantages Although this is a new asset class in South Africa, venture capital funds have proven to be extremely successful in the UK where such companies are traded as venture capital trusts – a multimillion Pound industry. Grovest Venture Capital Company is South Africa’s first operational venture capital fund incorporated under section 12J of the Income Tax Act.

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The management team of Grovest has combined experience of more than 80 years in investing and in supporting unlisted growing companies and is well placed to attract ongoing deal flow.


U

nder section 12J, this venture capital company structure has been made possible by the South African Revenue Services. It offers investors direct exposure to the rapidly growing venture capital (VC) sector, while offering up to 40 per cent tax relief on the investment. This means that if an individual invests R100 000 and is paying tax at the maximum threshold, he will receive income tax relief of R40 000, making the net cost of the investment only R60 000. The tax benefits apply to trusts and companies alike. In addition to this tax break, which reduces risk capital to 60 per cent of the investment, investors also enjoy tax-free dividends.

companies: a lack of capital and suitably trained management. Banks are unlikely to finance young ventures, yet funding is the oxygen of entrepreneurs. Good businesses are being crippled due to lack of finance. The management team of Grovest has combined experience of more than 80 years in investing and in supporting unlisted growing companies and is well placed to attract ongoing deal flow.”

With a minimum investment of R100 000, investors have access to venture capital exposure as part of a balanced portfolio. Investors now have exposure to the alternative investment asset class that was previously available to only family offices, VC funds and very high net worth angel investors.

The two main reasons for the failure of small companies: a lack of capital and suitably trained management.

Grovest plans to maximise dividends to shareholders by distributing profits on disposal of investments. It plans to raise R100 million which will be invested in a blend of high quality small and medium private companies with significant growth potential. The focus will be on innovative, high growth businesses in the technology and mobile industries. Jeff Miller, director of Grovest, says, “The two main reasons for the failure of small

Grovest’s objective is to achieve returns of between three to five times in a five- to seven-year time frame, equating to an investment rate of return (IRR) of between 25 to 37 per cent.

Equally encouraging is the willingness by National Treasury and SARS to engage with practitioners in the venture capital industry about workable policies and incentives to attract investment. “The establishment of Grovest’s Venture Capital Fund is an important step towards encouraging other venture capital firms to do the same, thereby creating scope for investors with the appropriate risk profile and level of sophistication to gain exposure to this asset class.” Miller suggests that investors apply five to seven per cent of their portfolio to this asset class. With the tax benefit of 40 per cent in hand for the individual (assuming marginal tax), the investor’s down side has been extremely reduced. Yet the investor is also positioned to take advantage of the potential upside.

Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA), says that SAVCA is pleased to note the progress being made by the South African policymakers in creating incentives for venture capital to flourish. “Lessons from elsewhere in the world have shown that a sensible tax framework – one which rewards taxpayers’ contributions to enabling innovation, kindling growth and boosting job creation – pays off.

Jeff Miller, Director of Grovest

COMPOUND INTEREST IS CONSIDERED THE MOST POWERFUL FORCE IN THE UNIVERSE

YOU NEED TO HARNESS THIS FORCE TO BECOME A SUCCESSFUL INVESTOR.

The Lenape Indians sold Manhattan to the Dutch in

At Foord Asset Management we believe in

1626 for a bunch of beads estimated to have been

investing for the long term. Our track record over

worth 60 guilders at the time. At a 7% per annum

30 years is proof that managing investment risk

rate of return the current value would exceed €5.5

and compounding superior returns are key to the

trillion, allowing the Indians’ descendants to buy

creation of exceptional wealth.

Manhattan back and have trillions to spare.

021 531 5085 | unittrusts@foord.co.za | www.foord.co.za Foord Unit Trusts Limited is an authorised Financial Services Provider

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allan gray

How to build a sustainable practice Jeanette Marais | director of distribution and client services, Allan Gray

Building a sustainable financial advisory practice is as much about helping your clients as it is about running a successful business. But in an advisory world replete with compliance requirements, how do we get on top of the basics to create a practice that is managed efficiently and built to last?

T

o make sure that your practice has a life and future that is independent of you as an individual, it pays to make some time to focus on managing and developing your business. Take a thorough look at the various aspects of your practice. Try to understand and implement best practices aimed at helping you to run a more efficient business, improve client satisfaction and increase profits. Successful practice management strategies can go a long way in taking your business to the next level. There are various aspects to practice management that need to be tackled over time: from building your business plan, creating a value proposition and reviewing financial planning processes to understanding the local regulatory environment and international trends. Whether you are starting out, or established in the advisory business game, giving these aspects of your business attention can have far-reaching benefits for your clients, your practice and for you as an individual. Yourself Good practice management begins with you, and managing your time effectively so you can get on top of all of your deliverables. You need to align strategy and delivery, and learn how to identify the best revenue opportunities. It’s also important to keep developing your skills and to stay informed about local and international trends.

Your clients When new businesses open their doors, they are usually focused on gathering as many clients as they can to cover expenses. The reality is these may not be the clients they want in the future. Give some thought to the ideal clients you might like to have and work purposefully towards gaining them. Having no plan in this regard almost guarantees that you will end up with a large mix of clients and servicing them may be more time consuming than it’s worth. Having identified your target base, you need to define your value proposition. A value proposition is a powerful description of you and your practice. It is a crucial piece of your overall business strategy and needs to be thought through carefully so that it generates interest and gives clients a sense of your expertise. It must set you apart from your competitors. As you start to build your client base, remember these relationships need to be nurtured. Get relationship-building right and the positive effects are bound to filter down your pipeline through referrals. While building relationships is time consuming, effective practice management should make you more efficient, increasing the time you have to service your clients. Your practice Take a good look at the way you work within your practice. Share your vision with your staff

and develop productive working relationships with your teams. An advisory practice with a culture that encourages employees to grow fosters loyalty and commitment. It’s important to have a handle on resources – from staff, capital, systems, insurance and licences. These are all practical issues determined by the needs of the business and will change as the business grows. Identifying them and planning for them means that they can be applied when appropriate and at a reasonable cost to the business. Businesses seldom follow the path planned for them, so it is important to review your plans from time to time and to remain adaptable. Make changes that will allow you to increase practice value through focusing on key deliverables. Changes you make will allow you to maintain your independence and build a long-term, sustainable practice. Source: Fundhouse Allan Gray Adviser Services and financial services consultancy, Fundhouse, are working together to bring Allan Gray-registered advisers an exclusive, practice development initiative designed to provide comprehensive practice support to financial advisers. Through learning, interaction and debate, members of the initiative will gain invaluable insight into how to grow and develop their practices. For more information, please contact Allan Gray’s Adviser Service centre on 0860 000 653 or e-mail info@allangray.co.za.

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal being to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services short lists third party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the short list of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website. 20

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Asset

management

Hedge funds the new darling for retail investors?

A

s the gold boom shows signs of coming to an end, miners and analysts question whether hedging, in a different form, could make sense again. Furthermore, increased hedge fund regulation is a global trend that will automatically make the asset class more accessible to retail investors, thereby resulting in further growth.

that hedge funds will need to become much more transparent in terms of what they invest in and how they do it. “The new regulation, when implemented, will prescribe the amount of leverage that can be used in funds, potentially imposing a cap on this amount. This all creates an additional layer of comfort for investors looking for the downside protection that hedge funds provide.”

While the extent of this growth is yet to be determined and some hedge funds may be required to change their business strategy as a result of these changes, it seems the return of the hedge fund is imminent.

Scott Campell, director of Appleton International Investment Management, says investors should take comfort in the variety of investment strategies available in hedge fund investments. “It is a misconception that hedge funds all use a similar investment strategy. In fact, hedge funds employ a wide range of approaches, with risk profiles that range from conservative to speculative,” he explains.

Craig Margolius at Emperor Asset Management, says since the inception of hedge funds in the USA, the traditionally very high minimum investment amounts excluded all but the extremely wealthy, financially astute retail investor. However, recently hedge funds have been breaking away from this and opening up to individual investors by lowering the minimum investment amounts. “Furthermore, fund of fund investments mean that many investors are actually already invested in a hedge fund, whether they are aware of it or not. This, along with new draft legislation increasing the regulation of hedge funds is driving a clear shift in the market.” Margolius adds that the draft regulation proposes that hedge funds be treated as restricted or retail hedge funds. This means

Margolius meanwhile, says as the regulation starts to eliminate the barriers to entry for retail investors, he anticipates significant growth in the uptake of hedge funds by individual investors. However, while access to hedge funds for retail investors is a great opportunity for the novice investor to secure some protection against a volatile market, investors must carefully consider their risk profile and how a hedge fund investment could affect this. “Hedging got a bad reputation because of multi-year hedge books. However, the fact remains that at certain points in time, for certain companies and individuals, it makes sense,

if you know why you are hedging and for what purpose. That’s why it’s crucial that investors educate themselves before jumping in,” says Canaccord Genuity analyst Peter Mallin-Jones.

The new regulation, when implemented, will prescribe the amount of leverage that can be used in funds, potentially imposing a cap on this amount. “Hedge funds are still a riskier asset class than equities and bonds because they are derivative instruments which results in gearing or leverage in the underlying instruments. It’s therefore crucial to select the fund carefully and to ensure that one is fully and regularly informed where their money is being invested and all the factors that will affect the risk of their investment,” adds Margolius. While there are certainly still risks involved, for investors wary of twitchy markets both locally and abroad, it seems that it would be wise to allocate funds to a reputable hedge fund. This will decrease the risk without jeopardising strong returns.

FP

PR

I C Mee on t u fe s Ins renc at o ur e 1 ur an s c 1- tan 28 e C 12 J d a -3 on un t th Whether you operate as a financial planner or as a large fully integrated 0 fer e Ju en or e financial services firm, PROFIDA provides Financial Planning & Practice ly ce at the

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Management Software for you. Our leading technology gives you an option of using either the PROFIDA desktop or webbased solution. Large size clients even have the choice of employing a combined application, extending logins to advisers and policyholders alike. PROFIDA follows “best practice”, basing its financial planning process on actuarial calculations and modern school of thought. It incorporates CRM, Astute-downloads, record keeping, to-do-lists, data mining, bulk newsletter campaigns, customised reports and letters. Its unique extension framework means it can grow with you and adapt as your business changes. PROFIDA manages life and non-life insurance as well as investments on one platform to accommodate your entire product spectrum now and in future.

Visit us at www.profida.co.za or phone (021) 975 0215

The Technology Leader

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Barometer

Hot

Highest total return on JSE

SA ranked top African retail market

The PSG Group reported a total return index of 51.4 per cent on its investments, the highest of any JSE-listed group over the past 17 years. PSG has 36 underlying investments in financial services, banking, private equity, agriculture and education.

A survey conducted by Barclays to determine British retailer’s attitudes towards international expansion has placed South Africa as the top market for retail expansion in Africa. Almost a quarter of the companies surveyed thought Africa would be the ‘new retail growth story’ in the next decade, with 18 per cent listing South Africa as the number one choice when

considering where to expand within the continent. Ghana and Kenya followed with six per cent and four per cent respectively. South Africa tourism outperforms South Africa tourism grew at 10.5 per cent for January to November 2012, more than double the global average of four per cent. This is according to SA Tourism Minister Marthinus van Schalkwyk, speaking at an awards ceremony in New York.

Africa growth strong but not enough to reduce poverty The World Bank’s Africa’s Pulse of economic prospects for the region has projected that foreign direct investment into sub-Saharan Africa would increase to record levels from $37.7 billion in 2012 to $54 billion by 2015 due to increased investments and high commodity prices. However, despite this anticipated growth, the poverty levels within the region remain a concern.

Sideways

Not 22

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Index reveals sector decline

STRIKES RESULT IN BILLIONS LOST

Global growth forecast cut

The third edition of the Absa SME Index, which measures the number of small businesses across different sectors, revealed the retail, wholesale and restaurant trade sectors within SA have declined over the last three years and reported a negative 3.1 per cent growth.

According to figures released by the South African Institute of Race Relations, the South African mining industry reported a loss of more than R15 billion in production during the strikes in the 2012–13 financial year. The export loss exceeded the direct loss due to the mining sector’s strong links with other sectors.

The International Monetary Fund has cut its forecast for global growth to 3.3 per cent this year, down from its forecast in January of 3.5 per cent. The global lending organisation predicts that government spending cuts will slow US growth and keep the Euro currency alliance in recession.


Chris

Hart

Gold: The Enigma Chris Hart | Chief Strategist, Investment Solutions

A huge sell-off in gold has led to much speculation about its role in an investment portfolio and whether its bull run is over.

T

he sell-off was in itself interesting as it came in the face of a haemorrhage of gold from official Comex vaults and rising imports into centres such as India and China. Physical demand has also been exceptionally strong in the face of the sell-off. The day it was initiated, around 500 tons of gold was dumped onto the market in a short time when liquidity conditions were at their lowest. This had all the hallmarks of some sort of official intervention to specifically drive down the price of gold. If this is indeed the case, it may well have been due to the massive escalation of quantitative easing (QE) and rate cuts that have begun to dominate monetary policy. The last market response a central bank wants for its policies is a soaring gold price. The desired market outcome is for the currency to be weaker, stock markets to be higher and precious metal prices to be subdued. The reason for this is that gold still has an important monetary role. It should act as the conscience of central bank policy. QE and zero rates are anathema to sound monetary policy, but the prevailing policy direction is that the financial system faces an emergency and that extraordinary monetary measures are necessary to retain systemic integrity. Confidence is the critically important component of the financial system and a rapidly rising gold price is essentially a vote of no confidence in monetary and fiscal policy. In an age where behavioural finance is increasingly dominant, the apparently easier policy measure is to damage confidence in gold.

But these mantras reveal great ignorance and a lack of depth in thinking. If gold is analysed in an industrial role, it is difficult to make a strong investment case. However, an extremely strong case is to be made when analysing gold in a monetary capacity. In this capacity, the same mantras used to describe gold can also be applied to cash, but with some important differences. Cash has no industrial use. Cash has no yield. Money was never meant to have an industrial use. It is merely a tool used as a means of exchange and a store of value. It also has no yield, unless it is put to risk and deposited in an interest-bearing account. But the same applies to gold. It can be leased out and it earns a lease rate when subjected to counterparty risk. Cash has zero intrinsic value and depends entirely on confidence for its value. Gold, on the other hand, might be difficult to value but it takes considerable effort to wrest from the ground. And this is an important justification of gold as an investment.

When monetary policy is aimed at the debasement of cash, this is a property which gold provides protection from. Gold cannot be debased, while paper can. Debt is being hyper inflated and this assures the system will ultimately be subjected to either deflation (i.e. the debts get defaulted away) or massive inflation (i.e. debts get eroded away). Whatever the case, the value will be apportioned from savers and transferred to the indebted. The indebted are politically more powerful than the savers and any solution to unpayable debt will be to lean on the savers. Already negative real interest rates are systemically embedded and this will be the case for a long time. Cyprus brought a fresh dimension where uninsured deposits will also merely be appropriated. Now the ECB wants to introduce negative rates, which target insured deposits. Under these circumstances, investors can protect themselves by accumulating assets that do not depend on confidence for their value (cash and bonds), but rather on their own embedded intrinsic value (precious metals, property and equities (mainly manufacturers).

Gold then plummets in price and confidence is immediately questioned. The mantras are trotted out. Gold has no industrial use. Gold has no yield. There is an excess of gold reserves in vaults around the world. Gold is too volatile. Gold cannot be valued – and so on. investsa

23


Economic

commentary

The economy is not out of the woods yet

L

ocal economic conditions remain subdued and patchy almost four years into the recovery from the 2008/09 recession. Economic growth has been disappointing. Last year the economy grew by a tame 2.5 per cent after expanding by an equally moderate rate of just over three per cent in both 2011 and 2010. This pace is simply too slow to encourage the levels of capital expenditure and job creation needed within the private sector to help address the country’s greatest challenges – poverty, unemployment and inequality. The blame is often placed at the door of a fragile, and therefore unsupportive, global economy, which is still struggling to gain convincing momentum after the global financial crisis in 2007/08. While weak and volatile global demand has been a factor, it is not the only culprit, because most other emerging or commodity-based economies have managed to produce much faster and broader economic growth during the past four years. The performance of local producers, especially in the mining and manufacturing sectors, has also been undermined by a loss of international competitiveness and persistent infrastructure constraints. Local producers’ ability to compete have been eroded by surging production costs caused by sharp increases in electricity tariffs; higher unit labour costs as wage growth has outpaced productivity gains; rising transport, logistics and communications costs due to inadequate road, rail and port infrastructure; and finally a growing compliance burden brought about by increasingly complex legislation, mounting red tape and corruption.

24

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There have also been more labour disputes and strike action during the past four years, with painful consequences for the affected industries, jobs and the economy as a whole. Last year’s protracted and violent wildcat strikes in the platinum and gold mining industries and later in the transport sector were particularly damaging as economic growth slowed down to a crawl, exports imploded and the trade deficit widened, while tax revenue collapsed and budget deficit worsened. Added to these pressures, foreign investor confidence was tested and the three major international rating agencies – Standard & Poor’s, Moody’s and Fitch – all downgraded South Africa’s sovereign debt credit rating by one notch, placing pressure on the Rand. The economy was carried mainly by the services industries supported by continued albeit more moderate growth in domestic spending. While government consumption expenditure remained relatively firm, household spending slowed on softer wage growth, limited job creation and fading confidence. At the same time, private companies remained hesitant to undertake capital expenditure given substantial spare capacity in some industries, weak demand and persistent doubts about future growth prospects and domestic economic policies. On the upside, there were encouraging signs of progress in the roll-out of the public sector infrastructure programme, which has become increasingly urgent in order to lift the constraints on the private sector and facilitate higher levels of fixed investment and employment. Unfortunately most of these challenges remain unresolved in 2013. Recent economic indicators continue to reflect a general lack of economic momentum and there is little evidence to suggest that the economy gained any significant momentum in the first quarter of 2013. The underlying growth rate still appears modest while the composition of that growth remains generally unbalanced, with domestic spending outpacing production although by a smaller margin than in 2012. Recent developments suggest that the downside risk to the domestic growth outlook probably

increased marginally over the past month. The world economy appears slightly weaker than anticipated, with sharp cuts in government spending likely to keep US growth in check while recession in the Eurozone is set to continue as fiscal austerity deepens, banks struggle and confidence declines.

With all these choices available the investor can gain exposure to several segments of the market – locally as well as globally – in a quick and efficient manner. Growth in China and other major emerging markets will moderate as exports to the Eurozone remain under pressure. Added to this, the upcoming wage negotiations in the mining sector and the threat of disruptions to power supplies due to winter maintenance may result in a weaker production and export outcome than currently expected. In contrast, consumer spending should continue to support the economy, only moderating slightly as wage growth slows, employment remains relatively stagnant and credit standards tighten in certain segments of the market. Infrastructure spending by the public sector is still expected to buoy total capital expenditure in 2013, but developments have not been encouraging, with long disruptions to construction, first at Medupi and now at Kusile. Overall, we expect a year very similar to 2012, but with economic growth marginally firmer at 2.6 per cent, although the risks remain on the downside.

Nicky Weimar, Senior Economist at Nedbank


Industry

associations

Sound financial advice crucial to protect consumers The long-standing dominance of financial intermediaries in the distribution of financial products has been challenged by the emergence of product providers that are marketing directly to the consumer.

A

lthough this incursion represents a small percentage of total industry sales, it is nevertheless of concern to both intermediaries and consumers, because financial products need to be accompanied by appropriate advice to fulfil their purpose. This is according to Brian van Flymen, president of the Financial Intermediaries Association of Southern Africa (FIA), who believes that consumers are best served by skilled financial advisers with intimate product knowledge. “It is extremely difficult, if not impossible, for a call centre operator to communicate the workings of a complex financial product to consumers.” Van Flymen was presenting at the 2013 FIA Regional Conferences held countrywide in March and April this year. The FIA Code of Conduct, published in 2012, establishes its members as advisers rather than sales people and is evidence of the organisation’s commitment to the professionalism needed to restore confidence in the financial services industry. In his message to conference attendees, Jonathan Dixon, deputy director of insurance at the Financial Services Board (FSB), confirmed the importance and value of independent advice as an important factor in adequate consumer protection. “A key element of adequate consumer protection is the value of good

advice and the FSB places a high value on independent advice to customers.” Dixon explained that equal importance is placed on each role player in the product development and distribution cycle to deliver fair outcomes to consumers. “One of the criticisms of the Financial Advisory and Intermediary Services (FAIS) regime has been that it created a perception that the responsibility for the delivery of fair outcomes rests solely on the shoulders of the intermediary. With Treating Customers Fairly (TCF), we are making it clear that delivery is a joint effort between product provider and the intermediary.” To further aid intermediaries in delivering fair outcomes to consumers, the FIA Business Practices Manual for Key Individuals – by FAIS expert, Anton Swanepoel – was launched at the conference to FIA members. “This manual aligns with the basic purpose of our association, which is to represent the collective interests of intermediaries,” says Van Flymen. “This type of support is crucial to the sustainability of intermediaries and intermediation.” Keeping to the overarching theme of the value of good financial advice, attendees were given insights into the developments and challenges of the financial intermediary profession over the next five years. The FIA is a keen participant in the ongoing debate as to what constitutes intermediary services

and the question of adequate remuneration; both subjects currently under discussion as part of the regulator’s long-awaited Retail Distribution Review. Van Flymen says the FIA will build on the successes it has achieved over the past five years by keeping a close watch on industry developments and taking cognisance of challenges that will affect our members. “Above all we strive to remain the dominant player in the financial product distribution channel. It is thus crucial for intermediaries to support pro-consumer initiatives by increasing their knowledge and providing sound advice whenever called upon,” concludes Van Flymen.

Brian van Flymen, President of the Financial Intermediaries Association of Southern Africa (FIA)

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Managing

risk

Survey: Buy-side market risk management trends

T

he latest international survey of buyside risk practitioners, sponsored by SunGard, has been released. SunGard is the largest privately held software and technology services company and serves over 100 customers in 10 African countries across capital markets, core banking, asset management, insurance and the corporate treasury market. With responses from 375 participants in 60 different countries (including SA), this report offered some interesting insights. A few of these insights are summarised below and the full report is attached. The 2013 risk trinity: regulation, liquidity and counterparty risk The post-crisis business environment poses new challenges for risk management. The main investment risk issues faced by buyside firms this year are emerging regulatory regimes and the interconnectedness of financial markets in the form of liquidity risk and counterparty risk. Risk regulation is now top of the list of risk management and buy-side firms are very concerned about the uncertainty surrounding buy-side regulations, 26

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with 45 per cent of buy-side firms believing that these regulations will increase the cost of doing business. On the positive side, a good proportion of participants (36 per cent) have found that regulatory uncertainty has made their firms more risk aware.

The main investment risk issues faced by buy-side firms this year are emerging regulatory regimes and the interconnectedness of financial markets in the form of liquidity risk and counterparty risk. Establishing firm-wide risk insight: the move towards integrated risk management The point of many of these new regulations, such as Solvency II, is to bring together a firm’s risk in an holistic way to increase

transparency and improve risk reporting. This theme is reflected in this year’s survey as we are seeing a move towards integrated risk management, characterised by buy-side companies’ desire to integrate their disparate risk systems with a view to create a risk dashboard. Less than half of firms surveyed currently have a risk dashboard that enables the board and the chief risk officer to gain an aggregate view of firm-wide risk insight. From risk compliance to risk culture Lessons from risk management failures have shown that the best way to prepare for the unexpected is for risk management to be holistic and to move from a tickbox compliance culture to an integrated investment risk culture. Survey respondents highlighted the need for a better risk culture and a better integration of risk into the investment process. Yet at the majority of firms (approximately 70 per cent) risk and investment decision-making are completely separate functions and a lot of progress needs to be made to empower risk managers to become if not integrated, at least involved in the investment decision-making process.


Morningstar

Offshore equity and balanced funds lead the pack while domestic equity returns moderate The Rand’s depreciation boosts returns for South Africans invested in offshore assets

S

trong returns from developed markets such as the US and Japan helped lead offshore fund categories to double digit returns in the first quarter of 2013. Meanwhile resource-focused funds suffered losses as the price of oil and gold fell modestly, according to performance numbers released by Morningstar South Africa. Gold’s historic price correction which saw the yellow metal suffer a 13 per cent drop in two days occurred just after the end of Q1. The best performer among the 29 ASISA categories that Morningstar tracks was the Global Equity category which saw gains of 16.7 per cent in the first quarter of 2013. Many offshore categories produced excellent results for the quarter. This included the Global Multi-Asset High Equity, Global Multi-Asset Flexible, Global Real Estate,

and Global Multi-Asset Medium Equity categories which rounded off the top five categories. Returns in these categories ranged from 10.7 to 14.5 per cent. Performance in the offshore categories was driven by two primary factors: high returns from large developed markets and the depreciation of the Rand. The US market which makes up roughly half of the MSCI World Index did particularly well with the S&P 500 index returning 11 per cent for the quarter. This was outdone by the Japanese market as the Nikkei 225 index jumped 19 per cent over the same time period. Also helping to buoy offshore fund returns was the Rand’s dramatic depreciation versus many major foreign currencies. The Rand depreciated roughly eight per cent versus the US Dollar and Chinese Renminbi and over five per cent versus the Euro. A depreciating

Rand is a boon to South African investors buying offshore assets as these investors must sell their Rand to buy foreign assets. When these assets are eventually sold, investors then buy back the Rand at lower prices and profit from the trade. The two biggest categories, South African Equity General and South Africa MultiAsset High Equity saw more muted but still positive returns for the month at three per cent and 4.6 per cent respectively. These performances slightly bested the return of the FTSE/JSE All-Share SWIX which clocked in a 1.6 per cent return in the first quarter of the year. Fixed income funds also produced more modest performance to start 2013. The South African InterestBearing Variable Term and the South African Interest-Bearing Short-term categories squeaked out returns of 1.1 per cent and 1.3 per cent respectively.

Q1 2013 ASISA category performance Name

Q1 2013

2012

(ASISA) Global EQ General

16.6

18.6

(ASISA) Global MA High Equity

14.5

18.3

(ASISA) Global MA Flexible

13.8

14.7

(ASISA) Global RE General

12.9

28.4

(ASISA) Global MA Medium Equity

11.1

13.5

(ASISA) Regional EQ General

10.7

25.0

(ASISA) Global MA Low Equity

10.3

10.7

(ASISA) Wwide MA Flexible

9.9

16.9

(ASISA) South African RE General

7.8

31.5

(ASISA) Wwide EQ Unclassified

6.9

(ASISA) Global IB Short Term

6.9

3.8

(ASISA) South African EQ Industrial

6.8

30.9

(ASISA) Global EQ Unclassified

6.4

(ASISA) Global IB Variable Term

6.4

11.5

(ASISA) South African EQ Mid/Small Cap

6.3

27.5

(ASISA) South African EQ Financial

5.8

34.9

(ASISA) Regional IB Short Term

5.6

6.3

(ASISA) Wwide EQ General

5.1

(ASISA) South African MA High Equity

4.5

16.3

(ASISA) South African MA Flexible

4.5

17.8

(ASISA) South African MA Medium Equity

4.1

15.8

(ASISA) South African MA Low Equity

3.7

13.1

(ASISA) South African EQ General

3.0

20.0

(ASISA) South African EQ Large Cap

2.0

25.7

(ASISA) South African EQ Unclassified

1.6

(ASISA) South African IB Short Term

1.3

6.7

(ASISA) South African IB Money Market

1.2

5.4

(ASISA) South African IB Variable Term

1.0

15.4

(ASISA) South African EQ Resources

2.4

0.6

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

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27


Practice

management

What’s it all about, alfie? An unintended consequence is the potential loss of many experienced advisers who found it impossible to pass the examinations.

The words of the theme song from the 1966 movie of the same name are apt if we look at the current state of compliance in the financial services industry in South Africa.

R

egulatory measures, ostensibly aimed at protecting consumers, have not yet achieved the required result. Regular reports of scams confirm this.

The implementation of the FAIS Act in South Africa on 30 September 2004 was welcomed by all who wanted the industry cleaned up. It is not easy to sell products which consumers are dubious about. Getting rid of the bad apples would, in time, restore faith in the industry. It is now nine years later, and I’m afraid the outlook is not as rosy as it seemed back then. There are a number of reasons for this. The first and possibly single biggest cause is that too much emphasis was, and is, placed on the application of rules, at the expense of the required outcomes. During the advice process, many advisers simply go through the required motions, rather than truly establishing the client’s needs. They strive to comply with the letter of the act, but not the intent. 28

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A further practical outflow is that advisers will steer away from products which may be the right one for their clients, but of a more risky nature. This, of course is exactly what the act did not set out to achieve. The introduction of regulatory examinations to force the industry to come to terms with their obligations under the act achieved mixed results. An unintended consequence is the potential loss of many experienced advisers who found it impossible to pass the examinations. Many may have to leave the industry, leading to their clients becoming ‘orphans’, in industry terms, without the benefit of a trusted adviser. It is unlikely that too many of the ‘bad apples’ formed part of the fall-out. It is more likely that they now simply know better how to operate without detection.

will force product providers to come to the party. Up to now, most of the focus has been on financial advisers, which is a case of shooting the messenger. The six outcomes, which form the basis of TCF, set out to effect a culture change, putting the client first, from product design to the day the benefit becomes payable. How does all of the above impact on the consumer? It is, after all, all about them. I’m afraid that as yet, in practice, not much has changed as far as this is concerned. Perhaps the industry should consider the advice given in the Burt Bacharach song: What’s it all about when you sort it out, Alfie? Are we meant to take more than we give or are we meant to be kind? And if only fools are kind, Alfie, then I guess it’s wise to be cruel.

The buying of business by influencing advisers through incentives was, and still is, a common practice in the industry. Steps to curb these measures led to structures being put in place to hide such actions, rather than conformance with the spirit of the legislation. In an ideal world, a compliance culture should have been inculcated in the industry from the start. It did not happen. The authorities are now looking at introducing measures to address this, chief of which is the Treating Customers Fairly (TCF) initiative. While it aims to achieve a general change in approach to compliance in the industry, a secondary benefit is that it

Paul Kruger | Head: Communication, Moonstone Information Refinery (Pty) Ltd


Responsible

investing

Regulation 28 puts responsible investing firmly on the agenda The preamble of the new Regulation 28 of the Pensions Fund Act states that prudent investing means giving appropriate consideration to any factor that could materially affect the sustainable, long-term performance of a fund’s assets, including environmental, social and governance factors. This means that responsible investing is no longer simply a nice-to-have, or the domain of some retirement funds, but not others. All trustees, irrespective of their existing mandates with fund managers, should now ensure that responsible investing is on the agenda. What is responsible investing? Responsible investing integrates any factor that affects long-term sustainability, including environmental, social and governance factors, into investment practice. Put simply, responsible investing is about integrating the goal of providing return-based benefits to investors with a broader consideration of the world and society in which they live.

Why is it so important? There is no point providing pension incomes to beneficiaries if the world they retire into cannot provide them with food, potable water or a habitable climate. Consider climate change and its predicted and evidenced impact on the region. With average temperatures rising and rainfalls decreasing, food production is under threat, which affects food prices. Globally, approximately 75 million people are malnourished as a direct result of food price increases. In South Africa, the majority of pension fund members, who can be classified as low-income wage earners, spend nearly 70 per cent of their income on food. Continuing pressure on food supply could make this alarming situation potentially devastating. The good news is sub-Saharan Africa appears to be ahead of the curve on responsible investment implementation. According to the 2011 IFC-SinCo research on sustainable investment in the region

(RisCura was a research partner in this project), using a broad definition of ESG integration to estimate assets under management for responsible investment “…integration of ESG factors into fund investment policy and/or process, SI in South Africa, Kenya and Nigeria is estimated at $125 billion AUM – equivalent to 20 per cent of general asset management and 44 per cent of PE [private equity] in sub-Saharan Africa. This puts the overall SI market in subSaharan Africa ahead of the US, Brazil or South Korea”. The importance of responsible investment is clearly gaining traction.

An approach, not a product Responsible investing is not an asset class that should be ring-fenced in a portfolio by investing in one of the many SRI products available on the market. It goes deeper than this – it’s a way of considering all investments, and cuts across different investment mandates, asset classes and investment products. Responsible investing is an approach to investing, not just a product.

companies and their impact on markets and societies, considering ESG factors when making investment decisions should result in better decisions and reduced risk by uncovering key issues that traditional number-based analysis can miss. Institutional investors, primarily pension funds, are in the perfect position to drive long-term thinking around responsible investing to parallel their long-term investment horizon. Pension fund investing should not be about three-month, 12-month or even three-year returns; it should be about 10 to 20-year sustainable returns. It is becoming increasingly easy to argue, based on a significant volume of research, that sustainable long-term returns require the integration of ESG factors.

The issue of returns A common belief is that investing responsibly affects returns negatively. Yet every year, more and more international research demonstrates that responsible investing does not, in fact, result in lower returns. In reality, responsible investing is being proven to affect fund returns positively. Because it calls for a deeper analysis of

Prasheen Singh, Head of Investment Consulting, RisCura

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Sunél

veldtman

Meaning and money Have you ever wondered what secret ingredient causes life to hold great meaning for some, and so little for others?

T

here is a remarkable man who directs the morning traffic and parking at my son’s school. One morning, after attending the school for only a week, this man caught me by surprise, “Good morning Mrs Veldtman and how are you this morning, Mrs Veldtman? Have a good day, Mrs Veldtman!” He knew my name. He also knew my son’s name. He had made it his business to learn every parent and child’s name at the school. Here is a man who probably doesn’t have much in life. But he has something – his life has meaning. He regards his existence as valuable enough to enliven the parents and boys who walk past him in the morning. He is consistently cheerful and eager to help. In contrast, I meet many wealthy people who have everything, but no meaning. People who travel, own luxury homes and lead exciting lives. I often walk away from these meetings feeling utterly depressed. I search for elements of meaning in their lives, and feel disappointed when they do not recognise their ability to add value, to contribute and bring positive change. This is not an attack on the wealthy. I am merely observing that money does not translate into meaning. Have you ever wondered what secret ingredient causes life to hold great meaning for some, and so little for others? Does it have to do with regarding yourself as valuable enough to have an influence on others? Does it have to do with regarding others as valuable enough to want to influence their lives for the better? We cannot talk about meaning without referring to the work of Viktor Frankl, a holocaust survivor and great thinker. In his

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book, The Unheard Cry for Meaning, he writes:

investments, we create an environment for life without meaning.

“For too long we have been dreaming a dream from which we are now waking up: the dream that if we just improve the socioeconomic situation of people, everything will be okay, people will become happy. The truth is that as the struggle for survival has subsided, the question has emerged: survival for what? Ever more people today have the means to live, but no meaning to live for.”

As financial planners, we have the opportunity to talk to our clients about the meaning in their lives, in addition to their money. Writing bucket lists is not enough, not if the lists entail only more entertainment and adventure. We can help our clients develop an understanding of what will bring true meaning to their lives. We are positioned to ask the right questions, which lead them to think about the meaning their money brings. We also have the opportunity to simply be human to people who are often entertained only for their money.

In his autobiography, Frankl writes: “As early as 1929, I developed the concept of three groups of values, three possibilities to find meaning in life – up to the last moment, the last breath. These three possibilities are: “1) A deed we do, a work we create. 2) An experience, a human encounter and love. 3) W  hen confronted with an unchangeable fate (such as an incurable disease, an inoperable cancer), a change of attitudes. In such cases we still can wrest meaning from life by becoming witness of the most human of all human capacities: the ability to turn suffering into human triumph.” Frankl emphasises that finding meaning in life inevitably requires what he calls “self-transcendence”. The more one forgets oneself – by giving oneself to a cause, to serve another person, to love – the more human one is and the more actualised. You may very well ask what this has to do with finance. I think much. If we elevate money as the ultimate goal, we miss the point of being human. If our highest goal is to maximise earnings, savings and

If we are in financial planning for the money, will we look back at our careers with regret? Will we regret not stepping up to the opportunity to challenge people, to live meaningful lives? Will we regret not even showing up as human beings?

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


Events

ASISA

Regaining confidence in the financial services industry The ASISA 2013 Conference was held at the International Convention Centre Durban (ICC Durban) from 9 to 11 April 2013 and the key theme was, ‘Regaining confidence in the financial services industry’. Following the global economic crisis in 2008, there has been a high degree of distrust of the industry by members of the public and policymakers.

T

he ASISA event hosted close to 400 delegates from the industry, comprising a variety of senior executives from the industry’s top financial institutions, who also sit on ASISA’s executive board. These include members of National Treasury, the Financial Services Board, the Financial Planning Institute, the Financial Intermediaries Association of Southern Africa, the South African Reserve Bank, SASBO, as well as a variety of asset managers, financial planners and financial brokers and the media. The topics for discussion focused on significant issues such as costs; disclosure of information; access and transparency to products and services; innovation of new products and practice management; and the role that the financial services industry plays in building South Africa’s infrastructure, noting that stakeholders within the industry

must make a collective effort to coherently work towards the achievement of the National Development Plan for South Africa. Johan van Zyl, chairman of the Association for Savings and Investment South Africa (ASISA) and CEO of Sanlam, says that regulations alone would not restore confidence in the industry unless a sustainable environment conducive to doing business is guaranteed. Van Zyl referred to unnecessary barriers to doing business in South Africa, saying that the financial services industry in the country did not suffer the same catastrophes as its European and American counterparts, and that restoring confidence in the industry lies in the industry players working together towards a common goal. “As an industry, we recognise that in order to achieve our long-term goal of ensuring that our industry remains relevant and sustainable, we need to deliver solutions that are in line with the needs of our country, taking into consideration global and local developments and challenges.”

A further issue that arose at the conference was the need for greater education of the financial services industry. With the implementation of regulations like Treating Customers Fairly, FAIS and Retail Distribution Review (RDR), which are to the benefit of the industry and investors, the country’s financial sector is on track to

lead the way for sustainable practices and bolstering confidence in the industry. For example, RDR is aimed at allowing investors to know the cost for expert investment advice, to know what they are paying for (if this is independent or restricted advice), and aims to improve professional standards and best practice. Leon Campher, CEO of ASISA, says that ASISA members are constantly engaging with the FSB in implementing RDR. Van Zyl also said that ASISA is a committed partner to National Treasury and the Financial Services Board (FSB) in realising ‘a safer financial sector to serve South Africa better’, which is also the title of the National Treasury policy document released in 2011. A further issue that arose at the conference was the need for greater education of the financial services industry. The ASISA Foundation, which was approved in 2012, is focused on driving consumer financial literacy and consumer education initiatives on behalf of the savings and investment industry, together with the ASISA Consumer Education Standing Committee. The ED Fund has a specific focus on enterprise development and supplier development and is aimed at creating sustainable value for all stakeholders through the growth and development of small- and medium-sized enterprises (SME). The development of the SME sector was another key feature, where it was highlighted that the key to improving the country’s unemployment and poverty issues can be achieved through greater investment into the SME industry. While regaining the confidence of its stakeholders is a key priority, another is for ASISA and its members to support the national agenda of creating employment, reducing poverty and inequality. investsa

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Industry

news

Appointments

Novare Equity Partners, the private equity fund manager focused on investment in sub-Saharan Africa, has announced the appointment of Naledi Mongoato as an investment analyst. Mongoato is a qualified chartered accountant studying towards a master’s degree in financial and risk management at the University of Cape Town and previously worked at PricewaterhouseCoopers, Cliffe Dekker Hofmeyer and Basileus Capital. During this period, he gained valuable experience conducting statutory audits of blue chip companies. As an investment analyst, Mongoato will be responsible for conducting research into potential investment opportunities in sub-Saharan Africa.

Cape Town-based global asset manager Regarding Capital Management (RE:CM) has appointed Jan van Niekerk as CEO of the firm. Van Niekerk was previously group CEO of Peregrine Holdings Ltd, and he also served as executive chairman of wealth management company Citadel. Van Niekerk comes on board not only as CEO, but also as a significant shareholder in the business and investor in funds managed by the firm. He will be taking over the responsibility for the strategic management of the firm and will continue to implement the same value-based investment philosophy and process.

MET GLOBAL PROPERTY FUND EXCEEDS R1 BILLION MILESTONE Listed property investments, unlike most asset classes, are not tightly synchronised with market cycles, making globally diversified property investments an attractive option. The MET Global Property Fund has exploited these opportunities successfully, delivering a performance of 48 per cent over the past 12 months. In so doing, attracting investors’ interest and exceeding the R1 billion assets under management mark. The fund is managed by Greg Rawlins, chief executive officer of Reitway Global, a MET boutique investment management company specialising in global listed property investments. In the past nine years, Rawlins has focused on foreign listed

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property vehicles, where considerable knowledge was built up on matters such as withholding tax, fund raising and real estate investment trusts (REIT). An investment methodology was developed to exploit the unsynchronised nature of the REIT industry in terms of economic cycles, thereby providing greater sector choice and diversification opportunities. Rawlins says, “We are very pleased that we have been able to deliver great satisfaction to our investors. South African’s are, to a large extent, limited to the traditional retail, industrial and office property investment sectors when investing in this asset class. When investing in REITs offshore, however, there is greater flexibility in terms of economies and property investment sectors. The asset class has much to offer.”

Themba Gamedze has been appointed as chief executive of strategic projects at Sanlam. In this new role, Gamedze will manage the large number of strategic initiatives at group and business cluster levels as well as co-ordinate various business initiatives across the group. Apart from extensive experience in the financial services industry, Gamedze, an actuary by profession, is the president of the Actuarial Society of South Africa. He was also the founding president of the Association of South African Black Actuarial Professionals and serves on the boards and various committees of Santam, Sanlam Investment Management (SIM), Sanlam Emerging Markets (SEM) as well as the subsidiary boards of SEM in Botswana and Kenya.


INVESTEC ANNOUNCES APP FOR PRIVATE CLIENTS Investec has announced the launch of its mobile banking and trading tablet application. The iPad app’s provision of quick and easy access allows Investec private clients a way of managing their accounts while on the move. It offers a secure, real-time banking and trading platform, including a consolidated account dashboard where clients can view all the relevant information for their Investec private banking and global wealth and investment accounts. Clients with private bank accounts domiciled in South Africa will be able to view their balances and transactions, as well as make payments. Wealth and investment clients will be able to view their global portfolios, browse market data; and buy and sell JSE-listed equities. Lyndon Subroyen, CIO of Investec wealth and investment, who is also driving the digital programme for Investec, says this is the first in a series of developments that use digital innovation to make banking and investing easier for our private clients, especially for those who tend to be on the move. “This app consolidates the Investec private client businesses, allowing clients a clear view of their investments, as well as facilitating their transactions. We are proud of the work that has gone into launching the app and we already have a roadmap of further developments, including an app for Android tablets, smartphones as well as innovation in traditional online banking.” The app is available for free download from the Apple App Store (initally only in South Africa).

EFFICIENT MAKES INVESTING EASY Efficient Select Funds has announced the launch of its first-ever iPad application, designed for financial advisers and investors to access and navigate their complete range of investment products and information.

An added resource on the app is the Risk Profiler, which enables the user to quickly quantify their risk tolerance via the assessment questionnaire – a major consideration when investing. The app aims to provide investors with a deeper understanding of their investment products and strategies, as well as facilitate efficient ways for financial advisers to deliver information to their clients. An added resource on the app is the Risk Profiler, which enables the user to quickly quantify their risk tolerance via the assessment questionnaire – a major consideration when investing. Regular updates will enable users to remain current on fund information, data and statistics for risk-appropriate Efficient Select funds. The app also includes standardised performance updates, fund fact sheets, fund-specific information and presentations. Users are able to join the conversation on Twitter and Facebook.

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Products

Prescient launches China balanced fund

P

rescient Investment Management has announced the launch of the Prescient China Balanced Fund, which has been approved by the Financial Services Board (FSB) to be marketed to the retail market in South Africa. The fund launch comes after the investment manager was the first investment house in Africa to be awarded with a Qualified Institutional Investor (QFII) licence in 2012. In order to invest directly into Chinese markets, direct investments can only be made through a Qualified Institutional Investor (QFII) licence holder. Liang Du, the Prescient

PSG LAUNCHES NEW FUND PSG Asset Management has recently launched a new fund, the PSG Global Flexible Fund. This fund, a Guernsey domiciled, US Dollar-denominated fund has been launched while PSG Asset Management believes that investors, particularly South African investors, should be taking a very good look at the attractive valuations

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China Balanced Fund manager, said that Prescient Investment Management is the first African institution to be awarded a QFII Fund licence in 2012. “This allows us to invest directly on the Shanghai and Shenzhen stock exchanges in China, as well as access to the inter-bank market and use of the futures market.” The fund is a sub-fund of Prescient Global Funds plc, an open-ended umbrella fund with segregated liability between its funds and authorised by the Central Bank of Ireland as a UCITS fund pursuant to the UCITS Regulations. “Investors will have

access to the Prescient China Balanced Fund by subscribing to shares directly in Ireland through the utilisation of their offshore exchange control allowance, or by investing via the Rand-denominated Prescient China Feeder Fund in South Africa,” says Du. “We saw the opportunity to offer the South African investor access to the Chinese market through the fund, due to current investment prospects in the country based on a growth market at decade low valuations. This comes down to supportive long-term policies, encouraging short-term data and an ideal source of diversification,” Du concludes.

which are on offer in many developed markets. The PSG Global Flexible Fund has a similar investment strategy as its multi award-winning PSG Flexible Fund, albeit that the new fund invests predominantly outside South Africa, while the latter, wellestablished fund invests predominantly inside South Africa.

local counterparts. “South African investors will do well to look at opportunities to invest across the globe where valuations are compelling. The fund’s flexible asset allocation allows us to own lots of quality companies when they are cheap and to wait patiently in cash and other instruments until the opportunities present themselves.”

Henno Vermaak, portfolio adviser on the PSG Global Flexible Fund, says that offshore quality companies are very attractively priced when compared to their

The PSG Global Flexible Fund has been approved by the FSB for marketing in South Africa and a feeder fund will be available for people wanting to invest in Rand.


The

world

portugal, europe, africa, china, brazil, japan, greece, united states

DEEPER SPENDING CUTS PLANNED BY PORTUGUESE GOVERNMENT WARDS OFF SECOND BAILOUT

in Ghana, Guinea, Liberia, Nigeria and Sierra Leone should also continue to attract investment.

Following the constitutional court throwing out budget measures and in order to meet tough targets set by international lenders, Portugal’s prime minister announced plans for further cuts to health and education spending rather than raising taxes again. Lisbon has pledged to trim a budget shortfall of 6.4 per cent of gross domestic product in 2012 to 5.5 per cent this year in order to fulfil the terms of its £78billion bailout.”

China and Brazil sign $30 billion currency swap agreement

MORE TRANSPARENCY NEEDED TO CURB TAX EVASION IN EU

Qatar offers Egypt $3 billion lifeline

In an effort to ease bank-secrecy rules to fight the financial crisis, Luxemburg’s Finance Minister Luc Frieden told Germany’s Allgemeine Sonntagszeitung newspaper he wanted to strengthen co-operation with foreign tax authorities. Luxembourg is known for its highly secretive banking sector but its banks and other financial institutions have assets worth more than 20 times the country’s economic output. Luxembourg is in talks with the US about implementing the Foreign Account Tax Compliance Act, a US law that aims to prevent tax evasion in the country.

Qatar will aid Egypt’s ailing economy by buying into three billion Dollars of its bonds. According to Prime Minister Sheikh Hamad bin Jassim al-Thani, this much-needed financial lifeline extended by Qatar is in addition to an $18 billion investment deal, which will see the country supply Egypt with natural gas when needed.

Economic growth in Africa surpasses average global mark According to the World Bank, economic growth in Africa should marginally outpace the global average over the next three years, due to a significant rise in higher commodities, increasing investment opportunities and a general pick up in the world economy. This is said to boost the continent’s growth to more than five per cent, with the forecasting of foreign direct investment reaching record levels of $54 billion year by 2015. Mineral sectors

In order to ensure smooth bilateral trade, despite a struggling global economy, China and Brazil have agreed to a $30 billion currency swap deal. The agreement, signed during the BRICS summit in South Africa, is designed to safeguard both nations against future global financial crises.

Cyprus bailout valued at 10 million Euros by IMF Valued at 10 billion Euros, Cyprus’s bailout package will see GDP growth for the nation at -8.7 per cent year on year in 2013. This is predicted to improve to -3.9 per cent in 2015, 1.1 per cent in 2015 and 1.9 per cent in 2016. Cyprus’s Finance Minister Harris Georgiades and European Central Bank (ECB) boss Mario Draghi recently stated positive views on the economic results that the Cyprian bailout will have on its economy in the long run. PMI survey indicating Eurozone output still falling Output in the services and manufacturing sectors are continuing to fall in the Eurozone, according to Markit’s composite purchasing

managers’ index (PMI). The index revealed that the Eurozone remained at 46.5 per cent in April, unchanged from the month before with a reading below 50 posing a cause for concern. Chris Williamson, chief economist at Markit, said the contractions are being accompanied by a downturn in Germany and will slow down growth. US stimulus sends Japanese Yen lower Following the latest round of its Central Bank stimulus, the US Dollar recently surpassed the Japanese Yen, as the Yen dropped to its lowest level since 2008 against the Dollar. The Yen fell as low as 98.85 per cent, before rebounding slightly. “This has shaken people’s attitudes toward the Bank of Japan and the new government,” said Andrew Wilkinson, chief economic strategist at Miller Tabak and Co in New York. Cancelled merger plan causes Greek shares to plunge Following the cancellation of a planned merger between the National Bank of Greece and Eurobank, Greek shares fell almost 30 per cent. The merger was cancelled as the two banks would be too big to manage as one. The National Bank of Greece relayed its fears that a merged bank would be too dominant in the market and that recapitalisation would be a major issue in future. US economy creates only 88 000 jobs With official data showing a stable yet disappointing increase, the US managed to create only 88 000 jobs in March as opposed to the 200 000 jobs predicted by economists. The US job rate also declined to 7.6 per cent from 7.7 per cent. Paul Dales, an economist at Capital Economics, was dissatisfied stating that numbers below 100 000 are a concern.

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they

 said

They said “The number five has a special ring here in general. Our summit is taking place in Africa, with its rich nature and very diverse fauna. In Africa people talk about the Big Five – the five biggest animals on the African continent. BRICS is also made up of five countries, and as I just said, we make a very visible contribution to the global economy.” President of Russia, Vladimir Putin, commented while attending the 5th BRICS Summit in Durban. “The investment in broadband by the city and the provincial government will help to establish the Western Cape as a centre of business excellence and the Silicon Valley of Africa.” Fred Jacobs, president of Cape Chamber of Commerce, commented on the Western Cape being on track to establish itself as Africa’s Silicon Valley. “When it comes to life stage investing, investors have traditionally been advised to invest more heavily in bonds the closer they get to retirement.” JP du Plessis, fixed income portfolio manager at Prescient Investment Management, advises foreign investors to reconsider looking at bonds as a safe investment haven, instead they should be considering products such as protected equities if they have a low risk appetite. “So if the savings position of government does not improve, it will be left up to the private

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sector to save more and so private-sector spending [a pillar of SA’s growth] will be constrained.” Arthur Kamp, economist at Sanlam Investment Management, discussing the absence of a sufficiently large domestic savings base, which resulted in foreign investors funding a third of SA’s gross domestic investment last year. “The importance of BRICS for South Africa is best reflected in bilateral trade relations at a practical level. In 2012, South Africa’s total trade with the BRICS countries stood at R294 billion, which is 11 per cent higher than the 2011 figure of R264 billion.” President Jacob Zuma, commented on the eve of the fifth BRICS summit. “Unresolved labour disputes in the mining sector pose a significant risk to the exchange rate and to economic growth through their negative impact on export revenues, employment growth and investor perceptions of SA.” Gill Marcus, governor of Reserve Bank, on the Reserve Bank’s reluctance to raise interest rates in an environment where difficult labour relations threaten SA’s fragile economic recovery. “Though North American oil and gas production has posted impressive volume growth and attracted substantial investment, value creation has been more elusive.” Robin West, chairman of PFC Energy,

commenting on a report that revealed global energy consumption is expected to increase by approximately 36 per cent by 2030. “There is now a shortage of quality assets for sale in the investment market, as property funds hold on to prime assets.” Ndibu Motaung, head of research at Jones Lang LaSalle (SA), a global real estate services firm specialising in commercial property management, commented on the aggressive efforts of pension fund managers and institutions to increase their exposure to prime retail, office and industrial buildings. “With contrasting national cultures and personalities putting greater strain on relations between BRICS partners than within the more homogenous European Union, SA can help deliver a coherent BRICS trade and investment plan.” Dr Alexei Vasiliev, director of the African Studies Institute (ASI) at the Russian Academy of Sciences, remarked that although SA may be the youngest BRICS sibling, its diplomatic skills are prized and must be put to good use within the BRICS family and beyond. “If there is reduced development or investment in China, it will have a strong impact on our economy.” Gerhard Kuhn, Industrial Development Corporation, commented on the report that China dominated South Africa’s non-gold exports, with R60 billion worth of mineral sales to the country last year.


you

said

u o Y id sa ets e w t st e t b s a e l h f t er the o e som you ov f o tion ned by eeks. c e l A se mentio four w as @LMariB: “Bet gold bears saying “Told you so!” today. But with 3 big gold negative reports last week, it might be a bit of a selffulfilling prophecy.” Mari Blumenthal – General economics and markets reporter @Sake24. Loves fiction, fashion and finance and writes about most things that includes index in the title. Johannesburg @MyJSE: “Communication is the life blood of capital markets” – Professor Mervyn King speaking at the JSE.” Jhb Stock Exchange – The JSE is the market of choice for local and international investors. Follow us for market information and get to know the JSE. Johannesburg, South Africa. @angelo27: “Excellent & how will it be paid back, in diamonds?” ->RT @busrep: SA will provide Zimbabwe with $100m, says Biti Angelo Coppola – Freelance TV business correspondent, blogger, financial journalist and runner. I mean and support everything I tweet and RT. Johannesburg, South Africa. @rudibest: “Sometimes you wonder how invested some of the commentators, pundits &

analysts are... if at all?” BesterInvestor – Blogging about stocks, life, investment, retirement, debt, pensions and occasionally common sense financial information. United States of America. @gillian_findlay: “@mayaonmoney Women live longer than men so need greater retirement capital. What other factors affect women’s need for assets? #FinLitSummit” Gillian Findlay – Economist, data scientist, communicator and fascinated by the world around us. Johannesburg. @brucebusiness: “JSE down 627 points. About R108bn wiped off the value of investments. That’s 1/10th of SA’s annual budget - in one day. Gone. #justsaying.” Bruce Whitfield – On the beach. Johannesburg. @chrislbecker: “Gold at $1365 this am, down $200 in two days. This is a huge gift to longterm gold bulls. Fundamentals for gold are stronger than ever.” Chris Becker – Economist. Libertarian. Strategist. Market strategist at http://

etmanalytics.com. Founder of Mises Institute South Africa. Johannesburg @commodityirl: “Know what you own, and know why you own it.” - Peter Lynch Peter Whelan – Commodities and equities specialist, published writer, technical analyst, strategist, motivational speaker, economics. Interests: sport, travel and politics. Kilkenny, Ireland. @manualofideas: “Value Perspective: Theme parked - Investors may love themes but no portfolio should be a one-way bet.” The Manual of Ideas – Great ideas are the lifeblood of investing and the focus of The Manual of Ideas. New York, London, Zurich @rubicon59: “What are ‘risk assets’? Aren’t all assets ‘risk’?” rubicon59 – Undervalued. Underfollowed. Looking for low-bars to step over. @MarkMobius: “Following preconceived ideas, or the crowd, can be to our detriment as investors.” Mark Mobius – Investment adventures in emerging markets

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And now for something

completely different

Combing through celebrity hair investments and its profitable prospects

T

o some people, owning memorabilia of a favourite celebrity, in whatever shape or form, may seem a simple keepsake and its prospects as an investment are often overlooked. A less popular, but very personal type of celebrity memorabilia collecting comes in the form of human hair. Some collectors spend large sums of money to own and add a few famous locks to their collection. Fans the world over are now able to own a piece of their favourite celebrity and can expect rewarding returns if they are fortunate to come across such a find.

Ernesto Che Guevara – $119 500 The most expensive lock of hair to ever be sold belonged to Cuban revolutionary, Che Guevara. The eightcentimetre strand of hair was taken by a former CIA agent who oversaw Guevara’s burial shortly after he was shot dead in Bolivia in 1967. The hair was taken together with fingerprints and photographs of the dead revolutionary’s corpse as proof that the mission was complete. Guevara’s hair was sold to Texas book shop owner, Bill Butler, in 2007 for $119 500 by Heritage Auction Galleries.

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Hair collecting became very popular during the Victorian era when it was not uncommon for public figures to hand over locks of their hair instead of an autograph. Historians believe that this exchange was a sign of affection, more so than an autograph. In fact, through the collection of famous figures’ hair samples, historians have been able to determine that Thomas Jefferson fathered a child with one of his slaves, and that Beethoven suffered from lead poisoning. Many Victorian-era hair collections appear on auction today, alongside more modern

samples. One particular example is that of pop-sensation, Justin Bieber. Hair from the singer’s trademarked comb-over fringe was sold per strand after he cut it to donate the proceeds to various charities. There are many collectors who focus particularly on celebrity hair, but usually the hair is collected as part of a larger film or music memorabilia collection. With an increased demand for famous hair by the growing number of collectors worldwide, the value of these sought-after celebrity locks is on the rise. Here are a few hair-raising examples of how lucrative they actually are as an investment.

Elvis Presley – $115 120

John Lennon – $48 000

The hair of Elvis Presley, the King of rock and roll, takes its place as the second most expensive celebrity hair sample to ever go on sale. Elvis Presley’s hair was sold by his personal barber, Homer Gilleland, in November 2002 for $115 120 to an anonymous buyer. The portion of hair is approximately eight centimetres in length and was sold with letters of authenticity detailing its history by Elvis memorabilia and hair-collecting specialists. This was not the only example of Elvis’s hair sold; in 2009, a single strand of hair was sold for $1 750 at an auction in Britain.

The memorabilia of deceased Beatles member, John Lennon, never fails to rake in large amounts of money. It was nothing different when a piece of Lennon’s head of hair was sold for $48 000 to an unnamed buyer as part of an auction by Gorringes in 2007. The lock was given to Betty Glasgow, the band’s hairdresser, as a gift together with an autographed copy of Lennon’s book, A Spaniard in the Works. Not only was Glasgow fortunate to get to know the band on a personal level and can still recall the band’s distinct hair regimes, but she was fortunate to take ownership of various items of memorabilia from the band members.


10762/E

Which unit trust has outperformed inflation by over 5% p.a. for the last 10 years? SIM Inflation Plus Fund: 12.02% Consumer Price Index (CPI): 5.90%*

The SIM Inflation Plus Fund has met investors’ needs by consistently outperforming inflation. For more information, call your financial adviser, visit www.sanlamunittrusts.co.za or call us on 0860 100 266. Sanlam Investment Management. As ambitious as you are.

www.sanlamunittrusts.co.za LICENSED FINANCIAL SERVICES PROVIDER

*Inflation is represented by the annual increase in the Consumer Price Index (CPI). Source: MoneyMate. Annualised return from 31 March 2003 to 31 March 2013. Collective Investment Schemes (CIS) 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. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the manager. Commissions and incentives may be paid and, if so, would be included in the overall costs. Forward pricing is used. Based on a lump sum investment calculated on a NAV to NAV basis with income reinvested. Member of ASISA.


OM4624/INV/E

Of course you don’t want to read this, it might make you rich when you’re older. Yes, it’s completely true. Reading this could make you rich when you’re older. But first, we have to get past that age-old obstacle. Procrastination! For reasons we can never figure out, people still find it extremely difficult to put a plan in place that sorts out their future financial needs. Feeling guilty? Then yes, we’re talking to you too. No matter what your reasons are for not getting round to it, the fact is, the sooner you start, the easier it gets. The good news is it couldn’t be simpler. It’s called the Classic Five Investment Collection from Old Mutual. Five hand-picked unit trusts that will deliver returns you never dreamed possible in years to come. Even setting aside a small amount now can mean a big payout thanks to the power of compounding over time. And if you’re feeling commitment pangs, don’t! • Unit trusts do not lock you in. • You can get access to your money in one day - without penalties. • You can miss monthly payments. Also, no penalties. • No up front admin fees, so your money works from day one. Congratulations. If you’ve read this far, then you’re well on your way to bucking the trend and taking control of your future wellbeing.

1. Contact your Old Mutual Financial Adviser or your Broker

Classic 5 INVESTMENT COLLECTION 1

2

3

4

5

Old Mutual Enhanced Income Fund

Old Mutual Stable Growth Fund

Old Mutual Balanced Fund

Old Mutual Flexible Fund

Old Mutual Top Companies Fund

2. Call 0860 INVEST (468378) 3. Visit investmentcollection.co.za

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


Invetsa june 2013  
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