Page 1

NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 2 C

M

Y

CM

MY

CY CMY

K

FourthQuarter Newsletter 2011

unit trusts | offshore | retirement funds

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 3 C

M

Y

CM

MY

CY CMY

K

Features A letter from Nic

3

Uncertain times require a focus on the basics

4

The Nedgroup Investments Managed Fund -- well-suited to living annuitants

6

The role of money market funds in a world where instability is the new norm

8

Preference share market overview

9

Japanese addition to the Nedgroup Investments Global Equity Fund holdings

11

Understanding more of (un)employment

12

Our investment approach We help you find Best of BreedTM fund managers and the right investment solution When you invest, you want the most appropriate fund manager to look after your savings. We assist you in this process by actively researching and appointing fund managers to manage our fund range. Our independence is our strength Our fund manager research process helps us to identify managers with specific traits that we believe will enable them to deliver superior results over the long term. We focus on monitoring fund managers so that you don't have to Things do change. To help you manage this, and to ensure that our range remains Best of BreedTM, we actively monitor and review the appointed fund managers. If we think it is necessary, we will replace specific fund managers that are no longer deemed appropriate.

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 4 C

M

Y

CM

MY

CY CMY

K

Nic Andrew

Head of Nedgroup Investments

Dear valued investor You may have seen or heard our advertising campaign we have been running on TV, radio, magazines and at the airports over the last year. The essence of our brand message talks about how strong our emotions are and how natural it is for us to be impacted by them in all spheres of life. It then highlights that when it comes to investing, how damaging falling prey to our emotions can be. We believe managing one’s emotions is one of the eternal “investment truths” and is as relevant as ever in the current environment. It is not surprising that many investors are both nervous and confused. They face a barrage of negative news headlines, enormously complex macro-economic issues, extreme market volatility and often contradictory comments from the experts. Amidst all the uncertainty, we hope this newsletter provides some assistance and clarity. Or, at the very least, awareness that one’s actions are being impacted by one’s emotions is a good start. When we select Best of BreedTM managers to manage your monies one of the things we look at carefully is their long-term performance track record and particularly how they react and have performed in times of market stress. Our research has shown that managers who have well-thought strategies and the discipline to stick to them in tough times are greatly rewarded in the long-term. In this newsletter, we cover a broad range of issues that investors have to deal with. One of the most challenging issues retired investors face is trying to determine how much of their money they can withdraw each year without running out of money. This is a complex issue and we have tried to highlight the key factors one should consider in the Nedgroup Investments Managed Fund article. A staggering figure of R470 billion is currently lying in ‘lazy’ balance sheets of firms who remain hesitant to invest in the current economic climate. We introduce our Cash Solutions proposition and focus on money market funds which have continued to prove their resilience to the unstable environment and deliver steady returns. Lower interest rates have also had a dramatic impact on investor’s in low-risk vehicles that have traditionally relied on interest for a regular income. We consider two of the options conservative investors have, namely money-market unit trusts or for those looking for a greater after-tax return, investment in preference shares. The Nedgroup Investments Global Equity Fund has added a Japanese medical devices company to its holding and this stock now makes up 3% of the Fund. Read about this addition on page eleven of this issue. Lastly, our guest column this quarter features political and economic analyst, JP Landman, who shares with us the impact of financial market volatility on the South African Labour market. Once again thank you very much for your support. We will continue to be single-minded in our efforts to help you achieve your investment goals. Regards,

3

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 5 C

M

Y

CM

MY

CY CMY

K

Uncertain times require a focus on the basics

Nic Andrew

Head of Nedgroup Investments

Negative news headlines, complex macro-economic issues, extreme market volatility and often contradictory comments from the experts, it’s not surprising that many investors can be both nervous and confused. There are an almost overwhelming number of factors influencing the market. These range from the US fiscal deficit and bungled dealing of managing the debt ceiling by Washington, to S&P downgrading US government debt (the “ultimate” risk free asset for so long), to Greece’s expected default, the knock-on effect on the rest of Europe and the impact that would have on confidence and longer-term economic growth. The combination of factors and their inter-connectedness aggravate the situation and further muddy the outlook. Although experts normally differ in their opinion (as that is what creates a market), one has rarely seen such extreme and often opposite views as are being currently expressed. An example of this is the inflation debate where there seem to be very compelling arguments for both deflation (slow growth, unemployment, excess capacity and austerity measures) and inflation (loose monetary policy, excessive stimulation and higher food and commodity prices). Amidst all the uncertainty what should we investors do? Focus on the long-term It is near impossible to predict short-term market movement and it is easy to be unsettled by extreme volatility. There are significant advantages and opportunities to astute and patient investors who are able to look through the short-term noise and to retain focus on their long-term goals and overall plan. When assessing performance of one’s investment, we recommend measuring equity investments (high growth objective) over rolling seven year periods, balanced investments (medium growth objective) over rolling five year periods and lower risk investments (capital preservation objective) over rolling three-year periods. Diversify There are few free lunches in investing and diversification is one of them. At times like this when the range of potential outcomes is so wide, it makes sense that to diversify one’s portfolio by investing amongst assets that are not highly correlated. For the South African investor this includes having a reasonable offshore allocation. Our asset allocation solutions such as the Managed, Stable, and Flexible Income funds take advantage of their wide mandates to ensure they are well diversified. Similarly if one appoints a number of different managers, it makes sense to appoint managers who are different which in itself provides diversification benefits.

4

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 6 C

M

Y

CM

MY

CY CMY

K

Focus on valuation and quality Many studies have shown that the price one pays for an asset is the most important determinant of your end result. The most successful investors are able to ignore short-term market turmoil and momentum and identify opportunities where assets are driven below their fundamental value. A focus on value provides an important anchor that helps prevent panic selling of existing holdings which may be driven below their fair valuation and provides the conviction to invest when all are selling. Another characteristic of market declines is that indiscriminate selling often means little distinction is made for individual company characteristics. The result is that high quality companies (which normally and rationally trade at premiums) are sold down with the market to very attractive levels. Purchasing these high quality companies at attractive prices has typically proved to result in very satisfactory investment outcomes. Currently, where mandates allow our managers have found some excellent opportunities of purchasing high quality global companies at very attractive valuations. Awareness of the danger of emotions It is completely natural for investors to feel the emotions of fear and panic. Investors are well served to be aware of the dangers of reacting emotionally and put in place the structures and framework to manage their natural reactions. A good understanding of the principles outlined in this article should assist in developing and sticking to that framework. Many of the best investment managers are well aware that they too are at risk of behaving emotionally and apply disciplined processes to ensure that they stick to their well thought out plans and philosophies. Manager selection is important There are a number of principles we look at when selecting investment managers to manage our clients monies. We assess a managerÂ’s performance over the full market cycle, as we are well aware that no manager will consistently outperform over short periods. Our research suggests that top managers have historically produced the bulk of their outperformance (up to 80%) in poor market conditions. Most of Nedgroup InvestmentÂ’s Best of BreedTM managers have exceptional long-term records and much of this outperformance has come as a result of their specific focus on protecting clients capital. Expectation management of returns and volatility Few commentators would deny that the issues facing the global economy are material and that the environment is significantly less benign than it was for much of the latter part of the twentieth century. Many of the previous tailwinds such as long-time leveraging, political stability and capital market friendly legislation have now turned into headwinds. For South African investors the experience of the last decade has been above average returns the average general equity fund has produced about 17% per annum and those investors fortunate enough to be in top performing funds such as the Nedgroup Investors Rainmaker fund have enjoyed returns of almost 22% per annum for ten years. Investors should prepare and expect lower returns than the last decade, and in all likelihood with continued high levels of volatility. Understand the risk of not taking risk Despite the expectation of lower returns going forward, this does not mean that investors should not take risk. With interest rates (both nominal and real) at low rates, investing too much of oneÂ’s portfolio in cash seriously increases the shortfall risk or risk of running out of money. Our longer term expectations are still that quality growth assets (such as well-run companies, with high returns on capital, strong barriers to entry and high cash generation) purchased at current levels will reward patient investors. Investors undoubtedly face challenging circumstances. Applying these principles should assist them in navigating the choppy waters and ultimately achieving their investment goals.

5

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 7 C

M

Y

CM

MY

CY CMY

K

The Nedgroup Investments Managed Fund -- well-suited to living annuitants Anil Jugmohan

Investment Analyst, CFA, Nedgroup Investments

Retired people are often the ones most impacted by a fall in the equity market. The primary reason for this is that they have reached the stage where they are dependent on their savings to meet their day to day needs. Retirees are no longer adding to their nest eggs, but rather taking away. Living annuitants, in particular, are highly dependent on the return that they generate on their capital base. When markets fall, living annuitants are required to withdraw from their capital at depressed prices, effectively locking in some of their losses at lower values. This, unfortunately, can increase the likelihood that they run out of money. The table below highlights, using realistic assumptions for market returns and costs, the likelihood that a male (retiring at age 65) will not run out of money in retirement. Different asset allocation scenarios and withdrawal rate assumptions provide different outcomes. Note that withdrawals are increased by the rate of inflation every year in order to maintain the retireeÂ’s lifestyle.

Probability of not running out of money (%), Males (after costs) Asset allocation

25% Equity

50% Equity

75% Equity

2.5%

99

99

99

4%

93

96

95

6%

68

76

80

8%

47

54

61

10%

35

39

45

Withdrawal rate

Source: Nedgroup Investments

For example, a male requiring 6% of his initial capital, increasing by inflation, with 50% of his savings invested in equity, will have a 76% chance of not running out of money. It is crucial that retirees take note of the implications of drawing more than they can afford. The results indicate that most strategies can comfortably accommodate a withdrawal rate of up to 4% p.a. and that at 6% p.a. a higher equity allocation improves oneÂ’s odds to an acceptable level. Current regulation precludes investors from allocating more than 75% of their annuity value to equities. For those retirees requiring withdrawals of 8% or more, there is little certainty (especially for females who tend to live longer in retirement), even at maximum equity allocations. With increased market volatility and lower returns potentially the order of the day, achieving the multiple objectives of producing inflationbeating returns, protecting capital and supporting monthly withdrawals may well be more difficult going forward. An important factor that can help increase the odds of not running out of money is by investing in a fund that has lower (especially downside) volatility than funds with similar objectives. The chart below shows a simulated version of the scenario where a client invests R1,000,000 into a fund that provides an average return of 12% per annum over 20 years with a volatility of 17.5% compared to a fund that produces the same average return but with a lower volatility of 12.5%. In both instances the annuitant is drawing 6% of initial capital, increasing annually by the rate of inflation.

6

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 8 C

M

Y

CM

MY

CY CMY

K

It is clear from the chart on the left that if an investor can achieve the same portfolio returns at a lower level of risk when drawing down funds from his investment, he will be better off. In fact, by reducing volatility from 17.5% to 12.5% p.a., the investor is potentially able to support a 2% p.a. higher withdrawal rate! There are two ways to achieve lower volatility; the first is by ensuring that you are invested in a welldiversified fund. As an example, a typical balanced fund that is able to invest 25% of its assets offshore would historically have had a volatility 2.5% lower than a fund that was limited to domestic assets only - and this decrease in volatility would not have been at the expense of return. Secondly, by investing with a manager whose philosophy distinctly places a high emphasis on capital preservation, volatility can be even further reduced.

The disadvantage of high volatility 3 000 000 2 500 000

Outperformance = 56% = 2.2%p.a.

2 000 000

At Nedgroup Investments our manager selection process is structured to identify those managers whose process is valuation-based and therefore tend to display lower volatility and superior capital protection characteristics than the average fund manager in times of market turmoil. This is nicely illustrated by the Nedgroup Investments Managed Fund, a balanced fund that can hold up to 75% in equities and 25% offshore. The fund is managed by RE.CM, an investment manager that has consistently displayed greater than average downside protection and lower volatility than the average manager of balanced funds; in fact, over the past three years the Nedgroup Investments Managed Fund has had a 2.5% lower volatility than the average of the five largest single manager balanced funds.

1 500 000 1 000 000 500 000 0

Low Volatility Fund

High Volatility Fund

Source: Nedgroup Investments

The drawdown analysis on the left shows the fund (and fund manager’s) performance during periods of market weakness over the past 13 years. This chart enables us to focus purely on the periods during which performance has been negative, and ignores all of the ‘good’ periods. It is for this reason that all the spikes point downwards, indicating the severity of the fall in value during each market event. The chart highlights that the fund has consistently protected capital for clients better than funds with similar objectives, with the largest drawdown being in the region of 10% compared to the average fund’s maximum drawdown of 30%. This fund, with its low volatility and top quartile returns is therefore very well suited to the needs of living annuitants.

0%

-5%

Drawdown

-10%

-15%

-20%

-25%

-30%

-35% May-97

May-99

May-01

May-03

Nedgroup Inv Managed & RE . CM Source: Nedgroup Investments, Morningstar

May-05

May-07

May-09

Average Balanced Fund

May-11

To summarise, withdrawing a lesser amount each year and also having a higher equity allocation will usually result in better outcomes. Of course, having this higher equity weighting also comes with the increasing need for the investor to have the ability to tolerate periods of extreme market volatility. As such, a product like the Nedgroup Investments Managed Fund, which can give investors the benefit of a higher allocation to equities while still protecting on the downside makes it a great alternative to other balanced funds, particularly for those clients with high income requirements.

7

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 9 C

M

Y

CM

MY

CY CMY

K

The role of money market funds in a world where instability is the new norm The recent volatility in financial markets has caused investors to question whether the potential returns they can achieve compensate them for the risk they are taking on and the answer in many cases has been ‘no’.

Sean Segar

Cash Solutions, Nedgroup Investments

Looking at South Africa over the 50 years to December 2010, cash has delivered a steady return at 10.7% per annum (2.1% per annum above inflation). This represents 61% of the returns generated by equities but at 1/15th of the risk. This 50-year period includes many phases and cycles; some of which favoured cash, but one cannot deny the merits of cash as a sound risk adjusted investment asset class. As warren Buffett said: “Holding cash is uncomfortable, but not as uncomfortable as doing something stupid!” In economic periods like the one we find ourselves in today this advice should be heeded and money market funds are the ideal vehicles through which to invest in or to park cash. Money market funds are a relatively new investment phenomenon having been first introduced in the USA in the 1970’s. This concept of pooling investor cash for higher yield and constant net asset value was exported to Europe in the 1980’s and the first money market fund was launched in South Africa in 1997. Already, R270 billion has found its way into these funds. The proposition of money market funds is simple: these funds invest in cash and high quality short- dated money market instruments. Investors have immediate access to their funds, similar to the accessibility of a call account, but they achieve better yields than call. The higher interest rates are a result of the fund manager investing in longer-dated fixed income instruments, but still retaining some liquidity in the fund to fund investor withdrawals. The money market fund is managed by professional investment managers who typically do a better job than investors who try to manage their own assets. Through a money market fund investors also achieve exposure to a spread of underlying money market assets and this diversification of duration, and credit, makes the fund a far better proposition than a deposit in a single instrument with a single bank. Fees in this space are very low. However, before investing in a money market fund, investors should ask themselves the following questions: Is it preferable to invest with one bank or to earn the same yield by having exposure to many banks and rated issuers of money market investments? Is it better to invest in “locked up” fixed term deposits, or to earn the same yield with immediate access to your funds?

8

Fourth Quarter

Composite

The answer in both cases above is the latter clearly illustrating the key proposition of money market funds. So money market funds can be used by a multitude of investors, as an investment asset class or as a building block in a portfolio. We like to say investments into money market funds can be ‘R1 to R1 billion and for 1 day or forever’. But it is not just investors who can make use of money market investment product. South Africa’s corporates have notoriously lazy balance sheets. Money market funds are increasingly being used by cash flush companies and high net worth individuals, to improve income returns without compromising on liquidity and risk, and to put their cash to work and reduce cash drag. Cash type investments not only comprise a significant portion of the investment universe, but they have proven to be a credible, risk adjusted, positive return investment asset class. The money market fund proposition remains very compelling and hence their increasing popularity as this proposition becomes more widely understood. Nedgroup Investments offers one of the more successful money market funds with top quartile returns over ten years. This consistent performance has been achieved with Taquanta as the best of breed investment manager since the fund’s inception in 2000. Taquanta’s track record extends beyond just generating above market yields, but the August 2011 RisCura survey shows that they run lower risk that 20 of the 22 fund managers surveyed over three years. This is a function of a clear investment philosophy, a robust process, and a team that has been together for over a decade. It also reaffirms their appointment as the Best of BreedTM manager. The role money market funds have for retirement funds, individual investors and corporates differs, and the level of investment into such funds varies depending on the economic environment and investor circumstances. Money market funds are here to stay and Nedgroup Investments will be paying more attention to this space in order meet the needs of our clients. The saying “keep your powder dry” alludes to gunpowder which soldiers had to keep dry in order to be ready to fight when required, but today means saving ones resources until they are needed. Investors particularly have adopted this expression which is increasingly bandied about in today’s turbulent markets. Fortunately there is an asset class that ploughs on regardless: money markets!


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 10 C

M

Y

CM

MY

CY CMY

K

Preference share market overview

Peter Wille

Investment Analyst, Nedgroup Investments

Preference shares have being topical of late, with all the proposed regulatory changes and poor performance recently. In this article, we would like to share our views on this asset class. The SA preference share market had disappointing returns over the last 12 months, with a total return of only 0.2%. We would like to provide some insight into the recent returns. The returns should be seen in the context of the previous yearÂ’s performance when the preference share market returned 18%. It was to be expected that more normalised returns of high single digits would likely follow such a strong year. However, the return of close to zero over the last year was lower than expected. The positive take-away from this, is that the starting point for the next year is attractive in our view, and we expect reasonable returns for the year ahead as a result. The graph below depicts the bank preference shares, which constitute 65% of the index, traded around 72% of prime one year ago. A level we believe to be fair, not cheap but neither expensive. Since then, they have de-rated and currently trade around 78% of prime. The return over the last year can be divided between a 7% return from dividends (yield) and a capital decline of around 7% (so-called de-rating). Hence, it is clear from a historical perspective that the valuations of preference shares are currently attractive.

BanksÂ’ percentage of prime trading range over last 10 years 90.0%

Attractive

85.0% 80.0% 75.0%

Fairly valued

70.0% 65.0%

Expensive

60.0% 55.0%

Apr-11

Aug-11

Dec-10

Apr-10

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Apr-06

Aug-06

Dec-05

Apr-05

Aug-05

Dec-04

Apr-04

Aug-04

Dec-03

Apr-03

Aug-03

Dec-02

50.0%

9

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 11 C

M

Y

CM

MY

CY CMY

K

So what is a fair level for preference shares to trade at? Looking at the implied risk premiums is a useful guide. This measure essentially compares the dividend yield on preference shares to after tax money market returns. This is, in essence, the additional reward investors receive for taking on the risks associated with investing in preference shares. Equity (normal shares) risk premiums are generally around 5%, so a 3.5% to 4% risk premium is attractive for preference shares, since this asset class has substantially less risk than equities. Based on this, preference shares offer reasonable value. The historic range illustrated below has been between 2% and 7%, and mirrors the chart on the left.

Implied risk premium of bank preference shares 7.50 6.50 5.50 4.50 3.50 2.50 1.50

The clampdown by SARS on dividend funds intensified over the last year and it appears that some dividend funds may have to close down as a result. It should be noted that JSE-listed preference shares are not targeted by SARS. The effect of SARSÂ’s clampdown on the unlisted preference share market could be increased flows towards JSE listed preference shares, as investors seek sustainable dividend yielding assets. If this turns out to be the case, then some capital appreciation of JSE-listed preference shares is possible. The pending dividend withholding tax has created additional uncertainty for this asset class. We believe that the new tax will not have an impact on the total return that preference share investors earn. Most of the JSE-listed preference share issuers have confirmed that they will increase the percentage of prime that their issued preference shares pay, in order to make up for the negative impact of the new withholding tax. The effect of this will be that investors will be in the same position after receiving a higher coupon, but paying the new withholding tax. We believe preference shares, as an asset class, are attractively valued and expect reasonable returns for the year ahead.

10

Fourth Quarter

Composite

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Dec-07

Apr-07

Aug-07

Dec-06

Apr-06

Aug-06

Dec-05

Apr-05

Aug-05

Dec-04

Apr-04

Aug-04

Dec-03

Apr-03

Aug-03

Dec-02

0.50


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 12 C

M

Y

CM

MY

CY CMY

K

Japanese addition to the Nedgroup Investments Global Equity Fund holdings Andy Headley

Veritas Asset Management, Nedgroup Investments Global Equity Fund

Markets have continued to remain volatile and ‘flip flop’ between optimism and pessimism. The third quarter experienced a fairly large dose of pessimism which had the effect of taking the return from global equities from being moderately positive at the half year stage to being quite markedly negative at by the end of the third quarter. Against this backdrop, our ‘dependable compounders’ theme remains as pertinent as ever. With so much uncertainty on the political, policy and economic fronts, companies that can dependably grow their revenues, earnings and cash flows even in a subdued economic environment and are available at attractive valuations will deliver excellent performance over our investment horizon of five years. Adding Terumo to our fund holdings One such position that we have bought this year is the Japanese medical devices company, Terumo. This stock now makes up nearly 3% of the Nedgroup Investments Global Equity Fund. Terumo has three key divisions, Catheter and CV Systems (44% of sales), General Hospital Products (36%) and Blood Management (18%). While we anticipate only modest (but dependable) growth from the company’s hospital products business, we are excited about prospects for both the blood management and the catheter and CV systems division. In the blood business, Terumo’s leading positions in disposable equipment for blood transfusions and the company’s strong position in Asia has been enhanced by the acquisition of the US company Caridian BCT. Caridian has leading positions in automated equipment for blood collection / processing and strong market positions in the US and Europe. While we are usually highly sceptical of ‘synergies’ from acquisitions, in this instance the two company’s complementary geographic and product portfolios should lead to strong revenue growth. In its largest revenue segment, catheter and CV systems, Terumo is a premium, niche player with a reputation for high quality and well-engineered products for interventional cardiologists. With a limited US presence currently, the company should gain substantial share in the next five years as the leader in transradial coronary intervention (TRA) which is rapidly gaining acceptance in the US. TRA is a minimally invasive procedure to gain access to the heart and proximate blood vessels. A key advantage of TRA intervention (compared to the current standard, transfemoral intervention) is that patients do not need to stay in hospital overnight and the procedure is more comfortable with fewer complications. Payers have now realised the advantages of the transradial procedures and more cardiologists are training in the technique. Despite good growth prospects in much of its business, we were able to invest in Terumo at an attractive valuation. The free cash flow yield at purchase was approximately 6% (March 2012 estimate) and we anticipate that this cash flow will grow at almost 15% annually for the next four years. At entry we anticipate just over a 15% annual return on our investment from what we consider to be a well-managed ’dependable compounder’.

11

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 13 C

M

Y

CM

MY

CY CMY

K

Understanding more of (un)employment

JP Landman

Political and Economic Analyst, (Consultant)

In the midst of all the turmoil and volatility on the financial markets, September 2011 was quite a seminal month for the SA labour market. A ground-breaking wage agreement was struck in the Clothing & Textile Industry, and two important reports were published that enhance our understanding of the labour market. Theory at last meeting practice Lower entry-level wages for new workers have been agreed between employers and unions in the clothing industry. In urban areas new workers can be paid 30% less than the agreed minimum wage, and in the rural areas 20% less. A “new worker” is somebody who has not worked in the industry before or has not worked in it for three years. The idea is to help new people into the industry, not to replace current workers with new ones at lower wages. In exchange employers must create 5000 new job opportunities by 2014. Should those jobs not materialise, the 30% and 20% ‘discount’ falls away and wages will revert to minimum levels. If the deal works and the extra jobs are created it will be a powerful argument in favour of lower wages for first-time workers. (Of course, if the Rand retains its recent depreciation, foreign competition may very well be less severe and it will be easier to create the 5 000 jobs and the reverse is that a headwind will be created if the dollar goes and the Rand gets stronger again!) The agreement will fall apart if employers (ab)use it to retrench older, more experienced workers earning higher wages to employ younger, cheaper ones. This agreement does not affect the position of well-publicised factories in Newcastle in KZN and Botshabelo in the Free State who have not been paying minimum wages and have threatened to close down if they do not get a reprieve from current minimum wages. They still have to pay the prescribed minimum wages by February 2012. So what? This agreement has political significance. The SA Clothing and Textile Workers Union is a Cosatu union. As such, their acceptance of this deal undercuts Cosatu’s virulent opposition to Government’s proposed youth-wage subsidy, now winding its way through the Parliamentary and Nedlac processes. That wage subsidy is now another step closer to reality. The agreement will bolster the confidence of other employers to negotiate similar deals in other industries. As we pointed out in earlier missives, employers form 50% of negotiated agreements, and they can thus influence what they get out of agreements. Bargaining is not a one-way (union) street. This agreement proves that. It also proves a point we made in August: the industrial relations system in SA is deeply embedded in our political DNA; it is part of our political psyche. It is not going to change quickly or radically. Tweaking it, yes; making changes as problems arise, yes; a holus bolus change, no. Jobs and Growth The regular Quarterly Employment Statistics was published in September. It reveals that the number of people employed in the formal, non-agricultural labour market of SA increased by 2% between June 2010 and June 2011. That equates to an increase of 164 000 in formal jobs. However, this is for the formal labour market only. The informal labour market forms about 30% of the whole labour market. Thus, we ignore a big chunk of the labour market when we look at the formal labour market only. Changes in the total labour market are picked up through the Labour Force Survey (LFS), which is a household survey. The June LFS indicates that jobs were lost in the informal sector (mainly in agricultural and private households). It confirms the Quarterly Employment Statistics finding that jobs were indeed created in the formal sector. The nett result was a growth in total jobs of 64 000.

12

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 14 C

M

Y

CM

MY

CY CMY

K

Thus, progress in the formal labour market was off-set by losses in the informal market. The National Planning Commission (NPC) found in their diagnostic report that SA enjoyed an employment co-efficient of between 0,6 and 0,7 from during the decade 1997 to 2008. (This simply means that for every 1% economic growth, jobs grow at 0,6% to 0,7%.) The NPC also found that this co-efficient is much higher than the 0,3 to 0,5 found in other emerging economies. Currently (June 2011) the number of jobs in the country comes to 13,1 million, down from 13,8 million at the peak (Dec 2008), but up from the 12,9 million at the bottom (Dec 2009). So what? 150 000 jobs have been created in the 18 months since the trough in Dec 2009. Over the past 12 months the economy did not produce as many jobs as it did during 1997 to 2008. Is this a temporary phenomenon because the labour market has not yet recovered from ongoing business uncertainty or is it a permanent decline to a lower employment co-efficient as in other emerging economies? Time will tell. Currently the labour market is clearly ‘sticky’ and that underlines the importance of the clothing sector’s wage deal for new entrants and the proposed youth wage subsidy. Labour Market Dynamics 2010 During September 2011 Stats SA released a report titled Labour Market Dynamics in SA, 2010. It contains a very useful six year comparison of labour data. The trends are quite clear: as the economy grew over the four years from 2005 to 2008, employment also increased by about 1,1 million jobs. Then the recession of 2009/10 struck, and employment fell by about 1 million jobs. Much of the progress made over four years was wiped out in two years of recession and its immediate aftermath. The Labour Market Dynamics report indicates that in 2010 70% of the labour market consisted of people employed in the formal, non-agricultural sector. The balance is employed in the informal sector (16.5%), in private households (8.6%) and in agriculture (4.9%). A particularly shocking finding is that the median income of all those employed (i.e. 50% earn more and 50% less) came to R2 900 per month or less than R36 000 p.a. The report also reveals that 30% of employees were members of trade unions and 32,7% had salary increases negotiated through some form of collective bargaining. About 35% of employees were not entitled to paid leave; 54.2% did not contribute to a pension fund; 68.2% were not entitled to medical aid benefits. Perhaps most telling of all is that 43% of women were working in jobs that had no provision for maternity leave. So what? Clearly, not nearly all employees enjoy high wages and even standard benefits. No wonder the bigger SA politic is vehemently opposed to across-the-board wage reduction as a way to create jobs. It is not just the recalcitrance of unions. In arguing for lower wages, one is asking people earning less than R36 000 p.a. to reduce their income further so that jobs can be created. Not a very saleable proposition. I have always found the standard analysis that it is only COSATU who is blocking a change to labour laws an insufficient explanation. These numbers explain that the recalcitrance sits in the bigger body politic.

13

Fourth Quarter

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 15 C

M

Y

CM

MY

CY CMY

K

Collective investment schemes in securities (CIS) are generally medium to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Units are traded at ruling prices and a CIS can engage in scrip lending and borrowing. Some of these portfolios may be closed. Different classes of units apply to these portfolios and are subject to different fees and charges. A schedule of fees and charges and maximum commission is available on request from Nedgroup Collective Investments. Commission and incentives may be paid and, if so, would be included in the overall costs. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Nedgroup Collective Investments Limited is a member of the Association for Savings and Investment South Africa. Nedgroup Collective Investments Limited Reg No 1997/001569/06. Nedgroup Investment Advisors is an authorised financial services provider (FSP number 1652). Address: PO Box 1510, Cape Town, 8000. Trustees: The Standard Bank of SA Limited, PO Box 54, Cape Town, 8000.

Composite


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 16 C

Composite

M

Y

CM

MY

CY CMY

K


NED_4rdQ006.FH11 Wed Nov 23 10:23:07 2011

Page 1 C

M

Y

CM

MY

CY CMY

K

Client Service Centre

Tel: 0860 123 263 (RSA only) or +27 21 416 6011 (outside RSA) Fax: 0861 119 733 (RSA only) or +27 11 263 6067 (outside RSA) Email: clientservices@nedgroupinvestments.co.za

Cape Town (Head Office)

Physical address BoE Clocktower Clocktower Precinct V&A Waterfront Cape Town 8001 Postal address P O Box 1510 Cape Town 8000

Gauteng

Physical address Nedbank Building 2nd Floor I Block 135 Rivonia Road Sandton 2001 Postal address P O Box 2242 Houghton 2041

Durban

Physical address 2nd Floor Ridgeside Campus 2 Ncondo Drive Umhlanga Rocks 4320 Postal address P O Box 50995 Musgrave 4062

www.nedgroupinvestments.co.za

NEDQ_908tc

unit trusts | offshore | retirement funds

Composite


Nedgroup Investments Q4 Newsletter 2011  

Latest opinions and insights from Nedgroup Investments.

Advertisement
Read more
Read more
Similar to
Popular now
Just for you