MoneyMarketing April 2019

30 April 2019 | www.moneymarketing.co.za

@MMMagza

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR APRIL ISSUE

THE ELEMENTS OF TRUST

Your guide to the smaller managers

Page 11

The financial services industry is once again the least trusted sector globally

Page 6

THE IMPORTANCE OF GROWTH ASSETS FOR LIVING ANNUITY INVESTORS How to manage a living annuity

Page 28

Retirement funds overcharged by service providers: FSCA

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etirement fund trustees need to realise the and proactively take actions to mitigate risks, he said. benefits that economies of scale provide and In this regard, the RFSD has enhanced its the bargaining power of retirement funds. surveillance of retirement funds. That’s the word from Naheem Essop, analyst in the “The FSR Act has enabled us to have far-reaching Retirement Funds Supervision Division (RFSD) of the information-gathering tools at our disposal. We Financial Sector Conduct Authority (FSCA). intend to use these in order to identify emerging “All too often, we pick up that retirement funds are risks. However, we will not be relying only on our paying service providers well in information-gathering tools or act excess of market rates,” he said in a on complaints, whistleblowing or MEDIA ARTICLES only speech prepared for delivery at the findings of onsite inspections.” ABOUT NEGATIVE Pension Lawyers Conference that Retirement funds can expect the took place last month, in which RFSD to be monitoring the Pension CONDUCT he also highlighted some of the Fund Adjudicator determinations and IN SPECIFIC important aspects of the FSCA’s assessing whether trends are emerging RETIREMENT regulatory strategy. that may be caused by systematic Essop gave the example of an failures. “If the Adjudicator makes FUNDS WILL attorney who had charged a fund comments about slow responses ALSO RECEIVE R72 000 for a two-page letter. to complaints or poor corporate “It induces a sense of shock. ATTENTION FROM governance, we will proactively The question that you should address these issues with the specific THE REGULATOR ask yourself is whether, in your retirement fund,” Essop added. personal capacity, it would be acceptable for an Media articles about negative conduct in specific attorney to charge R72 000 for a two-page letter?” retirement funds will also receive attention from the regulator and during the course of 2019, a Market Surveillance of retirement funds Conduct Return and Governance Return will become The FSCA must not only be equipped to mitigate risks compulsory for funds to submit to the FSCA at least to its objectives that have already resulted in prejudice once annually. to customers or financial markets, but it must also be “These market returns will enable us to identify equipped to pre-empt such risks before they happen, emerging risks and determine ways to mitigate such

risks. There will be a fund-specific view but it will always be balanced with thematic reviews of crosscutting emerging risks that we identify.” ‘Mystery shopping’ is another tool at the RFSD’s disposal. Essop explained that during a ‘mystery shopping’ exercise, an employee of the FSCA (usually a supervisory team member) or an external individual appointed by the FSCA, may approach a retirement fund or a service provider in the role of a potential customer or member to understand first-hand what a typical member experience would be in a specific scenario in relation to that retirement fund or service provider. Continued on page 3

Naheem Essop, Analyst, Retirement Funds Supervision Division, Financial Sector Conduct Authority

Launch of the Laurium Income Prescient Fund Laurium Capital launched the Laurium Income Prescient Fund on 1 March 2019. The fund aims to achieve inflation-beating returns with controlled risk and low volatility. Target return of inflation +3% p.a

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Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up as well as down and past performance is not necessarily a guide to future performance. CIS’s are traded at a ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges, and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Limited, Registration number: 2007/026029/07 is an authorised Financial Services Provider (FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochures and application forms please go to www.lauriumcapital.com

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NEWS & OPINION

30 April 2019

Continued from page 1

Trustees’ responsibilities The FSCA will adopt a judgment-based style of supervision where it interrogates and, if necessary, challenges the strategic decisions and business practices of retirement funds. “In other words, we will not just be focused on compliance with the law but we will look at how trustees are exercising their fiduciary responsibilities and using their discretion.” There will be intensive questioning of the strategic decisions that boards of funds take, and trustees may be asked questions such as why they remain contracted to a service provider who may be providing a poor service or charging higher rates compared to what is available in the market. Another question could focus on why a fund chooses to outsource certain functions that could be housed internally in a much more costeffective way.

WE WILL BE INTRUSIVE WITH OUR REGULATORY INTERVENTIONS “We will be intrusive with our regulatory interventions and where we identify risks, funds can expect directives issued that are aimed at, among other things: fair outcomes for members, providing proper financial education to members, to remove a service provider, or to not pay a specified bonus or performance payment.” Default regulations Addressing the 1 September 2017 introduction of default regulations, Essop stated that funds were given 18 months to comply with the provisions of the default regulations, which expired on 28 February 2019. He said a large number of funds had applied for exemption from the default regulations.

EDITOR’S NOTE During the period 1 September 2017 until 31 January 2019, the FSCA received approximately 90 exemption applications. In the last month, from 1 February 2019 until 28 February 2019, it received approximately 451 applications. Out of the 451, it received 318 in the last week before the deadline, and out of the 318, a total of 154 applications were received on the last day before the deadline. Essop explained that at some point during the evening of the last day before deadline, while there was still a steady inflow of applications, the FSCA’s online system crashed. “While we acknowledge that it is our responsibility to process these applications, funds share a responsibility to co-operate with the regulator and act in a reasonable manner. Where 18 months were afforded to retirement funds to comply with the default regulations, I submit that it is neither reasonable nor responsible to wait until the 11th hour to submit your applications to the regulator.” Regulatory strategy document In conclusion, he stressed the importance of the FSCA’s regulatory strategy document and encouraged all those present at the conference to read it*. “Everything that we do – when we approve a rule amendment or reject it, grant a licence or refuse it, enter into an enforceable undertaking, make a regulatory instrument, issue a guidance notice or interpretation ruling, conduct an investigation, enter into leniency agreements, issue directives or administrative penalties, when we grant exemptions or extensions, when we are transparent and consultative, when we are risk-based and proportional, pre-emptive and proactive, when we are intensive and intrusive – must be viewed through the lens of our regulatory strategy document.” *The FSCA regulatory strategy document is published on the FSCA’s website.

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or the last fortnight, my first task upon waking has been to check City Power’s website for the load shedding schedule in order to plan our household’s day. Unfortunately, load shedding has become necessary due to the dire status of the country’s power grid. Without the blackouts, the grid could go down completely and there would be chaos. The owner of our local pub is another who checks the load shedding times each morning. The impact of the blackouts on his business has been devastating and he has been forced to consider buying a generator – if he can find one. Word is it that stocks of generators are low, if not nonexistent at present. The small businesses that cannot afford expensive generation equipment will go bankrupt, should load shedding last much longer. Medical care outside big facilities with generators is in jeopardy and those at home who rely on oxygen tanks risk dying during a blackout. The press conference held last month by Eskom and government did very little to put the nation’s – and investors’ – minds at rest. What is important, I think, is that those responsible for the electricity crisis should be jailed and made to pay back the money they looted from Eskom. This seems unlikely, as most of the corrupt are politically well-connected. The ANC’s electoral list gives the impression that corruption isn’t to be taken seriously. But South Africans aren’t stupid and are fully aware of how state capture has made the country poorer. They may remind the governing party of this on the 8th of May by the way in which they vote. Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za

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NEWS & OPINION

PROFILE

30 April 2019

VERY BRIEFLY

MURRAY WINCKLER CO-FOUNDER AND PORTFOLIO MANAGER, LAURIUM CAPITAL

How did you get involved in financial services – was it something you always wanted to do?

After school, I completed my B.Com and was persuaded by my father to do a Chartered Accountant (CA) qualification. During the first year of my articles at Deloitte, I became interested in the stock market and started buying and selling shares. When I qualified, I had the option of moving into corporate finance or taking a position at Ivor Jones Roy & Co, a well-known and reputable stockbroker at the time. I chose the I CHOSE THE stockbroker role and never looked STOCKBROKER back, becoming ROLE AND NEVER a partner at LOOKED BACK Ivor Jones Roy three years later. During the deregulation of the Johannesburg Stock Exchange in the early 1990s, we sold our business to Deutsche Bank where I spent the following 12 years, three of those as chief executive officer. After a year and a half sabbatical, I started Laurium Capital together with my partner, Gavin Vorwerg.

What makes a good investment in today’s economic environment?

The South African market has offered very little in meaningful returns over the past four or five years with the All Share Index remaining flat and dividends returning only about 3% a year; a better alternative would have been buying an index tracker of the S&P 500. To make good returns in today’s environment, you need to invest in economies that are providing strong GDP growth and choose companies that have good volume growth, and the ability to set prices and generate good cash flow. Avoid companies with high debt levels, particularly as the global trend is for interest rates to move higher.

What was your first investment and do you still have it?

I can’t remember my first investment but around the time I first began buying and selling shares, I remember shares such as Powertech and gold stocks being popular. I bought my first house in 1987 and sold half my portfolio just after the crash to pay towards the cost of my first home. Four months later, the market recovered and though I had sold half my shares, I still had a house! Shares proved to be a far better investment!

What have been your best – and worst – financial moments?

I’ve had many highs of varying degrees throughout my career. Over the years, I have got to know many of the JSE-listed company chief executives and financial directors – that has always been one of the best parts of my job. Getting decent ratings as an analyst, such as a top rating by the Financial Mail, was always a high of my career, while selling Ivor Jones Roy to Deutsche Bank was an extremely exciting time. I haven’t had too many lows, but I would say calling a share incorrectly or poor investment performance have been some of them. One of the scarier moments was in August 2008, when Gavin and I launched Laurium with R100m of clients’ money, only to be hit by the Lehman Bank crisis six months later.

What’s the best book on investing that you’ve ever read – and why would you recommend it to others? I’m not an avid book reader but one of the most memorable books I have read was Security Analysis by Benjamin Graham & David Dodd. I read it when I first became a stockbroker; it was a really impressive description of the principles of investing. While doing my Chartered Financial Analyst qualification, I was exposed to Warren Buffett and have always been impressed by his books and quotes.

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UPS & DOWNS

American jeans manufacturer, Levi Strauss, boosted its IPO price last month due to robust demand from investors. The IPO brought in $623m through the sale of 36.7m shares at $17 each, giving the company an initial

market value of $6.6bn. Levi Strauss is once again a publicly traded company after an absence that lasted more than three decades. While the jeans maker was publicly traded in the 1970s and early 1980s, it went private in 1985.

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Sun International has cut the value of its Sun City asset by R306m after the resort reported an operating loss in 2018. Sun City’s income dropped 3% to R1.7bn in the year ended December, while

the asset made an adjusted operating loss of R8m, from a profit of R26m in 2017. Sun City is the company’s third largest resort by income, after GrandWest and Monticello.

Sizwe Ndlovu has been appointed Head of Investor Relations at Old Mutual Limited, with effect from 1 March 2019. He joined Old Mutual plc in 2014 as Investor Relations Manager South Africa, and has fulfilled various roles within the Group. For the last two years he has held the role of Regional General Manager within the Personal Finance Division, helping to push forward the development of the PF distribution business within Old Mutual retail branches and corporate work sites. Prior to joining the Group, he was a Senior Manager for Investor Relations at MTN and Investment Banking Associate at Standard Bank. He is a qualified Chartered Accountant (SA). Patrick Bowes, currently Interim Head of IR for Old Mutual, leaves the Group at the end of March Sizwe Ndlovu after nearly 10 years.

Underwriters in South Africa will now be professionally recognised with the introduction of the first ever formal underwriter occupational qualification. The Insurance Sector Education and Training Authority (INSETA) has completed a successful pilot project to deliver an Occupational Certificate: Insurance Agent (Insurance Underwriter). For many working in the underwriting section of short term, long term, medical insurance and reinsurance, career mobility has previously been hampered by the lack of qualifications. This has changed following INSETA’s completion of this pilot project. “It has been a successful pilot, with more than 60 candidates entering the programme. We initially received many more applications, but candidates had to qualify in terms of their industry experience, as this is a Level 5 qualification,” says Nasreen Ravat, Acting Quality Assurance Division Manager, INSETA QA Division.

Short-term insurer Santam has acquired Vantage Insurance Acceptances, an Underwriting Manager (UMA) with specialist underwriting skills and claims management of executive and classic cars. Vantage started operations as a registered Financial Services Provider (FSP) and UMA in 2009, and distribution is done through a network of independent brokers. Edward Gibbens, Executive Head: Commercial and Personal at Santam, says they are excited about welcoming Vantage into the Santam fold, especially around the possibilities the partnership will enable. “Vantage has grown consistently throughout its history, primarily because of its ability to maintain long-term relationships with the broker network supporting the company. We look forward to developing this business relationship with the Vantage team,” he adds. Adriaan Louw, CEO of Vantage, says that personal service delivery to their clients is the cornerstone of their business ethos. “With the direct support of Santam and the availability of many more resources to Vantage, it will further enhance our service abilities to this select market.”

NEWS & OPINION

30 April 2019

The elements of trust

RICHARD RATTUE CEO, Compli-Serve SA

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The trust of the innocent is the liar’s most useful tool” – Stephen King. I realise this is quite a challenging quote with which to start a column. But I’m sitting in my office with the results of the latest Edelman Trust Barometer and, depressingly, the financial services industry is once again the least trusted sector globally. In South Africa, trust in the industry declined a further six points over the previous year’s report. Ongoing scandals don’t help. South Africa is still reeling from the Steinhoff debacle, which saw local investors, including those saving for retirement in pension and provident funds, lose millions of rand. In addition, the VBS scandal – one of the most shocking examples of bank fraud in South Africa’s history – erupted last year. The financial services industry isn’t the only poor performer in the

report. Faith in our institutions has looking. It is about what a company faltered, and trust in our leaders – has or hasn’t done, what its leaders be they corporate or government – have said, and how they’ve behaved. is at an all-time low. We hardly even Trust, on the other hand, is trust anything we read anymore, forward looking. “Trust is a bet that thanks to the proliferation of fake stakeholders place, trusting that the news and the chilling realisation organisation will deliver against their that there are bad actors who positive expectations,” says the report. intentionally If you think about mislead and drive it, that is how it the public, like works. If you trust THE FINANCIAL sheep, towards their an individual or a SERVICES agendas and causes. company, you’re INDUSTRY WAS For the past saying that you couple of decades, trust them to act ONCE AGAIN THE companies have in a certain way LEAST TRUSTED focused increasingly not only in the SECTOR GLOBALLY present, but also in on ‘reputation’ as a corporate asset, and the future. Yes, you a whole field of advisers has emerged might base your expectations on past to help companies measure and behaviour, but you’re projecting it manage their reputations. into the future. Interestingly, the Edelman report What are the elements of trust? points out that reputation, while Edelman boils trust down to four: important, is inherently backwards Ability: The perception that an

organisation is good at what it does Integrity: The conviction that an organisation and its leaders are honest Dependability: The expectation that promises will be kept Purpose: The sentiment that the company is trying hard to have a positive impact on society. The last element is particularly thought provoking, though not that surprising. Profit as the sole motive for business is no longer sufficiently meaningful to consumers. They realise the impact that companies have on their lives and communities and want more than just an excellent set of financial results. I chose the Stephen King quote because, while harsh, the financial services industry has, time and again, been guilty of lying or at the very least misleading the innocent – consumers who lack the knowledge and expertise to catch them out. When will it end?

The legalities of the digital signature

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igitalisation and digital transformation have seen a significant organisational shift from paper-based processes and procedures. Most organisations have adopted alternative methodologies for signing documents to ensure auditable document trails while minimising the costs associated with paper-based transactions and the risks of fraud and identity theft. However, few recognise the difference between an electronic signature and a digital signature – a critical difference that can have an impact on the legalities and security of any document trail. “The electronic signature is usually defined as an identifying mark that can be anything from a photograph or a scan of a signature to a squiggle made on a mobile phone or tablet,” explains Adv Rian Schoeman, head of Legal, LAWtrust, an Etion company. “It isn’t secure. In fact, the electronic signature is at risk of fraud as it is easy to copy, move and adjust. This is particularly true of poorly executed signatures that are not easily identifiable.” To ensure deeper security, particularly with regards to highly sensitive or complex records and contracts, digital signatures are more efficient and reliable. A digital signature ensures an auditable, provable trail that can be clearly linked to a specific person and identity. Usually, a digital signature can only be used once the individual has undergone a process of identity verification, which assures all parties that the right person has signed the right documentation.

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“When you open a digitally signed document with a solution such as Adobe PDF reader, selecting the signature will reveal the digital certificate that outlines the individual’s name, surname, and other specified identifying factors such as an email,” says Schoeman. “These signatures are certified and legally binding.” An electronic signature, paper-based signature, photograph or email signature may have legal weight but proving that the person’s intention was to be bound by that signature is an involved, complex process. A digital signature does not face the same challenge. The identity verification process ensures that much of this evidence is built into the signature. While the legal process will require that the organisation prove who made the signature, in the event of a query, the process is simplified by the digital trail and embedded forensic evidence. “To be completely assured of digital signature security, South Africa’s Electronic Communications and Transactions Act (ECTA) recognises the concept of an Advanced Electronic Signature (AES),” adds Schoeman. “This is similar to a digital signature in that it is based on a digital certificate, but it requires

face-to-face verification. This ensures the person receiving the document that the signer (signatory) of the document has been verified in person.” When a signature is disputed, it is the person who queries the signature who has to prove that it is invalid. For large organisations that enter into numerous contract agreements, this is a valuable tool as it assures them of a measure of security when signing agreements. “To provide both enterprise and its legal department with peace of mind, it is recommended that all digital contracts or agreements are signed using a digital signature,” concludes Schoeman. “This will not only alleviate unnecessary issues that could occur further down the line but will provide all parties with the right levels of assurance from the outset.”

Adv Rian Schoeman, Head: Legal, LAWtrust

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NEWS & OPINION

30 April 2019

Africa Structured Products and Derivatives Awards 2019 Investec picks up four awards

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nvestec excelled at the annual Africa Structured Products & Alternative Investments Conference 2019 – hosted by Structured Retail Products (SRP), the online resource for the global structured products community – picking up four accolades. Investec beat off a number of major local and global houses in collecting awards for the Best Distributor (South Africa and Offshore), Best Performance and Deal of the Year – the Offshore Protected Share – Asia Pacific Basket. The presentation took place last month at a gala event in Cape Town, attended by leading South African and global banks, exchanges, law firms, technology providers and other financial markets service providers. The awards recognise the best performing structured products manufacturers, distributors and service providers in the market, as voted by the industry. Brian McMillan from Investec Structured Products says the

WE SEE CONSIDERABLE SCOPE FOR THE DEVELOPMENT OF THE STRUCTURED PRODUCT SPACE

awards are an affirmation of the work Investec has done to establish structured products as an indispensable tool in realising specific investment strategies. “Investors are increasingly seeing the benefit of structured products in providing certainty of outcomes – with attractive pay-out profiles and protection – in uncertain, volatile times. The success of our numerous structures over the years attests to this.” Structured products provide a pre-defined risk-and-return profile with returns linked to one or more underlying assets or indices, across currencies and geographies. Investec has launched 21 structured products in the past 12 months, six of which were offshore and 15 were rand-denominated local investments. “We see considerable scope for the development of the structured product space, as part of a balanced portfolio. This includes retirement vehicles like retirement annuities, preservation funds and living annuities. We have already done a great deal of work in tailoring investments to comply with Regulation 28 of the Pension Fund Act and we see this as a growth area in the future,” says Japie Lubbe, Consultant at Investec. Investec Structured Products is an offering from Investec for Intermediaries, which is focused on providing a holistic value proposition for financial intermediaries, helping them save, invest and trade on behalf of their clients. The offering brings together dedicated relationships, an integrated digital platform and client-focused solutions under a single Specialist Bank.

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Left to Right: Japie Lubbe, Carlo Accolla, Brian McMillan, Sonia Lynch and Barbara Davies of Investec

Wealthport receives two awards

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ealthport, a wealth and For the Best Technology Platform, investment management key criteria examined comprised of platform in South Africa, pricing capacity, risk model capacity, has won two accolades at the Africa user interface and integration. Structured Products and Derivatives “These awards support our focus Awards 2019, within the Service to provide leadership and technical Provider Awards category: Best Linked innovation within the investment space. Investment Service Provider (LISP) Our team of experts are passionate platform, and Best Technology Platform. about offering new solutions and This is the second time improved technology Wealthport has achieved platforms, which we know THESE these accolades. will positively impact Eugene Maree, founder the investment sector for AWARDS and group CEO at current and future needs. SUPPORT Wealthport, says, “We My gratitude must also be are absolutely thrilled extended to our full team OUR FOCUS and proud to once again TO PROVIDE for their dedication to be recognised by SRP excellence, which I have no LEADERSHIP doubt played a massive role Africa. We believe that this acknowledgement in this achievement. AND comes off the back of “We are a business TECHNICAL continual hard work who strongly believes INNOVATION in the power of a simple and our commitment to re-shaping the traditional WITHIN THE proposition – without investment model.” the clutter of complicated INVESTMENT business rules and The Awards, which SPACE form a crucial part of the seemingly endless choices. SRP Africa Conference, are Instilling such a belief considered to be the most prestigious holds us accountable to ensuring that honour within the industry, aimed at we focus on what really matters when acknowledging best buy-side firms, it comes to investment products – along with classifying service providers to provide only the highest quality who are active in the structured solutions and support to our clients products and derivatives market. and advisors. For us, these awards Key criteria for the Best LISP Platform reinforce this, our business model, and award include technology innovation, encourages us to keep this focus for post-trade service, breadth of coverage future business growth and success in and user interface. the investment sector,” says Maree.

INVESTING

30 April 2019

JASON FORSSMAN Head of Equity and Multi Asset, Ashburton Investments

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rade wars, slowing global growth, power failures, nervousness ahead of elections, possible further rating downgrades, and some spectacular price collapses in Johannesburg Stock Exchange (JSE) market darlings have led many South Africans to reduce investments in the local market or to stop investing. But there is a way for investors to feel a lot more comfortable about achieving consumer price inflation-beating returns by putting money to work on the JSE – by building a core portfolio of shares based on the concept of quality. What are the characteristics of quality shares? On the quantitative side, there are three principal areas that should receive attention – profitability, financial strength and cyclicality of earnings. For example, to weather a decelerating growth environment, a company should have a strong balance sheet, a degree of defensiveness that reduces

Good solution for nervous SA investors

earning volatility and the ability to sustain profitability. Profitability is fundamentally important. Stock returns are generally a function of earnings growth and so we evaluate a company’s ability to generate earnings growth over a long period of time. Other key metrics we look at are return on assets, return on equity and return on invested capital, which are all good indicators of profitability. A company’s ability to convert earnings into cash is also an indicator of quality. Financial strength is vital too. We like companies with sustainable debt levels capable of withstanding economic shocks. Finally, we prefer companies with low earnings volatility, positive earnings through the economic cycle and a track record of uninterrupted dividends. Once we have satisfied ourselves that our financial analysis confirms these metrics of quality, we then evaluate additional qualitative factors, such as barriers to entry into the business

of the company under analysis, the strength of current management, and the regulatory and social environment the company operates in. What are examples of companies that pass these rigorous quality tests? Mondi is an international paper and packaging group with production operations in 31 countries, with key operations in central Europe, Russia and South Africa. It has the global market leading position in Kraft paper and industrial bags. And the leading position in a number of additional products in its markets. Over the last five years it has managed to grow compound earnings in excess of 14% per annum in euros. Having invested €2bn in acquisitions since 2012, their last reported return on capital employed of over 24% suggests strong management, prudent capital allocation and efficient operations – all the hallmarks of quality.

We also regard Mr Price as a quality name that should form part of a core portfolio, despite recent share price pressure indicative of domestic consumer stress. The Mr Price Group and its subsidiaries operate 1 041 stores across Southern Africa. Its four retail chains sell clothing, footwear, accessories and homeware. We believe the company still has no true competitor in South Africa and that its value retail formula works through all economic cycles. It boasts the highest return on invested capital among its peers, a gross profit margin of over 40%, return on equity of 39% and low debt to equity of 3%. It is clearly a quality company. When headlines are scary it is tempting to hide all our savings in cash, hope for the best and forget the basic principles of investing. But we all need our savings to grow at a reasonable rate above consumer price inflation and hoarding cash is not a long-term solution.

OUR WINS ARE YOUR WINS To you, the mediators, the pioneers and the trailblazers, thank you for constantly seeking a better way to enhance your clients’ experience. It inspires us to continue striving and innovating the very best solutions. At the SRP Awards, we walked away with both the Best Linked Investment Service Provider Platform and the Best Technology Platform awards. We couldn’t have done it without you. Here’s to a future of sharing many more wins together.

INDEPENDENT INVESTING POWERED BY

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INVESTING

30 April 2019

VALDON THERON Head: Institutional Business, Prudential

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he limitations of past investment performance are well noted. However, the reality is that investment flows continue to follow relatively short-term fund performance. An investment return between two specific dates, long-term or not, tells us little about how and when the performance was delivered. We would ask that, in judging a fund’s performance and whether the managers have delivered on what they promised, investors look at the performance journey of a fund over time and through different market conditions, rather than a frozen, point-in-time snapshot. Rolling returns provide an improved measure, allowing investors to see the long term in more detail by using more data points. The chronological view that rolling returns provides can reveal important information on how a fund has ‘behaved’ over various market cycles, and ultimately whether investment results have lived up to the manager’s stated investment approach. Rolling active returns, namely portfolio returns above or below a benchmark, can provide significant insight into the consistency of a manager’s outperformance, an important consideration in assessing investment skill.

Judging asset managers: The journey of past performance

Importantly, successful investment is not about being ‘correct’ all the time. What matters ultimately is how much money you make when you are correct versus how much you lose when you are wrong. A frequency distribution is an effective graphical way to distinguish between frequency and magnitude of active returns and observe a manager’s ‘alpha profile’. In other words, we can see how often an investment manager produces positive and negative active returns, and how large they have been, across various periods. The graph shows the frequency distributions of rolling one-, three- and five-year active returns for Prudential’s Core Equity Composite for the 10-year period ending 31 December 2018. The number of observations (frequency) is shown on the vertical axis, while the active return outcomes, grouped into 2% intervals, are shown on the horizontal axis. From this we can see the following: • Underperformance over rolling one-year periods can and will happen. However, the frequency and magnitude of outperformance (observations to the right of the 0% vertical line) more than offset the instances of underperformance. This is in keeping with Prudential’s approach of compounding relatively

GAVIN RALSTON Head of Official Institutions and Thought Leadership, Schroders

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ven though China is the world’s second largest economy, Chinese stocks have historically been underrepresented in global benchmark indices. This is because for a long time China A-shares, stocks listed in mainland China, were difficult for foreign investors to access due to restrictions on capital flows. A major shift happened in 2014 with the introduction of the Shanghai-Hong Kong Stock Connect, which allows qualified foreign investors to trade eligible A-shares without the need for a local Chinese licence. Index providers have taken notice of this liberalisation. Last year MSCI added A-shares to its suite of global benchmark indices. Initially, only 5% of the full market capitalisation of A-shares was included. However, MSCI recently announced that the inclusion factor would quadruple over the course of 2019, to reach 20%. Currently, A-shares are only around 0.8% of the MSCI Emerging Markets Index, but this could rise to more than 14% after full inclusion. Nonetheless, there is no clarity on when or if A-shares will be fully included. As the weight of A-shares grows, investors will have to decide how to access this part of China’s equity universe, and how much to allocate to onshore equities. We believe that rather than waiting for index providers to raise the weighting, investors should consider a

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small gains over time. • Underperformance over rolling three-year periods has occurred far less frequently: in only three out of 85 observations. Also the combined frequency and magnitude of outperformance significantly offset the relatively small instances of underperformance. • Over rolling five-year timeframes, all active returns are positive as a result of prudently ‘winning more than losing’ over the shorter time periods. • Notably, there are more small gains and losses (in the 0%-2% and 2%-4% ranges) over time than larger gains and losses (over 4%). This is also in

line with Prudential’s approach of being mindful of the size of potential losses. • By compounding relatively consistent outperformance over time, the Prudential Core Equity Composite has outperformed its benchmark by 1.7% p.a. since inception in 2004 (gross of fees). So next time you’re judging fund manager performance, we encourage investors to look beyond short-term, point-in-time returns measured to the most recent date, and consider the longer journey taken to achieve those returns over time.

A new approach to investing in emerging markets separate satellite A-shares allocation, in addition to a global emerging markets mandate. Such an allocation would allow investors to access a much larger portion of the A-shares market. The broader opportunity set is necessary to reap the benefits of the compelling characteristics of the A-shares market as listed below. An inefficient market The A-shares market is dominated by retail investors, who in 2018 accounted for 86% of the total trading volume. This has made the market volatile and susceptible to wild swings in sentiment. In late 2014, the CSI 300 Index started to rise fast. Hoping to jump on the bandwagon, retail investors began opening new stock trading accounts. At one point in 2015, more than four million new accounts were opened every week. Consequently, stock prices became detached from fundamentals, driven by speculation. Inevitably, the bubble burst in June 2015 and the index fell close to 50% over the following months. Fertile ground for active managers Given the inefficiencies, the A-shares market has been a fertile ground for active managers. Over the last five years, the median China A-shares manager has been able to earn an

annualised excess return of 6.3% after fees. This is an exceptional figure by global standards. Median excess returns have been close to zero or negative in most global equity categories over the same timeframe. The high level of potential alpha means that investors can earn good returns even if the market as a whole does not deliver. The correlation argument The A-shares market can also be an important source of portfolio diversification. Historically, the onshore MSCI China A Index has had half the correlation with global equities than the offshore MSCI China index. As the share of A-shares is gradually increasing in global benchmarks, the diversification benefit will decline over time as A-shares become more integrated with the global investing universe. Important Information: Past performance is not a guide to future performance and may not be repeated. Countries mentioned are for illustrative purposes only and not a recommendation to invest. For professional investors and advisers only. The material is not suitable for retail clients. We define ‘Professional investors’ as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries. Schroders Investment Management Ltd is an authorised financial services provider FSP No: 48998, registration number: 01893220

BOUTIQUE ASSET MANAGERS SUPPLEMENT

IDENTIFYING, PARTNERING AND GROWING WORLD-CLASS ASSET MANAGERS PAGE 16

WHY SIZE MATTERS PAGE 14

ARGUMENT FOR BOUTIQUE ALLOCATION ‘COMPELLING’ PAGE 21

C H A L L E NG E S C R E AT E OPP ORT U N I T I E S PAGE 12

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30 April 2019

KEVIN HINTON Director, The Collaborative Exchange

NIGEL BARNES Head: Business Development, Denker Capital

CHALLENGES CREATE OPPORTUNITIES

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t has been a really tough five years for the entire South African asset management industry as alpha has been somewhat elusive. Whether you are a large asset manager or small boutique manager, a similar pattern prevailed, driven largely by uncertainty in the global macro-economic environment and a domestic market that was plagued by corporate scandals and problems in state-owned entities. Profits for the industry have also come under severe pressure, largely driven by intense domestic competition – further fuelled by foreign asset managers and a rise of lower-cost passive investment solutions. At this year’s Raging Bull and Morningstar Awards, smaller managers such as RE:CM, Element, Aylett, Kagiso, NFB and Fairtree featured strongly. Yet 75% of all CIS industry flows continue to flow to 10 fund manager groups, so the market is very concentrated in South Africa. Globally, the world’s concentration of assets of the top 20 managers reached the highest level ever in 2018 and now accounts for 43% of the top 500 asset managers’ AUM. Whereas there are a number of industrydriven pressures facing all investment managers, the following points will create some further headwinds for smaller fund managers: 1. Crowded space: Industry experts estimate the US mutual fund and ETF count to be in excess of 10 000 and raise the question of whether there is room for so many managers, which could imply that consolidation may be inevitable. The same argument can be made for SA, where there seems to be too many fund managers relative to the size of the market 2. Fee and margin pressures: Both active and passive managers face fee pressure. According to PwC research, actively managed mutual fund fees are expected to drop by approximately 19%, from an average of 54bps in 2017 to 44bps in 2025. As in the past, passively managed funds will face the biggest decline, with management fees projected to decline 20.7% by 2025. Price will probably be the key differentiator amid intense competition for market dominance. Fee pressure is expected to persist until asset managers improve their performance. Investors and professional fund buyers (DFMs) are increasingly looking to derive greater value from fees, and there is more consideration these days by traditional asset managers to switch to outcome-based fee structures. 3. Flows into ETFs: Low-cost passive funds and ETFs continue to attract assets

across the world at a record pace. SA’s passive products have not been largely successful relative to their active manager counterparts, but is all that due to change? Although current volatility may boost returns for some active managers, ETFs are likely to go mainstream. 4. Performance and product expansion: A vast majority of active managers have underperformed their benchmarks. According to S&P Global’s SPIVA scorecard for mid-year 2018, approximately 85% of all US mutual funds lagged their benchmarks over a 10- and 15-year period. Now, with markets volatile, active managers have an opportunity to ease concerns about fees and prove their alpha-generating abilities. Without improving their performance, they risk facing greater outflows than before. 5. Distribution: With so many financial advisory businesses making strides towards vertical integration, it is clear that a new era for the investment distribution landscape is underway. One only needs to look at the mega distribution deals underway in Europe, like Standard Life Aberdeen and Prudential and Schroders’ recent deal with Lloyds Bank (who also owns Scottish Widows), to see that asset managers are increasingly acquiring distribution channels, possibly crowding out other fund managers from previously contested markets. 6. Insurance players: Insurance companies continue to pursue the acquisition of asset and wealth managers, a complementary line of business. Insurance firms that buy asset and wealth management can grow their services and client offerings and improve their general investment propositions. We have seen Old Mutual do this through AdviceWorx and Sanlam via Graviton Wealth. Insurance companies also own platforms where the bulk of flows emanate to fund managers, but increasingly they are narrowing their access to third-party fund managers and adding their own solutions to their buy lists. Challenges create opportunities and the asset management industry, despite its headwinds, remains a cash-rich, high-margin business. Smaller boutique-minded asset managers will do well, provided they are clearly very differentiated from their larger peers, and they demonstrate better riskadjusted returns over the longer term. If they fail to get that right, they will be crowded out of the marketplace by larger managers, vertically integrated firms and platform buy lists.

HOW SMALLER INVESTMENT MANAGERS CAN HELP OPTIMISE CLIENT OUTCOMES

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he alignment of investment managers with clients is generally better achieved by smaller firms because the investment managers are both business owners and seed investors in the portfolios they manage. The manager shares in both the risk and returns alongside clients. When one invests with a smaller boutique manager, as opposed to one of the large managers that is linked to a larger conglomerate bank or distribution entity, the benefits are clear: Client-centricity and focus Smaller teams that don’t have the luxury of a ‘guaranteed’ flow of assets from their related businesses, have to perform well and tend to be a lot more client-centric from a service point of view. The intimacy of a smaller firm leads to very strong and interactive debate, breeds a real passion and support system within the business, and develops a focus on providing clients with a personable service that is a true differentiator in the minds of our clients. A small business has the distinct advantage of being nimble as well as unconstrained by liquidity. In simple terms, this provides more agility and a potentially larger universe of companies into which the funds can invest. An example of this would be in the small- and mid-cap sectors. While small-cap companies account for approximately 5% of the JSE’s market capitalisation, small caps comprise 17% of Denker Capital’s South African equity portfolio. This includes holdings such as Altron, Combined Motor Holdings (CMH) and Italtile. Agility and nimbleness should not be confused with constant trading. Denker Capital has a long-term approach and our trading activity is low. We see agility as the ability to identify opportunities and act on them promptly to build up a decent position. We believe that much of the negative sentiment is already priced in, so small, incremental changes to sentiment will result in a significant change in returns based on relative valuations alone. Continued on page 14

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BROADEN YOUR INVESTMENT UNIVERSE Are you beneďŹ tting from the most attractive opportunities in the South African and International equity markets?

Many investment managers’ size and liquidity constraints prevent them from deploying money into a broader range of investment opportunities.

At Denker Capital we are able to consider a much wider investment universe to help our clients grow their wealth.

DISCOVERING OPPORTUNITIES BUILDING WEALTH

+27 (0) 21 950 2603

service@denkercapital.com

www.denkercapital.com

Sanlam Collective Investments (RF) (Pty) Ltd is a registered and approved Manager in terms of the Collective Investment Schemes Control Act 45 of 2002 (CISCA). A schedule of fees can be obtained from the Manager. Maximum fund charges include (incl. VAT): Advice initial fee (max.): 3.45%; Manager initial fee (max.): 0.00; Advice annual fee (max.): 1.15%; Manager annual fee (max.): 1.55%; Total Expense Ratio (TER): 1.74%. The fund may from time to time invest in foreign countries and therefore it may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information.

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30 April 2019

Continued from page 12

Potential for outperformance from smaller companies in the market Smaller businesses can generate an excellent return on equity based on high levels of cash conversion. Large managers don’t tend to allocate research resources to the small- and mid-cap companies, which gives smaller managers’ analyst teams the opportunity to get to know and understand these businesses better. Over the last few years, the challenges facing South Africa have had a significant impact on the small- and midcap sectors. As a result, there is currently a greater proportion of mispriced opportunities in this sector than in large-cap, dual-listed companies. A great example would be CMH. The business has been around for decades, has a superb and stable management team, and a very strong track record of allocating capital efficiently. But the business isn’t on large investment management firms’ radars. Smaller managers are willing to be more active at both portfolio and shareholder levels This willingness to be active applies at a portfolio construction level, but also at a shareholder level, i.e. taking action if the investment manager believes that value is being constrained by the current executive team or board of a business. The management team are custodians of share capital and responsible for the efficient allocation of capital to projects, as well as the execution of those projects. It’s ironic that despite their scale and apparent clout, many larger managers are reluctant to take on an active approach to unlocking value for their clients. Denker Capital takes an active THE MANAGER approach to unlocking SHARES IN BOTH THE value, if we believe that management is making RISK AND RETURNS poor decisions, the ALONGSIDE CLIENTS business is allocating capital badly, or there is poor governance. This is because we have a fiduciary duty to do so on behalf of our clients. Denker Capital believes that building scale is important. Keeping the cost base under control and growing revenue by attracting new clients are also key. But the most important factor by far is to make good investment decisions that ensure we provide our clients with strong returns over the long term. Denker Capital is a great example of a business that has very experienced, high-quality investment professionals who are focused and have a deep desire to meet the expectations set by those who invest with the team.

ADRIAN CLAYTON Chief Investment Officer, Northstar Asset Management

WHY SIZE MATTERS

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ize matters in investing, just not in the way we may have been led to believe. In many ways smaller is better. This is certainly true of the inverse relationship between size and the ability to generate returns above the benchmark, which has been confirmed in study after study. Specialist investment managers – a term we at Northstar Asset Management prefer to ‘boutique’ – not only have a bigger investment field in which to play, but can also be more dynamic in the market, aren’t obliged to chase large stocks when these are overvalued, and can exit investments more rapidly should a situation reverse. Big investment managers have an edge with their powerful brands and diverse business models, which allow them to earn fees off the same customer at several points in the investment value chain. Pity the monoline boutique manager who sets up shop promising to shoot the lights out and fails to deliver. Large managers can use their diverse income streams and economies of scale to offset the not insignificant costs of investment compliance and administration. But the rise of competitive outsourced solutions gives specialist managers access to equivalent services and the ability to manage these costs down for the benefit of their clients, without having to worry about damaging another part of their business. Combining outsourcing with a streamlined business model gives specialist investment professionals the space to indulge their passion for investing, ensuring that clients’ interests and investment returns stay firmly where they should be – at the centre of the business.

Size matters, too, for the clients of specialist managers. On top of improved performance, they also have far greater access to decision makers than with a large manager. This also supports greater accountability – sitting across the table from an investor to explain underperformance or the thinking behind an investment that goes against market consensus certainly sharpens the mind. Recent trends in investment flows show that investors and multi-managers are beginning to recognise the considerable expertise available outside the large managers and appreciate the performance advantages this confers. As the approach to portfolio construction evolves with the entry of further competitive products and the rise of artificial intelligence, the unique differentiation offered by specialist managers is likely to become a sought-after asset. Large managers risk losing their position at the centre of the traditional ‘core and satellite’ portfolio construction approach to low-cost exchange traded funds. This could benefit specialist managers as the important role their particular approach plays in portfolio outperformance becomes better understood and more effectively modelled. We expect the total number of asset managers to reduce, as the industry is definitively overtraded. The managers most likely to prosper during this consolidation will be those with a clearly defined specialisation and a track record of generating alpha over time. For specialist managers that can combine a passion for investing with good business skills, minimise distraction and keep clients’ interests at the centre of their business, being small is far from a disadvantage.

Closer to the truth

Our obsession with depth and detail brings greater understanding and better performance. We offer onshore and offshore funds and share portfolio management. To find out more, visit www.northstar.co.za

Northstar Asset Management (founded 1996) is a licensed Financial Service Provider (FSP 601).

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BOUTIQUE ASSET MANAGERS SUPPLEMENT

30 April 2019

GAVIN WOOD CIO, Kagiso Asset Management

THE BIG OPPORTUNITY IN SMALL STOCKS

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e believe that the South African market is particularly materially mispricing smaller companies at the moment and we identify some of the potential reasons for this below. If we are correct, this presents the clients of skilled, contrarian, medium-sized asset managers with an unusually attractive (perhaps temporary) opportunity for very high, market-beating returns from here on. Academic studies have consistently found that smaller stocks outperform larger stocks through time. Potential explanations are hotly debated and include investor inattention due to insufficient information on these shares, and compensation for higher risk or increased transaction costs. Our view is that much of the outperformance comes from pricing anomalies resulting from less widespread scrutiny of smaller companies, often together with superior earnings growth. In many cases, a successful smaller company is able to grow its earnings faster than a successful large company, simply because it has a low base. Such a growth company may have a large, as yet untapped, addressable market or it may be winning market share from larger competitors. These ‘growth’ style shares are usually very well appreciated by investors and rated very 155 highly (high share price). X 220 ziraFA.pdf 1 2019/03/01 5:43 PM A smaller company may also have a low earnings

base because its earnings have fallen significantly below what it historically generated. The decline can be for transitory reasons or it may be reversible with new management. These ‘value’ style shares are often accompanied by very lowly-rated share prices and consequently very high potential investment returns if the earnings and rating rebound. The earnings decline can, of course, be permanent, for example, if due to a structural change or irreversible damage from management actions and such shares may be best avoided. Smaller companies are typically less thoroughly researched than larger companies because they do not offer worthwhile opportunities for large financial services players. This lower research scrutiny leads us to believe that, structurally, one may be able to find mispriced shares more often among smaller companies. It is our view that there is currently a particularly large and lucrative mispricing opportunity in South African smaller equities, due to them falling even further out of favour than is normally the case. The prevalence of global emerging market (GEM) investors in SA has increased and typically, their universe is restricted to MSCI Emerging Market Index constituents and/or stocks with minimum average daily value traded. Smaller companies are necessarily excluded from this list. The GEM investor universe has

outperformed at the same time as the increased foreign flows into South African equities. This seems to have led to some large local managers giving up on smaller company exposure. Increasingly, more investors appear to pursue short-term investment strategies, into which smaller companies do not easily fit. In addition, the proliferation of recent corporate disasters has left many investors biased towards ‘quality’ shares. ‘Quality’ may be defined by attributes such as: management reputation, financial returns, operational momentum, governance standards and often company size. It is therefore behaviourally very difficult to be contrarian and take a lonely position on the share register of a smaller company. While there are potentially high returns on offer from smaller shares, it is very important to have a deep understanding of the company in order to avoid the risks they may pose and to avoid those that have poor prospects. Given that the South African equity market is so concentrated, it is mathematically self-evident that large asset managers are unable to offer their clients material exposure to smaller stocks. This presents a clear competitive advantage for a skilled mediumsized asset manager, who can offer clients exposure to both larger and smaller shares, depending on where the opportunities lie.

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IDENTIFYING, PARTNERING AND GROWING WORLD-CLASS ASSET MANAGERS

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MI Investment Managers (RMI IM) first launched its affiliate business model in 2015, the first of its kind in South Africa. Through this distinctive model, the firm acts as a noninterfering, patient and longterm shareholder that provides financial, strategic, operational and distribution support to boutique investment managers, so they can focus on what’s really important – protecting and growing client money. This fresh approach was implemented as a means of challenging South Africa’s highly concentrated asset management industry by growing the next tier of successful managers, but also as a way to ensure the longevity of early-stage asset managers. RMI IM has observed that an alarming percentage of new investment management firms in South Africa typically failed within five years. A combination of a lack of shareholder support, poor business models, misaligned staff incentivisation, inadequate differentiation and unsatisfactory investment performance were listed as the top five reasons for failure.

A non-interfering shareholder RMI IM’s business model centres on addressing the first four aspects to help independent investment managers succeed, while the last is left entirely up to the investment managers themselves. “We don’t seek to influence investment philosophy or performance; this falls entirely within the skill set of the managers themselves, and we believe that’s where their focus should be,” says CEO Alida de Swardt. “We want our affiliates to maintain their independence in terms of their investment decisionmaking and process; where we add real value is by offering business support on the strategic, distribution and operational side. We want to help shoulder the burden of running the business, so the managers have more time to dedicate to managing money for their clients.” Identify, partner, grow RMI IM’s purpose is to identify, partner and grow world-class asset managers. From the affiliate model’s launch in 2015 until the end of 2017, the team were primarily focused on the ‘identify’ phase – looking for the best investment talent in South Africa to include as part of their portfolio of affiliate managers. As 2018 drew to a close, the portfolio was largely in place with 12 managers and combined assets under management in excess of R153bn across various investment styles and asset classes, including active, passive, traditional and alternative investments.

Alida de Swardt, CEO

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“We are now very much in the ‘partner’ and ‘grow’ phases of our business model, although we are still able to consider new opportunities that will complement our existing portfolio,” says de Swardt. “To articulate the exact areas where we can have a meaningful impact on our affiliates’ businesses, we have created a shareholder value map. This includes six strategic focus areas where our team is able to assist with the successful growth of our affiliates, depending on their particular life stage and requirements.” The six areas include strategic support, asset raising, thought leadership, marketing, digital transformation and operational support.

How RMI IM adds value as a shareholder De Swardt likens the value map to a menu that enables the affiliates to pick and choose as and when they need support, specific skills and/ or insights with different business aspects and challenges. She emphasises that the WE ARE NOW shareholder value map is not a prescriptive model; VERY MUCH IN rather, it is a partnershipTHE ‘PARTNER’ based approach that AND ‘GROW’ enables the individual affiliates to benefit from the PHASES OF OUR RMI IM team’s expertise as BUSINESS MODEL and when required.

“We understand that each business is unique; different cultures, different ambitions and different strengths and weaknesses,” she says. “So a one-size-fits-all approach, where we dictate how an affiliate should be running their business, is never going to work. Instead, we work together with our affiliates to fully understand their growth ambitions and how we can play our part in assisting them achieve their goals.” Specialist support De Swardt explains, “Given RMI’s well-established and credible entrepreneurial brand, we are able to offer our affiliates comprehensive strategic assistance across a number of business areas including, among others, financial support, board representation and assisting with succession planning and talent management.” As most of the affiliates in the stable are either early- or mid-stage managers, portfolio executives Zamazulu Molai and Anthony Moore, together with associate Takalani Mashau, provide strategic advice and support to assist affiliates to increase their probability of successfully raising assets. “We offer strategic advisory support to assist the affiliates in achieving retail readiness, as well as coverage support

30 April 2019

ADVERTORIAL

where we facilitate direct retail client thought-provoking content, whether engagements and open doors to new that’s boutique industry studies, relationships,” says Molai. client surveys or our Leading “Our partnership with Insights events,” says Moore. Momentum, which has a long and RMI IM recognises the need successful distribution track record, to stay digitally relevant against a especially in the retail market, along competitive backdrop of disruptive with our own efforts, provides technological capabilities. “We additional support to our affiliates’ provide support for our affiliates’ own distribution capabilities,” digital transformation and innovation says Moore. plans, and introduce them to Patiently building a trusted technological, platform and joint and well-recognised brand is venture opportunities,” says Andre paramount to the long-term success Rousseau, Chief Operating Officer. and sustainability of investment “We are able to assist affiliates to management firms. “In the asset find economies of scale and cost management industry, efficiencies and give branding was once advice on operating WE DON’T SEEK considered a topic models,” he adds. reserved mainly for Rousseau mentions TO INFLUENCE large mutual fund further that RMI INVESTMENT providers, but that IM also provides PHILOSOPHY OR compliance, risk and perspective has changed dramatically regulatory support, PERFORMANCE since the global assists in generating financial crisis and today, branding finance and management accounts, is emerging as a top priority for asset and helps with service provider managers,” say Paige Robertson, Head research and selection. of Marketing. “We offer our affiliates strategic brand advice and support The proof is in the pudding assisting with the refinement of value By offering access to this propositions and key differentiators, comprehensive set of strategic as well as advice on implementing business support services, the design and digital best practice.” RMI IM team believes it can help The RMI IM team also ensures increase the affiliates’ probability that affiliates have access to relevant, of success. Although still in the quality thought leadership and early years of the business model, analysis on important industry issues the team is encouraged by the in a world dominated by content continued strengthening of the overload. “Our thought leadership is investment and operational centred around helping our affiliates capabilities across the affiliates. stay on top of industry trends by providing access to insightful and Continued next page

Anthony Moore and Zamazulu Molai, Portfolio Executives

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In addition, many of the managers across the main categories (equities, fixed income, listed property, offshore and balanced funds) were able to post top-quartile investment performance and attract new assets under management during 2018, despite very tough market conditions. Patience is a virtue Building enduring investment management businesses is a long-term endeavour that requires patience, humility and stamina. Looking ahead, de Swardt believes that RMI IM’s patience and long-term outlook will stand the team in good stead to navigate what is likely to be another tough few years. “Our partnership model was truly put to the test in 2018 during what was a trying year for everyone in the market,” she says. “However, we are patient providers of long-term capital and business support and

30 April 2019 ADVERTORIAL

while we don’t expect the investment backdrop to get any easier in the next few years, we are confident in our ability to stay the course and continue backing management teams that we truly believe have what it takes to succeed.”

benefit from this demand. “Our goal is to transform the asset management landscape in South Africa by providing a full suite of business support services to boutique managers without interfering with or unduly influencing them in any way,” says de Swardt. “Our portfolio represents a worldTransforming asset class collection of businesses with the management in potential to become top-tier investment South Africa managers in South Africa.” It’s no secret Importantly, there is still investor that the South African market is sorely appetite to allocate assets to boutique lacking proper choice in managers, given managers and the high concentration of the success of the assets in the hands of the WE ASSIST RMI IM affiliate larger managers. portfolio is AFFILIATES FIND RMI IM’s ambition is to testament to this. challenge this status quo, ECONOMIES OF The association and the success they’ve SCALE AND COST with a trusted enjoyed thus far brand like the in doing so EFFICIENCIES Rand Merchant bodes well group, together with the RMI IM for a much more even team’s business acumen and strategic playing field, which will insight, will go a long way to undoubtedly be highly helping independent South African beneficial for the industry investment managers access and as a whole.

Andre Rousseau, Chief Operating Officer

Paige Robertson, Head of Marketing

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We pride ourselves in bringing back these values by investing in and partnering with South Africa’s best investment talent.

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+27(0)11 282 4462 | info@rmiim.co.za | www.rmiim.co.za

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30 April 2019

‘OUR INVESTMENT TEAM IS OUR BIGGEST ASSET’ MoneyMarketing speaks to Iain Power, Truffle Asset Management’s chief investment officer, about the business’s investment approach and investment team. As a boutique investment management company, what differentiates Truffle Asset Management from the larger asset managers? We are an owner-managed business with a highly experienced investment team, a bottomup fundamental philosophy and a very detailed and rigorous process. Unlike larger managers, we outsource many non-investment-related functions, which creates the focus needed to achieve superior risk-adjusted returns. A key competitive advantage is our relative size, which gives us the ability to build meaningful positions in many small and midcapitalisation companies that are not accessible to larger managers. It also allows us greater agility when trading out of a position. We are very client focused, which means clients have the ability to more easily engage with the fund managers to gain insight into the fund positioning. How important is it that the staff of Truffle Asset Management invests alongside its clients? A fundamental tenet of our philosophy is to ensure that the interests of clients and our investment team are optimally aligned. Coinvesting alongside clients creates a framework for aligning all interests, and ensures that our investment team remains solely focused on achieving the stated fund objectives. How has Truffle Asset Management’s AUM grown over the years? Truffle Asset Management is a medium-sized boutique manager with a well-established

brand and a record of top quartile performance for almost a decade. As a consequence, our assets under management have grown in excess of R20bn over the last five years. Our focus remains on delivering superior risk-adjusted returns, and not gathering assets. If we feel the size of our assets starts to compromise our ability to deliver superior risk-adjusted returns, we will cap our assets. Tell us about Truffle Asset Management’s investment team Our investment team is our biggest asset. We have a collection of highly experienced and qualified independent thinkers from different backgrounds covering the engineering, accounting, finance and actuarial professions. One of the key attributes we look for – other than qualifications and an independent thought process – is the ability to openly interrogate and rigorously debate the investment merits of an idea among the broader investment team in an open and unemotional manner. This ensures that the bases for all our ideas are stress tested for weaknesses and any flaws in their logic. How would you describe Truffle Asset Management’s investment approach? We believe the market is efficient over the long term, but inefficient in the shorter term due to typical human psychology. Our investment approach is based on a bottom-up fundamental process to seek out valuation inefficiencies in the market over the longer term. One of the areas we feel we are fundamentally different from our peers is that we firmly believe that superior risk-adjusted returns are not only a function of correctly identifying mispriced securities, but also about avoiding stocks that have the potential to suffer large structural declines in value. We try to assess these downside risks in our investment cases in the event of us being wrong in our view.

This understanding of the downside risk is critical in that it helps us risk adjust our positions in our portfolios. How do you see the future of boutique asset managers in South Africa? Is there space for more boutiques? Structural challenges facing the fund management industry, like fee pressure, increased regulatory costs and a shrinking sell-side industry, makes it much harder for new boutiques to achieve scale and breakthrough to compete with the bigger franchises. Having said this, boutiques have a particular set of competitive advantages that should see them achieve better returns than their larger peers over the long term. The Australian fund management industry has a much bigger group of well-established boutique businesses that manage a much bigger share of the market compared to South Africa. This suggests that despite the increased headwinds facing boutiques, they are likely to continue to take share from their larger peers.

Iain Power, Chief Investment Officer, Truffle Asset Management

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A CULTURE DRIVEN BY HUMILITY MoneyMarketing speaks to Sentio Capital Management about its culture and its investment philosophy

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t Sentio Capital Management, culture is seen as one of the key elements of success, as well as one of the fundamental principles on which a competitive advantage is sustained over the long term. “People underestimate the importance of culture, but at Sentio we’re very deliberate about this idea,” says Mohamed Mayet, CEO and co-founder of the company, which is majority controlled by management and staff, while a minority stake is held by RMI Investment Managers. He adds that culture is more easily managed by smaller asset managers as, from the outset, the business can be run with the culture that its founders want. “You can hire the talent you want along those lines. Larger asset management firms tend to have pockets of excellence and managers there have individual cultures within the organisation. It’s difficult for them to have a singular coherent culture. From a smaller manager perspective, we think that culture is an aspect that is very important, because this is a people game. The culture that we’ve built from day one is the one we wanted, and this culture wasn’t what we found in the corporates we were formerly in.” Mayet says the idea was to do something better, “not just for us, but from a client perspective and from an investor perspective: a culture more investor-centric, rather than manager-centric.

sometimes a manager is seen as a good one if he’s arrogant and overconfident, whereas any good book about investing will tell you that investing’s singular sin is overconfidence.” Mayet adds that while everyone quotes Warren Buffet, few follow Buffet’s advice. “The one thing that sticks out about Warren Buffet and Charlie Munger – or any good investor – is the ability to admit when you’re wrong and to do something about it. The humility comes from the fact that it’s not our money. The money that we manage is given to us as a trust and that implies that it’s not about us proving that we’re right, it’s actually about making money for the client.” Team orientation Rayhaan Joosub, deputy CEO and co-founder of Sentio, says the culture of boutiques is very team orientated, whereas at larger managers there is a focus on individuals driving their own self-interest and playing corporate politics. Joosub cites the example of what happens when a bad investment decision is made. “In a boutique environment, we all pull together and focus on fixing that decision, because the decision was made as a team.

The guy at the larger manager knows that he has to protect his skin and he maintains that the bad decision was the market’s fault. He knows that it’s in the client’s interest that the situation be rectified. This doesn’t happen because he would be admitting failure and would fall down the corporate ladder. The blame game is what destroys some larger managers. At Sentio, there’s no blame game because of our culture of humility.” Mayet says investors don’t realise that if they’re using larger managers what they’re really getting is one individual using the brand of a large organisation. “The irony is that with smaller managers like us, clients receive attention from more people.” He explains that at Sentio, not one senior member of the investment team has left after the 12 years the firm has been in business, meaning that there is stability. “We also have RMI as a strategic partner. We think we’re in a comfortable position getting the best of small manager nimbleness and large manager robustness.” Sharing ownership Joosub says boutiques go wrong when they don’t share ownership with the next level of stars within the organisation. “We decided at the beginning that we were not going to be the only shareholders in the business

and we made a conscious decision that those individuals who are going to grow the business with us would be sharing in the ownership of the company. “Even though Mo and I are still very active and a key part of driving the strategy – the next tier of owners, managers and senior people in the organisation are just as active as us, getting out and talking to clients. They have ownership in the organisation. They’re here for the long term.” Stock bombs Sentio’s investment style is based on the premise that markets are not always efficient, allowing investors to profit from market movements in the near term. Risk, however, is seen as an integral part of investing and something that cannot be avoided. There is a focus on risk-adjusted returns over time, rather than a simplistic focus on returns with undue risk. Mayet points out that there will be more events occurring that are similar to Steinhoff and EOH. “Investors will need a good manager to identify risks and know what do when stock bombs happen. Clients will appreciate how managers create returns when things are going wrong, and not necessarily when things are going right.

PEOPLE UNDERESTIMATE THE IMPORTANCE OF CULTURE

Mohamed Mayet, CEO, Sentio Capital Management

The mantra of humility He points out that Sentio’s culture is built completely on the mantra of humility. “We think this is a competitive advantage, the reason being that we live in a world where people are focused on strong conviction –

Rayhaan Joosub, deputy CEO, Sentio Capital Management

We take care of how you spend the rest of your life At Sentio Capital Management the highly motivated and skilled teams of investment managers understand investor requirements and that discipline and humility deliver exceptional performance and sustainable returns. Our track record and robust methodology delivers for the good of our clients, the environment and for humanity.

www.sentio-capital.com info@sentio-capital.com Tel: +27 11 880 1994, Illovo Edge, Building 3, 1st floor, 5 Harries Road, Illovo, Johannesburg, South Africa, 2196 Sentio Capital Management (Pty) Ltd is an authorized Financial Services Provider. FSP No.33843

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BOUTIQUE ASSET MANAGERS SUPPLEMENT

30 April 2019

PETER ARMITAGE CEO, Anchor

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sset management is a fascinating game with over 200 companies positioning themselves to attract the hard-earned investments of South Africans. Advertising agencies are kept busy, generally briefed to create images of trustworthiness and wisdom. Hundreds of millions of rand are spent conveying these to the SA public. The bulk of the new assets invested in South Africa find their way to the oldest, most-established asset managers, whom you see daily on billboards. This is just reward for years of toil and performance. But, as this trend continues, and the big get bigger, so the new generation grows – in the form of what we call a boutique asset manager. This is usually a reference to the age or size of assets under management. And these boutique managers have distinct advantages, which routinely sees some of them emerge into the big league. The seed of most

ARGUMENT FOR BOUTIQUE ALLOCATION ‘COMPELLING’ boutique managers is germinated team size and governance. And there’s at the desk of a star at a big asset always the nagging question as to manager. The boutique entrepreneur what extent an individual determines pictures his/her own business, for the big company performance – can whatever reason. They might just be they do it by themselves or was entrepreneurial by nature. there a ‘secret sauce’ they are leaving However, to attract any decent behind? It’s very difficult to answer quantum of assets, the key asset many of these questions and that manager has to have is why the standard a track record and industry response is to experience, and this THE BOUTIQUE wait at least three years industry is fairly unique boutique managers to IS FAR MORE for in that most boutique prove themselves in their FLEXIBLE AND new guise. managers are prior stars of big asset managers. It always makes sense CAN MOVE So that sounds pretty to include some exposure POSITIONS attractive – big asset to boutique managers in WITH EASE manager experience a portfolio, because they with the hunger to grow fundamentally operate in assets and deliver investment returns. a different playing field. South Africa In addition, the boutique is far is a tiny market and as soon as you more flexible and can move positions have over R10bn of SA equity assets, with ease. This is where due diligence your options become very limited. Go comes in – investors need to be and have a look at the top-10 shares cautious. Issues to be considered are of any big South African manager key-person risk, risk management, and it’s all the top-20 shares listed on

the JSE. This might be good or bad, but it’s a situation they are forced into by size. The boutique manager also typically has far more liquidity. With all the equity bombs going off lately (MTN, Aspen, Tiger Brands, etc.), one needs to be able to move quickly. A boutique manager can often get out of (or into) a big position within a day, while for a big asset manager changing a position can often take months. Liquidity in big shares is important, but when smaller opportunities are discovered, the small asset manager can also take advantage where a bigger player cannot. So, the argument for a boutique allocation is compelling – a bigger toolset, often owner-managed, more flexible and, in principle, more driven. Identifying one is a bit more complex. Our view is to find one that resonates with you from a quality and philosophy perspective and that has been around, to allay start-up fears.

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BOUTIQUE ASSET MANAGERS SUPPLEMENT

30 April 2019

WHEN SMALLER MEANS FLEXIBLE AND NIMBLE

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latinum Portfolio’s recipe for successful investment management starts with its investment process as well as its status as a smaller boutique manager, which allows it to be both flexible and nimble. Performance is driven by the fact that the fund managers, Mel Meltzer and Charolyn Pedlar, are also the owners of the business and have their own funds invested alongside those of their investors. The focus is to invest in companies as long-term owners and not for short-term gain. Platinum Portfolios manages money for private clients only, and this, together with its size, allows it to have more personal relationships with both its IFAs and clients. This level of contact and communication allows it to more effectively prevent the types of behavioural mistakes investors make in difficult markets. These advantages can be seen in the way Platinum Portfolios has managed its funds and in the results it has achieved – recent nominations for the Raging Bull Awards, and Morningstar voting the Platinum BCI Worldwide Flexible Fund as winner of the best Flexible Allocation Fund. The Platinum Global Managed Fund USD The Platinum Global Managed Fund recently received a nomination for a Raging Bull Award for Best (FSCA-approved) Offshore Global Asset Allocation Fund for risk-adjusted performance over five years to December 2018. This fund has a flexible mandate, which allows it to invest in an unconstrained way for the longer term in the various asset classes, whether it be global bonds, cash, property or equities. Currently the fund is conservatively positioned with 66% allocated to global equities, 31% USD cash and 3% global property.

The fund is managed within a disciplined investment process, focusing on high-quality global companies that offer stable growth, are profitable and financially strong. Preferable are companies with economic moats that protect them against competition and negative market conditions and that generate sustainable, rising dividends. Currently the fund’s top holdings include Berkshire Hathaway, Microsoft Corp, Starbucks Corp, Intel Corp and Williams-Sonoma Inc. Platinum Portfolios approaches its analysis and research on companies as business owners, with the view to a long-term investment in the company and therefore the turnover in the fund is low. The valuation focus ensures that it does not overpay for these quality companies, thus ensuring it makes purchases with a margin of safety. The focus is to deliver good risk-adjusted returns over the long term and portfolios are constructed taking into account the risk of losing money. Therefore, protecting investors in difficult markets and limiting drawdowns in the fund is as important as outperformance. The charts showing the fund’s calendar returns for the last five years illustrate this.

CALENDAR RETURNS

Source: Morningstar

INVESTMENT GROWTH SINCE INCEPTION TIME PERIOD 2013/05/29 TO 2019/02/23

Disclaimer: Guernsey International Management Company Limited is the registered Manager of the Offshore Mutual Fund PCC Limited (“the Scheme”) together with the Platinum Global Managed Fund (“sub-fund”), approved to provide investment management services to collective investment schemes in Guernsey by the Guernsey Financial Services Commission. The Scheme and sub-fund are approved in terms of section 65 of the Collective Investments Schemes Control Act, No 45 of 2002. Collective Investment Schemes in securities are generally medium- to long-term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. A schedule of fees, charges and maximum commissions is available on request. Full details and basis of the award is available from the Manager.

Source: Morningstar

Mel Meltzer and Charolyn Pedlar, Co-owners, Platinum Portfolios

THE RISE OF BOUTIQUE MANAGERS

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ver the past decade or so, there larger firms may have greater liquidity has been a substantial increase issues if their funds are sizable, thereby in the number of boutique restricting their investment universe, asset managers in South Africa. and lengthening the time it takes to Investors have different execute a view in their portfolio. Large interpretations of what boutique managers run the risk of owning too really means. For some, boutique is much of a smaller company when related to the number of employees trying to take meaningful positions in and the size of assets – typically their portfolios. The flat organisation fewer than two dozen staff and structure of boutiques means that assets less than R50bn seem to be a investment decisions are made and common rule of thumb. For others, implemented quickly. what is often more important in Typically, boutiques are owned the definition of boutique is the by their founders, who often are ownership structure responsible for and extent of asset management SMALLER ASSET personal assets and have a invested by the significant portion MANAGERS CAN BE investment team in of their personal NIMBLER AND MORE assets invested the portfolios they manage. Finally, in the portfolios OPPORTUNISTIC IN boutiques have THEIR STOCK PICKS they manage. At a differentiated Laurium Capital, and focused approach to investing, besides the co-founders, key people compared to larger managers. across the operations and investment Smaller asset managers can be areas also have ownership and are nimbler and more opportunistic in invested in the funds. Consequently, their stock picks and play outside managers and employees have a the large-cap universe. Managers at vested interest in the success of the

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firms’ funds, which better aligns them to their clients’ interests. The relationship between a client and a fund manager is a more personal one at a boutique and there is greater scope for a shared investment philosophy. In contrast, large investment managers are too big for the client to have a properly personal interaction. However, asset managers can often become victims of their own success. If assets under management grow too quickly, making and implementing successful investment decisions becomes more challenging. Managing a successful boutique is not as easy as it may seem. As the company grows, it is important to ensure that the core entrepreneurial DNA is maintained and that no bureaucracy creeps into the organisation, changing the way you manage money. We believe that the culture of the firm should be illustrated via the work ethic and behaviour of our team, as opposed to being printed on brochures or emblazoned on office walls.

Successful investment management and sustainability of the business is often dependent on key individuals, so it is important to have a good succession plan in place and to nurture the next generation. Although choosing a boutique asset management firm doesn’t guarantee better performance, they do have the potential to produce excellent investment returns, which are less correlated to the larger managers and the FTSE JSE Top40. Including a boutique manager in your overall portfolio should result in better risk-adjusted returns for your clients. As you search for investment managers who have the potential to deliver strong results, be sure to consider boutiques.

Kim Hubner, Head: Business Development and Marketing, Laurium Capital

With over eighteen years of discipline, focus and a commitment to long term performance behind us, our clients believe in the consistency of our investment process and performance.

Platinum BCI Worldwide Flexible fund wins Best Flexible Allocation fund. Platinum Portfolios was also nominated as a finalist for the best fund house – small fund range. The annual awards recognise funds and fund houses that added the most value for investors within the context of their relevant peer group in 2018 and over longer time periods. Morningstar selects the finalists using a quantitative methodology with a qualitative overlay that considers the one-, three-, and five-year performance history of all eligible funds, and adjusts returns for risk using Morningstar Risk, a measure that imposes a higher penalty for downside variation in a fund’s return than it does for upside volatility.

T. 011 262-4820 | Block F, Pinmill Farm, 164 Katherine Street, Strathavon, 2031 PO Box 782755, Sandton, 2146 | www.platinumportfolios.com

Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002. Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. A schedule of fees, charges and maximum commissions is available on request. Full details and basis of the award is available from the manager.

Platinum Portfolios (Pty) Ltd is an authorised Discretionary Financial Services Provider (FSP No. 641).

BOUTIQUE ASSET MANAGERS SUPPLEMENT

30 April 2019

A DEEP-ROOTED COMMITMENT TO STEWARDSHIP AND QUALITY SERVICE

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elville Douglas, a global and industryleading boutique investment management company that forms part of the Standard Bank Group, provides innovative investment solutions both domestically and globally. The business prides itself on the deep personal relationships it nurtures with clients to ensure they achieve their individual and business investment goals. Established in 1983, the investment management company oversees more than R76bn in assets in South Africa and Jersey on behalf of a wide range of institutional and private clients. With a solid track record of superior risk-adjusted performance, Melville Douglas assists investors from the African continent looking to diversify their portfolios internationally. “We are able to offer our clients nimble, creative and bespoke solutions, as a boutique investment company. We believe this gives us an edge over larger competitors. With our lean organisational structures, entrepreneurial spirit and manageable asset levels, boutique firms such as ours are uniquely able to effect rapid responses to today’s constantly evolving market conditions. This allows us to capitalise on opportunities that larger organisations may miss,” says Mike Laws, Managing Director at Melville Douglas. “As the custodians of our clients’ savings, pensions and financial assets, we understand that they put their future in our hands. It is for this reason that we partner each of our clients with a dedicated portfolio manager. Our investment professionals, based in

Johannesburg, Cape Town, Durban and Jersey, work within an experienced investment team with a deep understanding of how to help individual clients achieve their own unique investment requirements,” says Laws. Whether domestic or offshore, single funds or blended investments, single or multi-asset classes, Melville Douglas has the expertise and solutions to capitalise on investment opportunities and growth. The company is driven by a team of investment professionals with over 400 years of collective experience, which enables them to offer clients unparalleled expertise, founded on sincerity and long-term relationship building. The investment philosophy focuses on realising undiscovered opportunities for clients through a deep-seated commitment to independent and bespoke research. This is a multifaceted approach that seeks to find the sweet spot between risk and return, growth and cash, as well as compound and cyclical performance, tempered by a long-term view of market returns. “Superior risk-adjusted returns can only be achieved and sustained by building high-conviction portfolios with quality assets of considered diversification with a time horizon that fits your life ambitions,” says Laws. “Our approach is to deliver sustainable long-term returns through a personalised service in an industry that is primarily driven by short-term performance outcomes. This is achieved by managing all aspects of client servicing in-house by people intimately familiar with client circumstances and long-term personal life goals,” explains Laws.

As a homegrown South African company, Melville Douglas is able to provide personal attention and endto-end investment solutions to clients with portfolios of $1m and more, a segment that is not traditionally considered by global boutique investment managers. Melville Douglas’ partnership with Standard Bank has been enormously effective in expanding its offering across the continent and enables it to operate confidently in an increasingly globalised world, with the backing of Africa’s largest banking group. Awards for excellence set Melville Douglas apart in a market that is crowded with competitors. Accolades include the recently awarded Morningstar Award for best South African Global Equity Fund, The Best Boutique Asset Manager in South Africa from Global Brands in 2018, and being a finalist and one of the ‘top four’ wealth managers in the UK for the best overall medium-sized firm at the Citywire Performance Awards. As well as being a finalist in the prestigious PAM awards, Melville Douglas has been included in a shortlist of the 30 best asset managers in the UK Wealth management industry.

Mike Laws, Managing Director, Melville Douglas

THE BOUTIQUE ADVANTAGE

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ophisticated investors around the world are increasingly recognising the ability of focused boutique active investment managers to outperform both non-boutique peers and indices. This is one of the findings of a recent survey, entitled The Boutique Premium – The Boutique Advantage in Generating Alpha, carried out by Affiliated Managers Group (AMG), an American international investment management company headquartered in West Palm Beach, Florida, that owns stakes in a number of boutique asset management firms. “Many of these investors follow a barbell strategy, in which they complement their core passive exposures with allocations to active equity and alternative strategies managed by boutiques.” The survey found that investing exclusively with boutiques over the past 20 years would have created 16% greater wealth for investors than choosing a bigger counterpart. AMG believes the core characteristics that position boutiques well to consistently outperform in return-seeking asset classes include: Alignment of interests: Direct equity ownership ensures that key principals have a vested interest in the long-term success of a boutique. Many of the most talented investment professionals in the world are drawn to the boutique structure, where the incentive system allows them to own the results of their investment performance. Multi-generational management: The presence of a multi-generational management team, including a succession plan, is another core element of a

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boutique. This ensures that key principals will continue to remain motivated and highly involved in business development. Entrepreneurial culture with a partnership orientation: Key partners manage the daily operations of a boutique and are actively involved in business planning and building an enduring franchise. “We believe talented investors are more likely to be drawn to boutiques that offer an entrepreneurial culture and allow them to have a direct impact on the future success of their business.” Investment-centric organisational alignment: A boutique has an investment-centric organisational alignment, typically geared to a distinct investment philosophy (e.g., valueoriented with strong focus on purchasing securities below their intrinsic value) with a highly focused investment process (e.g., bottom-up stock picking). “These investment considerations have primacy at a boutique, which we believe is more likely to manage towards optimal risk-adjusted returns, often setting capacity limits to remain nimble in its investment approach.” Commitment to building an enduring franchise: Key principals of the most successful boutique firms are committed to the long-term growth and success of the firm; in AMG’s experience, this quality is often signalled by principals’ willingness to sign multiyear employment agreements. A stable, long-term environment is ideal for generating investment

Source: AMG

BOUTIQUE MODEL: CORE CHARACTERISTICS GIVING BOUTIQUES AN ADVANTAGE IN GENERATING ALPHA

success, and a group of principals bound together by long-term equity is well positioned to deliver this success. AMG’s analysis incorporated more than 1 300 individual investment management firms around the world and nearly 5 000 institutional equity strategies, comprising approximately $7tn in AUM.

CRAFT DSGN MD 1145-19

Take on the world. Invest in the Best Global Equity Fund in South Africa* When you invest in the Melville Douglas Global Equity fund, you are investing in quality international companies that are not necessarily available to South African investors. In an uncertain world, a globally diversified portfolio through the Melville Douglas Global Equity fund will give you peace of mind in knowing you are reducing the concentration risk of investing in a single region. If you are looking for a partner to help you reach your long-term financial goals,

now’s the time to consider investing with one of South Africa’s truly global managers. Ask yourself, if you are not investing with us, where are you investing? For more information and a personal introduction to the Melville Douglas Global Equity fund, please visit www.melvilledouglas.co.za.

Melville Douglas is a subsidiary of Standard Bank Group Limited. Melville Douglas Investment Management (Pty) Ltd.(Reg. No. 1987/005041/07) is an authorised Financial Services Provider. (FSP number 595). Some transactions described in this advertisement may give rise to substantial risk and are not suitable for all investors and may not be suitable in jurisdictions outside the Republic of South Africa. You should contact Melville Douglas before acting on any information in this advertisement, as Melville Douglas makes no representation or warranty about the suitability of a product for a particular client or circumstance. You should take particular care to consider the implications of entering into any transaction, including tax implications, either on your own or with the assistance of an investment professional and should consider having a financial needs analysis done to assess the appropriateness of the product, investment or structure to your particular circumstances. Past performance is not an indicator of future performance. Morningstar South Africa Fund Awards 2019*

BOUTIQUE ASSET MANAGERS SUPPLEMENT

CL TREURNICHT Portfolio Manager: Gryphon All Share Tracker Fund

Consistency We live in the era of the fourth industrial revolution; industries are scrambling to implement seemingly innovative new processes and, at the same time, face the threat of being left behind. In the investment industry we are witnessing innovation on all fronts to ensure operations are more efficient and deliver better outcomes. Despite all this innovation, there is one sphere of investing that remains constant: Indexation (or rules-based investing). We consider it the safety net that’s taken investors more than 40 years to appreciate. The question is no longer whether indexation should be utilised in constructing portfolios, but rather what allocation is appropriate. As at 28 February 2019, an index fund that tracks the broad market outperformed at least 72% of its peers in the General Equity Sector over various periods, as seen in Table 1. This percentage could have been higher had the funds that have closed down also been considered (survivorship bias). We have noticed that the majority of the General Equity Sector assets are held by funds that have highly inconsistent performance – the five biggest funds with a 10-year history hold 30% of the assets. The Gryphon ALSI Tracker has consistently outperformed these funds, as well as at least 80% of its peers, over multiple periods.

30 April 2019

INDEXATION WITH PURPOSE

The vertical axis in Chart 1 fees being charged; tracking ability the selected index. indicates the percentage of peers in is critical. Chart 2 illustrates the The zero-percentage grey line indicates the General Equity Sector that each variability of capabilities in tracking an ideal tracking error of zero. fund has outperformed. We are not inviting the CHART 1: CONSISTENCY OF BIG FUND RETURNS active vs. passive debate but rather are committed to informing the investing public of the merits of allocating a portion of their wealth to indexation. As seen in this chart, some funds consistently under-performed the majority of their competitors, while others’ performance was markedly inconsistent. Timing an investment demands an incredibly deep understanding of the fund, the fund manager and the strategy employed Source: Profile Media, Net performance data from 15 Feb 2009 to 15 Feb 2019 at a specific time when CHART 2: TRACKING ERROR ON INDEX FUNDS (ANNUALISED PERFORMANCE %) the investing world is (constantly) evolving. We believe it is extremely challenging to identify an outperforming fund beforehand and, further, to disinvest at the right time. Index tracking There is also measurable skill involved in tracking an index. Selecting an index fund does not depend solely on the type of index that the fund tracks and the Source: Profile Data, 31 December 2018

TABLE 1: GRYPHON ALL SHARE TRACKER A TR IN ZA

6m

1yr

Return % Outperformed

Return % Outperformed Return

% Outperformed Return % Outperformed Return

% Outperformed

-0.26

-1.49

82%

83%

74%

3yr 72%

18.53

5yr 36.08

10yr 86%

300.34

Source: Profile Media – FE Analytics, 28 February 2019

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INVESTING

30 April 2019

Old Mutual sees improved investment opportunities in SA

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same period,” he explains. Tucker believes that South Africa is currently in a better position compared to this time last year and is making incremental progress. Therefore, combined with attractive valuations in select areas, he is seeing increased opportunities. “The market will provide opportunities to trade aggressively, however, active management is essential in the current shifting environment. For example, we bought Capitec after the Viceroy controversy at the beginning of 2018 and have seen it rally more than 50% since then,” he says. “In this move towards increasing SA exposure, bonds are our preferred asset class,” adds Tucker. “It’s still a bit early to aggressively invest into South African equities, unless there’s a good valuation underpin as we see in financial services.” Old Mutual Investment Group does, however, acknowledge that there are risks facing South Africa, not least of which is Moody’s, the last of the three ratings agencies

to still assign an investment grade to the country’s debt, which is scheduled to announce its rating decision at the end of March. Moody’s said on 21 February, a day after Finance Minister Tito Mboweni delivered his 2019 budget speech, that it did not believe the decision to increase the expenditure ceiling by R16bn over three years would weaken the credibility of South Africa’s fiscal policy. “A lot depends on Moody’s, and then there’s the election in May coming up,” said Johann Els, Chief Economist for Old Mutual Investment Group. “On balance they will probably keep the rating unchanged, although even if they do put us on credit watch, that would still give South Africa three months to present a plan to convince them otherwise before they institute a downgrade.” Els forecasts economic growth in South Africa to reach 1.5% in 2019, from an estimated 0.7% last year. He said the rand was likely to remain stable over the next few years,

provided the country maintained its political stability after the 2019 general election scheduled for 8 May 2019. The Old Mutual Balanced Fund has been one of Morningstar’s top quartile funds over the last three-, five- and ten-year periods as at 31 January 2019, within its category. Both the Old Mutual Flexible Fund and Stable Growth Fund also delivered competitive returns over these periods. Despite a challenging five years for equities, these funds have delivered ahead of their respective objectives, with the Old Mutual Balanced Fund providing annualised performance of 12.4% as at end January 2019.

Graham Tucker, Fund Manager, Old Mutual

119625L

ld Mutual Investment Group has been steadily reducing the exposure of its actively managed balanced fund offering to global markets such as the US, and is increasing allocations to South African asset classes. This is due to a gradual improvement in South Africa’s public sector prospects, which could drive an uptick in economic growth in the years to come. “Growth in the US is still good, but it is going to be increasingly challenging to maintain the current level of growth,” says Graham Tucker, Manager of the Old Mutual Balanced Fund. “The US market is already largely reflecting this positive growth, hence we believe US equity returns will disappoint from here. At the moment the US market is as good as it gets, while South Africa offers quite a compelling opportunity. “We have steadily reduced our active exposure to global assets. By contrast, the Funds’ active exposure to South African assets, primarily bonds, has been increased over the

WHY YOUR INVESTMENT CHOICES MATTER.

18 000 children receiving quality education. 1 300 teachers employed.

Our investors want their investments to do well and do good. That’s why we incorporate environmental, social and governance factors into all our investment and ownership decisions. And why we have committed over R122bn of our clients’ capital to sustainable investments that generate longterm returns, while solving some of society’s biggest challenges. Invest for a future that matters. Read more at oldmutualinvest.com INVESTMENT GROUP DO GREAT THINGS EVERY DAY

The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group (Pty) Ltd Holdings approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group. Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No:604. | Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No:45255. | African Infrastructure Investment Managers (Pty) Ltd (Reg No 2005/028675/07), FSP No:4307. | Futuregrowth Asset Management (Pty) Ltd (Reg No 1996/18222/07), FSP No:520. Figures as at 31 December 2018 unless otherwise stated. Sources: Old Mutual Alternative Investments; African Infrastructure Investment Managers (AIIM); Old Mutual Specialised Finance; Futuregrowth Asset Management.

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INVESTING

30 April 2019

JACO VAN TONDER Adviser Services Director, Investec Asset Management

The importance of growth assets for living annuity investors

PART This is the fourth article in our series on how to manage a living annuity to provide an inflation-proof income over 4/5

a period of 30 years. In our first, second and third articles, we introduced some of the key conclusions from our living annuity research, and we expanded on how important volatility is to the long-term success of an income portfolio. We also took a closer look at how to manage the income withdrawal strategy for a living annuity investor. In this article, we look at what growth assets mean for living annuity investors.

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e now examine how best to construct living annuity portfolios, looking at the size and composition of the equity component required to deliver a 30-year inflation-proof income. From our research, using index return data going back to 1900, we make three conclusions: 1. A living annuity portfolio should consist of 25-40% in equities for low starting incomes in the range of 2.5-3.5% . 2. As initial income levels increase from these low levels, annuities require increased exposure to equities – as high as 75% – once initial income drawdown levels reach 5%. 3. A living annuity requires a consistent 20-35% exposure to offshore equities, irrespective of the size of the initial income drawdown levels. Beating inflation requires exposure to equities Even though the principle of ‘beating inflation requires exposure to equities’ is widely accepted by all investment professionals, it is easy to overlook this principle in situations where an investment portfolio is required to produce an income. We often find that portfolios set up to produce inflationmatching incomes end up with the bulk of their assets being exposed to fixed income instruments only. Over the years we have asked advisers to vote for the most popular investment portfolio they would use for living annuity clients. Until recently, the standard response was to choose a portfolio with a maximum of 40% exposure to equities for all annuity clients. For many advisers this portfolio represented the ideal combination of risk and return, striking a balance between achieving inflation-beating growth over the long term and managing short-term portfolio volatility (and the associated investor anxiety). We decided to test this maxim about the 40% equity portfolio. Using our annuity model, we optimised asset allocations for 30-year term annuities with a range of starting incomes from as low as 3% to as high as 7.5%. We tasked the optimiser engine to: • Project failure rates for annuities

FIGURE 1: MINIMUM EQUITY EXPOSURE REQUIRED TO MINIMISE FAILURE RISK OF ANNUITY

FIGURE 2: FAILURE RATES OF ANNUITIES WITH A MAXIMUM OF 40% EQUITY EXPOSURE

with a 30-year lifespan based on their ability to produce an inflationprotected income. • Optimise the asset allocation for different starting incomes to minimise annuity failures. • Keep the investment portfolio inside the Regulation 28 limits for equities, i.e. the portfolio cannot have more than 75% in equities. Figure 1 summarises the results: The results clarify important points regarding equity exposure for annuities: • Annuities need a meaningful exposure to equities – even annuities with starting incomes as low as 2.5% require at least a 25% equity exposure to succeed. • Portfolios with zero equity exposure don’t get the job done. Using the last 118 years’ actual investment returns, a living annuity with a starting

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income of 2.5% and a portfolio that has an exposure of 20% to the money market and 80% to South African bonds, has a failure rate of almost 60%.

OUR DEFAULT ANNUITY PORTFOLIO OF 40% EQUITIES IS ONLY OPTIMAL FOR STARTING INCOMES UP TO 3.5% • As the starting income on an annuity increases, the minimum equity exposure required rises. • Our default annuity portfolio of 40% equities is only optimal for starting incomes up to 3.5%. As your starting income requirement reaches 4%, the minimum equity exposure is already at 50%. And at a 5% starting income, your equity exposure should be over 70%. For many investors and advisers these results contain some surprises. Many people have expressed astonishment at how quickly an annuity portfolio’s equity exposure needs to rise as the starting income levels increase. Figure 2 highlights how sensitive annuities are once starting incomes go over 4%. It also illustrates the failure rates of annuities where the maximum equity exposures are capped at 40% (as opposed to 75% in our examples). The results in Figure 2 clearly show how dangerous it is to use a 40% equity portfolio for a 4.5% or 5% starting income annuity.

LIVING ANNUITIES

Is your retirement inflation-proof? One of the biggest risks pensioners face, is running out of money. To address this age-old problem, our in-house research has created a few important guidelines. They range from how you should invest your capital to what level of income you can afford to draw, what exposure to offshore equities you should consider and the significance of volatility on ensuring a comfortable retirement. To make the most of your retirement, visit www.investecassetmanagement.com/livingannuities

Asset Management

Unit Trusts

Retirement Funds

Offshore Investments

Investec Asset Management and Investec Investment Management Services are authorised financial services providers.

IAM_MM_E_89870

INVESTING

30 April 2019

Employers still owe a fiduciary duty to their employees

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ore employers are turning trustees who are appointed by a to umbrella funds to help commercial sponsor and who have provide their employees with no personal relationship with the retirement benefits. But even though members. umbrella funds relieve employers of Employees often have limited much of the administrative burden of understanding of retirement running a standalone retirement fund, products, their benefits and the employers still owe a fiduciary duty to fees that they pay for management, their employees. administration and advice. They This is according to Saleem are often not consulted on how or Sonday, head of group savings and where their hard-earned money investments at Allan Gray, who notes is invested and have little or no that even though, as an employer, say at all in fee negotiations. Fees you may take advantage of the ease of are often perceived to be excessive administration and lower costs that are relative to investment growth. often provided by umbrella funds, it is “The decisions you make have important to remember that you are a direct impact on the member’s not relieved of your fiduciary duties. retirement benefits. Members are The term “fiduciary” refers to a vulnerable, as they have little-toperson who holds a position of trust, no opportunity to engage with or whether in a legal or ethical sense. object to these decisions,” he says. “If you apply common law Sonday offers four practical thinking, in our view it is clear that actions to take in fulfilling your as an employer you have a fiduciary fiduciary duties: duty to protect the financial interests • Conduct an appropriate due of your employees,” says Sonday. His diligence into the preferred rationale is summarised as follows: umbrella fund before you Members of occupational funds agree to participate. This have little to no control over their should include a review of employee benefits. As an employer you the governance, service, decide whether or not you will provide administration capability and employee benefits, which provider to costs of those funds, to ensure invest with, how contributions are to that members will receive good be invested, which adviser/consultant service and value for money. to engage with and, often, the rate of • Assess the appropriateness the members’ contributions. Members and cost-effectiveness of the agree to contribute to a retirement investment arrangements in light fund in terms of their employment of the profile of your employees contracts and most are not able to and, carefully consider the negotiate these terms. default investment portfolios In standalone funds, the Pension offered by the Fund. Funds Act requires that at least half of • Ensure that adequate and the board must comprise of memberappropriate communication elected trustees. However, umbrella is provided to members so funds are usually exempt from that members understand the this requirement and their boards benefits and costs associated comprise Money_Marketing_Quater_Page_No_Early_Bird_220x80mm.pdf mostly of professional with the fund. Ensure09:23:20 that AM 1 2019/03/26

there is adequate ongoing member communication and engagement. • Periodically reassesses your chosen product provider, the governance of the fund, the costs being deducted from employee contributions and benefits, the default investment portfolio you have selected and, where applicable, the fees and services of your appointed adviser.

consultant to assist with the above process and/or to provide advice and intermediary services to help you make a more informed decision,” Sonday says.

“If you are not in a position to carry out the above process on your own, consider appointing an adviser or

Saleem Sonday, Head: Group Savings and Investments, Allan Gray

Satrix lists global ETFs in Africa Satrix is taking its exchange traded funds (ETFs) into the rest of Africa. The first phase launched last month as the Namibian Stock Exchange welcomed the secondary listing of the Satrix global ETF suite. Satrix launched three global ETFs on the Johannesburg Stock Exchange (JSE) in July 2017: Satrix MSCI World, Satrix MSCI Emerging Markets and Satrix S&P 500. In April 2018 the Satrix NASDAQ 100 was added to the global offering. All four these ETFs are now available to Namibian investors on their own exchange, in their own currency. Says Satrix CEO Helena Conradie, “Investors’ interest in our JSE-listed global suite has been very encouraging, with assets now just over R2bn. We want to open up this opportunity to other African exchanges, with Namibia being a natural first choice.”

“The NSX has two main goals, being to deepen and to diversify the investment offerings to the Namibian public and pension funds – these products that allow international and multi-currency hedging opportunities fit our purpose to a tee,” says Tiaan Bazuin, CEO of the Namibian Stock Exchange. Satrix plans a further roll-out of secondary listings on other major African exchanges.

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2019 marks the 30th FPI Professionals Convention, themed “Adding Value” which takes place in Johannesburg on the 17th and 18th July 2019 at the Sandton Convention Centre. Our line-up this year offers some of the best local and International thought leaders and speakers.

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Why you need to attend this year’s FPI Professionals Convention? • Access tools and practical insights to build business and promote your self-development. • Learn industry trends and how they are implemented. • Meets experts and influencers face-to-face. • Input to questions posed panellists. • Network with like-minded professionals and top speakers at the FPI Awards Ceremony Gala Dinner.

WHO TO CONTACT? Adele Whyte / Bhavisha John

Email: adele.whyte@fpi.co.za / bhavisha@fpi.co.za Telephone: 011 470 6000

INVESTING

30 April 2019

Safety in numbers

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uppose you were given a once-off there is indeed safety in numbers. chance to make a million rand Using the same example, suppose from a fair coin toss if it lands instead of standing to lose half a on heads, or alternatively, pay or lose million its only five hundred rand, half a million rand if it lands on tails. and similarly, only a thousand Most people, much like the colleague instead of a million rand is up for that renowned economist Paul A. grabs. Suddenly the once-off gamble Samuelson wrote about in his 1963 becomes much more palatable. As paper, Risk and Uncertainty: A Fallacy painful as losing the five hundred of Large Numbers, would hesitate to could potentially be, it is unlikely to take this gamble. And rightly so. lead to financial ruin. Behavioural finance has since This is consistent with appropriate taught us that we exhibit loss aversion. active position sizing in our That is, despite the favourable odds, investment portfolios. Our active the pain of losing half a million rand positions are adjusted to ensure would outweigh the utility of gaining that, regardless of how much we a million rand. Consequently, when like a company, the possible alpha evaluating these types of decisions, contribution, or detraction, from any the greatest consideration must single counter will not compromise always be placed on the downside the active performance of the entire risk, as opposed to the upside gain. product or portfolio. These circumstances are analogous Coming back to the analogy – to buying shares in a company for suppose you can flip the coin up to a half a million rand that could either thousand times instead of only once, triple in value or fall to naught. Yes, it and that you can walk away from the could be argued that the probability table at any point. Again, this makes of tripling a share’s the gamble much more value versus a total tolerable. Given the paywipe-out is not OUR APPROACH offs for each outcome and akin to a coin toss, SIMPLY STACKS barring the fact that the and this would be overall expected pay-off THE NUMBERS is the same, you may well a valid argument. The pertinent point, IN OUR FAVOUR lose money on a single however, is that either flip, but you are more way, the expected payoff is necessarily likely to realise the positive pay-off positive, denoting a company that is from repeatedly playing. well liked and expected to perform Therefore, unlike some other positively. managers that would make a Yet for most people, irrespective of handful of large bets, we repeatedly the positive expected pay-off, taking make small active bets across a such a gamble without somehow larger number of shares that have managing the downside risk would a positive expected payoff. We may be considered rash. While none well be wrong on a few shares but by of this is new, we repeatedly see spreading our bets over many shares, examples of the devastating effects on overall, we are more likely to realise performance from taking large bets that positive pay-off. on single stocks: Aspen Pharmacare, This is not to be confused with Steinhoff, Mediclinic, MTN Group, passive portfolio management as the British American Tobacco, Resilient overall active share remains as large REIT and Ascendis Health – to as, if not larger than, other active mention a few. Many funds took large managers. Our approach simply stacks and lumpy bets on one or several of the numbers in our favour, while these counters before they all took a importantly ensuring that we are bath, mostly on the back of factors protected from idiosyncratic risks that endogenous to the companies. have so often been the downfall of the We argue that, regardless of how performance of many managers. much you like your odds, taking This is Prescient’s DNA: slow, steady a bulky active position in a single and consistent. counter is not unlike taking the gamble proposed earlier. It is an approach plagued with emotional biases, most notably overconfidence, and is principally focused on upside gain with an inept level of regard for downside active risk management. We prefer a much more pragmatic Seeiso Matlanyane, and less emotionally fuelled approach, Portfolio Manager, one that stacks the likelihoods in our Prescient Investment favour and relies on the premise that Management

Over R750m raised to stimulate SA economy

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estbrooke Alternative Asset Management, SA’s largest Section 12J asset manager, confirmed that it successfully closed its February 2019 fundraise, with over R750m raised across four local Section 12J investment strategies. These strategies include investment into businesses in student accommodation, moveable asset rentals, hospitality and asset-backed operating businesses. Investors were also able to diversify their investments across these strategies, by investing through three S12J investment portfolios. Dino Zuccollo, S12J fund manager at Westbrooke Alternative Asset Management, and a founding member of the S12J Association of South Africa, says, “We see increased growth each year from our now more than 700 passive investors. We raised R420m in 2016, R470m in 2017, R565m in 2018, of which over R900m has been invested into small/ medium-sized business across South Africa. We are very pleased with our 2019 raise of more than R750m. Our 2019 fundraise was in line with our targets and we were able to solidify our position as South Africa’s largest S12J asset manager. This highlights investors’ growing interest in this asset class and confirms that National Treasury’s intention to encourage investment in the SA economy and to stimulate job creation is on track.” It is estimated that the S12J market now has upward of R5bn under management, positioning Westbrooke as the market leader in the S12J industry, with approximately R2.3bn in S12J assets under management. Jonti Osher, a S12J fund manager at Westbrooke Alternative Asset Management, adds, “Westbrooke spearheaded the formation of an industry body to prove the viability of extending the incentive past June 2021 (there is a 12-year sunset clause). The body, The Section 12J Association of South Africa, aims to compile what the association believes is the relevant information that National Treasury can use to assist in understanding the success of the incentive and motivating to extend the legislation post the sunset clause.” The S12J Association will look to investigate the number of Section 12J investments made, how many jobs have been created and sustained, how much S12J capital has been deployed, what sectors of the economy and geographic areas are benefiting, and economic activity around S12J, among others. The body will track successes as well as areas that can be improved for the benefit of the industry and investors. S12J is an investment tax incentive that was introduced by the South African Revenue Services under Section 12J of the Income Tax Act in 2009. It wasn’t until 2014, however, when SARS made a number of favourable amendments to the Section 12J legislation, that the industry began to gain traction among investment circles. The intention of S12J is to boost the South African economy and promote job creation by encouraging investment into a range of private companies that meet defined criteria. The incentive gives individuals, companies and trusts the ability to write off 100% of their investment against their taxable income in the year they invest. Therefore, investors can benefit from up to 45% immediate tax relief, thereby reducing the cost of the investment and enhancing overall returns, rewarding investors for participating in the economic stimulation of the SMME sectors.

Dino Zuccollo and Jonti Osher, S12J fund managers, Westbrooke Alternative Asset Management

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RISK

30 April 2019

Insuring weird and wonderful high-networth items

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etting insurance for your household contents and motor vehicles is pretty standard procedure these days. However, how does one go about insuring a Coca Cola memorabilia collection worth about R750 000, or a brand new Rolls Royce that was bought for R12M, then sent for bespoke personalisation in Italy, resulting in the car arriving in South Africa worth about R25m? Tarina Vlok, General Manager at Elite Risk Acceptances – a subsidiary of Old Mutual Insure that provides bespoke short-term insurance solutions to high-net-worth individuals – says that they have a panel of specialists that are able to conduct valuations of these weird and wonderful items. “The benefit of getting experts to conduct this type of value assessment is that they have no emotional connection to the bespoke item or collection, and can therefore assess the items from a purely replacement-value perspective,” she explains, adding that, often, these collections cannot be replaced, in which case the replacement value has to be agreed upon. Over time, the appreciation value of most of these items is usually closely related to the exchange rate, she says. “Professional valuators consider this volatility when assessing the value. However, any addition to a collection or modification to a bespoke item will clearly have an impact beyond exchange rate fluctuations, and it is therefore recommended that these valuations are done every two years to ensure that your collection is correctly valued. “If there has been no addition, the original valuator will probably do a desktop re-valuation based on rarity, supply and demand, exchange rate and exclusivity. With new additions, they prefer to do a new valuation,” she explains. These valuable items do, however, often carry specific storage and care requirements when being insured. “Many valuable collectibles and memorabilia – particularly fragile items such as old books or even designer clothing – may require temperature controlled storage areas with controlled air-flow and lighting. “In the case of looking after custom-made cars, clients will usually have structured and regular engagements with the vehicle manufacturers and/or distributors to ensure that the engines remain in good running condition. It also follows that these vehicles are not driven that regularly and are collected purely for the joy of the collection.” Vlok says that when it comes to valuable collectibles and memorabilia, the most common pitfalls remain underinsurance or not insuring the items at all. “This is often because people have no intention to ever replace these items – perhaps because their real value may be more sentimental than financial – or they are completely unaware that such items aren’t automatically included in a normal home contents policy. “Nevertheless, failing to insure these items properly will result in substantial financial loss should something happen to them. Furthermore, if the items are not specifically excluded from the contents sum insured, it may result in underinsurance, which could lead to the reduction of settlement amounts on claims.” Most importantly, however, Vlok highlights the need for specialist cover when it comes to insuring these weird and wonderful collectibles and memorabilia. “Given the high values at risk, their complexity, and the need for a bespoke service, insurance for these high-value items is far removed from the high-volume personal lines market. This is one of the many reasons why specialist underwriters and brokers are required to effectively service the unique needs of the high-end market,” she adds.

Tarina Vlok, General Manager, Elite Risk Acceptances

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Research debunks myths about life cover

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ife insurance, a product once perceived as a luxury purchase made mostly by married couples and young families with kids is no longer the norm according to a recent study conducted by Olico, one of South Africa’s largest direct marketing companies. In a study of more than 10 000 applicants who applied to the many life insurance products marketed, it was found that the most common buyer of life cover is neither married, has kids, nor does she or he own a home. In fact, it’s becoming a more popular choice for South Africans as the rising middle class is buying more aspirational insurance products. Head of Sales at Olico, Gareth Mountain says: “There are a number of reasons why people take out life cover. For some it’s to provide a lump sum of money in the event of their own death. Or to provide a lump sum for someone else’s life in the event of their death. Often the payout is used to cover any debt left by the deceased that that would need to continue for a number of years or to sustain the family of the deceased who is often the primary breadwinner. Payouts usually run from R100 000 up to millions of rand.” While life insurance is very different to a funeral plan, a funeral plan has traditionally been the more popular of the two in South Africa. Funeral plans are used to pay for funerals and cover costs of the headstones. They can cover many family members under one policy. While the premiums are lower, the payouts are lower when compared with life insurance payouts. This research reveals specific details about the characteristics of people who apply for life cover.

THE MOST COMMON BUYER IS IN FACT NOT MARRIED WITH KIDS

Firstly, the median profile had to be determined: • Age: 30-39 • Has good credit (i.e. has a credit card, but no personal loan) • Has children • Has a cellphone contract and credit card • Black • Car owner, but not a homeowner • Full-time employment (but not by the government) • Not married Based on this median profile, which is considered to be the most common profile and not the average, some further interesting analysis was done: • The white population is 2.8% more likely to have life insurance compared to the median. • Self-employed people are 10.9% less likely to have life insurance, whereas government employees are 4.8% more likely to have life insurance than the median. • Those that earn over R45 000 per month are only 6.9% more likely to have life insurance than the median. • People that do not own a car are 17.1% less likely to have life insurance than the median, whereas home owners are 9% more likely to have life insurance than the median. Interesting findings include: 1. Younger people are the most common owners of life insurance, moving away from mass marketing funeral plans, as they can now afford more cover. Traditionally, life insurance has been bought by young families with kids, who have debt (home loans). This research shows that the most common buyer is in fact not married with kids, and does not own a home. 2. Those that have life insurance tend to have a number of different financial products and have a more sophisticated outlook when it comes to their financial affairs.

Gareth Mountain, Head: Sales, Olico

RISK

30 April 2019

Cyber incidents top risks for financial services sector

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he financial services industry’s biggest risks are cyber incidents, which are increasingly bringing significant disruption and financial losses to the industry. This is according to the eighth Allianz Risk Barometer 2019, an annual survey on global business risks from Allianz Global Corporate & Speciality (AGCS) that incorporates the views of a record 2 415 experts from 86 countries, including CEOs, risk managers, brokers and insurance experts. Cyber incidents took the top spot for two years running with a response rate of 46% versus 51% last year. Many incidents are the result of technical glitches or human error rather than malicious acts. This is according to an analysis conducted by the UK’s financial services regulator, which revealed a 138% increase in technology outages over a year, but just 18% of reported incidents were cyber-attacks. Reports claim that cybercrime will be the most disruptive economic crime to affect their organisations in South Africa over the next 24 months. The country has the third highest number of cybercrime victims worldwide, losing about R2.2bn a year to cyber-attacks.

Changes in legislation and regulation also retain second position with a response rate of 31% versus 28% in 2018. This is due to increased regulations in the financial services sector locally and internationally. One of the most significant regulatory changes affecting the industry in South Africa was the establishment of the Twin Peaks model for financial sector regulation as a means to reform the regulatory and supervisory system of financial institutions. This was implemented through the passing of the Financial Sector Regulation (FSR) Act. The FSR Act gave effect to important changes relating to the supervision of the financial sector. Most notably, it created a prudential regulator, the Prudential Authority (PA), located within the South African Reserve Bank (SARB), and established a market conduct regulator, being the Financial Sector Conduct Authority (FSCA), which is located outside of the SARB. The PA is responsible for regulating banks, insurers, cooperative financial institutions, financial conglomerates and certain market infrastructures. Previously, the Financial Services Board had oversight of prudential regulation of insurers, whereas SARB

had prudential oversight of banks. This created opportunities for regulatory arbitrage, in particular for larger financial conglomerates whose different subsidiaries may have had different regulators overseeing their prudential positions. Clearly, in a post-credit-crisis world, financial conglomerate and group supervision is essential and this “marks an important milestone on the journey towards a safer and fairer financial system that is able to serve all citizens”. Although unrelenting regulatory changes come with increased costs and implementation challenges, they do, however, present hidden opportunities for insurers to better manage risk, and allocate capital appropriately. Some of the new regulations that are put in place are expected to prompt insurers to redesign simpler and more appropriate products for their customers. Market developments (e.g. volatility, intensified competition/new entrants, mergers and acquisitions, market stagnation, market fluctuation) moved down from second to third, with an unchanged response rate of 28%. For instance, reports indicate that the newly-licensed South African banks are likely to pose disruptions to the local banking industry through web- and app-based services and by leveraging on behavioural and neuroeconomics. Risk arising from natural catastrophe (e.g. storm, flood and earthquake) is a newly ranked risk at number

four, with 26% of responses. A recent report indicated that reinsurers do not regard South Africa as a low catastrophe-risk region anymore, with the country having experienced a high frequency of large loss events in the last five years, such as Knysna fires and Durban floods, which cost the industry more than R5bn. Business interruption (BI) has moved from fourth to fifth place with 24% (2018: 27%) of responses. Companies face an increasing number of BI scenarios and many of them can occur without physical damage but with significant financial losses. In addition, the breakdown of core IT systems, product recall or quality incidents, political violence or protests, as well as environmental pollution, can severely impede a company from operating. If companies are unable to provide products and services, or customers choose to stay away, the impact on revenue can be devastating.

Broader offering of insurance solutions for aviation sector

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zriel Aviation Africa and the Constantia Insurance Group have partnered to offer the aviation sector a much-needed broader offering of insurance solutions. Collaboratively with Constantia Insurance, Azriel Aviation Africa can offer insurance to the aviation sector that goes beyond essential aviation insurance. “We have expanded into international and local travel cover, and can now offer primary health insurance and gap cover, among other solutions,” says Jan Coetzee, CEO of Azriel Aviation Africa. Business and personal lines products can be bundled to provide holistic insurance solutions for businesses and individuals. Azriel’s wider cover also provides for premium savings and increased comprehensive risk management for clients. “We are jointly geared for a changing insurance market where holistic offerings make for streamlined insurance cover that provides for clients’ needs beyond aviation,” says Coetzee.

Following a successful eight-year partnership with Centriq Insurance Company, under the brand of Azriel Aero Aviation Underwriting Managers, Centriq has shifted its strategy away from aviation, which provided Azriel the opportunity to partner with Constantia in December 2018. Says Constantia CEO Volker von Widdern, “Constantia is 100% owned by Conduit Capital Limited, a Global Credit Ratings (A)-rated company with four branches countrywide and a proud heritage of 65 years. Together, this partnership forms a powerhouse in the aviation, short-term and life insurance markets.” Says Coetzee, “I’ve been involved in aviation insurance for more than two decades, and Azriel Aviation Africa has been a specialist insurer in the aviation insurance market since 2010. At Azriel, we share Constantia’s vision of being the leading players in the market by offering the aviation sector a broader selection of innovative solutions. Our solutions will be backed by unparalleled service excellence for which both companies are known. Our aim is to achieve mutually rewarding relationships with our brokers, clients and staff.” Coetzee assures the market of Azriel’s commitment to the insurance market. “With increasing demands of aviation safety, security and risk management, it is critical that we continue to guarantee brokers a

speedy turnaround, from quotation through to claim settlement. To ensure service and claims excellence, all administrative requirements are processed inhouse with service levels via Constantia’s legal and technical resources. This means that brokers can focus on providing outstanding service to clients while the partnership team dots the i’s and crosses the t’s,” explains Coetzee. He says that the new partnership is founded on respect and transparency, which means full disclosure upfront, and clear, agreed-on underwriting terms to ensure ongoing relationships with clients. “The claims stage, during which the broker and client are under pressure, is not the time to be discussing small print,” says Coetzee. Says Von Widdern, “We believe that insurance should be personal, and this philosophy is shared by Azriel. At Constantia, we are a passionate and responsive team that seeks to provide innovative risk and insurance solutions in current and new markets, while preserving our proven capabilities. We know that wisdom comes with six decades of carefully studied experience, but it means nothing without a mind hungry for knowledge. Insurance innovations, fresh ideas and combined knowledge, along with enhanced applications, is what this new Azriel and Constantia partnership is all about.”

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EDITOR’S BOOKSHELF

BOOKS ETCETERA

30 April 2019

WE ARE THE NERDS THE BIRTH AND TUMULTUOUS LIFE OF REDDIT, THE INTERNET’S CULTURE LABORATORY BY CHRISTINE LAGORIO-CHAFKIN Reddit sees itself as ‘the front page of the internet’. It’s the third most-visited website in the United States – and yet, millions of Americans have no idea what it is. We Are the Nerds is an engrossing look deep inside this captivating enterprise, whose army of obsessed users have been credited with everything from solving cold case crimes and spurring tens of millions of dollars in charitable donations, to seeding alt-right fury and landing Donald Trump in the White House. We Are the Nerds is a gripping start-up narrative: the story of how Reddit’s founders, Steve Huffman and Alexis Ohanian, rose up from their suburban childhoods to become millionaires and create an icon of the digital age – before seeing the site engulfed in controversies and nearly losing control of it for good. Based on Christine Lagorio-Chafkin’s exclusive access to founders Ohanian and Huffman, the book is also a compelling exploration of the way we all communicate today – and how we got here. Reddit and its users have become a mirror of the internet: it has dingy corners, shiny memes, malicious trolls, and sometimes an ability to connect people across cultures and ideological divides.

AMAZON HOW THE WORLD’S MOST RELENTLESS RETAILER WILL CONTINUE TO REVOLUTIONIZE COMMERCE BY NATALIE BERG AND MIYA KNIGHTS The retail industry is facing unprecedented challenges. Across all sectors and markets, retailers are shifting their business models and customer engagement strategies to ensure their survival. The rise of online shopping, and its primary player, Amazon, is at the heart of many of these changes and opportunities. This book explores the e-commerce giant’s strategies, providing original insight at a time when the company is on the cusp of revolutionising itself even further. Amazon’s relentless dissatisfaction with the status quo is what makes it such an extraordinary retailer. This book explores whether the company has what it takes to become a credible grocery retailer, and as it transitions to bricks-and-mortar retailing, explores whether Amazon’s stores can be as compelling as its online offering and if innovations such as voice technology, checkout-free stores and its Prime ecosystem will fundamentally change the way consumers shop.

ZUCKED WAKING UP TO THE FACEBOOK CATASTROPHE BY ROGER MCNAMEE

SUDOKU ENTER NUMBERS INTO THE BLANK SPACES SO THAT EACH ROW, COLUMN AND 3X3 BOX CONTAINS THE NUMBERS 1 TO 9.

This is the story of how a noted tech venture capitalist, an early mentor to Mark Zuckerberg and investor in his company, woke up to the damage Facebook is doing to society and set out to try to stop it. The book’s author, Roger McNamee, had mentored many tech leaders in his illustrious career as an investor, but few things had made him prouder, or been better for his fund’s bottom line, than his early service to Mark Zuckerberg. Still a large shareholder in Facebook, he had every good reason to stay on the bright side. Until he simply couldn’t. Zucked is McNamee’s reckoning with the catastrophic failure of the head of one of the world’s most powerful companies to face up to the damage he is doing. It’s a story that begins with a series of rude awakenings. First there is the author’s dawning realisation that the platform is being manipulated by some very bad actors. Then there is the even more unsettling realisation that Zuckerberg and Sheryl Sandberg are unable or unwilling to share his concerns. And then comes Brexit and the election of Donald Trump, and the emergence of one horrific piece of news after another about the malign ends to which the Facebook platform has been put.

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EDITORIAL EDITOR: Janice Roberts janice.roberts@newmedia.co.za LAYOUT & DESIGN: Julia van Schalkwyk SUB EDITOR: Anita van der Merwe

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