29 February 2020 | www.moneymarketing.co.za
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HOW GRETA THUNBERG IS RESHAPING THE GLOBAL INVESTMENT INDUSTRY
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PROPER RETIREMENT BENEFITS COUNSELLING COULD CHANGE THE LIVES OF EXITING EMPLOYEES
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Employers have the power to add meaningful value to their employees
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The future of investing
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he changes impacting both South African and global investors this year, and beyond, are significant. That’s the word from Alexander Forbes’ Chief Investment Officer, Gyongyi King, and Head of Manager Research, Lebo Thubisi.
Gyongyi King, Chief Investment Officer, Alexander Forbes Investments
“Change is firmly in the air as clients are increasing their interest in sustainable investing. We’ve also seen that managers have increased resources deployed to technology and big data, while aggregate investment management fee levels have decreased,” they told a media briefing at the company’s headquarters in Sandton last month. A consolidating asset management industry “Consolidation is taking place in the asset management industry and this is getting a lot of attention overseas, where the bigger managers are getting bigger,” King said. “You think that some of the largest asset managers can’t possibly merge any more, but they merge again and again. This isn’t happening so much in South Africa – yet.” She explained that some larger investment managers are using their scale to expand profit margins, while offering products at lower costs. Many of these firms have done so by investing in new technology to improve performance and efficiency, with their success leading to brand recognition.
Meanwhile, many small and midsized investment managers, lacking scale, are battling to maintain profitability. High fees and subpar returns from active funds have led to a flood of assets from active to passive managers, “but this is more tempered in South Africa than globally”, King said. “The biggest switch from active to passive has been in the US and it has been predicted that next year, passive will be bigger than active there.” The move from active to passive investments has sent fees lower, led to the loss of thousands of jobs and forced large-scale consolidation among firms. “That’s pushing the industry – with $74tn in assets – towards a shakeout where only the strongest will survive and where you have to be either very big or very niche to compete. Those in the middle are going to struggle,” she added. Regulation Regulation is another important trend in asset management and King pointed out that the legislative framework instituted by the European Union to regulate financial markets, known
as the revised Markets in Financial Instruments Directive, or MiFID II, is costly and complex: “It could even tip managers with tight margins into liquidation or consolidation, accelerating the trend towards a market with fewer, larger investment houses in Europe.” MiFID II will require asset managers to make sweeping changes and implement reporting infrastructures for the first time. It is a response to the market turmoil created by the global financial crisis of 2008 and will affect any business involved in the manufacture, distribution and trading of financial instruments in the EU. Sustainability and ESG “There has been a strong focus on climate change and its impact on the earnings of listed companies; this is now centre stage for asset managers to consider,” Thubisi told the briefing. He noted that BlackRock – the world’s largest asset manager in charge of $7tn – is now placing sustainability at the centre of its investment thinking. Continued on page 3
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NEWS & OPINION
29 February 2020
Continued from page 1
Looking at transformation trends in the South Morgan Stanley is currently combining machine African asset management industry, Thubisi said learning algorithms with predictive analytics to black-owned market share of the top 20 asset assist its 16 000 financial advisers to generate more managers remains flat, and black-owned firms’ insights and offer customised advice for clients, market share of traditional equities has fallen. He Thubisi added. added that merger and acquisition activity has increased across the sector, driven by B-BBEE and A new breed of asset managers consolidation. “This is as a result of a tougher trading Firms will make use of state-of-the art technology environment, and an evolving market with expanded that helps to identify, segment and retain key and differentiated product offerings. The move to clients. “The shift to scale and the mega-manager either cash and bonds, private markets or balanced model will also be driven by global regulation, funds, has affected the allocation which will provide a powerful barrier to black managers that offer equity to entry to smaller firms,” Thubisi SOME LARGER only stategies.” explained. Yet market structure will still leave room for local market INVESTMENT Non-investment risks specialists, spanning traditional, MANAGERS Thubisi explained that criminals alternative and hybrid managers, are targeting financial firms who may or may not partner with ARE USING because that’s where the money THEIR SCALE TO the mega-managers, he said. is – and while asset managers EXPAND PROFIT Alternatives join the may not directly interface with the public at large, they are still mainstream MARGINS, a tempting target to attackers as wider range of investors, WHILE OFFERING A they hold a wealth of customer including retail, will be able to PRODUCTS AT data. In addition, their intellectual access alternative investments as property is a key to their success regulators allow regulated vehicles to LOWER COSTS and differentiation. Data theft by be more widely distributed, Thubisi insiders or outsiders is a real concern that could said. “Alternative asset classes will feature more have a catastrophic effect. prominently in institutional and retail portfolios. “According to IBM Security, the average time Looking ahead, a disruptive shift is emerging where to identify a breach in 2019 was 206 days, while, a large portion of investors expect to increase according to Accenture, the financial services their active involvement in limited partnerships, industry takes in the highest cost from cybercrime or access the asset classes directly rather than at an average of $18.3m per company surveyed,” investing with external he said. managers.” He added that passive investing Monetisation of data analytics is expected to grow Artificial intelligence has found promising at the expense of application in enhancing wealth advisory services, active management offering customised portfolios, and digitising as investors increase customer service, Thubisi said. “Some investment allocations to smart managers are acquiring robo-advisers to offer beta, rather than custom portfolio solutions for independent pure passive advisers, as well as traditional wire-house strategies. representatives.” This widening application of AI across the investment value chain increases the possibilities Lebo Thubisi, Head: of a shift in the business model, especially across Manager Research, customer touchpoints. American multinational Alexander Forbes investment bank and financial services company Investments
EDITOR’S NOTE
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s this issue goes to print, the new coronavirus originating in Wuhan, China, has killed almost 200 people and has infected thousands more in that country. There have been confirmed cases in other countries, with the US warning that travellers should avoid nonessential trips to China and British Airways suspending all flights to the Chinese mainland. The World Health Organization (WHO) eventually declared the virus – that appears to have originated at a market illegally trading in wildlife – an international public health emergency. The WHO does not recommend a travel and trade restriction - yet, but according to a note from Commerzbank, the impact on China's economy is likely to materialize gradually, which will yield an international impact as China plays an essential role in the global supply chain. Moody’s says in note that a coronavirus pandemic would be even more of a ‘black swan’ than the global financial crisis and Great Recession of 2008-2009 because unlike the US home mortgage meltdown, no one predicted the early 2020 arrival of a potentially devastating virus. In addition, unlike the financial crisis, public-health and economic policymakers may be limited regarding their ability to remedy or offset a 1918 (or Spanish flu) type pandemic. Some analysts are pointing out that the markets are more vulnerable to economic shocks from this virus than they were from SARS that struck at a market low point when stocks could only move up. This time the situation is different as the virus has occurred after the longest US bull market in history. Will the coronavirus be the catalyst to tip markets into bear territory? At this stage, no one knows. Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za
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NEWS & OPINION
29 February 2020
PROFILE EBETH VAN HEERDEN BUSINESS DEVELOPMENT MANAGER, SCHRODERS
How did you get involved in financial comes to investing, the earlier you start the better, services – was it something you always and you should never underestimate the value of wanted to do? compound interest. It is also essential to remember A career in financial services was not one that I had that you don’t have to do it alone: surround yourself originally considered. I am a social science graduate with trusted partners for financial advice and fund and was lucky enough to be discovered by a wise and management. courageous mentor early on in my career when I was I believe there is a perception that many South working for an executive search firm. She appreciated African investors think investing – and offshore my passion for people and showed me that financial investing in particular – is simply not “meant services are not merely about markets for them”. The view is that to and numbers, but that one of the understand markets, investors THE purposes of the retail investment industry need to be qualified or understand is to help people build better futures. the very complex language of FINANCIAL the industry. There is also a SERVICES How easy is it for women misconception that investing is only INDUSTRY to succeed in the financial for the wealthy – in order to meet services industry? HAS SUCH AN the high investment minimums. I believe it should be easier for women For women, these perceptions are IMPORTANT to succeed in this sector, and the amplified by the prevailing social ROLE TO PLAY and economic inequality in South industry is slowly waking up to this. In my opinion, the purpose of the financial Africa. The financial services IN MAKING services industry is to meet client industry has such an important role INVESTMENTS to play in making investments more investment needs and to do this we MORE need to understand clients’ objectives, accessible to women. challenges and perspectives. Clients are ACCESSIBLE not a singular gender or cultural group How do you view your new TO WOMEN and the purpose of financial services role at Schroders? starts with client empathy. To be relevant Schroders is an offshore asset in the future, businesses need to recognise that management business that is more than two diversity and inclusion is imperative, not optional. hundred years old, with an appreciation of valuing As the number of women in finance – especially its clients’ interest and evolving in a sustainable way those in senior roles – increase, the younger to keep serving their investors. I’m very excited generations should look at the industry and see it as to have this opportunity a place where they can build their careers. It’s good to to continue expanding know that each one of us can contribute to making a South Africa’s truly space for women; one where they feel they belong. world-class investment industry, by offering fund How can South African women be management solutions encouraged to invest more? to support investors, and Women’s financial wellbeing should receive the the financial planning same priority as family, fitness, career and friends. community in achieving It is important to invest time and energy to educate their long-term wealth yourself around the state of your finances, work creation aspirations. out what your goals are for the future and how to get there. For many women, though, one way of investing more could simply be to start. Start with what you can save on your budget and invest on a monthly basis, and then remain invested. When it
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VERY BRIEFLY Advocate Matome Thulare has been appointed as the Deputy Pension Funds Adjudicator for a period of three years. “Thulare comes to the position with a wealth of relevant experience in the pensions and financial and intermediary services divisions of the Financial Sector Conduct Authority,” the Office of the Pension Funds Adjudicator says. “He is a practising advocate of the High Court of South Africa with demonstrated experience of financial services regulation.” Thulare studied for a BA degree in Criminal Justice at University of Venda, which he attained in 1995. In 1998 he attained a BA (Hons) degree in Employment Relations at the then Rand Afrikaans University. In 2007 he attained a Bachelor of Laws degree at the University of South Africa. He also has post-graduate legal qualifications in the fields of Master of Laws (General); Master of Laws (Labour Law) and Master of Laws (LLM) Consumer Protection. Commenting on Thulare’s appointment, the Pension Funds Adjudicator, Muvhango Lukhaimane, says, “With the advent of market conduct regulation of the financial services industry by the FSCA, it can be expected that there will be an increase in the number of complaints received from retirement funds members and, with the concomitant need to finalise complaints expeditiously, my new deputy will have his work cut out for him.” Matome Thulare Chubb has announced the appointment of Allan Bader as Accident & Health Underwriter. “In this role, Allan will be responsible for the development and growth of the company’s Accident & Health portfolio, focusing on Group Personal Accident and Business Travel,” the company said in a statement. Bader has worked in the insurance industry for 16 years and joins Chubb from CN&CO, where he worked with insurance industry stakeholders in a marketing and events role. He will be based at Chubb’s Sandton office. Luke Powis, Head of Accident & Health, Chubb Insurance South Africa, said: “I am delighted to welcome Allan to the team. His considerable experience within the insurance industry will be instrumental in growing our A&H portfolio. I am excited about the opportunities that Allan’s appointment will Allan Bader bring for Chubb in South Africa.” Jaco van Zyl, Senior Associate at Maitland, a global advisory, family office and administration firm, has joined Maitland’s Mauritius office. Van Zyl has worked for Maitland for the past 10 years in the UK, Luxembourg and South Africa. Maitland has operated in Mauritius since 2012 when it acquired Inter-Ocean Management Limited, a corporate services and trust company. In a statement, the company said, “Mr van Zyl is highly experienced in legal, tax and international structuring advice, with a focus on the UK and Africa. He will also act as an experienced director on various client entities.” Jaco van Zyl
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NEWS & OPINION
RICHARD RATTUE MD, Compli-Serve SA
The dangers of becoming a cheerleader
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he status of the compliance officer and the compliance function has changed significantly over the last 10 years and now generally has a seat at EXCO. This change in status has been helped along by both local and international scandals whereby a combination of questionable no impact on objectivity. business practices and lax If we take a look at the local risk and compliance controls environment, we have seen resulted in magnified a similar focus on the roles of downside for investors and compliance officers and the stakeholders. We must take a compliance function, albeit closer look at where there have with a more positive aspect as been failures and breakdowns the local compliance industry within the compliance function has taken strides towards and analyse exactly what the professionalism. causes are. We are moving towards a Reading through various principles-based oversight regulatory postregime and must mortems shows that note the inexorable problems occurred rise of tech in the CLEARLY WHEN not as a lack of rules industry, which will YOUR SALARY per se, but rather force the risk and IS PAID BY THE a combination of compliance function lax oversight from COMPANY ITSELF, to adapt and evolve. both the regulatory Some components THIS DOES CLOUD of the role will no authorities and risk and compliance doubt be taken over INDEPENDENCE management. In by algorithms, yet many instances, risk and compliance this will not change the fundamental leaders had forgotten their impartial requirement of the compliance officer role and had essentially become to act without fear or favour and, cheerleaders for the business. indeed, be given the space to do this I understand and have indeed by the business. myself experienced instances For financial services providers who whereby a compliance officer can be engage the services of a compliance subjected to quite intense pressure officer, I must point out that in order from a business to approve certain to do their job properly, they cannot structures or products. become sycophants for the business, If the compliance officer is not of and must apply themselves objectively strong personality and in a position to any issues that are presented of some authority within a firm, there before them. To do anything else is is a risk that their opinions and/ to place the business, and indeed the or concerns will not be heard and compliance officer, at great risk of will not get management attention. personal censure from both the FSCA Compliance officers should not and potentially the courts. forget that a fundamental tenet of Compliance officers must their role is to remain objective, and remember that their position is one independent at all times. of seriousness and it is important Clearly when your salary is paid by that any cheerleading takes place the company itself, this does cloud on the sports fields and not in the independence, but it should have compliance department.
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29 February 2020
Money Smart Week South Africa to be launched next month Money Smart Week South Africa (MSWSA), a financial literacy campaign aimed at motivating and empowering South Africans to become more educated about their finances, is taking place between 23 and 28 March 2020.
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n initiative of the National Consumer Financial Education Committee (NCFEC) and championed by National Treasury, this campaign sees organisations – which include any South African firm or business that offers a financial product or service or any organisation with an interest in financial literacy – having the opportunity to conduct their own financial education projects and programs throughout South Africa during the designated period. The inaugural campaign in 2018 limited activities to Mamelodi, Tembisa, Alexandra and Soweto within Gauteng. It is reported to have reached over 5 500 consumers at various activities and reached over nine million impressions through various media platforms. The 2020 campaign aims to reach as many South Africans as possible, to inspire people to become more financially literate and to educate people about the myriad of structures that exist to provide financial advice. Above all else, MSWSA2020 is a platform to raise awareness of the benefits of financial literacy for all South Africans at every stage of their life. Results from the Human Sciences Research Council’s 2017 Financial Literacy component of the South African Social Attitudes survey revealed that although 60% of South Africans kept a close watch over their finances, nearly half (48%) did not manage to save at all and a significant segment (42%) of the adult population had no long-term savings. The decline in disposable income, the low savings culture and the failure to service debt, makes a campaign such as MSWSA more vital as improved financial literacy can play a major role in improving consumers’ ability to make sound and informed financial decisions. “One financially literate person in a home can influence an entire generation. This campaign is about educating South Africans that financial education is accessible and readily available to all,” says Lyndwill Clarke, Head of Consumer Education at the Financial Sector Conduct Authority. Any organisation with an interest in financial literacy can apply to host an educational event or programme during Money Smart Week. All applications will be vetted according to set criteria as defined by the NCFEC. All successful applicants who will be running programmes during the campaign will benefit from marketing support to promote these initiatives nationally. Interested organisations are urged to go to https://www.mswsa.co.za/ or to email info@mswsa.co.za to find out more about how they can become more involved in creating a money smart South Africa. This flagship event is aligned with the objectives of the NCFEC and National Treasury to coordinate and implement financial education, promote financial literacy and, most importantly, empower people to change their lives for the better. Money Smart Week South Africa coincides with Global Money Week, an annual financial awareness campaign built to inspire children and young people to learn about money matters, livelihoods and entrepreneurship. Since its launch in 2012, this campaign has reached over 40 million children and youths in 175 countries worldwide. Information about all activities, dates, venues, participants, campaign champions and ambassadors will be communicated on the website https:// www.mswsa.co.za/ and social media platforms in due course.
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NEWS & OPINION
29 February 2020
SA likely to avoid a recession but not a Moody’s downgrade
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t appears that South Africa will November after remaining about flat discussion with a bearish view on avoid a technical recession, in October. the rand. says Miyelani Maluleke, a “Overall, we expect fourth quarter “We believe that Moody’s is more senior economist at Absa Bank. 2019 GDP data to reflect a small likely than not to downgrade us on He was speaking at an ABSA rebound of 0.4% q/q saar, helping March 27, while S&P and Fitch could round table discussion, attended South Africa to avoid slipping into its perhaps wait until the second half of by MoneyMarketing last month in second recession in as many years,” the year,” he said, adding that he sees Johannesburg. Maluleke added. the rand softening to R15.16/USD South Africa recorded GDP in Absa has cut its GDP forecasts by the end of Q1 20 and reaching the third quarter of 2019 of -0.6%. sharply as weak business sentiment R16.13/USD by year-end. Both Fourth quarter 2019 GDP will only be and bouts of load shedding are Absa’s Structural ZAR model, which published on 3 March and also seems constraining the country’s growth estimates the fair value of the exchange set to be weak, partly due to renewed prospects, while the drought seems rates based on SA’s current account power cuts. However, Maluleke likely to present a significant negative balance and the country’s interest rate believes that a modest recovery from effect in 2020 as well. Maluleke said differentials, and Absa’s Peer model, the third quarter contraction is likely. the forecast was now for real GDP which compares the rand to other He explained that the available growth of just 0.3% for 2019, 0.9% this high-yielding and commodity-based activity data for the fourth quarter of year and 1.2% in 2021. currencies, imply the local currency is 2019 are mixed but generally quite Strategist at Absa Capital, Mike currently overvalued. subdued. After a promising start to Keenan, provided the round table “The rand will be vulnerable to the quarter, with growth of 2.5% m/m (sa) in October, manufacturing output fell by 1.5% m/m (sa) in November. Meanwhile, mining output fell sharply by 3.5% m/m (sa) after growth of 1.7% m/m sa in October. He believes that the severe electricity constraints in December are likely to cause further weakness on the production side of the economy. Electricity output has already fallen by 0.5% m/m (sa) in October and by 1.4% m/m (sa) in November. “However, the demand side of the economy will provide an offset to the production side weakness, thanks in part to the ‘Black Friday’ effect, which is not fully accounted for in Stats SA’s seasonal adjustment framework,” he stated. Encouragingly, passenger vehicle sales rose by a seasonally adjusted and annualised 27.7% q/q saar in Q4 2019. Meanwhile, constant price retail Miyelani Maluleke, Senior Economist, Absa Bank and Peter Worthington, FPI-advert-PR.pdf 4 (sa) 2019/11/15 15:50 Senior Economist: Absa Corporate and Investment Banking sales rose by a solid 3.1% m/m in
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capital outflows during the first half of this year, firstly because Moody’s is likely to downgrade South Africa’s local currency credit rating in March and this will eject SA government bonds from the World Government Bond Index. What the size of the flows will be is the billion dollar question. “Secondly, JP Morgan is scheduled to further reduce South Africa’s bond weighting within its emerging market bond index during the first half of 2020 to make space for Chinese bonds.” The rand could actually weaken by more than expected if the Reserve Bank cuts policy rates by more than what the market currently expects and/or if the economy falls back into recession. However, the rand may be more resilient if global volatility levels continue to subside on the back of reduced global trade tensions, which in turn could rekindle the rand’s carry trade appeal, and any further improvement in South Africa’s terms of trade might also support the local currency. Senior Economist at Absa Corporate and Investment Banking, Peter Worthington, told the roundtable discussion that fiscal policy is a huge problem for South Africa and that the budget to be presented on the 26th of this month is key. “We think the government will again rely mainly on taxes to attempt to narrow the deficit and, in particular, we are making the bold call for a one percentage point rise in the VAT rate. This call is perhaps a bold one, given the likely political fallout, but it is difficult to see what other options the government has. Further increases in personal income tax rates would likely damage the tax base.”
NEWS & OPINION
29 February 2020
Alexander Forbes announces shareholder reorganisation Patrice Motsepe’s African Rainbow Capital will become the new majority shareholder at Alexander Forbes, after announcing plans to buy over R1bn of the pension fund administrator’s shares.
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lexander Forbes last month announced three independent transactions, together referred to as the Shareholder Reorganisation. The three independent transactions are: • the Acquisition by ARC of 193 000 000 ordinary shares from Mercer for a total consideration of R1.013 billion, which amount to 15.0% of Alexander Forbes’s issued share capital (ARC Acquisition) • the proposed Specific Repurchase by Alexander Forbes of 200 800 000 Alexander Forbes shares which amount to 15.6% held by Mercer for R1.034bn; and • the implementation of the proposed exchange of shares held by ARC in Alexander Forbes Limited for shares in Alexander Forbes Group Holdings Limited, as well as the proposed waiver of ARC’s consequential obligation to make a mandatory offer to all Alexander Forbes shareholders. Following implementation of the ARC Acquisition and the Specific Repurchase, ARC will hold 33.9% of Alexander Forbes issued share capital. “Our further investment in Alexander Forbes is in line with our stated strategy that Alexander Forbes is a key part of ARC’s financial services strategy going forward and the strategic opportunities we see. We believe real value can be unlocked for all stakeholders,” says Johan van Zyl, the co-CEO of ARC. Alexander Forbes says the Shareholder Reorganisation will neither affect nor disrupt the existing strategic alliance between Mercer and Alexander Forbes, which includes all current commercial agreements and WE WELCOME ARC AS associated service and product offerings. Both Alexander OUR KEY STRATEGIC Forbes and Mercer are fully ANCHOR SHAREHOLDER committed to continuing a AND, CRITICALLY, AS AN close commercial relationship, EMPOWERMENT PARTNER ensuring that client interests remain paramount. “At the time of Mercer’s strategic investment in Alexander Forbes, our relationship was at its initial stages. Since then, our commercial relationship has become well established and Mercer no longer believes it is as important to maintain an equity investment. We routinely evaluate investments of this type, and we are pleased to have agreed on an alternative that is highly accretive to Alexander Forbes shareholders, while deepening the existing relationship with a local strategic investor such as ARC,” says Martine Ferland, President and CEO of Mercer. Alexander Forbes and Mercer will continue to work together to innovate and deliver solutions to clients across Africa, including Arrive – the joint panAfrica benefit solution, which provides corporate clients with access to quality healthcare, as well as standardised employee benefits across multiple countries. From an investments perspective, the partnership with Mercer will continue to allow Alexander Forbes clients access to financial strategies and global asset managers, including a portfolio of integrated solutions. Alexander Forbes Chief Executive Officer, Dawie de Villiers, says it was important for the company to establish, through this transaction, a committed long-term partner who understands the company’s business and is aligned to its strategy. “We welcome ARC as our key strategic anchor shareholder and, critically, as an empowerment partner. In ARC, we have a strategic partnership which will ensure the sustainability of our Dawie de business and enhance our advice-led and clientVilliers, CEO, centred strategy.” Alexander Forbes
ADRIAN GORE Founder & Chief Executive, Discovery Limited
Climate change is a behavioural problem; I remain optimistic
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n our business, we’re focused on changing behaviour towards healthier choices – across health, driving and financial management. Our research shows that the majority of mortality, sickness and financial risk is a function of a few key behaviours. Change these, and you change the outcome. But why is it so hard to change behaviour? Because we’re miscoded. Evolution has conditioned us with responses better suited to the physical threats and scarcity experienced by our predecessors, than the abundance and systemic threats we live with today. Instant gratification (I want that muffin, now) and hyperbolic discounting (my wellbeing in my 60s matters less than my cigarette today) are two primary examples. Given our emerging insights on behaviour change, it is instructive to look at the largest risk facing us – climate change – because averting it is fundamentally about shifting behaviour. According to the latest World Economic Forum (WEF) Risk Report released ahead of Davos last month, the greatest threats to society are systemic risks unfolding gradually – with climate front and centre. This, too, is a pernicious problem from a behavioural perspective: while instant gratification and hyperbolic discounting also explain our suboptimal response, two further conditions make it difficult to modify our behaviour. Gradualism Evolutionary biology is once again to blame: it has coded our brains to respond to short-term threats (the literal snake in the grass), and not to long-term gradual threats, which may be infinitely more menacing, but that evolve slowly before our eyes. The WEF article, Our minds are wired to fear only short-term threats, proposes that while we are attuned to respond to sudden and visible problems (forest fires, hurricanes, uprisings), the complex movements underpinning these problems (rising greenhouse gasses, shifts in voting constituencies, etc.) confound our prehistoric brains. Our bias is temporal: unless the threat is immediate and visible, it is ignored. So we make that international flight, in spite of the fact that just one return flight from London to New York produces a greater carbon footprint than a whole year’s personal allowance needed to keep the climate safe.
‘Tragedy of the commons’ While the same logic (instant gratification, hyperbolic discounting) applies to our sub-optimal behaviour in relation to systemic threats, it is complicated by self-interest. You see, the outcome of better behaviour is diffuse rather than personal in this context. Health is a private good: when you make a decision to improve your health, you are the direct recipient of that improvement; the environment is a public good: when you make a decision that benefits the environment, it is fairly intangible and the benefit is shared – making you less inclined to act. Remedies I certainly don’t have the expertise to know how grave the climate threat is, but I am hopeful that we will see rapid and deep behaviour change, for the following reasons: • Gradual threats will become imminent crises, driving action: Given we are now seeing the effects of climate change – the smoke in downtown Sydney as an example – our biological coding will kick in to respond to issues that are urgent and visible. • The market will drive change by allocating capital towards sustainable investing. Take BlackRock – the world’s largest asset manager – and its recent decision to make climate change a focus of its investment strategy, essentially exiting investments with high sustainability risk. We are likely to see this proceed at an unprecedented rate. • Regulation and nudges will accelerate: This will make sustainable choices either the legal or the most rewarding choices – or both. • Sustainable behaviour will be deemed normative: The above will, in combination, make it as socially unacceptable to make choices and decisions that aren’t climate friendly, as it is to smoke in public or wear fur. • Finally, underpinning the above, will be innovation: Corporates and public players will conceive new interventions that help to personalise long-term and systemic threats; and make acting more frictionless and rewarding in the short-term – eliminating destructive self-interest.
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INVESTING
29 February 2020
Section 12J enables investment in 5-star Cape Town hotel
Investment firm launches new Africa research report
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nvestment firm RisCura’s 2019 Bright Africa research was released last month, providing a broad analysis of the investment landscape across Africa. The research initiative was started in 2013 to answer key investor questions about investing on the continent. This year, RisCura expanded the breadth of its analysis, to include inter-Africa connectivity, currency risk, sources of capital on the continent and the inclusion of sovereign bonds, real estate and infrastructure asset classes. In the past, the research covered private equity fundraising, transaction activity, pricing and investor focus in Africa. “Bright Africa once again highlights the marked structural differences between African regions,” says Gilbert Anyetei, Alternative Investment Services Associate at RisCura. “For investors looking to allocate capital to emerging or frontier markets, understanding the differences between the various African regions, and how these compare to their global counterparts, is crucial,” he adds. For this reason, the Bright Africa research segments Africa into nine meaningful markets, or regions, by analysing cultural connections, interconnectivity through trade blocs, sharing of expertise, good business relations, and relative ease of transportation, among others. This segmentation allows investors to more easily compare African regions to other frontier markets. “Our research shows that there are several themes uniting the continent in 2019,” says Anyetei. “The private equity industry continues to grow, with deal activity still increasing and asset prices remaining robust.
“The growth of Africa’s pensions and insurance industries, and the resulting increase in local capital available for investment, also provide significant opportunity.” Bright Africa 2019 findings • Nigeria still has the largest economy in Africa, followed closely by South Africa and the Maghreb region. The continent continues to feel the adverse impact of the commodity cycle, with total exports (mostly extractive commodities) decreasing from 2014 to 2018 by 21% in USD terms. • Although South Africa has experienced low growth in recent years and local investor sentiment is at record lows, when viewed in comparison to its emerging market peers, it remains an attractive investment destination for foreign investors. • Due to the recent oil discovery in Ghana, crude oil petroleum has overtaken cocoa beans to become that country’s largest export product. • Trade within Africa remains poor, as two-thirds of African imports come from Europe and Asia, whereas intra-continental trade is a mere 13% of all African imports. This is set to improve, however, thanks to the African Continental Free Trade Agreement (AfCFTA) that came into effect in May 2019. • Most African countries follow a conventional pegged exchange rate regime. While a pegged exchange rate may provide lower exchange rate volatility, it is unable to protect a currency from major currency shocks, as seen in Nigeria and Angola. Furthermore, most African countries have overvalued currencies, with the two most overvalued currencies being the Nigerian Naira and the Ghanaian Cedi. • Southern Africa remains the leader in pension coverage across the continent. South Africa boasts the fourth largest insurance sector in the emerging markets sector.
Gilbert Anyetei, Alternative Investment Services Associate, RisCura
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n a country like South Africa – where equities have had several lean years – investors are now paying more attention than ever before to their portfolios and their returns. In this changing environment, investors are increasingly looking at alternatives. And as part of a bold new investment offering, South Africans who earned over R1m this past financial year now have an opportunity to invest in Cape Town’s 5-star Pepperclub Hotel via an innovative Section 12J fund, Pepperclub Invest. In addition, these investors can do so with zero cash outlay at the beginning, meaning that Pepperclub Invest offers pre-approved finance for this investment as part of a unique 12J structure. Pepperclub Hotel is a landmark 22-storey development that opened its doors in 2010. It is a full-service hotel, offering guests luxury accommodation, an elegant restaurant, sidewalk cafe, private cinema, spa, gym and swimming pool that overlooks Table Mountain, as well as upmarket conferencing facilities. Section 12J is part of South Africa’s Income Tax Act and it enables investors to provide much-needed capital to local businesses while receiving an immediate tax deduction equal to 100% of the amount they’ve invested. The end result is that investors in the top tax bracket can see a relief of up to 45% on their investments in the year in which they invest. In excess of R8bn has been invested into Section 12J funds in SA since inception, and the 12J Venture Capital Company (VCC), Pepperclub Invest, will use this initiative to help carry out a R450m acquisition of the Pepperclub Hotel by February 2025. The way this investment vehicle will work is that Pepperclub Invest will raise a mortgage before the end of the investment period to carry out the acquisition of sectional title units and then pay investors as a distribution at the end of the period. The VCC is managed by Grovest Corporate Advisory, the pioneers of Section 12J and the largest administrator of Section 12J funds in South Africa. Pepperclub Invest will further offer a guaranteed minimum average yield of 7.6% per annum for five years by the hotel manager SBG (Solomon Brothers Group). Eligible investors receive 100% pre-approved finance and zero cash outlay, which means that they don’t need to put a cent down at the beginning of their investment. Pepperclub Invest is able to do this because it is lending investors the money based on the strength of the underlying asset: a hotel that has a 10-year track record of being profitable, an average occupancy rate of 60% and an existing loyal customer base. The cherry on top is that each investor will be entitled to six free room nights per annum on the first R1 000 000 investment into Pepperclub Hotel. Thereafter, each investor will become entitled to an additional three nights for every additional R500 000 invested. The investor will continue receiving free room nights as long as they hold a minimum of 1 000 shares. Individuals and trusts are allowed to invest a maximum of R2.5m a year, while private companies can invest up to R5m a year. The closing date for investment is 28 February 2020. Pepperclub Invest Fund Manager, Amaresh Chetty, says, “Section 12J has already enabled much-needed investment for many businesses in South Africa. This investment class has rapidly developed and grown – we believe that Pepperclub Invest will become a pioneer in its own way by offering a unique pre-approved finance model. The fact that the VCC is also administered by Grovest Corporate Advisory means that the most experienced experts in this space will be there to guide this investment.”
INVESTING
29 February 2020
DWAYNE DIPPENAAR Co-portfolio Manager and Mining/Telco Analyst, Laurium Capital
N
aspers is a company that many are familiar with due to its large size (R1tn market capitalisation) and stellar performance over the last few years (+18% compounded over five years). The company (incl. Prosus) currently makes up 17% of the FTSE/JSE All Share Index (ALSI) and 22% of the JSE/FTSE Shareholder Weighted Index (SWIX). As such, the company is widely held by most South African asset managers on behalf of South African investors and pension funds and has done very well for these investors over time. Most of the company’s intrinsic value is made up of a stake in a Chinese internet company called Tencent (listed in Hong Kong), a stake Naspers bought in 2001 for USD33m, which is now worth USD147bn – in other words the investment has generated a +56% annual compound return for shareholders to date. At the current spot Tencent share price, the stake that Naspers owns in Tencent makes up 147% of Naspers' market capitalisation. At our calculated intrinsic value,
Naspers: Why we like it
Tencent is worth even more at 160% of the Naspers market capitalisation. Naspers is thus currently trading at a 41% discount to our intrinsic value of its underlying assets when using the listed spot prices for Tencent and Mail.ru. When compared to the historic average discount over 10 years of 26%, the discount is currently very wide. The large discount Naspers trades at has become a hefty point of contention in the market, with many market participants debating and speculating, when, if and how, the discount should narrow. Generally, holding companies that have stakes in an assortment of underlying entities trade at a discount for various reasons. Historically, holding company discounts have
varied widely, but the norm is approximately 15% - 20% depending on various factors including management fees, tax structure, control of underlying cash flows and voting structures. Naspers management has stated that they believe the current discount is too wide, that the discount has historically been around 20% - 25% and for multiple reasons started widening three years ago. They have also said that they are exploring all possible options to close the discount to a more reasonable 20%. Laurium believe that such a wide discount is not justified and that the discount should narrow going forward. This should be driven by improving cash-flow generation from
NPN Discount to Net Asset Value (Listed Prices) ‐20% ‐25% ‐30% ‐35% ‐40% ‐45%
the rump assets (ex Tencent & Mail. ru) in the company’s portfolio, as well as the management actively working towards getting the discount to a more reasonable level. Post the new management team taking the helm in 2014, we have seen consistent action from them that should over time continue to drive the discount down. Examples of these would be the sale of Ricardo and Allegro (E-commerce assets in Europe), the sale of Flipkart (E-commerce asset in India), the sale of a stake in Tencent, the unbundling of Multichoice Group (pay-TV in Africa) and the listing of Prosus. Our view is that management will continue to focus on driving the discount down through multiple options, e.g. doing share buy backs on the Naspers line of stock, which has just been announced. We thus hold Naspers on behalf of our clients across our portfolios, providing exposure to a quality portfolio of emerging market internet assets at a 41% discount, which provides clients with a large margin of safety and enhanced returns from the discount narrowing over time.
Source: Bloomberg
Guernsey lures SA investors with secure, tax-effective offshore options
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outh African investors looking to protect their nest eggs against the ravages of tax and currency depreciation are increasingly focusing on Guernsey, where international retirement plans created especially for the local market are steadily gaining popularity.
Guernsey has long been one of the world’s safest havens for offshore investments, and its so-called 40ee retirement plans provide rock-solid security for investments, along with a range of tax and estate planning benefits, says Bryony Oostingh, a consultant at Sovereign Trust (SA) Limited. “A lot of South African investors want to diversify their portfolios but find the idea of investing offshore a bit daunting and unattainable. Their major concern is that they want to be 100% sure that their money – and ultimately, their families – will be looked after,” adds Oostingh. This is where offerings like Sovereign’s Conservo international retirement plan are attracting the attention of a range of investors, including South African expats with existing offshore funds, South African tax residents wanting to use their annual R10m foreign investment allowance, and conservative investors looking to move some of their locally-based assets offshore for their retirement. A key selling point for many investors is Conservo’s succession benefits, which make it a good estate planning tool. “Unlike most conventional investments, Conservo offers a range of succession benefits that allow assets to be passed to any nominated beneficiary on death, or into a trust. As it is exempt from Guernsey income tax, it offers tax-free growth, and does not form part of the investor’s estate, making it an off-balance-sheet asset,” says Oostingh. The Conservo Plan is typically funded by either a cash contribution or the transfer of existing assets to the retirement plan. These assets can be in the form
of anything from cash GUERNSEY to investments to art HAS LONG collections, or even BEEN ONE OF shares in underlying private companies – THE WORLD’S depending on which SAFEST HAVENS tier the investor selects. Another major FOR OFFSHORE selling point is INVESTMENTS Conservo’s flexibility. Since there is no actuary dictating how much the investor is allowed to withdraw, the investor can withdraw the full amount if they choose after age 50 and collapse the whole plan. Investors can take a loan of up to 50% of the fund value before they are 50. As the funds contributed to Conservo are post-tax money, the conduit principle applies: that is, capital going in is also capital coming out. There is no tax on the return of the original capital, with the only tax applicable being CGT on the growth portion of the funds. “The bottom line is that offshore investing doesn’t have to be risky – it, in fact, offers great benefits like security, tax-effectiveness, and succession planning,” says Oostingh.
Bryony Oostingh, Consultant, Sovereign Trust (SA) Limited
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INVESTING
29 February 2020
HAYLEY BROWN Executive: Business Development, PPS Investments
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ecent market volatility and the uncertain investment climate has raised questions among South African investors. Industry trends show that investors are reducing their equity exposure and increasing their exposure to fixed-interest investments. Although equities have outperformed fixed interest over the last 25 years, in recent times, investors have started to prefer the relative safety of cash and bonds. Since 2016, muted economic growth locally, and an increase in geopolitical risks globally, contributed to South African equities underperforming fixed interest assets. Table 1 illustrates some of the most popular ASISA categories with regards to net flows and the contrast in their performance during two specific periods. During period 1, there was a clear benefit to investors who increased their equity exposure. The opposite is true during period 2, where taking on additional risk resulted in additional underperformance. Investor response Sustained equity underperformance during the medium term has contributed to investors switching from equities to South African fixed interest. Although this de-risking trend started in 2016, it gained considerable momentum during 2018, as the JSE All Share lost 8.53% during the calendar year. When observing asset class net flows across the industry during the two abovementioned periods, there has been a clear shift in the direction of flows. Graph 1 illustrates the percentage flows into each asset class during Period 1 (July 2012 to December 2015) and Period 2 (January 2016 to June 2019). Are professionals any different? In contrast to industry trends, PPS Investments analysis of investors shows that they have been more resilient regarding their investment behaviour. Although there has been a slight increase in the proportion of assets flowing into fixed interest investments, the shift has been
EQUITIES ARE AN IMPORTANT ASSET CLASS FOR ACHIEVING LONGTERM INFLATIONBEATING RETURNS
How professionals are investing in volatile market conditions TABLE 1 ASISA Categories Annualised returns
Average Equity exposure
Period 1 Jul ‘12 - Dec ‘15
Period 2 Jan ‘16 - Jun ‘19
(ASISA) South African IB Short Term
0%
5.95%
8.46%
(ASISA) South African IB Variable Term
0%
3.55%
9.74%
(ASISA) South African MA Income
7.64%
6.56%
8.15%
(ASISA) South African MA Low Equity
29.48%
9.28%
5.41%
(ASISA) South African MA Medium Equity 45.69%
10.78%
4.44%
(ASISA) South African MA High Equity
57.89%
11.81%
4.02%
(ASISA) Worldwide MA Flexible
67.01%
17.76%
3.05%
GRAPH 2: ASSET CLASS FLOWS ON THE PPS INVESTMENTS PLATFORM
GRAPH 1: FLOWS INTO ASSET CLASSES OVER TIME
Source of table and graph: ASISA| MorningStar
Source: PPS Investments
GRAPH 3: ASSET ALLOCATION PER PROFESSION
Source: PPS Investments
significantly lower compared to the industry. The consistency of net flows over time onto the platform is illustrated in graph 2. A look-through into the professions saving the most on our platform show that they continue to maintain a healthy allocation to growth assets, with those in the financial and accounting profession having the largest allocation to equities, and those in the dental profession, the lowest (See graph 3). Professionals investing towards retirement goals Investing towards retirement remains the priority for the majority of PPS members across the age spectrum.
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GRAPH 4: AVERAGE MARKET VALUE PER PROFESSION
Source: PPS Investments
Furthermore, the research shows that other popular investment solutions include investment accounts and taxfree investments, particularly in the 20 to 44 age group in the professional market. Looking at professionals that save the most, dentists top the category, ahead of scientists and accountants by almost 40% (See graph 4). Stay focused and committed to your financial plan The best defence against risk and uncertainty is to hold a welldiversified and sensibly constructed portfolio that is not reliant on any particular market outcome. Through its multi-manager approach, PPS Investments combines various asset
managers that have been through our rigorous research process and due diligence to offer a carefully selected combination that is well-placed to achieve the stated objectives. Making rash investment decisions could affect your ability to achieve your long-term goals. Keep in mind that despite their volatility over the short term, equities are an important asset class for achieving long-term inflation-beating returns. It is therefore essential to maintain an appropriate and meaningful allocation that is consistent with one’s risk appetite and investment objective. Visit www.pps.co.za for more information.
INVESTING
29 February 2020
DAVID GIBB Fund Management, Anchor Capital
Investing in tech
David Gibb co-manages the Anchor Global Technology Fund (and is the manager of the Anchor Worldwide Flexible Fund) and has been with Anchor since July 2012. Prior to joining Anchor, he was at Stanlib.
T
echnology and internet sectors (tech) have become a significant share of the total global equity market capitalisation. Tech is close to accounting for 30% of US stock market value and 20% of global stock markets’ value. SA is in line with the global average, with SA’s sole major tech company – Prosus/ Naspers – representing some 20% of our market. At Anchor, we believe that our clients should be offered the opportunity to invest directly in this exciting sector. The prevalence of network effects in the tech sector has made it an extremely lucrative area for investors – over the long term. Fortunately, Anchor has the appropriate in-house experience (Anchor’s Global Tech unit) to offer this opportunity to our clients, hence the launch of the Anchor BCI Global Technology Fund in June 2019. What makes the tech sector different? Network effects are probably the most important attribute. As Professor W Brian Arthur described in his seminal piece in the Harvard Business Review in 1996, entitled Increasing Returns and the New World of Business, knowledge-based industries such as tech work differently to traditional processing industries. He wrote, “Increasing returns are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage.” Think of the social media site Facebook in the 2000s as it strove to gain users. At first, the company targeted the university campuses before spreading its net wider – with the number of users soaring as the depth and breadth of the Facebook community became better and better. Who wanted to remain on MySpace
and Friendster when everyone was shifting to Facebook? What happened over time was that users began to lock-in to Facebook and abandon other social media sites. If locking-in happens en masse (like Microsoft’s dominance in PC software), then tech products tend to establish monopoly positions in their markets. Network effects partly explain why the five largest companies in the world by market capitalisation are all in the tech sector (I am cheating by ignoring the recent listing of Saudi Aramco – the Saudi state oil business – which is now the largest company in the world). For investment analysts, researching the tech sector requires a different mindset. Most of us were schooled in the Benjamin Graham – Intelligent Investor – approach to understanding traditional processing companies. Think of this as the East Coast (of the US) approach to investing, where company balance sheets are important and where income statements lend themselves to calculating price earnings (PE) ratios and returns on equity (ROE). We spent less time on the somewhat racy approach on the West Coast (i.e. Silicon Valley) of user growth, lock-in and delayed monetisation of the fastgrowing tech companies. Here the balance sheets didn’t seem to have many tangible assets, and income statements were expensing vast amounts of money on research and development (R&D). Frankly, traditional financial statements don’t provide a particularly insightful view of the world of a tech company. Investors often struggle to be good at both the East Coast and West Coast approaches to investment, partly because they don’t realise that they require different mindsets. With tech shares having performed so well over the past decade relative to
the broader market, is it too late and too risky to invest now? Unlike the tech bubble of 1999/2000, the valuation of technology companies in early 2020 is supported by strong underlying earnings. Although historic PE ratios are higher than the broader market, earnings expectations for the tech sector are higher than the broader market over the next three years. There is no doubt that regulatory risks for the major tech platforms (Alphabet, Amazon, Apple and Facebook) have increased sharply in the past two years. With these tech firms having done more or less as they please in the past, the state is under pressure to rein them in. The question is how to do this. The Economist magazine expects a ‘grinding war of attrition’ over the next few years once regulators have established how to tackle the technology giants. What’s new in tech? The Anchor BCI Global Technology Fund comprises core tech holdings (typically 70%-80% of the portfolio) and emerging tech holdings (20%30% of the portfolio). Core holdings are companies that have established market dominance in their expanding fields. Examples include Alibaba, the e-commerce giant in China, and Alphabet, the search giant in the western world. Core holdings are, typically, profitable and highly innovative businesses – and, depending on how attractively they are priced on global stock markets, may represent large weightings in the portfolio. Emerging holdings represent the newer areas in tech, like Delivery Hero, the online food delivery company. These businesses are far riskier investments and are weighted accordingly in the portfolio. But they offer enormous potential for value creation if they are later able to establish market dominance in a brand-new category. An area we are watching with great interest is quantum computing – the field of computing that will succeed classical computing (i.e. the computers of today). Google recently claimed its experimental quantum chip had completed a specific calculation dealing with random numbers in 3 minutes and 20 seconds. The Google researchers estimated that it would have taken the world’s most powerful supercomputer 10 000 years to reach the same result. Google, Microsoft, IBM and some smaller players are vying for an early lead in this new
tech category. IBM is wanting to bring quantum computing into mainstream business use within the next ten years. It is possibly too early to pick a leader in this field, but we certainly will do so when, and if, this becomes apparent. Quantum computing will have profound implications for solving complex calculations about climate change, etc. Since the 1970s, we have seen three major trends in tech. These trends typically change every twenty years or so. The 1970s and 1980s was the time of integrated circuits – which facilitated computation at a level never seen before. This enabled the boom in personal computers. The 1990s and 2000s was the era of digital networks as computers and other devices became connected through various networks (fibre optic, wireless, etc). This facilitated offshoring and arguably boosted a strong period of globalisation. According to Professor W Brian Arthur, the 2010s and 2020s is the era of ubiquitous sensors, providing enormous amounts of data that will fuel artificial intelligence. Computation, connection and now intelligence (AI) – and, arguably, the last of these major trends (i.e. AI) will have the greatest impact on the workplace. Conclusion The tech sector is a large component of global stocks markets. However, there are variations across the world with certain areas being heavily represented in tech, like the US (primarily Silicon Valley) and China (Beijing, Shanghai and Hangzhou), while other areas such as Europe and the UK are under-represented in tech. South Africa has one stellar platform company – the Naspers/Prosus group. Network effects are prevalent in the tech world and this partly explains why the five largest companies in the US by market cap are all tech businesses. Tech shares have performed better than the broader stock market over the past decade but, unlike the tech bubble of the late 1990s, this has largely been driven by strong earnings growth from the underlying companies. Market forecasts suggest this will continue in the years ahead. Alphabet, Amazon, Apple and Facebook are likely to face increased regulation in the future, which may curb certain of their activities. Anchor is offering its clients direct exposure to this broad category through the Anchor BCI Global Technology Fund.
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13
ESG INVESTING FEATURE
29 February 2020
EUGENE VISAGIE Portfolio Specialist and VICTORIA REUVERS Senior Portfolio Manager, Morningstar Investment Management SA
What is ESG? Environmental, Social and Governance (ESG) investing is an investment philosophy that pursues financial returns while encouraging positive social and environmental change. Also known as socially responsible investing (SRI) or sustainable investing, ESG’s three pillars each measure different elements of sustainable practice. The Environmental pillar includes, but is not limited to: • A company’s track record or efforts on climate change issues and carbon emissions • Air and water pollution • Energy-efficient waste management • Water scarcity • Biodiversity and deforestation. The Social pillar includes: • Gender and diversity policies • Safety and quality controls • Human rights • Labour standards • Privacy and data security • Employee engagement. Governance includes: • Board diversity • Corporate ethics • Executive compensation • Bribery and corruption policies • Lobbying activities and accounting practices.
MANY FINANCIAL INTERMEDIARIES ARE YET TO FULLY EMBRACE SUSTAINABLE INVESTING
Why is this important? Increasingly, investors prefer to put their money into companies with a demonstrated social conscience – that may be a strong environmental record or companies that embrace other developments, such as gender equality. Globally, this has been driven by millennials, an increasingly powerful investor segment with a higher level of confidence in the long-term investment value of strong ESG practices. As their investable assets grow, more assets are likely to move into sustainable funds. Asset managers are taking note of these dynamics and accounting for them in their investment processes. Additionally, in the South African market, multiple corporate governance failures have fostered a growing awareness around the governance angle, resulting in more pressure on investment managers to incorporate ESG into their investment strategies. If the growth of ESG focused assets in the global market is anything to go by, the movement isn’t a fad – instead, we’re viewing it as a real opportunity for advisers to differentiate a client’s investment experience. As ESG awareness grows, the industry is grappling with the best way to incorporate these preferences into previously standardised practices. In the US, we’ve observed that this isn’t just about meeting growing investor demand – instead, fund managers are incorporating ESG because they believe it can improve their overall investment process and results. As stakeholders hold public companies to higher standards for corporate behaviour and performance, these issues become
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ESG: A primer on sustainable investing central to a company’s sustainability and ethical impact. How can you incorporate elements of ESG when you’re allocating capital? It’s important to note that individuals will prioritise ESG pillars/principals differently. Some investors won’t want any exposure to certain industries (tobacco, gambling, weapons), while others are more concerned about incorporating best practice values when it comes to board composition and staff wellbeing. A more recent wave of ESG, impact investing, looks at investing solely into projects that focus on renewable energy, recycling and similar. Historically, ESG approaches have excluded companies with apparent shakier ethical standing: industries like gambling, weapon manufacturing, thermal coal, etc. Next, companies that didn’t incorporate best practices were screened out (i.e. companies lacking board diversity, such as ones with low female representation, or companies without independent boards). As investors are increasingly led by their social values, more listed companies have been incorporating ESG principles (some even establishing an ESG sub-committee to the board) to address some of these concerns. This way, companies that operate in sectors that are perceived to be bad for the environment can get a more positive score by establishing practices that partially offset their carbon footprints. This is broadly done in three different ways: • Values alignment: screening out or
excluding certain stocks • ESG integration: mitigating risk and generating alpha • Impact or thematic investing: mission-driven companies searching for solutions to largescale environmental and social issues. Sustainable funds and ESG integration come in several forms. As ESG considerations grow, more asset managers are starting to recognise sustainability issues in their investment processes. By contrast, ESG integration funds take a more thorough approach, building portfolios that reflect sustainability factors and often screen out certain industries or companies. Impact funds look at measurable social and environmental impacts alongside financial return, while sustainable sector funds focus on the growing green economy. Going forward, we expect more conventional funds to move into the broader ESG consideration group and more ESG integration funds to move towards impact investing. Sustainable sector funds should also experience growth as more investors see opportunities in the low-carbon transition to a green economy. ESG incorporation and sustainable funds have plenty of room to grow. Assets under management and flows, though both higher than ever before, remain tiny compared with the overall investment universe. While many financial intermediaries are yet to fully embrace sustainable investing, asset managers are recognising the fiduciary benefits – not to mention satisfying investor demand – that come from incorporating sustainable practices.
ESG INVESTING FEATURE
29 February 2020
MOHAMED MAYET CEO and Portfolio Manager, Sentio Capital Management
ESG investing is not black and white
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t Sentio Capital alone in a relatively small and Management, ESG resource-heavy stock market like investing has been an ours. Investors risk shrinking the inherent part of our investment investable universe to a handful process since we opened our of companies, which can make doors in 2007. We believe in generating required returns not investing for good, in two senses only hard to do but risky too, given of the phrase. We invest for good an inability to properly diversify. (as in for the long term) but also by doing good; by being good Focus on pricing ESG risk corporate citizens and investing and engaging responsibly and sustainably. ESG Instead of restricting the lies at the core of our company opportunity set, we advocate a analysis and has always played more pragmatic, returns-driven a central role in our investment approach that incorporates decisions; it’s in our DNA. pricing ESG risk correctly and But, for many investors, it has engaging to drive improved only recently come into vogue, corporate behaviour. Firstly, it’s and misconceptions abound. The important to consider that ESG biggest mistruth, risk is like all other in our view, is the risks: it needs to THERE ARE commonly held be measured and belief that ESG monitored. The VERY FEW investing is a blackaccurate pricing of PERFECT and-white exercise: ESG risk is critical CORPORATE either a company is to generating ‘good’ or ‘bad’ from CITIZENS ON A sustainable longan ESG perspective. term returns, which GLOBAL BASIS is why it’s such If a company doesn’t perform well on one a focus for us at aspect (perhaps governance is Sentio. Secondly, working with poor or environmental practices companies to engender positive are questionable), it’s put into changes in corporate conduct is the ‘bad’ camp and that’s where far more beneficial to the investor it stays. and broader society than simply Adopting this kind of approach washing one’s hands of a ‘bad’ in a South African context is company. particularly dangerous. There For example, Sasol is South are very few perfect corporate Africa’s biggest polluter, and Sentio_ESG 08:39 citizens on a global Print basis,Ad_MM let Feb 2020_FINAL.pdf scores poorly1 on2020/01/20 many measures
for environmental impact. But it is also a highly strategic asset and shouldn’t necessarily be shunned purely on the basis of environmental concerns. If it makes sense to hold Sasol from a returns perspective, it’s far more effective to accurately price the ESG risk, weight the holding appropriately and then engage with management to help implement mitigating or compensatory environmental measures. However, we caution investors that ESG investing is genuinely for the long term. In the short term, companies that score poorly on ESG factors can perform well, because it’s only really over long-time horizons that meaningful improvements in corporate behaviour can be seen. Look for authentic ESG managers It’s easy to pay lip service to ESG investing; there is often a gap between how managers behave themselves versus how they expect their investments to conduct themselves. We urge investors to take this into account when choosing a manager. You are far more likely to find an authentic ESG manager if responsible investing is deeply ingrained in their culture, than if it’s simply a black and white tickbox exercise.
BlackRock to put sustainability at centre of investing approach
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lackRock, the asset manager in charge of $7tn, will put sustainability at the centre of its investing approach. The firm’s CEO, Larry Fink, said in his letter to CEOs last month, “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.” Fink added that the evidence on climate risk is compelling investors to reassess core assumptions about modern finance. “Research from a wide range of organisations … is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.” As examples, Fink asked what would happen to the 30-year mortgage – a key building block of finance – if lenders could not estimate the impact of climate risk over such a long timeline, as well as what happens to inflation, and in turn interest rates, if the cost of food climbs due to drought and flooding. He added that investors are recognising that climate risk is investment risk. “Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios.” Because capital markets pull future risk forward, changes will be seen in capital allocation more quickly than changes to the climate itself. “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” Larry Fink, CEO, BlackRock
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A majority black-owned asset manager. Sentio Capital Management (Pty) Ltd is an authorised FSP.
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ESG INVESTING FEATURE
29 February 2020
How Greta Thunberg is reshaping the global investment industry
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reta Thunberg is not just helping to save the planet – she is reshaping the global investment industry. That’s according to Nigel Green, the chief executive and founder of deVere Group. His comments followed Thunberg’s address to the World Economic Forum in Davos last month in which the high-profile young Swedish environmental activist urged political and business leaders, as well as the media, to heed the science as she warned time was running out to tackle global warming. “With today’s emissions levels, the remaining budget is gone in less than eight years,” Thunberg said. “These aren’t anyone’s views, this is the science,” she added, citing a 2018 Intergovernmental Panel on Climate Change (IPCC) report. “I know you don’t want to report this or talk about this, but I will keep repeating the numbers until you do.” Her comments at the elite meeting in the Swiss mountain town came just before US President Donald Trump – a global warming sceptic – gave a keynote address. Green affirms, “Greta’s message is a consistent one, one based on science and fact, and one that is likely to hit home with millennials and Gen Z. “Typically, these generations – those born from the early 1980s onwards – seem to ‘get’ the climate emergency we’re facing, and the urgency with which it needs to be tackled, far better than older
PETER BROOKE Fund Manager, Old Mutual Investment Group
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esponsible investment is important. It is relevant. At Old Mutual Investment Group, we engage with it daily. We are committed to incorporate Environmental, Social and Governance (ESG) factors into our investment and ownership decisions. We deliver to our commitment by considering two sides of responsible ownership: • firstly, whether to own an asset (pretrade) and, • secondly, influencing the outcomes on assets that we already own (posttrade). Responsible investors: Pre-trade The first stage of incorporating ESG factors into our decisionmaking happens when we review an investment for inclusion in our portfolios. Our philosophy incorporates a uniquely twodimensional investment approach of ‘theme’ and ‘price’, on an equally weighted basis. Under theme, in addition to considering the macroeconomic environment that drives the performance of
generations. This is why it is crucial that she was at Davos in order to drive her message through to the political and business leaders who can actually do something about it right now.” He adds, “These younger generations who will listen to the message and warnings of Greta Thunberg, among others, are going to be the beneficiaries of the biggest-ever generational transfer of wealth – likely to be around $30tn – over the next few years. “They will also hold the balance of political and social influence. “With their socially responsible awareness, plus their new wealth and power, we can expect them to put Environmental, Social and Governance (ESG) issues at the centre of their investment decisions.
Therefore, Greta Thunberg is not just helping to save the planet – she is reshaping the global investment industry because financial institutions, companies and agencies will need to decisively shift their priorities to match those of millennials and Gen Z.” According to a new global survey carried out by deVere Group, some 77% of millennials cite Environmental, Social and Governance (ESG) investing as their top priority when considering investment opportunities. The poll of 1 125 people was carried out across the UK, Western Europe, the Middle East, Africa, North America, Australia, India, ASEAN and East Asia. Green notes, “This survey underscores that while traditional factors – such as anticipated returns (10%), past performance (7%), risk tolerance (4%) and tactical allocation (2%) – are important factors in millennial respondents’ investment decisionmaking, they are no longer enough.” Of Davos 2020, the deVere boss concludes, “In many ways, millennials and Gen Z ‘have got this’; they’re with Greta. Now it is time for the global investment industry to play catchup. And quickly.” Nigel Green, CEO, deVere Group
Practical implementation of ESG in asset management
the investment, we also consider industry dynamics and company specifics. In doing so, we look for any environmental, governance or social issues that may impact the investment now or in the future. Most often, these issues screen as negative themes and form part of our decision not to own a company. For instance, as part of our investment process we had decided to place a negative theme score on Steinhoff ’s corporate governance as far back as 2015. While this meant that since then we became active sellers of the shares, it also stopped us from buying shares when they got cheaper. This is a good example of our philosophy in practice, given what ensued from a corporate governance perspective for the company. As another pre-trade example, we don’t own commodity producer Sibanye, based on a negative theme score arising from social impact concerns. Deep-level mining is very risky from a fatality point of view and Sibanye has been among the worst in this regard. Coupled with the company’s antagonist relationship with labour, we
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are presented with a sizeable hurdle to ownership. Of course, the factors raised in these examples are dynamic and they can be resolved. Responsible owners: Post-trade Given the small universe of shares in South Africa, it is in our interests to actively engage with companies to get the best long-term outcomes for our clients. We invest in a company with an expected time horizon of around five to 10 years. As long-term investors, we need those companies to do the right thing – whether that be how they allocate capital, remunerate themselves or invest to grow. Decisions made by companies today impact their longerterm sustainability and hence the investment outcomes for our clients. While we are able to draw on the expertise of our Responsible Investment team as specialists on ESGrelated engagement, the responsibility to ensure that companies do the right thing sits with the portfolio manager. As active custodians, we regularly vote on company resolutions, but our level of engagement is much more than just
proxy voting. When material issues arise that we think could damage (or enhance) shareholder value, we actively lobby for change. For instance, following the listeriosis outbreak at Tiger Brands’ meat processing factories, we felt the company’s focus was only on the short-term cost of potential pay-outs and loss of sales. We pushed the board of directors to address the damage to brand value, as it could impact the long-term profitability of the business. (You can read more about our approach in our Responsible Ownership Report at www.oldmutualinvest.com). By integrating ESG considerations into our investment framework, we have managed to avoid owning many ‘landmines’. For those companies that we do own, we actively engage with their leadership, through voting and lobbying for change, to drive the best possible outcome for long-term value. As custodians of our clients’ wealth, we are focused on delivering returns sustainably and our philosophy of ‘theme’ and ‘price’ has worked well in growing and protecting our clients’ capital.
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More than 800 000 homes powered by renewable energy. Reducing total carbon emissions by 3 052 638 tons (equal to greenhouse gases from 587 963 cars driven for a year).
WHY YOUR INVESTMENT CHOICES MATTER 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 long-term returns, while solving some of society’s biggest challenges. Invest for a future that matters. Read more at oldmutualinvest.com
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.
TAX-FREE INVESTING FEATURE
29 February 2020
FAREEYA ADAM Head: Product Solutions, Momentum Investments
How to create money magic with tax-free investing
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ax-free investment products have been around for a while. Some clients are using these products as part of their financial plan, some are using them but not making the most of it, and some are not using them at all. Financial advisers know the major benefit of investing tax free, as depicted in the graph below.
Every R1 invested in a tax-free investment can grow to R6.73 after 20 years, assuming a yearly return of 10%. At a tax rate of 30%, the R1 will only grow to R3.87. But it could be difficult to bring home the true benefits to clients because of mixed messages in the media: you don’t want to encourage withdrawals even though they have easy access to the money at any time. The tax-free feature of this investment will be most beneficial when one starts early in life and keeps it until retirement or beyond.
PIETER HUGO MD, Prudential Unit Trusts
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hen investing in unit trusts, it’s important to be aware of the various taxes associated with your investment, particularly if you’re considering taxfree unit trusts. The impact of taxes on your portfolio differs according to your individual circumstances (such as your marginal income tax rate) and the underlying assets that you are invested in. While it’s fairly straightforward that the higher your marginal tax rate the greater the potential tax saving over time, the latter component may be slightly less obvious. If you own bonds or cash in your unit trust, you will incur tax on the interest income they pay out. Cash can include money market funds, bank deposits and any other short-term investments that pay out interest, apart from bonds. Your interest income is subject to income tax, and is taxed at your marginal
Clients will get the most out of the investment by: • investing as much as they can, within the limits; • investing as much of the allowable yearly amount as early in the tax year as possible; • investing in growth assets; and • leaving their money invested for as long as possible. Clients will override the advantages by: • using the investment as an emergency fund or for other short-term needs; • withdrawing any amount before retirement; or • investing in conservative underlying assets, such as fixed interest. Let’s have another look at how time and tax-free compounding can work for a client. If we assume the yearly limit of R33 000 (R2 750 per month) is too high for a young person, let’s look at R1 000 per month. If the client can afford a 6% increase every year, it will take almost 22 years to build up to the lifetime limit of R500 000. If the client in our example starts investing at the age of 25, this is how the value will increase if we assume inflation at 6% and a return of 10% a year (CPI + 4%).
IF CLIENTS HAVE THE DISCIPLINE TO INVEST TAX FREE, AND STAY INVESTED, THEY WILL REAP THE BENEFITS
Investment period 25 years 30 years 35 years 40 years
Investment value R1 959 927 R3 156 481 R5 083 545 R8 187 100
Note: Excludes the effect of fees.
If clients invest in a Flexible Tax-free Option from Momentum Wealth, they get the following added benefits: • We offer the widest choice of underlying investment components to suit each client’s investment needs and goals. • Our outcome-based solutions fund range targets specific growth outcomes, making the choice of investment funds so much easier. • We offer cost efficiency, even more on our Target range of funds where we use passive-style investing with an active twist. • We make sure clients don’t exceed limits with us, to avoid tax penalties. If clients have the discipline to invest tax free, and stay invested, they will reap the benefits. With growth assets and time on their side, they will enjoy money magic. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider. Momentum Wealth (Pty) Ltd is an authorised financial services provider (FSP657) and part of Momentum Metropolitan Holdings Limited.
Tax-free investments: A closer look at the benefits tax rate. Individual taxpayers enjoy a specified annual exemption on all South African interest income they earn, set by SARS every year. For the 2019/20 tax year, this exemption is R23 800 for individuals under 65 years old and R34 500 for individuals 65 years and older. For equities (excluding listed property companies), you will incur dividend withholding tax (DWT) on the dividend income they pay out. DWT of 20% is withheld from your dividends before they are paid out or reinvested. The tax regime associated with listed property companies in the form of Real Estate Investment Trusts (REITs) is more complicated than other asset classes. REITs do not pay corporate income tax, and investors must pay income tax (at their marginal tax rate) rather than DWT on their distributions. Capital Gains Tax (CGT) is another tax associated with investing
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in both equities and property. A capital gains event is triggered only when you sell your investments at a profit. Currently, an amount of 40% of this capital gain is included in your annual income; this makes the maximum CGT rate for individuals paying the maximum 45% marginal tax rate 18%. Note that individual taxpayers currently enjoy an annual capital gain exclusion of R40 000. Which tax-free investments offer the most tax benefit? From the above, it is difficult to determine which types of tax-free assets would offer the most benefit, since it depends on your unique circumstances. However, we can draw some generalisations. It is particularly beneficial to hold REITs inside a tax-free investment because there is effectively no corporate or individual tax on the investment returns. So, if your
primary motivation for investing is to maximise your tax savings, you may want to consider including listed property in your tax-free investment. However, this choice is dependent on many other factors as well – not least whether it is suitable for your overall portfolio. While it may seem like holding cash in a tax-free investment is also very attractive, it may in fact be the least appropriate asset class to choose over the long term. The primary concern of investing in cash is that it earns lower returns over the longer term than the 6% to 8% annual real returns provided by equities and listed property. The tax-free returns on these longer-term investments, re-invested and compounded over many years, will likely be much more powerful than cash. At Prudential, we offer a range of tax-free unit trusts to suit a variety of risk and return requirements.
TRANSFORMATION FEATURE
29 February 2020
DANIE VAN ZYL Head: Smoothed Bonus Centre of Excellence, Sanlam Corporate Investments
Partnering for change
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eading the 2019 annual BEE. conomics survey by 27four makes for sobering reading for anyone thinking of starting a new black asset management company. While there are a small number of firms with the necessary scale to offer a full suite of investment products and take on the traditional asset managers, there is a long tail of mid-sized and small managers. Managers often find it difficult to grow their asset base without their own distribution channel. Government, through the FSC scorecard, has placed more responsibility on Retirement Funds (the largest allocators of capital in the industry) to actively think about the service providers they use and what the BEE status of these service providers is. This, in turn, leads to institutional clients putting increasing pressure on the asset management industry to transform their businesses but also to support black asset managers where possible. As a result, some of the large financial service providers have partnered with black asset managers to provide products that fulfil this requirement. One such partnership is the Sanlam Progressive Smooth Bonus Fund, which is South Africa’s first black managed smoothed bonus portfolio. The portfolio was developed by Sanlam and 27four Investment Managers. Sanlam, in its more than 100 year history, has always adapted to the changing environment while ensuring that clients continue to receive the level of service and benefits they expect. The Progressive Smooth Bonus Fund is a perfect example of this.
The Progressive Smooth Bonus Fund has been providing its clients with smooth, stable returns since 2017 and attracted inflows exceeding two billion rand in the first year. The portfolio was launched to address the lack of representation of black asset managers in smoothed bonus portfolios. The Progressive Smooth Bonus Fund aims to invest only in managers meeting the following criteria: • Greater than 50% effective black (South African) ownership with equivalent voting rights • Greater than 50% black (South African) board members • Greater than 50% black (South African) investment professionals. By using the criteria above, Sanlam can ensure that the managers used are indeed those that will contribute to transformational change in the South African asset management industry. Traditionally, the Smoothed Bonus assets were predominantly managed in-house by the insurer’s asset management business. With the Progressive Smoothed Bonus Fund, Sanlam provides an avenue for black asset managers to access a larger part of industry assets but still provides clients with the level of security they are accustomed to from Sanlam’s governance and risk management functions. Does this fix the transformation problem in the asset management industry? No, but it is a step in the right direction and it shows that the industry is committed to change. At Sanlam we believe there’s never been a better time to partner for change.
PIETER KOEKEMOER Head: Personal Investments, Coronation
Committed to real transformation every day
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oronation is a proud South African business, privileged to manage the long-term savings of millions of our country’s citizens. This is a responsibility that we take very seriously. Coupled with that is our commitment to real transformation since we first opened our doors in 1993. While we are by no means at the end of our transformation journey, we are proud of the significant strides that we have taken and that we continue to take every day. Transforming from within Staff ownership is an integral part of our culture. We believe that through being part-owners in our business, our people can make the right decisions for the longterm benefit of our clients and the business as a whole. That’s why, in 2005, we created the country’s first staff-only black economic empowerment deal, the Imvula Trust. By working exclusively with our own people, we created a partnership that we believed would have a meaningful impact on our business and, over time, achieve true social change. In the creation of a new generation of owners, we made a long-term investment in 187 people, our business and the economy. We also follow a disciplined recruitment and selection process, and have successfully recruited, trained and retained exceptional black and female talent. Today, our team is 56% black, 50% female, and 78% of our board of directors are black. A significant percentage of our senior leadership team is black, including our CEO, CFO, COO, Head of Institutional Business, Head of Fixed Income and Head of SA Equity Research. Transforming and growing our industry Over the years, we have pioneered a number of corporate initiatives that have contributed to transformation and the development of skills in the asset management and financial services industry in Southern Africa. This includes establishing three independent black businesses – African Harvest Asset Management, Kagiso Asset Management and South Africa’s first black-owned transfer agency, Intembeko Investment Administrators – along with our deliberate intervention in the local black stockbroking industry. Supporting black stockbrokers In 2006, we introduced a ground-breaking initiative to transform the South African stockbroking industry with the launch of the Coronation Business Support Programme. Since its inception, the programme has allocated in excess of R300m in brokerage to its participants. As a result of this support, a number of businesses have evolved into sustainable stockbroking houses with value-added offerings to the investment community as a whole. Critical to the programme’s success was Coronation’s dedicated allocation to skills development, which was one of the key criteria for ongoing inclusion in the programme. As an example, over the past decade we have funded and trained 27 analysts through the Vunani Securities Training Academy. For both the industry and the companies themselves, the transformation has been material and in 2016 the programme’s success inspired the creation of a broader industry programme, the ASISA Stockbroker Development Programme, of which we are a sponsoring manager along with five other large fund managers. Developing black IFAs We have followed a similar cooperative approach to assist with the development of independently-minded black professionals in the financial planning industry. Since 2015, we have been a co-sponsor of ASISA’s Independent Financial Adviser (IFA) Development Programme. The aim is to provide business development support to existing black IFAs by equipping them with practical management skills and knowledge. It also includes an IFA internship opportunity for talented black graduates to gain theoretical knowledge and practical work experience at some of the country’s top IFA practices. Since inception, it has trained 120 black IFA businesses and created internship opportunities for 105 individuals, 42 of whom have been absorbed into the practices.
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TRANSFORMATION FEATURE
ZIYANDA TSHAKA Business Development Executive, Futuregrowth Asset Management
Transforming transformation - Futuregrowth’s perspective
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uturegrowth has been a leader in developmental investments for over 20 years. Our flagship funds, the Futuregrowth Community Property Fund and the Futuregrowth Infrastructure and Development Bond Fund, were launched in 1994 and 1996 respectively and we currently manage assets in development funds totalling over R33bn (September 2019). Investing in transformation is at the heart of our business, investment and organisational strategies. Our hope is that we have played a small but significant role in helping to develop and transform South Africa over the past 20 years. This begins at home, by tackling the drive for change from several angles. Transformation using our products as a vehicle It goes without saying that our products reflect our ethos when it comes to transformation. • Futuregrowth was one of the first investment houses to build and invest in retail shopping centres in townships and rural areas in South Africa post the 1994 elections, as it saw the dire need for infrastructure development in these areas, which were severely underdeveloped at the time. These communities were also in desperate need of essential goods and services at affordable prices. Many of the banks and property companies did not want to invest in these localities due to a lack of understanding of the risks. Futuregrowth also saw the opportunity to create jobs for the local community during the construction phase – and new permanent jobs once the shopping centres were completed. • The key focus of the Infrastructure and
Development Bond Fund is to invest in companies or projects that facilitate infrastructural, social, environmental and economic development in Southern Africa. • The companies in which we invest are required to provide us with impact data wherever possible, so that we can measure how our investments are transforming the lives of South Africans in a tangible way. This is a ‘work in progress’, where we are continuously improving the collection and reporting of this information. Transformation through people • Futuregrowth has 86 employees spread across the operational areas of Human Resources, Performance, Marketing, Information Technology, Compliance and Risk Management, Change Management, Client Reporting, Business Development, and Specialist Investment Administration – in addition to the Investment Team. • Since 2011, Futuregrowth has made 71 new appointments. 68 of these have been PDI staff, with 31 of the appointments Black African. • As black African staff were under-represented in the
company at the time, we started to place a stronger emphasis on employing black African candidates in 2012, and this effort has intensified over the past seven years. • Through the establishment of our Employment Equity Committee, we have formalised our focus on PDI staff appointments and promotions, with a specific emphasis on increasing black African representation in the company. Transformation through skills development • The latest Stats SA Quarterly Labour Force Survey shows that the country’s unemployment rate has hit its highest level since 2011, with the youth and black women bearing the brunt of South Africa’s struggling economy. The unemployment rate of black women is currently more than 30 percent, while the youth is the most vulnerable group when it comes to finding a job. Futuregrowth makes a concerted effort to improve this situation, through our internal skills development programmes and our participation in the Imfundo Trust, which was launched
Data at 30 September 2019
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F u t u reg row t h i s a li ce ns e d F ina nc ia l S e r vice s P r ovid e r .
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in 2011 to address South Africa’s shortage of PDI investment professionals in the asset management industry. • The average age of new recruits at Futuregrowth over the past five years is 29.9, and 33 of these have been female (of a total female staff of 52). • Every year, Futuregrowth hires a number of graduates with no working experience fresh from universities around the country – to enable them to kick-start their careers. • Since 2011, we have hired 17 PDI graduates for 18-month internships, of which 11 have been black African. • Post their internships, all 17 graduates were offered permanent employment. • Five of these have been promoted to analysts in the Investment Team and one to portfolio manager. Four of the five are black African. • Imfundo Trust owns 5.30% of Futuregrowth’s shares, and the annual dividends form a significant portion of the funding of the Trust’s student bursaries. In 2018, Futuregrowth dividends made up 50% of this funding. • Since its start, the Trust has spent R35m on student bursaries. It currently supports 25 students in a variety of study programmes at South Africa’s public tertiary institutions.
Internal Investment Team transformation • Our aim is for our business to reflect the racial and gender diversity of our country. • We have 17 black female investment professionals, who make up 49% of the total Investment Team in the company. • The Futuregrowth Investment Team applies a ‘team-based approach’ when it comes to investment decision making, ensuring that all voices are heard. • No one portfolio manager can decide or action a ‘buy’ or ‘sell’ instruction on their own. • Investment decisions are made by the whole Investment Team through various committees. • This collaborative ethos promotes the transfer of skills, with junior analysts contributing to the makeup of the portfolios long before they become portfolio managers. Ownership and status • Old Mutual Investment Group South Africa has been the majority shareholder of Futuregrowth since 2008. • Futuregrowth has a Management Shareholding Trust, of which up to 20% can be allocated to staff in the business.
• To date, more than 90% of Futuregrowth staff are shareholders. • Futuregrowth is a BEE Level Two Contributor. In closing At Futuregrowth, we know that transforming South Africa is about a lot more than scorecards and tickboxes. We recognise the impact that our business and investments have on our clients, communities, the investment industry, capital markets and the economy as a whole. As such, we take our role as responsible investor seriously. This extends beyond the initiatives covered above, to our role in raising awareness and sharing knowledge in both our immediate environment and the broader public. It is our duty to assist others to make informed and educated investment and economic decisions. This is evidenced in our communications around the status of State-Owned Enterprises, and the training that we run for pension fund trustees, among others – which have had an ever bigger impact than we expected. Futuregrowth Asset Management is a licensed discretionary financial services provider.
www.futuregrowth.co.za
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TRANSFORMATION FEATURE
TEBOGO NALEDI Director: Institutional Business, Old Mutual Investment Group
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t the inaugural Financial Sector Conduct Authority (FSCA) Retirement Funds conference held in Pretoria in September 2019, the Divisional Executive for Retirement Fund Supervision, Mr Olano Makhubela, announced that in 2020 the FSCA would be issuing a guidance note to retirement funds on BroadBased Black Economic Empowerment (B-BBEE) in retirement funds. This guidance note, like the one on Sustainable Investing issued in June 2019, will direct Principal Officers and Trustees of Retirement Funds on how to implement a principle of pension fund legislation, specifically Section 2c(iii) of Regulation 28 of the Pension Funds Act.
FOR US, TRANSFORMATION IS NOT JUST A MORAL REQUIREMENT Section 2c(iii) of Regulation 28 states that “A fund and its board must at all times… in contracting services to the fund or its board, consider the need to promote broad based black economic empowerment of those providing services.” Considering the inclusion of retirement funds in the B-BBEE Codes and the Financial Sector Charter in
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Accelerating transformation in the asset management industry 2017, B-BBEE will in all likelihood be a significant issue that retirement funds, in particular, will need to engage more deeply with in 2020 from a policy perspective. As a responsible business and a long-term steward of South Africa’s savings, Old Mutual Investment Group (OMIG) has an important role to play in addressing the systemic challenges of poverty, inequality and unemployment in South Africa. To address these systemic challenges, there are several critical elements that require focus and attention: • Inclusive economic growth • Societal transformation • Building a sustainable future in which our stakeholders and communities can thrive. There is a direct correlation between the prosperity of South Africa and that of our clients. So, for us, transformation is not just a moral requirement but a business imperative in viewing the solutions as a journey with significant milestones while taking on a holistic approach. OMIG is certified as a B-BBEE Level 2 contributor. Although this rating is important, we believe transformation goes beyond ratings and is also about changes in mindset and the true integration of diversity in a business. Our pursuit of investment excellence, and commitment to a future that matters, compel us
to drive transformation wherever and whenever we have influence as an enabler of economic activity, a custodian of the nation’s savings, and as a progressive employer. With that as background, we view transformation for a South African investment management business as primarily being about five elements: 1. Diversity and demographic representation among business leaders in the organisation – Given the importance of leadership in transformation, it is hard to see how an organisation can fully embrace transformation and diversity without this being reflected in the leadership. 2. Diversity and demographic representation of investment decision makers in the organisation – As ‘allocators’ of capital and ‘pricers’ of risk in financial markets and in the broader economy, investment decision makers are essential players in determining where capital flows to and where it doesn’t. Diversity and representation among investment decision makers is important in ensuring these capital and risk allocation decisions are optimal for all people with a stake in the funds we manage. 3. Black shareholding and ownership – A business structure should enable ownership stakes to black professionals within their own area of influence. It is true that this is not always possible at holdings level;
however, there is ample opportunity at divisional level. 4. Impact on corporate transformation – As active stewards of our client’s capital, engaging with investee companies continuously to influence their transformation agenda is crucial. Proxy voting on the various transformation issues an organisation champions, including Board Composition, B-BBEE transactions and succession planning, is key. 5. Investing to support inclusion and transformation – There are many opportunities for asset managers to invest to help the country achieve inclusive growth. Investments in areas of education, infrastructure, affordable housing, energy, and many others, not only encourage this but can reap rewards through investment returns. As Old Mutual Investment Group, we take our role and responsibilities in society very seriously when it comes to transformation. We still have some way to go on many of the elements discussed above, but we have also made significant positive strides on many aspects of transformation. We are resolved in our determination to continuously and progressively address transformation in our organisation. To learn more about our commitment to B-BBEE, please go to oldmutualinvest.com.
Financial sector transformation progress below expectations
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he financial sector still needs to improve its performance against its transformation targets as set out in the Amended Financial Sector Code (FS Code), the Financial Sector Transformation Council (FSTC) says. The 2017/18 Financial Sector State of Transformation Annual Report shows that, in general, financial institutions in the sector did not meet their transformation targets and need to do more. The report, which was released on 20 December 2019, provides findings of the overall performance of the sector in terms of transformation and covers the period 1 December 2017 to 30 November 2018. It is the seventh to be published by the FSTC and the first report to be issued under the Amended Financial Sector Code published on 1 December 2017. Response rate “167 financial institutions reported, down from 181
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in the 2016 report,” the FSTC states. “Of these 167 entities, half achieved empowerment contributor levels of between 1 and 4.” According to the FSTC, the lower response to calls for submission of reports continues to present a challenge despite reporting being made mandatory in the FS Code. It is, however, noted that many of the larger entities have complied. In an attempt to improve the response rate, the report is also naming those financial institutions who have not complied. Performance highlights Findings indicate that black ownership in the sector is still below target and that the sector has not improved on management control which measures the number of black people participating in Board and management structures. These findings are also in line with the B-BBEE Commission’s analysis of reports submitted by JSE-listed companies that shows
performance by the financial sector is regressing on both ownership and management control. The FSTC says the skilling of black people is still below expectations. “The support of black business through procurement and enterprise development is somewhat happening but also below the set targets.” It adds that financial inclusion, through the accessibility and appropriateness of financial products for the low-income segment of the market, is fairly provided in banking products and services, but falls short for insurance products. Financing for targeted investments is higher than the targets with more finance provided for infrastructure in underdeveloped areas and lesser for the financing of black SMMEs and industrialists, black farmers and for affordable housing. The FSTC is presently engaged in a process to amend the codes and to align them to the ones recently published by the dti.
Wow,
and I didn’t even ask! FundsAtWork Core is the proactive solution for smaller employers who often provide employee benefits only when employees ask. It is a hassle-free way to offer essential group retirement and insurance benefits. • Low administration and investment management fees make participating affordable. • Efficient, seamless delivery reduces operational issues for your clients. • Plus, members have access to FundsAtWork’s innovative value-added benefits and services.
Contact your Momentum Corporate Specialist. momentum.co.za
Momentum Corporate is a part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider. Momentum Metropolitan Holdings Limited is a level 1 B-BBEE insurer.
EMPLOYEE BENEFITS FEATURE
29 February 2020
ELIO E’SILVA Head of Alexander Forbes Retirement Fund
New year, new job – but don’t touch that retirement fund money
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hen visiting my folks last week, I had an interesting chat with my dad’s old mate. He was recently told that he could not afford to retire at 65. He of course was horrified, as he had contributed to a retirement fund throughout his working life. After some candid conversation, he revealed that he had lived a ‘really good’ life as he preferred to earn a little more each month so that he and his wife could enjoy their life. “After all, who knew if they would even live to 65?” he added. He explained that he had managed to do this by contributing a little less to his employer’s pension fund each month. He had also changed jobs a few times over the years and had always taken his retirement savings in cash when leaving the company. He would either buy a new car or make his wife happy by installing a new kitchen, but he kept contributing to his employer’s retirement fund at the next company.
YOU CAN NEVER START SAVING TOO SOON AND CAN NEVER SAVE TOO MUCH This is a sad but true reality for many soon-to-be pensioners. The truth is you can never start saving too soon and can never save too much. It’s vital to keep your retirement savings invested and keep up your pension contributions if you plan to live a ‘comfortable’ life when you reach retirement age. If you are leaving your employer and belong to your employer’s retirement fund, you will need to decide what to do with your retirement savings. Do not compromise your future financial well-being by cashing in these vitally important savings without understanding the consequences. You have the following options: 1. Keep your savings where they are – Your money will be invested in the default option, which the trustees of the fund have chosen. This is the
easiest process – you can change your decision or investment option later, your money will stay invested in the same portfolios and you will not be taxed on this option. Tax may apply if any deductions from your savings apply. For example, home loan settlements will be subject to tax if your retirement savings were being used as collateral. 2. Transfer your savings – Move your money to your new employer’s fund, with an option to take a small cash portion or transfer all your savings. The benefits of transferring your retirement savings means you can add future contributions and you keep all your retirement saving in one place. However, the savings you withdraw will be taxed. 3. Withdraw all your savings – Take your retirement savings in cash. Financial advisers don’t recommend this option because if you cash in your retirement savings now, you will need to start saving for your retirement from scratch. It could mean that you would not be able to earn the income you need, come your retirement years. You will pay tax on this money, depending on the value of the benefit. Your focus needs to be on your financial well-being journey, to guarantee you can retire comfortably. It is important that you discuss your future with a financial adviser to ensure that your current needs and future needs are met. When going on holiday you make sure that you plan your journey – why should retirement be any different?
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NASHALIN PORTRAG Head: FundsAtWork, Momentum Corporate
When your clients protect their employees, they protect their business
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ife is unpredictable. The impact of employees’ unexpected life events, such as death, disability and critical illness, can have serious financial consequences for their employers, particularly smaller businesses. Group insured benefits are a cost-effective way to protect employees from the financial impact of these events. However, many smaller employers see benefits like group insurance as unaffordable and operationally very complex. If you have smaller clients without group insured benefits, it’s time to talk to them about how to protect their business from the impact of their employees’ unexpected life events. The solution is an umbrella fund with an option specifically designed to meet the needs of smaller employers. Advantages of group insurance Given that insurance is a ‘grudge’ purchase as well as South Africans’ bias towards spending rather than saving, it’s likely that the only insurance many employees will ever have is through their employer. Group insurance offers economies of scale and cross-subsidies, which make it more affordable than individual benefits. Underwriting is less rigorous and the compulsory nature of a group arrangement ensures employees and their families, who may not normally have had access to cover, are protected. Avoid the double whammy In a smaller business, each employee needs to pull their weight for business success. The financial impact of losing the skills and input of a productive employee can be severe. It’s a double whammy for leadership if there is no insurance cover in place. They then face a moral dilemma: self-fund benefits to assist an employee’s grieving family or a disabled employee, or leave them to fend for themselves. The solution How can smaller businesses offer their employees group insurance and other benefits, affordably and effortlessly? The answer is an umbrella fund with a product option that offers core benefits to address the needs of smaller employers. In addition to retirement benefits, this solution should include a suite of group insurance benefits. Insured benefits should include an income disability benefit as well as a lump-sum disability benefit, critical illness benefits, death benefits and funeral benefits. Where appropriate, the benefits should also include a conversion option that allows the employee to change their group benefits to an individual insurance policy should they resign and leave the umbrella fund. Participation in such an umbrella fund should not only offer all the costefficiencies synonymous with this type of retirement fund, but administration and investment fees should be as low as possible. Other important capabilities or features to consider include: • Does the insurer underwriting the benefits have an effective disability management team, who will focus on rehabilitating and reskilling your clients’ employees with disabilities? This will ensure a smooth, speedy return to work and reduce replacement and retraining costs. • Does the fund offer benefit counselling and communication to help employees understand their benefits and develop a real appreciation for them? Better understanding and appreciation reduces the “grudge purchase” aspect, builds employee loyalty and helps employees to make smarter financial choices. • Does the fund offer value-added benefits and services to support behaviour change? When promoted and used, these benefits and services influence employees’ behaviour and improve their physical, financial and mental health. This not only boosts employee productivity but also reduces claim costs, which drives sustainable pricing for insured benefits.
AF19248
Making your employee benefits, employer benefits We’ve been working with South African businesses to gather data from employers and employees, and together with them, turned this data into a human form – knowledge. Based on this, our advice can lead to your employees working at their best, growing businesses and ultimately shifting the economy and wealth of our country. That’s the beauty of our insights, gathered over more than 85 years and put to work in our market. That’s knowledge, applied. Why don’t you let us apply what we’ve learned from our integrated service to your business too? Want to grow more? Go to alexanderforbes.co.za
Retirement | Investment | Health
Alexander Forbes Financial Services (Pty) Ltd is a licensed financial services provider (FSP 1177 and registration number 1969/018487/07). Alexander Forbes Investments Holdings Limited. Registration number 1997/022540/06. Alexander Forbes Health (Pty) Ltd is a licensed financial services provider (FSP 33471 and CMS registration number ORG 3064).
EMPLOYEE BENEFITS FEATURE
29 February 2020
BAREND LE GRANGE Head: Individual Member Support, Sanlam Corporate
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hen an employee leaves their company, it is often an emotional event for everyone involved. As an employer, there’s the temptation to be less invested in an employee the minute a resignation letter arrives. With retrenchment, the unpleasantness of the situation can also cause immediate distance. But it is often in these instances that an employer has the chance to really change a life. When changing jobs, an employee has various options for preserving their retirement savings. If they make the wrong decision based on their personal circumstances, the opportunity cost could be significant. For employers, there’s an opportunity to make a meaningful difference to the individual’s financial future by ensuring they have access to proper counselling at the right time. Well-considered retirement benefits counselling has proven to be extremely effective – especially when employers enable employees to actively engage through appropriate channels during these
Proper retirement benefits counselling could change the lives of exiting employees
moments in their lives. Changing jobs frequently comes with other major shifts in an employee’s life, especially given the increased velocity of job changes for millennials in particular. Exiting employees have been shown via Sanlam Benchmark research to make significant decisions without necessarily understanding their range of options or the long-term implications of their choices.
EMPLOYERS HAVE THE POWER TO ADD MEANINGFUL VALUE TO THEIR EMPLOYEES With retrenchments on the rise and many employers embarking on restructuring exercises, now is an opportune time to consider how to act in the long-term best interests of employees. By ensuring relevant processes are in place to notify employees of the counselling
service that is available, employers empower exiting employees in their financial journeys. Some of the critical touchpoints are appropriate communication with employees before they leave, as well as ensuring that the HR professionals directly involved with the employer’s formal exit process are familiar with the counselling services available. Having implemented a robust proactive retirement benefits counselling ecosystem for clients, Sanlam has been able to demonstrate that exiting employees receiving such counselling were found to be three times more likely to preserve their retirement funds than those who did not. This is a substantial difference in an environment where rates of preservation have been historically poor. While retirement benefits counselling is now an imperative for funds – due to the recent default regulations – not all forms of such counselling are equal. Written communication is the most
popular mechanism implemented by retirement funds but has been shown to be largely ineffective in isolation. The combination of various capabilities across a spectrum of channels, from WhatsApp to Member Apps to Human Counsellors, represents the most robust ecosystem to address the risks of poor decision making. This ecosystem is enabled by data and analytics that support employers in ensuring that the right interventions are applied for staff at the right time. Employers have the power to add meaningful value to their employees. When an employee leaves, they tend to be vulnerable from a financial standpoint and failing to preserve funds has lasting implications for wealth creation. The onus now rests on employers to actively evaluate the various counselling alternatives available to ensure that a robust ecosystem is implemented to enable financial resilience and prosperity for their employees.
Meaningful employee benefits make for a healthier bottom line Every company wants to be able to attract and retain top talent, and many believe that paying top dollar is all it takes. But, increasingly, this is not the case as employees look for a package that includes protection for themselves and their loved ones should things go wrong. For companies, a happy and satisfied staff complement makes for improved productivity, greater loyalty, and a positive effect on both customers and the bottom line.
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erman Lombard, founder and Executive Director of African Unity, believes that by providing benefits that are meaningful, companies are able to demonstrate their care for the wellbeing of their employees. “In times of trauma, like the death of a family member or the bread winner, the family needs to know that they can rely on their employer for assistance. By insuring the benefits through an insurance company, there is peace of mind,” he says. Lombard explains that several factors are taken into account when determining the correct price for group cover for an organisation, irrespective of the size. These include whether the group is taking out insurance for the first time or whether they are
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reviewing their existing cover. Lombard adds that for a new group, the use of actuarial quoting engines, mortality rates, industry norms, and the like are taken into account to determine the price. These factors are then managed over time. For an existing group, the claims experience over a specific period will be reviewed and taken into consideration. Whether the industry is high-risk or not, costing models can be tricky. Gathering information on past claims is an important part of the process to ensure that the underwriter is able to provide the cover at the price it has determined. Sports injuries, tripping and falling, and car accidents can happen at any time and to anyone, no matter how much you try to avoid them. South Africa has a particularly poor record where it comes to road traffic accidents, with an average of over 40 people a day being fatally injured and 20 being left permanently disabled. According to the World Health Organisation, the rate of road traffic fatalities in the African region remains the highest in the world, with South Africa being a significant contributor to this grim statistic. Lombard explains that accidental death and injury cover is a combination of life and disability cover that pays out in the case of injury with admission to hospital, disability or death from an accident. Payment is made either in the form of a lump sum or reimbursement for out-of-pocket expenses. “By choosing to offer this cover to employees, the employer is making financial provision for their employees in the event of an accident and, in the
process, shielding their loved ones from possible financial ruin,” he points out. Lombard cautions, however, that there are exclusions to this cover and explains that, typically, the exclusions would include injury or death caused by any unlawful act, self-inflicted injury, death or injury due to high-risk pursuits, non-accident related injuries, drug abuse, suicide and non-accident related injuries. Accidental death and injury cover offered to employees as part of the larger employer benefits package is more affordable than if the employee were to purchase this cover as an individual. Lombard explains that this is because buying cover for all employees through a provider on a ‘wholesale’ basis costs less per employee than it would if they were to buy a policy as an individual. “We believe that it is imperative for employers to provide benefits for their employees, regardless of the sector. By providing access to protection like funeral cover to bury a loved one, or accident insurance when life deals an unexpected blow, employers are showing they care and at the same time nurturing loyal and productive employees,” he adds.
Herman Lombard, Executive Director, African Unity
“WHAT IF” is a powerful question. It challenges the status quo and anticipates possibilities in the same breath. WHAT IF your retirement fund was able to harness leading-edge technology to save you time, money and effort? WHAT IF your consultants were able to engage with and influence your employees to make better financial decisions? WHAT IF your employees became more productive because they were in better control of their health and finances? WHAT IF you had a partner who looked at things a little differently? A partner who helped you to explore how advice, retirement funding, insurance and healthcare could transform people’s lives. A fully empowered partner with Africa’s largest insurance footprint. At Sanlam, we continue to explore the “what if” questions that enable financial resilience and prosperity for institutions and your employees. Visit www.financialresilience.co.za to begin to ask: What if?
Sanlam is a Licensed Financial Services Provider.
KINGJAMES 49593
There’s never been a better time to ask: What if?
RISK
29 February 2020
TERENCE WILLIAMS CEO, Aon South Africa
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he insurance market is in the midst of its most consistent shift in a number of years. In certain countries, sectors and lines of business, buyers are experiencing rate increases, capacity shortages, and a more critical attitude from insurers towards risk selection. Understanding how this could impact your organisation, the steps you can take to proactively manage the expectations of your business stakeholders and deliver an optimal outcome is crucial. What are the drivers of this change? #1: Unprecedented loss levels For insurance buyers, the impact is starting to be felt in terms of rate increases, capacity constraints, tightening terms and conditions, and growing insurer scrutiny on risk management practices. #2: Evolving buyer demands As organisations evolve through fundamental changes in their business models, it raises the question: are traditional insurance products keeping pace? Aon’s 2019 Global Risk Management Survey (GRMS) reveals that risk managers feel less in control than ever before; in part as a result of a changing political, economic and technological landscape and accelerated changes in market factors. #3: Changing exposures Key risks are evolving towards brand, reputation, intellectual property, crypto-currency, cyber and non-damage business interruption – challenging insurers to develop products for intangible exposures. People risks are also evolving, with declining health patterns leading to increased noncommunicable diseases and chronic conditions. The growing demand for Corporate Social Responsibility and Environmental, Social and Governance factors have impacted the industry and resulted in increasingly ‘ethical’ underwriting behaviour – for example, some insurers have ceased writing thermal power and coal risks. #4: Reinsurance pressures On the treaty side, 2019’s January reinsurance renewals saw some territories less impacted than others when it comes to rate rises, and there was, in general, less of a flow through to the direct market than
How the insurance market is changing
initially expected. In recent years, some direct insurers have consolidated their treaties and taken higher net retentions to reduce their reinsurance costs. This has hit their profitability in the face of the high levels of losses they’ve had to carry without reinsurance recoverable. There has been a more pronounced and immediate change on the facultative side. Lloyd’s provides a significant amount of facultative support to global insurers and, given syndicates’ performance over the last two years, the focus on improving lower quartile business is directly flowing through to direct insurers. #5: Increased cost of doing business The rush to updating and maximising the efficiency of working processes and leveraging data to innovate products, improve services and speed up claims settlements has started. Lloyd’s is the latest to comment on its vision focused on improving the ease of doing business and being a viable marketplace for the long term. The cost of compliance, technology, digitisation and salaries has increased exponentially over the past years. With insurers inherently being price takers and not price makers, it means they are forced to sell insurance at a price prevailing in the market. Hence, they can only become profitable if they control costs. #6: Political unrest/ uncertainty Violent service delivery protests spurred by service delivery failures, corruption and growing youth unemployment have become commonplace in South Africa – and virtually all exacerbated by criminal elements. Businesses could find themselves severely out of pocket if their assets are damaged during a violent protest and they do not have Sasria cover in place. Key market trends #1: Risk readiness is falling but volatility is growing Businesses are slow to develop and implement new risk and insurance programmes in the face of evolving risks such as cyber security and political risk. Yesterday’s solutions no longer address the risks posed by a technologically, economically and politically fraught environment, so a new lens is needed on matching specialised insurance solutions to these evolving risks.
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#2: A widening skills gap and widening social discontent Uncertainty around politics and economics are likely to widen SA’s skills shortages as an exodus of skilled people takes place, placing companies under pressure to afford and retain top talent. SA’s alarming unemployment rate is also likely to drive growing citizen dissatisfaction, manifesting in violent protest/strike action. #3: Political risks are a global challenge Developed nations traditionally associated with political stability are becoming new sources of volatility and uncertainty that worry businesses. #4: Specialty Capacity constraints, insurer withdrawals and consolidation are creating challenges in financial lines. The professional indemnity insurance market continues to deteriorate and has become severe for some industries. Increased claims activity and several large settlements have tipped insurer’s loss ratios to unprofitable. As the market hardens, underwriting agencies are becoming more relevant as they can provide quality capacity on the larger and hard-to-place PI placements. D&O insurance market conditions continue to deteriorate with premium increases needed to generate a sustainable rate level to cover. Demand for credit insurance continues to grow as trade becomes increasingly global. However, the market is clearly cyclical, with a strong correlation with GDP. Cybersecurity vulnerabilities are being addressed through tightened pricing and retention guidelines. #5: Weather catastrophes to intensify with climate change Property-related and business interruption losses as a result of fire and weather catastrophes have increased dramatically in South Africa, with 2017 having the highest underwriting losses on record. Storms, floods, tornados and fires increasingly account for the lion’s share of local property and business interruption insurance claims. #6: Business interruption risks intensify BI has been on the Top 10 list of risks since Aon’s Global Risk Management survey
started in 2007. As supply chains become global, there is increasing interdependency among companies, which in turn is heavily affected by incidents that turn into unexpected disruptions. The focus on inventory reduction and lean supply chains has also amplified such potential. More importantly, the proliferation of cyberattacks has also added new urgency and dimension to BI. What does this mean for insurance buyers? • Start preparing now – Renewal timeframes are generally becoming longer, which means the whole process must start much earlier and with more preparation and detail. • Cover – Companies in distressed sectors may struggle to get cover at an acceptable price. • Cost – Buyers are potentially being asked to pay more for risk transfer, as well as taking higher retentions and refocusing on the quality of their risk. • Improve risk marketability – The quality of the risk submission will become more important to ensure optimal renewal terms. Organisations will need to articulate to the insurance market how their risk is better managed than their peers’. • Explore alternative risk financing options – The trend towards increased retentions will almost certainly lead to more extensive utilisation of captives, even from organisations that may have previously discounted this approach due to a lack of scale. • Justify the approach to risk – Companies will have to increasingly reconsider and justify their approach to risk and the degree of insurance cover they have in place. • Review policy wordings – As insurers focus on the breadth of policy wordings, buyers need to carefully review the relevance of their wordings. When were wordings last reviewed? Is cover still relevant to the risk profile? • Refresh risk assessment processes – Bring the insurance buying function and enterprise risk management (ERM) team more closely together to better inform perspectives on risk profile and the control environment. • Stakeholder management – The risk management function may need to help the C-suite in their organisations to understand how this shift might affect the business from a cost and volatility perspective.
RISK
29 February 2020
Insurance Ombud cautions against misrepresentation of previous claims
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claimant who submitted 12 claims with a total value of almost R300 000 over a period of three years has had her latest claim for loss of possessions rejected by her insurer on grounds of non-disclosure of the previous claims. The insurer also voided the policy. Bending the truth to reduce the perceived risk came back to bite the Johannesburg woman when the former Ombudsman for Short-term Insurance, Deanne Wood, upheld the insurer’s rejection of the claim and its decision to void the policy. The rejection was upheld on the ground that the insured misrepresented material information regarding her previous losses. The matter related to the insured’s claim for the theft of her laptop and camera out of the boot of her motor vehicle on 2 April 2019. During underwriting, the insured was asked to disclose any losses she had suffered in the preceding three years (26 November 2015 to 26 November 2018). The insured disclosed one burglary incident that occurred in November/December 2017 to the value of approximately R20 000. Following the insured’s alleged loss, an assessor was appointed to validate the claim. The insurer advised that the assessor discovered that the underwriting information provided by the insured was not correct. She found that the insured failed to disclose additional claims submitted to her previous insurer during the relevant three-year period. From databases, it was established that 12 claims with a total value of R291 499 were recorded in the
insured’s name. Just between 18 February 2017 and 15 November 2018, the insured submitted a total of seven claims relating to household contents and portable possessions, eventually causing the previous policy to be cancelled based on an “unfavourable claims history”. In her latest claim, the insured informed the assessor that her laptop and camera THE INSURED were previously MISREPRESENTED stolen in 2013. She that they were MATERIAL FACTS stated both subsequently RELATING TO HER replaced and never stolen again RISK PROFILE until the reported incident. The assessor discovered that the insured claimed for similar items with her previous insurer after 2013 and was compensated for that loss. The current insurer argued that the insured intentionally provided misleading information relating to the claimed items. To support its rejection of the woman’s latest claim, the insurer cited the following relevant sections of the policy wording: “We may refuse to pay a claim under this policy or cancel the policy from the date on which you have deliberately or dishonestly tried to take advantage of us. “We may also take legal action against you. If this happens, you will have to repay all amounts which we previously paid towards your claims under this policy.”
Former Ombudsman for Short-Term Insurance, Deanne Wood
The insurer argued that the insured had a duty in terms of the policy to disclose all material facts truthfully so that it could properly assess the risk. It submitted that by failing to disclose the additional losses, the insured misrepresented material facts relating to her risk profile. This created an unacceptably high risk according to its underwriting guidelines. The insurer submitted it would not have agreed to conclude a contract of insurance with the insured had it been aware of her loss history. In her final ruling, Wood said, “Short-term insurance contracts are entered into in good faith. In dealing with material misrepresentation under common law, a policyholder, when requesting cover, must make full disclosure to enable the insurer to properly assess the risk. An insurer has the right to avoid a contract of insurance if the proposer has misrepresented a material fact. “Having regard to the facts in this case, and the ordinary application of the law on the relevant issue, we find that the insured misrepresented material facts relating to her risk profile. We, therefore, find that the insurer was within its right to void the cover and reject the claim.”
A new name on the specialised liability block
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Ken van Sweeden, Managing Director, Liability Matters
new name has arrived on the short-term insurance scene in South Africa. Liability Matters, a specialised liability insurance provider in partnership with Mutual & Federal Risk Finance and Strategic Insurance Services (SIS), has opened its doors. The company competes in the short-term insurance, specialised liability space and is headed up by Ken van Sweeden, who has over 30 years’ experience in the field of specialised liability. Asked exactly what Liability Matters will focus on, Van Sweeden says, “As experts in specialised liability, we are going to be assisting commercial brokers and their clients in recognising, reducing and managing liability risk. We follow a consultative approach, which results in bespoke
product solutions. No company or individual is alike and Liability Matters prides itself on the fact that we can provide tailor-made insurance cover to our clients.”
WE FOLLOW A CONSULTATIVE APPROACH, WHICH RESULTS IN BESPOKE PRODUCT SOLUTIONS To kick off, Liability Matters will be providing Professional Indemnity, Broadform Liability and Directors and Officers Insurance through a broker distribution network. Van Sweeden explains, “We have started with a basic product offering, but will
soon be adding additional liability products to our stable.” In addition to a bespoke product offering, Van Sweeden highlights that a major focus for Liability Matters will be the offering of master classes and consultative sessions with brokers and clients alike, in order to help make the world of specialised liability a little less complicated. More information on these can be found on the company’s website. “I find that specialised liability is often the least understood type of short-term insurance and, with my passion for the topic, I would like to make a difference in simplifying and providing knowledge around the subject.” Commercial brokers interested in distributing Liability Matters products may apply via www.liabilitymatters.co.za
WWW.MONEYMARKETING.CO.ZA
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OUT & ABOUT
BUSA’s Business Economic Indaba
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he mood at the gathering was sombre, with BUSA CEO, Sipho Pityana, saying in his opening address that South Africa is now facing an unprecedented economic crisis. He also called on President Cyril Ramaphosa to refrain from trying to please everyone. “As business, we welcome President Ramaphosa’s open and inclusive leadership style. We would, however, caution against an overemphasis on leadership by consensus, for this can condemn our nation to move at the pace of the slowest and the most conservative; or worse still, be vetoed by an unaccountable lot,” Pityana said. He added that the current challenges to SA’s economy demand urgency, agility, quick-footed responses and yet humble and thoughtful stewardship. “We urge the President – as we do
all leaders in society – to resist the temptation to make false promises to our people as that will result in the further erosion of public trust. Although urgent action will shorten the painful journey ahead of us, there must be no pretence that there are quick fixes.” On embattled electricity parastatal Eskom – seen as the greatest challenge of all to the country’s economy – Pityana warned that security of electrical energy supply is an urgent demand. He also voiced his concern that leadership appointment considerations at this stateowned enterprise might be caught up in ANC factional battles that have nothing to do with national interests. In a reference to calls for the axing of Public Enterprises Minister Pravin Gordhan, as well as demands for President Ramaphosa to move oversight for Eskom from Gordhan
to Mineral Resources and Energy Minister Gwede Mantashe, Pityana stated: “We must guard against using a critical matter like the Eskom crisis as a political football, as evidenced by the attack on Minister Gordhan and the new-found passion in some quarters for moving Eskom out of the Public Enterprises portfolio.” In his address to the gathering, President Ramaphosa said that the country will support efforts by businesses to generate their own electricity. “For the first time we are now saying let us have self-generation. We have opened up a new era where we are now embracing the fact there are companies and households that want to generate their own energy. We cannot stop technology and we cannot stop the future from arriving,” he added.
IMAGES: RUSSELLROBERTSPHOTOGRAPHY.COM
MoneyMarketing attended BUSA’s Business Economic Indaba at the Sandton Convention Centre last month.
29 February 2020
Top left: Cyril Ramphosa with the Indaba panellists Above: Minister of Public Enterprises, Pravin Gordhan, and Minister of Trade and Industry, Ebrahim Patel Left to right: Former Minister of Finance, Trevor Manuel; Executive Vice President of Energy Business for Sasol, Maurice Radebe, and Minerals Council CEO, Roger Baxter; MD of the Banking Association SA, Cas Coovadia, and President Cyril Ramaphosa Below left: BUSA CEO, Sipho Pityana, Exxaro Resources CEO, Mxolisi Mgojo, and Moderator, Nozipho Mbanjwa
President Cyril Ramaphosa addresses the Indaba
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EDITOR’S BOOKSHELF
29 February 2020
WHY ARE WE YELLING? THE ART OF PRODUCTIVE DISAGREEMENT BY BUSTER BENSON The way we argue is broken. Whether it’s about Brexit, the existence of ghosts, the best burger in the city, or who’s allowed to sit in your favourite chair, we end up digging our heels in and yelling at one another or choosing to avoid heated topics entirely. There has to be a better way. Buster Benson, a Silicon Valley entrepreneur with two decades of experience facilitating hard conversations at some of the biggest tech companies in the world, recommends eight things to try in order to make disagreements more productive. By applying these eight new habits, we can flip frustrating, unproductive disagreements into ones that bear fruit and bring people closer together. Readers of this book will master practical skills to make their disagreements more productive by: • Understanding four ways of disagreeing that are more valuable than simply ‘winning’ the argument • Identifying the kind of argument they’re having so they know how best to negotiate it • Articulating the best possible version of their opponent’s argument before attacking it
BOOKS ETCETERA
ROBERT MANGOLISO SOBUKWE: NEW REFLECTIONS BY BENJAMIN POGRUND (EDITOR) This collection of essays brings together a fresh and diverse range of contributors to reconsider the life, ideas and legacy of Robert Sobukwe – teacher, thinker, Africanist and founder of the Pan Africanist Congress (PAC). For leading the anti-pass campaign of 1960, Sobukwe was jailed for many years by the apartheid government, including solitary confinement on Robben Island, and then banished to Kimberley. Today, there are few memorials to Sobukwe, and while his followers venerate him, he has largely been written out of the history of the liberation struggle. Yet his ideas and example have enduring resonance in contemporary South Africa. Sobukwe’s pan-Africanism was an inspiring contribution to the development of Black Consciousness, which continues to energise new generations of young people. From his stances on the land question and racism to his love of gardening and knowledge of literature, as devoted family man and principled political leader, Sobukwe is revealed at every turn to be profound, erudite, compassionate and concerned with the betterment of all who identify with the advancement of Africa and Africans.
With this toolkit, readers can explore more possibilities and perspectives in the world, simply because they’ll no longer be afraid to wade into scary topics of conversation.
SUDOKU ENTER NUMBERS INTO THE BLANK SPACES SO THAT EACH ROW, COLUMN AND 3X3 BOX CONTAINS THE NUMBERS 1 TO 9.
EVERYONE’S GUIDE TO THE SOUTH AFRICAN ECONOMY (13TH EDITION) BY ANDRE ROUX Recession, inflation, interest rates, income tax, exchange rates, junk bonds… We are bombarded with these terms every day, but what do they actually mean? And how do they affect you? In this updated edition of Everyone’s Guide to the South African Economy, all these issues – and more – are addressed. The book clearly explains and evaluates a wide range of economic occurrences – from the budget and the rand/dollar exchange rate, to the balance of payments and the role of the South African Reserve Bank. The causes and consequences of the 2008/2009 global financial and economic crisis are investigated, and the sub-Saharan African economy is explored – as well as human development issues in South Africa and their implications for policy-making. Everyone’s Guide to the South African Economy is for those baffled by the specialised jargon of economists and bankers, and for those wanting to know more about the economic forces that subtly dictate their day-to-day existence.
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