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31 May 2017 |

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Chances of rate cut significantly reduced


efore President Jacob Zuma’s axing of Pravin Gordhan, many economists had predicted that the SA Reserve Bank (SARB) would cut interest rates during the course of 2017. The rand had firmed and inflation was dropping. Now, South Africans will be lucky if they see even one small rate decrease. “Before the cabinet reshuffle, my point of view was that there was a good chance for SA interest rates to come down,” Mike Schussler, chief economist at told MoneyMarketing. “I thought that this year we could see two interest rate cuts as we’ve had good inflation numbers and very good current account deficit numbers. “Up to April next year, I thought that we would have three or even four interest rates cuts, but now, these chances have been reduced significantly. We may now get one rate cut of 25 basis points and that’s not going to make a significant difference.” Last month, following the cabinet reshuffle, both S&P Global Ratings and Fitch ratings, downgraded SA to junk status citing recent political events as the reason.

They’re also worried that policy direction has now changed. “I’m not sure we would have averted a down-grade altogether. But we would have had more time – say six months to a year – to sort out our problems and get things on the right track, as last year’s low growth wouldn’t have helped our ratings,” Schussler says. State-owned enterprises “Right now, the change in the direction that the ratings agencies fear is quite real, because we see many of the state-owned enterprises (SOEs) really just spending money which the taxpayer will have to guarantee. Under these circumstances it’s clear that not all our SOEs will be able to be pay back the debt.” The total in state guarantees to SAA stands at around R19 billion. “The airline probably needs another R4 billion to R5 billion in guarantees and they’re unlikely to pay any of that back. That would add 0.5% of GDP to our government debt.” Schussler says that under the present situation, SA has been downgraded for the perceived lack of

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accountability and also the perceived change in policy direction. “Minister Gigaba says this is not going to happen, but other forums mention ‘radical economic transformation’, which is what people are worried about.” The rand The rand, relative to other emerging market currencies, has fallen badly, but Schussler reminds us that our currency is a double-edged sword, as a softer rand favours exporters who earn more under these conditions. “Farming and mining will do well. However, the problem is on the consumer side.” All indications are that Moody’s Ratings Agency – which currently has SA at two notches above noninvestment grade, will cut the country’s rating too. “It’s very likely that Moody’s will act within the next three months. If they move us down two notches that would be very serious. I do, however, believe Moody’s will move SA down one notch with a negative outlook and then the country will be on the borderline.” Schussler predicts that a lot of money

would flow from SA markets, “Which we’ll have to replace with our own pension fund money.” “With government bonds, we’ll probably find ourselves closer to rates of 10%. The rand will see a huge outflow of up to R130 billion – or a large part of it. This is unless something happens that reins in the current leadership of the ruling party.” Another downgrade? The downgrade he expects first after Moody’s in June, will probably come between June and December 2018 when S&P will again downgrade the country. “This time I expect they’ll downgrade our local bonds. Given this, I think we can say that within a two-year view, the rand will be under serious pressure.” Internationally, there are also concerns that the US Federal Reserve may raise rates more than anticipated. “This will put more pressure on the rand which means there’ll be an increased risk that the SARB actually hikes rates.” Continued on page 2

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Mike Schlussler

Continued from page 1

Schussler also points out that the strong team at the National Treasury has now been broken up, with Minister Gordhan, Deputy Minister Mcebisi Jonas and Director General Lungisa Fuzile having departed. “At Treasury we end up with six new people in the top 11 – and if you add the minister and his deputy, eight in the top 13 are new appointments. That says to me that we now have a very different Treasury team.” No matter how circumstances change, Schussler says it would be very difficult to bring former ministers back. “The best we can hope for is that someone who has experience is brought in [as DG] and once that is done, that person will have to gain a footing in the international markets. It would still take us at the least two years to get back to where we were before the ratings downgrades. Even if we do everything right in the next while, we’re going into the 2019 elections in junk status – but this doesn’t necessarily mean a change of government.” Recession The head of the ANC’s subcommittee on economic transformation Enoch Godongwana, recently warned that a recession is a likely possibility. “We’re not in a recession right now,” Schussler notes. “The first quarter of the year is already behind us and the 2nd quarter should have started well because commodity prices are still relatively high. The recession does, however, become a possibility later because the cost of capital for the banks will increase and they won’t lend money for new projects. Bad luck in the form of something like a drought and we’ll be in a very vulnerable position.


“Last year, SA experienced two quarters of negative growth, but not in successive quarters, so it wasn’t a technical recession. That said the chances of us hitting a recession in 2018 are fairly good. The balance sheets of banks have been impacted and they have less money to lend. The financial sector is our largest [economic sector] other than government and it’s very important that we acknowledge that the lending capacity of the banks won’t be there. “For a while, there’ll be money for projects, but this becomes a problem six months down the line when these projects are near completion and there won’t be any new projects. The construction and manufacturing industries will feel the strain. “If we have a summer drought or commodity prices decline following their better performance, then we’ll be in dire straits and SA will go into recession.” Schussler says the current situation reminds him of the 1980s after the Rubicon speech. “We had lower commodity prices then and lending stopped, the growth pattern was terrible, we all became poorer and then there was political change.” While the financial markets have reacted to the recent political changes in SA, the real economy takes a while to act: “We will see the impact on the real economy by the end of next year.” Foreigners currently hold R130 billion of our government debt and debt instruments, says Schussler. “Even if only R100 billion flows out, this will influence the rand direction. Tighter capital controls are a possibility but not everything will be blocked. I don’t think this will happen immediately though. There are people around with very short memories who think capital controls will help, but you cannot imprison money as if you do, you imprison the people. SA is supposed to be a constitutional democracy and one could argue that it’s unconstitutional to tell individuals where to place their money.”


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31 May 2017


ritish Prime Minister Theresa May’s calls for a snap general election last month took the markets by surprise, although this move should be welcomed. She may have previously said she was against holding an election before 2020, but she’s entitled to change her mind, especially if it’s in the interests of making the United Kingdom truly united, and to ensure a fit and proper Brexit. As British Conservative politician William Hague wrote in the Telegraph the day after May’s April 18th declaration: “Seldom has a prime minister emerged from 10 Downing Street to make an announcement so utterly and completely justified and correct.” May’s opponents believe that because the government’s majority is rather small, they will be able to force it to change course. The Labour party, while not actually opposing Brexit itself, has been planning to vote against the exit terms. Liberal Democrats regard Brexit with contempt. Scottish nationalists, led by Nicola Sturgeon (dubbed by some as the ginger dwarf from the North), are focused on using the Brexit issue as a means to push the case for Scottish independence. Furthermore, unelected members of the House of Lords have vowed to fight the Government at every turn. Under these circumstances, it is wise that May has called this June 8th election. The Conservative Party has a huge lead in the polls and it is highly unlikely that ‘June will be the end of May’ – as some wit recently tweeted. After the Tories emerge victorious (probably a landslide win), May will have the right to claim that she has a clear mandate to deliver Brexit. A possible by-product of the election could be the end of veteran left winger, Jeremy Corbyn, as Labour leader – something that is desperately overdue. For Labour, the election could be a political disaster, with the party polling its lowest vote since 1918. A landslide victory for May would also serve to end the Scottish National Party’s illusion of inevitable Scottish independence. The party has already lost some support. Markets always want to see political certainty and strong government – and this is what May’s victory will bring. Janice @MMMagza

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31 May 2017


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How did you become involved in financial markets – was this something you always wanted to do? My first job after university was with Marriott – as an asset manager based in Durban with a unique income focused investment style. I’m still there today, 11 years later and I thoroughly enjoy what I do. I found out early on at a school that I was pretty good with numbers and then discovered I had a passion for economics while at university. At that stage, I wasn’t sure exactly what I wanted to do but knew it would be a good idea to try and marry my relative strengths and interests with my career. Marriott presented me with an opportunity to do just that shortly after I finished my studies. Not long after I started working, I knew that I was on the right path. I found

the work stimulating, my role played to my strengths; I loved the company’s culture and believed we were making a difference in the financial services industry. I consider myself to be very lucky. Given the volatility in both local and offshore markets – downgrades in SA and elections in Europe – what makes a good investment in today’s economic environment? For a company to be considered a ‘good investment’ here at Marriott, it must tick two very important boxes. Firstly, it

must be appropriately priced, or in other words its dividend yield must be acceptable. Secondly, it must be able to consistently and reliably grow its dividends irrespective of changing economics, politics, fashions or trends. This helps ensure both a predictable and acceptable investment outcome over the long term. In today’s environment (and indeed most environments) we believe quality, dividend paying multi-national companies – that own the world’s most sort after consumer brands fulfil these criteria better than most. Not only are the dividend yields of these businesses relatively attractive

(approximately 3%) but the outlook for dividend and capital growth from these companies are also very good, as they stand to be major beneficiaries of the consumption boom anticipated in the developing world over the next decade. What do/will you teach your children about money? To look after it. Money is a function of talent, hard work and time.  All of those things are precious so being reckless with money makes no sense.  I was taught very early on in my career to only be prepared to invest in the shares of companies I would be happy to own for 10 years or longer – easier said than done, considering how the world around us is changing all the time. Thus, the objective of research prior to making an investment always begins with trying to answer one simple question – ‘what could go wrong’?  When the answer is ‘not much’, you know you’re on the right track.


China’s economy expanded by 6.9% in Q1 2017, the fastest rate in six quarters. This follows higher government infrastructure spending and a property boom that helped raise industrial output by the most in over two years. The Q1 result came in slightly higher than anticipated, but economists expect the

economy to lose steam later this year. This is as the impact of earlier stimulus measures start to fade and as authorities continue to attempt to rein in house prices. Production of crude steel rose 1.8% year-on-year to 72m metric tons. This implies a record average daily run-rate of 2.323m tons.

United Airlines’ stock dropped as much as 4% on Tuesday 11 April with the company losing around $800 million in value. This was sparked by an incident in which a 69-year-old man was dragged off an overbooked flight at

Chicago’s O’Hare airport on Sunday 9 April. On Monday, 10 April, the airlines shares were unaffected by the scandal, but by the end of the day, video footage of the incident went viral and the social media backlash intensified. The company’s CEO, Oscar Munoz, was then forced to make a third apology, following two unsuccessful ‘apologies’.

Coface, the French-based trade credit insurer, has announced the appointment of Jacqui Jooste as Coface South Africa CEO-Country Manager. “Ms Jooste has been an Executive Director and board member of Coface since August 2008 and has held the position of COO since September 2014. With a career spanning more than 20 years at the entity, Ms Jooste has grown through the ranks, having worked in various key strategic positions throughout the company since her inception in 1993,” says Gino Conte, the previous Coface South Africa CEO. He will return to Italy to focus on his existing responsibility as Chief Commercial Officer for Southern Europe and Africa.    Sasfin Wealth is pleased to announce the appointment of Errol Shear to the position of Head of Value Equity and Absolute Return. Shear will assume the position on 2 May 2017. The company says he brings considerable experience to the role and has had an extensive career, most recently as the CIO at Absa Asset Management. Shear’s more than 30 years’ industry experience includes a decade at Absa. Prior to that, he spent more than two decades at STANLIB, managing the absolute return portfolios with a value of over R10 billion. Additionally, Shear was responsible for the management of the Liberty Group and Liberty Active (Charter Life) life fund portfolios, as well as certain segregated funds.  Liberty Group has announced the appointment of Derrick Msibi as CEO of Liberty Asset Management Cluster and STANLIB South Africa with effect from 1 May 2017. He has 17 years’ experience and a proven track record in the asset management industry, ranging from a portfolio manager in the alternatives asset class to the managing director of the largest multi-manager in South Africa. “He will be a great asset to Liberty’s strategic journey with regard to attaining our Strategy 2020 objectives. Derrick’s responsibilities will be to drive strategy and provide leadership to the combined LibFin and STANLIB teams. Derrick will be a member of the STANLIB Board and the Liberty Group Executive Committee,” the company says. Michael Ferendinos has been appointed Enterprise Risk Business Unit Head at Aon South Africa. He joins the team from the Institute of Risk Management South Africa (IRMSA) where he served as the Chief Risk Advisor for the industry and as the Chairman of the Risk Intelligence Committee. He also holds the title of ‘Up and Coming Risk Manager of the Year’ and compiled and presented three IRMSA South African Risk Reports from 2015-2017.

31 May 2017



Protecting financial intermediaries and consumers


and complexity of regulatory change currently underway will negatively impact the long-term sustainability of advice-based practices. “Our members face a double-edged sword of rising business and compliance costs on the one side and income pressures on the other,” says Lizelle van der Merwe, FIA CEO. “Changes in the ‘cost and income’ balance affect the value of their practices as well as their ability to participate in a transforming insurance economy where financial inclusion and business development is at the heart of the broader strategy for the financial services industry”. The draft insurance regulations may cause hardship and loss of employment, particularly in the middle to lower earning brackets. The additional expenses necessary to give effect to increasing regulation, whether operational or compliance-related, will further render many small to medium size intermediary practices unsustainable. “There are thus genuine concerns that regulation will result in

unfavourable outcomes for the very consumers that our members’ insurance delivery currently serve to protect.” Van der Merwe adds: “We are also concerned about the possible impact of the proposed regulations and regulatory structure on the affordability of advice, the seamless delivery thereof and the knock-on effect on important objectives such as financial inclusion and transformation in the sector. “The latest wave of proposed regulation will make it more difficult for new entrants to enter the market, hinder transformation initiatives and restrict competition.” The FIA represents a diverse constituency across multiple insurance disciplines and with different business models; but the consumer always takes centre stage. “Our concerns with the proposed regulations range from the need for a holistic comprehensive economic impact study on the remuneration earned by the various intermediary and delivery models as well as the lack of enforcement of the current regulations when discipline is

required,” Van der Merwe says. Despite these challenges, the FIA is actively engaging with the regulators with the aim of ensuring disciplined and sustainable intermediated delivery in the financial services sector. “We are closely monitoring the process to ensure that our members’ concerns are adequately reflected in the eventual legislation.” She adds that being a financial adviser or insurance broker remains a relevant career in South Africa. “There are six sectors identified as promising for Africa-based companies to enter into, with insurance and healthcare being two of them; however, the three biggest areas of disruption are likely to take place in the insurance, retail banking and payments areas.”

Lizelle van der Merwe, FIA CEO


he Financial Intermediaries Association of Southern Africa (FIA) has issued comprehensive public comments on a range of draft and proposed regulations that will have a significant impact on intermediaries and consumers in the financial services sector. The extent of regulatory change is evidenced by the number of draft regulations issued for comment, including Draft Replacement Policyholder Protection Rules – Long Term & Short Term; Proposed Amendments to Regulations under S70 of the Short Term Insurance Act and S72 of the Long Term Insurance Act; and the proposed FAIS and Insurance Conduct of Business Reports. Comment on the Financial Services Board’s most recent Retail Distribution Review (RDR) update was due by 31 March 2017. Fair remuneration (under the principle of ‘cost plus a reasonable rate of return’) is important to financial advisers and insurance brokers. The FIA is concerned that the sheer volume


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31 May 2017


Whither or wither South Africa?


ormer Finance Minister Derek Keys told me in 1994 the best thing he ever did was to arrange for the then ANC economic policy unit to travel to foreign capitals, particularly of communist countries, to better understand how modern economies are run by finance ministries and central banks. What emerged from the ANC global fact-finding mission was a better understanding of how global markets operate, an appreciation of the vagaries of financial markets and stock exchanges, but most of all, he claimed, they returned with a message from the Chinese government: “Keep the state sector small, empower business and uplift the poor.” While these lessons were applied to some degree under the earliest post-apartheid administrations of Nelson Mandela and Thabo Mbeki, they are lost on the current administration. Today, politics has trumped economics and South Africa is the poorer for it. Politics in South Africa is brutal, cut-throat, uncompromising and its consequences impact directly on the wealth of its people. President Jacob Zuma has raised the stakes in a do-or-die political poker game that called the bluff of those who thought they had trumped his bid to wrestle control of the Treasury. This midnight manoeuvre was part of a grander strategy to loosen the purse strings to increase state expenditure, fund under-performing state-owned enterprises and to launch the proposed nuclear build programme, all in the name of radical economic transformation. The President’s ‘night of the long knives’ that brought about the ousting of his former close ally, Pravin Gordhan, saw Zuma emerge as a political victor, but at the cost of all South Africans. The reason for this is economic in nature. South Africa is fullyintegrated into the global economy and consequently, political actions have economic reactions with Newtonian certainty. Just as international factors, or

external shocks, such as the sub-prime lending crisis impact our economy directly, conversely, the governance of South Africa’s economy is watched closely by the international financial community, which is compelled to react, in this case, negatively. Pragmatists within the ANC have more in common in policy terms with the DA, COPE, the IFP, UDM and ACDP. Populists within the party are a very few degrees of separation from the Economic Freedom Fighters. This is not to suggest that the ANC is poised for another fratricidal split. History has shown that splits weaken the splitters. The South African electoral system, based on proportional representation party lists, militates against coalitions, so an alliance of ANC populists with the EFF is not possible in the current dispensation, nor is a grand alliance of ANC pragmatists and the current Parliamentary opposition. The only arena to reform the party and thus determine the immediate future of our country is from within the ANC. This does not mean that the rest of the country should disengage from politics. On the contrary, two factors will sway the ANC towards the election of a more pragmatic leadership at its national conference in December 2017. The first is popular opposition, more so than Parliamentary opposition. When blue collar workers, line-up on the streets with businesspeople, teachers, professionals, students and unemployed township dwellers as they did on Friday 7 April, it sends the clearest signal to politicians. The other influential factor is the financial markets, local and international, who care less about political strife, but will reward good leadership with investment and punish bad in equal measure. The people and the ratings agencies have spokenit is time for change.


The average maximum hourly rate a financial adviser can charge across the UK, according to the Financial Conduct Authority.


BP CEO Bob Dudley’s total pay package for 2016 – as stated in the company’s annual report after it was cut by 40%, following a shareholder revolt.


The amount investors put into American Investment Management Company Vanguard’s funds. The rest of the mutual fund industry (of more than 4 000 firms in total combined), took in only $97bn during the same period.


What MTN’s Executive Chairman, Phuthuma Nhleko received in pay and bonuses last year, after he negotiated a reduced fine with Nigerian regulators. This is according to the company’s annual report.


The value of special restricted share awards granted by Barclays Africa to “retain skills critical during the Barclays Plc sell-down and beyond”. This is according to the company’s Remuneration Report that forms part of its 2016 Integrated Report.

31 May 2017





31 May 2017

Financial services sector needs to up data protection

JAMES GEORGE Compliance Manager, Compli-Serve SA

Key individuals in the spotlight


aking on the responsibility of being a key individual (KI) shouldn’t be done lightly, as KIs carry an enormous load of accountability in managing and overseeing a Financial Services Provider (FSP), and ensuring that these duties are performed with due care, skill and diligence. They also have a fiduciary duty to the customers of the FSP, which means they have to ensure that customers can trust in and rely on the advice, products and services the FSP offers, and that they achieve the best possible outcomes. With the proposed Conduct of Business Returns (COBR) set to come into play from next year, key individuals need to be even more in control of their businesses as market conduct risk increasingly comes to the fore. As a brief reminder, key individuals need to ensure that: • The FSP remains fit and proper • The license conditions are complied with • The obligations on FSPs as detailed in the Act are complied with • The key individuals remain fit and proper • All persons falling within the definition of ‘representative’ are registered as representatives • The juristic representatives remain fit and proper • The employed representatives remain fit and proper • The representatives comply with all the requirements of the Code of Conduct

• The appropriate returns are lodged with the Financial Services Board (FSB) prior to the due date. Recently Compli-Serve completed its comments on the proposed returns, which all registered financial service providers will need to complete from 2018. KIs will need to play a pivotal role in reporting to the FSB. The COBR will effectively replace the existing FAIS compliance report with effect from the 2018 reporting period. The COBR is a material departure from the current tickbox report that we have all got used to over the last ten years or so. The COBR requires far more information from licensed entities and it is likely that it will require significantly more preparation to be undertaken by KIs and management. The 2017 compliance report will be largely similar to those of previous years, although some questions have been amended and/ or removed to facilitate a more streamlined document. However, this is the last year of this particular report format and we will move forward into the more principles-based reporting that the FSB wishes to implement as part of the wider Treating Customers Fairly (TCF) programme that has been rolling forward for the last few years. In conclusion, being a KI in today’s environment requires commitment and time, and anyone taking on this role needs to have a full understanding of the requirements, and the level of accountability it entails.

Being one of the most highly regulated industries, the financial services sector needs to improve data protection more than ever before. This industry is being put under the microscope by regulators, clients and investors alike – especially with the imminent introduction of the Protection of Personal Information (PoPI) Act. Data loss continues to make headlines worldwide with financial institutions being the primary target. Breaches include everything from insider data theft to skimming to stolen or missing hardware. The vast range and volume of new devices being deployed in the marketplace makes it nearly impossible for companies to safely manage and dispose of excess electronics. Most companies are oblivious to the risks associated with asset disposition and theft; failure to mitigate the risks could have dire consequences. Xperien CEO, Wale Arewa says financial institutions offer a good economic return for data thieves. “Although data theft is a concern across all industries, the financial services industry is a primary target of fraudsters due to the inherent value of the underlying data. “For these organisations, data breaches often mean a public relations nightmare, a distrustful customer base, a disgruntled board and uneasy stockholders. Regulatory noncompliance is just as bigger risk and can be devastating – it’s a huge reputational risk,” he warns. There is a deluge of personal data that financial institutions deal with and possess as a part of their day to day operations. They are increasingly focusing on enhancing their data privacy programmes due to the rising threat of data breaches, identity theft and associated fraud. Technology devices hold all kinds of proprietary company data as well as confidential customer and employee information. Data breaches are hard enough to control within any organisation, but when old computers are tossed in the trash without erasing the hard drive of old laptops, they could be releasing confidential data into the wild. Data security laws mandate that organisations implement adequate safeguards to ensure privacy protection of individuals.

Acknowledging the risks and inherent conflicts-of-interest surrounding retired assets will result in more effective IT Asset Disposal (ITAD) policies and adequate safeguards being implemented. Arewa says data loss prevention is an executive level initiative that impacts everyone, from HR to accounting and legal. “In a fast paced and ever evolving IT environment, management continuously need to recognise new methods for data protection, not only on working devices but on retired IT assets as well.” There has been a huge shift in the financial services sector to protecting data assets. This could include personal information, medical information and credit card numbers. Financial institutions owe it to their staff, clients and shareholders to implement data protection mechanisms to ensure privacy and confidentiality. However, most financial services organisations no longer have a choice of implementing privacy protection due to the imminent implementation of government regulations to which they have to comply. “Not only is the introduction of mandatory protection of personal data a huge challenge for companies, but now organisations are being prompted to rethink how they approach the reuse, recycling or recovery of their eWaste. The loss of confidence that they face from their suppliers and customers could seriously jeopardise their business,” he says.

Wale Arewa, Xperien CEO

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GEORGE HERMAN Citadel Director and Chief Investment Officer


31 May 2017

Looking on ‘the bright side’

ven after SA’s downgrades to junk status, Citadel Wealth Management prefers to ‘look on the bright side’. According to Director and Chief Investment Officer George Herman, it’s times like these that offer opportunities. “When other investors become forced sellers of South African bonds, we will have the opportunity to create attractive assets for our portfolios for many years to come. This is a good example of where active managers can effectively reduce risk prior to an event and, in so doing, protect capital and enhance returns. By comparison, the passive investor will now be forced to sell at a massive loss.” Herman also refuses to use the term ‘junk’ when discussing the country’s downgrades. “While current local rhetoric is relying heavily on the term ‘junk’, you will notice that Citadel does not use this description at all. No investment is ‘junk’ simply because some foreign investor can no longer invest in it. As South African investors, our home market still provides opportunities, despite some critics now scoring us lower than before. For us at Citadel, the movie goes on and our task of managing our clients’ wealth has not changed.” Herman insists that in turbulent times such as these, it is essential to remain calm and objective, and not to become embroiled in emotional judgements. Ask yourself: were South African bonds ‘junk’ 10 days ago? No. Has our probability of default increased meaningfully since then? The answer, again, is no.” ‘Junk’ is not a word used by ratings agencies Standard & Poor’s and Fitch explains Herman. “The word ‘junk’ is merely a label developed among regulated investors who are not permitted to invest beyond ‘investment grade’ securities or countries. And yet the word carries tremendous weight and emotional currency, most of which is an inaccurate reflection of what investment grade or sub-investment grade actually means.” According to Herman the term should be banished from the investment lexicon. “The attractiveness of an investment is determined by the objective of a client or investor and the mandate that client has

given the financial manager. That mandate may exclude many countries or asset classes and that exclusion doesn’t make those particular investments ‘junk’”. He likens global ratings agencies to film critics. “They have a published and pre-determined set of credit scoring criteria and aim to identify risks with those scores when giving their ‘outlook’. You may decide that you’ll only watch movies rated above a certain level by a certain critic, because you agree with the criteria, and that’s a perfectly acceptable way of filtering the entire universe of movies to suit your particular taste.” Herman says there are two messages to take from this analogy: 

1. If this critic rates a movie at a score lower than your cut-off point, it doesn’t make the movie ‘junk’. 2. If the critic rates this movie lower than a score generally associated with a ‘good’ movie, it serves absolutely no purpose criticising the critic.

“Global investment firms require an independent, objective party to rate or score the entire global fixed income investment universe. Their mandates are then set up to include only investments higher than a specific score and this universe of investments is then investable for them. Over the years regulations for global pension funds have been standardised and, in so doing, this has created what is now known as the investment grade universe,” he says. This is merely a line in the sand, since a distinction or limit needs to be set somewhere. “On the continuum of risk, the difference between the lowest ranked security in investment grade and the highest ranked security in the non-investment grade list is absolutely marginal and most definitely not as binary as the inclusion or exclusion would suggest. The one investment can’t be described as perfectly acceptable while the next is labelled as ‘junk’. It is merely outside the predetermined universe of a certain set of investors.”

SA centric property stocks sell off after downgrades

Politics and currencies; these two factors have been the main drivers of volatility in the capital markets of late and the month of March was no different,” says Catalyst Fund Managers in its latest monthly report. Following the announcement by President Jacob Zuma of the reshuffling of cabinet ministers including the removal of the highly respected Minister of Finance, Pravin Gordhan and his Deputy, Mcebisi Jonas, the rand was the major release valve for the volatility. The rating agency Standard & Poor’s (S&P) subsequently downgraded the country’s foreign currency sovereign credit rating to subinvestment grade citing numerous

concerns, including the cabinet reshuffle. Fitch Ratings followed suit by downgrading both the local and foreign currency sovereign credit rating to BB+ (subinvestment grade), citing similar concerns to those of S&P. “SA listed property stocks with offshore assets, such as intu, Capco and Polska Prop, that are considered rand hedge stocks, rallied following the downgrading by S&P while SA centric property stocks with higher SA property exposure, sold off,” the report adds. “The SA listed property sector is arguably experiencing a growing offshore composition relative to local property exposure. Foreign exchange volatility is a feature we

need to contend with in the SA Listed Property sector. The upside of this feature is the increase in opportunities to build robust portfolios that can withstand local specific risks without having to utilise offshore allowances. That said, we believe in the long-term, outperformance will be driven by the selection of stocks exhibiting solid property fundamentals. Therefore the decision to select offshore stocks will be driven by a combination of solid property fundamentals, management teams and the need to diversify the portfolios.” The report says that on local performance indicators, the SA Listed Property Index (SAPY) recorded a total return of 0.11%

for the month of March with the historic yield of the SAPY ending the month at 6.69%, 10 bps higher than the 6.59% recorded the previous month. The yield-to-maturity (YTM) on the Long Term Government Bond (R186) weakened by 16 bps to end the month at 8.88% (8.72% - 28 February 2017). From a global property perspective, the FTSE EPRA/ NAREIT Developed Rental Index recorded a net total USD return of -1.80% in March. The best performing listed real estate market was Hong Kong, which recorded a total USD return of 1.83%. The US recorded the lowest total USD return for March of -2.96%.

DID YOU KNOW? Less than 20% of South Africans have sufficient savings to maintain their standard of living in retirement…

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31 May 2017

Navigating the post-downgrade market turmoil


uccessfully navigating your way through post-downgrade market turmoil will require a clear head and a solid long-term investment strategy. Andrew Davison, a member of the Actuarial Society of South Africa’s Investments Committee, cautions that now is not the time to panic, as kneejerk decisions are likely to result in poor investment outcomes. “If you have put in place a well thought through investment strategy based on your long-term goals, there should be no need for sudden changes to your investment portfolio,” he says. He notes that investors who panic and try to time the market by switching their portfolios into cash are likely to lose out on periods of market recovery and growth. “Market timing hardly ever works. Typically, investors panic and sell when volatility has already impacted negatively on performance, thereby locking in their losses.” “During the lifetime of your investments, there will be times when some of the investment vehicles underperform. That does not mean, however, that you have made a loss. Only when you sell your units do you realise any gains or losses. For the rest of the time these are only true on paper.” Therefore, says Davison, make sure you have time on your side when building an investment portfolio. “Time buys you the luxury of absorbing short-term stock market volatility.” To illustrate, he points out that the JSE All Share Index (ALSI) delivered returns of 13% per year in the five years to the end of December 2016, despite economic weakness and events such as the removal of Nhlanhla Nene as Finance Minister and the shock Brexit announcement by the UK.  However, this return only benefitted those investors who stayed committed and rode out the volatility over the fiveyear period. “This is not the first time we have been sub-investment grade, or faced investment risks. In the 1970s the market fell by as much as 60%, and it took almost a decade to recover. This can be uncomfortable and can test investors’ resolve, but the important thing to remember is that ultimately the market keeps grinding higher over time,” he says. “If you don’t have a clear plan in place, then you should treat this as a wake-up call to set your investment goals and develop a sound long-term financial strategy.” Davison adds that if you are saving towards your retirement for instance,

you should have an idea of how much you need to accumulate and your time horizon. “Remember that your time horizon is not to retirement, but should extend into retirement. The exact end date is uncertain because it is actually for your lifetime. “If you have a clear plan, you will then have chosen specific portfolios for a reason, and when events such as a downgrade happen you will be able to remain focused on what you are trying to achieve.” He notes that good advisers play a valuable role in managing their client’s investment behaviour by taking the emotion out of investment decisions. He offers the following additional tips for managing investments in the months to come:


Seize investment opportunities Davison points out that weaker share prices may offer investors many value opportunities, enabling them to purchase more shares with any new contributions they make towards their savings. If you are saving towards retirement then you are making a regular contribution from your salary every month. This means that you automatically benefit from rand-cost averaging, buying more shares when prices are low, and fewer shares when prices are high. “The turmoil associated with a downgrade may lead to volatility in various sectors and even without changing anything, your monthly contributions may be buying stocks at more attractive prices. When these

recover you are likely to benefit from the returns.”


Diversification is key Diversification is key to achieving the best possible investment outcomes while minimising your investment risk, states Davison. “This means diversifying between different asset managers with different investment styles, as well as between different asset classes, sectors and regions.” He notes, for instance, that if you already had offshore exposure built into your investments, then you will have benefitted from rand weakness. Many investors may have this exposure through portfolios such as Multi-Asset portfolios that can allocate assets to foreign stocks. Also, many companies on the JSE do have exposure to markets other than South Africa, so this provides some additional diversification. “If, however, you were invested predominantly in a portfolio with insufficient diversification, such as a sector-specific fund investing only in Financials or a domestic-only fund, then you should re-evaluate whether your strategy truly will be able to withstand significant turmoil. If you have doubts, contact your financial adviser to take the appropriate corrective steps.”

and lessening the amount of time you will need to rely on these savings could have a profound impact on your retirement outcome.” He urges investors with living annuities to ensure that they are maintaining a sustainable drawdown level, as preserving their retirement capital will increase their financial resilience to withstand lower returns. “A sustainable percentage will depend on your age, gender and marital status, but should not be more than 4% for someone newly retired at the age of 65 years.”


Boost your savings With the cost of living expected to rise and interest rates likely to increase, Davison emphasises that it is vital you build resilience into your finances by carefully managing your expenses and prioritising your savings. “Pull back from spending to the limits of your income and save at least six months’ salary as a buffer against unforeseen expenses or financial shocks,” he suggests. He warns that tax rates may also rise as a result of additional pressure on the government’s budget, and suggests taking advantage of tax incentives through additional contributions to your retirement fund or to a tax-free savings account.


Consider your retirement plan carefully If you are nearing retirement, consider delaying your retirement if possible since each extra year worked is one year less to rely on your savings. “Boosting your retirement savings

Andrew Davison, member of the Actuarial Society of South Africa’s Investments Committee


31 May 2017

THABI LEOKA Economic Strategist, Argon Asset Management

After the unexpected cabinet reshuffle which occurred in the middle of the night on 30 March, it was obvious that a downgrade was imminent. The reshuffle affected 10 ministers and 10 deputy ministers, including then Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas. In response to the cabinet reshuffle, S&P downgraded South Africa’s long-term foreign currency rating to sub-investment grade (BBB- to BB+ with a negative outlook) on 3 April in an unscheduled review. The ratings agency also downgraded South Africa’s local currency rating by one notch to BBBwith a negative outlook. The downgrade has contributed to increased infighting in government that casts doubts on whether policymakers will be able to effectively implement the required policies for reform. S&P also believes that the aftermath of the reshuffle will negatively affect business confidence and investment, therefore slowing economic growth. In addition, they are


JP Morgan removes SA from bond index

concerned about the government’s growing contingent liability risk. On Friday 7 April, ratings agency Fitch downgraded South Africa’s long-term foreign and local currency rating from BBB- to BB+ with a stable outlook. This was also an out-of-schedule review. Unlike S&P, Fitch gives one rating to both local and foreign debt. According to this ratings agency, the cabinet reshuffle will likely change the direction of economic policy and undermine or even reverse progress in the governance of state-owned enterprises (SOEs). This raises the risk that SOE debt could migrate onto the government’s balance sheet. Moody’s decided to initiate a review for a downgrade, and their decision will be made known within 90 days. This was also prompted by the abrupt cabinet reshuffle. The rand weakened by about 4% on 27 March, after Gordhan was called back from the roadshow in London. On 30 March, the rand weakened

roughly a further 5%, following the cabinet reshuffle. Although this was a significant softening of the currency, it was not as severe as the weakening that followed ‘Nenegate’ in 2015. The downgrades led to JP Morgan removing South Africa from its Global Bond Index-Emerging Market (GBI-EM) at the end of April. According to JP Morgan, roughly $49 billion worth of South African bonds are benchmarked against its investment grade-only emerging market bond indexes, and $10 billion of debt is linked to its global bond index. The biggest risk, in our view, is if S&P downgrades South Africa’s local currency rating to ‘junk’ status. This would result in the removal of the

country from the Citi World Global Bond Index (WGBI). South Africa represents 0.45% of the market value of the WGBI and ranks 17th by market weight. The index includes 12 South African government bonds, with a market value of $93.82 billion. South Africa has enjoyed more than R80 billion in foreign purchases of its government bonds since it entered the WGBI in October 2012 and more than R260 billion in purchases since 2010. An outflow of these funds will be catastrophic.

Consider the long term in uncertain times


outh Africa’s recent sovereign rating downgrades to sub-investment grade or ‘junk’ status highlights the crossroads that our young democracy finds itself at. At this point, it is hard to predict the direction that we will end up taking. This is according to Old Mutual Balanced Fund Manager, Graham Tucker. He was speaking at the launch of the annual Long-Term Perspectives publication, a summary of long-term asset class data compiled by Old Mutual Investment Group’s MacroSolutions Boutique. Tucker says the resultant market volatility is going to be with us for some time to come, and in such times of uncertainty, it is crucial to take a long-term view and be well diversified. “When it comes to investments, sometimes bad news can become good news and one should be investing in exactly the opposite way to your initial gut reaction. Past and recent political events have taught us this,” he explains. “When the President fired Finance Minister Nene in December 2015, markets fell sharply over the next few days. The rand depreciated 9%, bonds fell by 10%,

listed property by 14% and within equities, banks fell by 19%. Importantly, however, investors who remained invested in these assets have since retraced and recouped these losses and more,” he says. “The current market performance we’re seeing following recent political and economic events might not even feature as a significant event on a long-term graph,” Tucker points out. “And while we could face a significantly volatile time in the short term, with potentially divergent outcomes, volatility may create opportunity within a mispriced market.” Tucker believes that the local equity market could deliver better returns going forward, although it is not possible to say when that will happen. “Short-term movements are extremely difficult to forecast as they are driven more by sentiment than fundamentals. However, given that the global economic environment is improving, the recent period of low or no returns from equities has allowed the market to regain some value,” he says. “This should enable multi-asset funds like the Old Mutual Balanced Fund to deliver a real return (after inflation) of 4% over the next five years in line with the performance objective.” Tucker highlights that inflation is the investor’s enemy. He expects inflation to continue to move lower through the remainder of 2017. “Despite the Cabinet reshuffle and recent downgrades, we have seen a relatively muted currency reaction and a very different environment to what we saw in December 2015 when the currency plummeted,” he says. “The real problem is South Africa’s structurally high inflation rate compared to the rest of the world.” The Long-term Perspectives review sets out how inflation erodes spending power. So how does one counter this? Tucker says investors need to be invested in growth assets like equity and property,

rather than cash. “Cash might make you feel safe in an environment like the one we’re currently in, but history has shown us that it is poor at fighting inflation, especially after taking tax into the equation. Your likelihood of achieving financial freedom decreases the longer you are sitting in cash.” Tucker believes that a rating downgrade spiral could result in a sharply weaker currency, thereby putting upward pressure on inflation. “In this environment South African pension funds should be relatively secure given the high exposure to offshore assets. For example, the Old Mutual Balanced Fund, in addition to a 25% offshore allowance, has significant additional exposure to rand hedges, including locally-listed equities like British American Tobacco and Naspers, as well as to other assets like gold. Taking this into account, this kind of investing will benefit from rand weakness and this will provide investors with considerable protection.” Nonetheless, Tucker says that Long-term Perspectives data illustrates the critical need for patience as an investor. “Financial freedom isn’t achieved overnight and the old adage holds true that its time in the market, not timing the markets, that counts. Ultimately, sentiment drives shorter term market movements and investment fundamentals need time in order to play out.”

Graham Tucker, Balanced Fund Manager, Old Mutual



31 May 2017

SA unlikely to offer local investors decent returns Following the downgrade to junk status by both S&P Global Ratings and Fitch Ratings as well as expectations that the country’s GDP will stand at just 0.2% in 2017, South Africa appears unlikely to offer local investors the chance of decent returns. To mitigate the risks domestically and increase potential for greater and diversified returns, investors are increasingly looking to take advantage of their R11 million allowance to invest outside of SA. MoneyMarketing spoke to Wayne Sorour, Head: Old Mutual International South Africa, about investing offshore. Shouldn’t sensible investors already have their money offshore? Since the Nene debacle, we’ve seen high net worth individuals (HNWIs) diversifying a larger percentage of their total investment portfolio offshore. It’s situations like the present one – following SA’s downgrades to junk status – that make people think about further increasing their assets offshore and not having too much investment exposure to this country. This includes property. Also, the increase in the offshore allowance to R11 million per person per annum allows investors to diversify and take money offshore more regularly. What do you do for those HNWI clients that have already used up their offshore allowance for the year? For those clients, we make use of private asset swaps. [Asset managers are permitted, as per the SA Reserve Bank, to invest a portion of their assets offshore and what they do not use is often given or sold to investors]. Clients invest into the same vehicle, the same strategy and stock, but these funds have to be repatriated. What we then do at the end of the year, when the investor qualifies for another R11 million offshore allowance, is unwind some of those asset swaps and convert them to the direct offshore route. Are foreign equities in aggregate presently priced at fair value? Foreign equities have had a phenomenal run over the last year. The Dow Jones moved from around 18 000 points to a touch beyond 21 000 at one stage and then came back slightly. There’s really been good returns offshore and obviously the valuations have moved up. It depends on what you’re buying – there are still good stocks to buy, but their values have definitely moved up. Our advice, in many instances, where clients are investing a lot of money at one time, would be for them to consider phasing this in.

Are offshore bonds out of favour at present? With offshore bonds or cash, you’re not going to get much return for now, so we’re steering away from that and rather looking at equities. Obviously, the risk increases and that’s why we recommend a staggered approach. If clients want a balanced portfolio, they’ll have to look at holding cash and the balance in equities. Is it sensible to say that for the foreseeable future, local investors are not going to get much value out of South African assets even if the ANC leadership changes? One must be careful not to mix politics with economics. You’ve still got some good companies in SA that are diversified or listed offshore. Many are increasing that percentage of profit and gains coming from their offshore operations and reducing those coming from SA. These local companies, as long as things continue as they are offshore, will benefit. However, for companies that are 100% SA-based, it’ll be a struggle for a while. What about those who insist that SA assets now present buying opportunities? In our space, we want to stick to investment principles, so it’s not a matter of trying to time the markets on or offshore. We stick to the principles of diversification which HNWIs should have started some time back. The consideration is now about increasing this exposure. Look at the choice you have internationally placed against locking your funds into SA only. Take the medical sector. Locally there are three stocks you can invest in, but on the London Stock Exchange itself, there are 60 medical sector stocks. We recommend that clients have a financial plan and review that plan as new situations arise. A plan

would take into account a key question such as: Where will you need the money? If all your future expenses will be in US dollars, then the bulk of your investable cash should be held in US dollar offshore investments (for instance, amongst other things, for children’s overseas university education). If a client is looking purely at a return on investments, switching funds to asset swaps is easier in terms of paperwork or regulation. The negative of an asset swap is it is taxed in rand, whereas if you invest offshore directly you only get taxed on your dollar or sterling gains. Do clients putting funds offshore worry about the rand? After the downgrades, there’s been a bit of a kneejerk reaction. The rand weakened and people ask if it’s going to weaken further – or strengthen. Some people adopt a ‘wait and see’ approach and sometimes it’s to their detriment and sometimes it’s to their benefit. With an annual offshore allowance of R11 million, clients can invest some funds now and some later to get a cost averaging on the rand. To time the rand is very difficult. You can ask four economists right now and you’ll get four different outcomes for the rand. That is why we encourage clients to consider buying hard currency using a phased in approach.

Wayne Sorour, Head: Old Mutual International South Africa


31 May 2017

MoneyMarketing asked Paul Hutchinson, Sales Manager at Investec Asset Management, about the process involved in bringing a unit trust to market. “Firstly, the unit trust manager’s business case is taken into consideration - i.e. why should the manager add to their fund range?” says Hutchinson. “Broadly the answer is profitably and sustainability. (The opportunity should be enduring and not in response to a short term fad). It should address a specific client requirement that is currently not being satisfied by another fund in their offering. Importantly, the manager must have the manufacturing capability and investment expertise to deliver on the proposed fund’s investment mandate.” He adds that the manager would need to be confident that he will raise sufficient investments to make the new fund profitable. “While we estimate this to be in the region of R100 million (depending on the fees charged), in making a new fund available we would look to raise R1 billion within a three year period. “By way of example, on 1 April 2016 Investec launched the Investec Worldwide Flexible Fund. We believed that investors would benefit from a broad, unconstrained by geographical or asset class limits, mandate. Investors have clearly recognised the benefits of such a mandate with the fund’s assets under management having grown to almost R600 million by the fund’s first anniversary.” Secondly, says Hutchinson, the formal requirements of the Collective Investment Schemes department of the Financial Services Board (FSB) must be taken into consideration. This is because any new fund needs to be approved by the FSB. “As part of this approval process, the FSB requires a detailed motivation, which must address a number of specific requirements, including what the fund’s investment objectives and characteristics will be, how and to whom it will be marketed and distributed, confirmation that the manager has the systems and procedures in place to support the new fund, and how it will comply with the FSB’s Treating Customers Fairly requirements,” he adds.

Paul Hutchinson, Sales Manager, Investec Asset Management

Why invest in unit trusts?


nit trusts are probably the easiest way to invest in the stock market. In addition, the risks associated with this type of investment are probably lower than the risks associated with direct investments. “It is possible to get fantastic returns investing directly on the stock market, but it is also possible to lose all of your money,” says Jeanette Marais, Director of Distribution and Client Service at Allan Gray. “Traders need a considerable amount of time to research and analyse stocks, and they compete with professional managers in an unforgiving environment. Unit trusts pool together money from many investors, allowing them to diversify their investment cheaply and use the services of a professional manager to invest on their behalf.” According to Paul Hutchinson, Sales Manager at Investec Asset Management, investors can take comfort in the fact that unit trusts are well-regulated by the South African Financial Services Board (FSB) in terms of the Collective Investment Schemes Control Act (CISCA). He makes the point that we are – after all – living “in a world where we regularly read of investors being defrauded or losing their entire investment capital in schemes like the recent Belvedere Management Ponzi Scheme, the Kubus milk culture scheme of the early 1980’s, the Leaderguard foreign exchange currency scam, and the Masterbond and Blue Zone property developments schemes, amongst others.” Additionally, he says, each unit trust fund must appoint an independent trustee and custodian, who must ensure that the unit trust fund is run both according to its mandate and in terms of the requirements of CISCA. “Importantly, the custodian holds all unit trust fund assets on behalf of investors, separating them from the manager’s own assets.” When investing in unit trusts, your investment term must be determined by your goals. “The unit trusts you choose should meet the goals you are aiming for. There are different types of unit trusts. Some can help you meet short-term goals, while others deliver over the long term. A financial adviser can help you find the right unit trusts for your needs,” Marais says. Hutchinson agrees: “This will depend on each individual client’s specific investment

objectives and could range from six to 12 months for clients investing emergency funds in the Investec Money Market Fund, for example, to 7+ years for clients investing in an aggressively-managed equity fund such as the Investec Value Fund locally or the Investec Global Franchise Fund internationally.” If one compares unit trusts to an investment like fixed deposits, the former appears to be a better investment over the long-term. “Fixed deposits may not be able to get returns that keep up with inflation over extended periods of time. This means that you are able to buy less with the money you get when the fixed deposit matures. Over the long term, unit trusts that invest in riskier asset classes, such as equities, tend to deliver inflation-beating returns,” Marais says. According to Hutchinson, while fixed deposits may have a place in a client’s overall portfolio, because they generate interest income only, they are unlikely to deliver a real return to investors after income tax and inflation. “As such, they may be suited for shorter term, conservative investments. Investors with a longer term investment horizon and a higher real return requirement need to consider a unit trust fund that is invested in growth assets (property, equities), which historically have delivered inflation-beating returns over time. The higher the real return required (inflation plus), the higher the required exposure to growth assets and the longer the investment time horizon.” Both Marais and Hutchinson agree that it’s a good idea to use unit trusts for tax-free savings. “Tax-free savings accounts are designed to be a long-term savings product, which means that they are well suited for unit trusts that deliver returns over time,” Marais says. According to Hutchinson, as the benefits of a Tax Free Savings Account (TFSA) are maximised over the longer term, it makes sense for investors to be exposed to growth assets. “In fact, the recently launched Investec Worldwide Flexible Fund has been a primary beneficiary of the introduction of TFSAs because of it broad, unconstrained growth mandate.” He adds that given each individual’s financial position, specific investment time horizon, risk tolerance and ultimately the importance of making the correct investment decision, it is strongly recommended that investors seek professional investment advice tailored to their individual circumstances.



The first South African unit trust was launched on 14 June 1965 by Sage with initial assets of R600 000.

Original shareholders in the first Sage fund were Sage founder Louis Shill, Donald Gordon, Liberty, Nedbank and some personal friends of both Shill and Gordon.


Twenty years ago, industry assets were under R100 billion.

Today, assets under management have surpassed the R2 trillion mark.

Source: Profile’s Unit Trusts & Collective Investments, March 2017


How a unit trust is brought to market




31 May 2017

31 May 2017




ELIZE BOTHA Managing Director: Old Mutual Unit Trusts

31 May 2017

Unit trust selection in South Africa


nit trusts have grown increasingly popular amongst local retail and institutional investors alike, driving the registration of 193 more unit trusts in South Africa last year alone, according to the Association for Savings and Investment South Africa (ASISA)’s collective investment scheme statistics to the end of 2016. In addition, ASISA’s statistics also showed that the number of unit trust funds in the country has more than doubled over the past ten years. Unit trusts cover a wide investment spectrum, from money market funds to equity and specialist equity funds, such as funds investing in predominantly gold mining companies for example. While this world of choice may seem overwhelming when identifying the funds most suited to investors’ needs, the fundamental classification and selection process have not changed and it should not change the way investors choose funds. An investor’s objective should always be the starting point before looking at the multitude of options available. The aim should always be to marry the investment objective of the investor with funds that are designed to deliver a similar objective. There tends to be a correlation between an assets’ potential to deliver good inflation beating returns over the long term versus its volatility in the short term. Globally, equities have and are expected to continue to deliver better long term returns than cash and bonds. The reason for this pay off lies in the fact that in general equities comes with more risk of capital loss than investing in government bonds or holding cash. In time, equities as an asset class do manage to deliver higher returns to compensate the investor for the higher level of risk. The above graph shows the equity markets’ performance since 1975 in South Africa. Over the last century, we’ve seen major developments (such as the invention of cars and the advent of the worldwide web), but also unprecedented political and economic upheaval – world wars; oppression and civil revolt. Throughout this period, according to a study by Credit Suisse Group AG and the London Business School (Bloomberg), South Africa has delivered the highest average returns for investors in the equity market.

Source: Old Mutual Investment Group and INet: 06-04-2017

Making sense of unit trust categories To select the best-suited unit trusts, it is important to have an understanding of the fund classification structure, which groups similar types of funds together to assist investors with fund selection and facilitate better comparison and analysis. Two of the major geographic classifications are South African funds and Global funds. To qualify as a South African fund, a fund must have invested a minimum of 70% of its assets in South African financial markets, while Global funds are required to hold at least 80% of their assets in non-SA financial markets. Further under these two banners, there are categories for each. For instance, a South African general equity fund must invest at least 80% of its assets in equities. High Equity and Flexible funds are both, in terms of classification, multi-asset portfolios. This means they may invest in any allowable asset classes, not only equity, but also for example cash bonds and listed property. A South African MultiAsset Flexible fund has complete discretion in allocating assets between the various asset classes (only subject to a minimum of 70% allocation to local assets). A SA High Equity fund has further restrictions and may not have more than 75% exposure to equities or more than 25% exposure to listed property. SA High Equity funds/mandates are typically found

in retirement fund savings, due to the restrictions mentioned. Flexible funds range from very aggressive to very conservative, depending on the fund’s mandate and objectives. Unlike the other two categories discussed, there is not really a generic flexible fund. The investor would need to evaluate the mandate of the fund in isolation, to gain a better understanding of the fund and how it differs from a General Equity or High Equity fund. South Africa’s top unit trusts Currently, South African Multi-Asset High Equity funds are the most popular category (by size) as these portfolios still offer the ability for good long-term returns, but typically display lower levels of volatility since the equity exposure is restricted. Retirement fund regulation prescribes maximum exposures and most High Equity funds aim to comply with these to be eligible as a (stand-alone) solution to retirement fund investors. Longer-term investors outside of retirement funds who are prepared to accept higher levels of volatility would consider General Equity funds and (aggressive) Flexible funds. Invest for the long term Generally speaking, all three types of funds are suited only for longerterm investors.

Stick to your plan and ignore short-term noise In general, unit trusts are longterm investments. Unit trusts have become the preferred way for most South Africans to invest due to their flexibility, daily liquidity, low minimum investment amounts and high levels of transparency. It also assists with the concentration risk that you may face with direct equity market investments. While there is an ever-growing list of funds to choose from and we can never predict the future, one thing we are certain of is that through turbulent times and stock market volatility, staying calm beats reacting impulsively. IMPORTANT INFORMATION Old Mutual Unit Trust Managers (RF) (Pty) Ltd is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment is accessible on the relevant fund's minimum disclosure document (MDD) or table of fees and charges, both available on our public website, or from our contact centre. Old Mutual is a member of the Association of Savings & Investment South Africa (ASISA).


31 May 2017


YOUR FUTURE SUCCESS AND MINE - ARE VERY MUCH ALIGNED. Feroz Basa Joint Boutique Head Old Mutual Global Emerging Markets

We believe that when you are personally invested in something, you are even more driven to make it succeed. That’s why Feroz Basa invests his own money alongside yours. Feroz is a fund manager of the Old Mutual Global Emerging Market Fund and is joint boutique head of the Old Mutual Global Emerging Markets boutique. Emerging markets are fast becoming a driver of global growth and we offer exposure to quality listed companies across a diverse range of global emerging markets. This, coupled with the team’s focus on sound corporate governance and on-the-ground analysis of potential investments, contributes to their success. But this is more than just Feroz’s success, it’s yours too.

Invest where the fund managers invest by contacting an Old Mutual Financial Adviser or your Broker, call 0860 INVEST (468378) or visit

Old Mutual Investment Group (Pty) Ltd is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services ( to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Unit Trust Managers (RF) (Pty) Ltd is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment are accessible on the relevant fund’s minimum disclosure document (MDD) or table of fees and charges, both available on our public website, or from our contact centre. Old Mutual is a member of the Association of Savings & Investment South Africa (ASISA).




31 May 2017

Amid uncertainty, outlook for returns isn’t so gloomy

MICHAEL MOYLE Head of Multi-Asset, Prudential Investment Managers


lthough heightened uncertainty has dominated local financial markets in the weeks since the Cabinet reshuffle and sovereign credit rating downgrade, Prudential’s view on potential investor returns over the medium term, subsequent to these events, has been less gloomy than one might imagine. The weakness seen in South African nominal bonds, listed property, and financial and retail shares has presented good opportunities for investors to buy up attractive assets at discounted valuations that should produce above-average returns over the medium term. In positioning our multi-asset portfolios in the ‘post-downgrade’ environment, as valuation-based investors it’s important to note that we have not changed our approach: we continue to place great importance in building well-diversified portfolios of attractively valued assets with the appropriate risk. These characteristics provide some level of inherent protection against future market shocks. So how are our funds positioned to earn the best possible returns over the medium

term? First of all, our portfolios have been, and continue to be, at or near the maximum allowed offshore exposure, which acts as a strong rand hedge. We believe foreign equities in aggregate are priced around fair value, despite the strong run in US equity markets since President Trump’s election in November 2016, as corporate earnings growth has accelerated and the market has re-rated as well. As such, we are neutrally positioned in our offshore equity holdings. And with government bond yields remaining very low across the globe, we are underweight offshore bonds. We prefer foreign cash assets, and are overweight in many of our portfolios since this gives us the ability to take advantage of opportunities as they arise. Among South African assets, we are moderately overweight equities, nominal bonds and listed property at the expense of inflation-linked bonds (ILBs) and local cash. The FTSE/JSE All Share Index’s 12-month forward P/E, at around 14.1x at the time of writing, is trading just below our estimate of long-term fair value, and is somewhat cheaper

KIM HUBNER Business Development and Marketing, Laurium Capital

than offshore equities. In our selection of shares, our portfolios are overweight wellpriced rand hedges like Naspers, British American Tobacco, Sasol, Anglo American and Glencore. We have also been overweight undervalued financial stocks, which remain attractive on a risk/reward basis. Listed property is another overweight holding for Prudential, having sold off following the Cabinet reshuffle and downgrade. At the time of writing, listed property companies (excluding developers) were priced to return approximately 16% p.a. over the medium-term (assuming no change in the market’s valuation of property), comfortably above inflation and, we believe, ample compensation for the risk involved. Finally, Prudential’s multi-asset unit trusts have been overweight in South African government and corporate bonds for some time now, and remain so, albeit to a lesser extent. We believe 10-year government bond yields of over 9% following the recent sell-off, as with listed property, offer an appealing return for the potential risk.


Boutique asset managers have potential to produce excellent returns What is a boutique asset manager?

Investors have different interpretations of what boutique really means. For some, boutique is related to the number of employees and size of assets, typically fewer than 20 staff and assets less than R20bn seems to be a common rule of thumb. For others, what is often more important in the definition of boutique is the ownership structure and extent of personal assets invested by the investment team in the portfolios that they manage. Finally, boutiques have a differentiated and focused approach to investing, compared to larger managers.

Why is this important?

Smaller asset managers can be more nimble and opportunistic in their stock picks and play outside the large cap universe. Managers at larger firms may have greater liquidity issues if their funds are sizable, thereby restricting their

investment universe, and lengthening the time that it takes to execute a view in their portfolio. The flat organisation structures of boutiques mean that investment decisions are made and implemented quickly. Typically, boutiques are owned by their founders, who often are responsible for asset management and have a significant portion of their personal assets invested in the portfolios they manage. At Laurium Capital, besides the cofounders, key people across the operations and investment areas also have equity and are invested in the funds.

What to look out for

Asset managers can often become victims of their own success. If assets under management grow too quickly, making and implementing successful investment decisions

becomes more challenging. Managing a successful boutique is not as easy as it may seem. As the company grows, it is important to ensure that the core entrepreneurial DNA is maintained and that no bureaucracy creeps into the organisation, changing the way that you manage money. Successful investment management and sustainability of the businesses is often dependent on key individuals, so it is important to have a good succession plan in place.

About Laurium

Laurium Capital is an independently owned asset manager. The Company was started in August 2008 by Murray Winckler and Gavin Vorwerg, who

remain the majority shareholders and portfolio managers across all funds. Laurium Capital manages several award winning hedge and long-only funds in South Africa and the rest of Africa. The Laurium Flexible Prescient Fund has a four year track record and remains ranked no.1 in the South Africa Multi-Asset category since inception at 1 February 2013 to 31 March 2017, with a cumulative return of 87.4% and return per annum of 16.3% after fees, well ahead of the FTSE/JSE All Share Index. The Laurium Balanced Prescient Fund, which has over a year’s track record now is also off to a good start, ranking 16 out of 150 funds in the South African Multi-Asset High Equity category since inception at 9 December 2015 to 31 March 2017.


If you’re in local property,

are you in international income?

Today, in the world of investments, everything is connected. Like local property companies and their stakes in off-shore markets. Understanding these connections is the difference between profit and loss. That’s why STANLIB connects specialists across markets and asset classes who share insights to make better investment decisions for you. Because a connected world demands multi-specialist investing. To put our multi-specialist approach to work to diversify your portfolio, contact us today. #ConnectedInvesting STANLIB is an authorised financial services provider.


Offshore exposure - SAPY


31 May 2017


GRAPH 1: Breakdown of the South African Listed Property Index (SAPY) LUBABALO KHENYANE, STANLIB Multi-Manager: Portfolio Manager and MALCOLM HOLMES, STANLIB MultiManager: Head of Portfolio Management

100% 80% 60%

Portfolio construction using listed property


nvestors wanting property in their portfolios should be well diversified across various investment approaches and philosophies to benefit from the asset class’s stable income and capital growth. In our experience, to achieve diversified property exposure an investor can look at SA property managers through three different lenses – those focused on high income, on capital growth or purely on global stocks. Previously, investors in the South African Listed Property Index (SAPY) were exposed to only SA-focused property companies but that dynamic has been changing. From being an almost 100% domestically-focused market nearly 10 years ago, the listed property sector in South Africa has broadened and deepened to include far greater offshore exposure (see graph 1). Today, around 34% of the revenue of the SAPY comes from outside of South Africa. This number also excludes the likes of Intu and Hammerson, which are London based and listed property companies with secondary listings in South Africa. This global dynamic has become an important investment consideration because of the currency effect. Rand weakness benefits property companies with offshore exposure, whilst Rand strength and the associated

benefits of lower inflation and interst rates favours domestically focused property companies. Understanding each manager’s investment approach is therefore fundamental to knowing how to achieve an intended return. Now lets turn to the question of how much property exposure should be held in a multi-asset portfolio? For effective portfolio construction, understanding investors’ goals is important. Often, investors will set investment target returns based on their long-term goals of growing capital, preserving capital or generating an income. So an investor’s time horizon and risk profile is a key indicator of their investment profile as a conservative, moderate or more aggressive investor. The more aggressive the growth target, the greater the allocation to growth assets (equities, property, etc.) and offshore exposure for diversification. A highly conservative investor targeting a return of CPI plus 2% per annum is typically 90% invested in cash-like assets, with a small allocation to growth assets such as property and equities. In constructing their portfolio an investor can use a quantitative tool, like the one highlighted in Graph 2, and complement this with a qualitative assessment.










20% 0%



2011 ZA & AF

2012 US

2013 EU


2014 AU



Source: Avior Research

GRAPH 2: Portfolio construction based on real returns using quantitative tools An overview of portfolio construction based on an investor’s real return goals (i.e. returns above inflation).

Source: STANLIB Multi-Manager

An investor targeting CPI plus 7% could have between 5% and 25% invested in listed property to achieve their goal over the long term. However, the property market is relatively small and faces some liquidity constraints – when you consider qualitative elements, the prudent allocation could be closer to a maximum of 15%. Property stocks are particularly interest rate sensitive and tend to react to economic changes. Locally, South Africa’s recent credit rating downgrades have put pressure on the asset class with interest rates now less likely to decrease than

initially anticipated. In the UK, a lack of clarity surrounding the country’s exit “package” from the European Union adds to uncertainty there. However, opportunities exist within each market. A good manager will conduct detailed research to identify stocks that have natural market dominance and are priced at valuations that make them attractive. For investors facing increased volatility both locally and globally, sufficient diversification across markets is the key to ensuring consistent long-term returns.

The only investment outcome that matters Outcome-based investing is a game changer for local investors, according to Momentum Investments Chief Investment Officer, Sonja Saunderson. MMI Holdings has fully committed its policyholder assets to outcome-based investing as its underlying investment philosophy and the framework for managing clients’ assets and their investor journey through Momentum Investments. “The true essence of outcome-based investing means a complete overhaul of the way we understand investor needs, make investment decisions, dialogue with investors and do business. It makes the investor’s goal the only benchmark that matters”, says Saunderson. She believes that investor behaviour is proven to be driven by behavioral biases with a focus often placed on short-term and peer investment returns, as opposed to long-term drivers. The industry in turn is product-driven as opposed to solution-driven and it often leads to a vicious cycle of sub-optimal outcomes for investors. Momentum Investments follows outcome-based investing as its philosophy. Given its role within MMI Holdings it has a dedicated vision to be be clientcentric. Saunderson says: “We have re-organised our investment capabilities to align to the optimal way of constructing investment portfolios. This includes having passive and smart beta, fixed interest and

liability-driven investments as well as alternative asset classes like private equity, property, commodities, hedge funds and others. We need these diversified capabilities to focus on the investment outcome and risk budget sought by the investor.” There are broadly five key steps to an outcome-based investment programme: • Understanding the client need or liability and setting the desired outcome clearly • Formulating an appropriate matching investment strategy through an outcome-based construction approach that will robustly deliver on the objectives • Regularly assessing progress and whether the plan is still appropriate to get to the outcome. • Managing risks continually and appropriately • Framing all communications to the investor and assessing ongoing success in terms of the desired outcome. “We uniquely offer an ability to use multiple sets of skills spanning different types of traditional forms of investment management depending on what will lead to the best client outcome. Our process tailors a solution using three different tiers, namely asset allocation, investment strategies and mandate selection, and we can blend strategies to eliminate downside experiences relevant to the investor,”

Saunderson adds. “We blend in-house capabilities, which are especially designed to deliver on key components of our construction process like our cost-effective passive and smart beta capabilities; and complement these with other investment opportunities through smaller and more agile investment companies, like ALUWANI and RMI Investment Managers, for high returns.” She says a key part of outcome-based investing is placing a priority on selecting the right investment opportunity first and foremost. “Diversification is key to outcome-based delivery and we therefore focus most of our energy on getting the right allocation of opportunities together. When we need to select a best-of-class provider for an investment opportunity, the investment philosophy and portfolio construction approach of the provider is important to us. “That matters far more in the long run, in terms of properly matching the required strategy of the portfolio they will be used in, than the portfolios past returns or a brand name. Saunderson emphasises that outcome-based investing is not a cover for poor investment returns: “The key for us is framing the adequacy of returns solely in the context of the liability or required outcome set at the beginning and not being distracted along the journey.”


31 May 2017


ANDRIETTE THERON Senior Investments Analyst, PPS Investments

Why manager diversification is important

UK election has economic implications

T It is widely accepted that portfolios should be diversified across securities, asset classes and geographies to include many uncorrelated sources of returns and minimise the impact of short term volatility of any of these factors. Manager-specific risk is probably the most unappreciated diversifiable risk that investors face. As a multi-manager, we provide investors with that additional layer of diversification by combining asset managers with different but complementary investment strategies. But why not simply invest in the top-performing manager? The simple answer is that the topperforming manager is highly unlikely to be the best performer all the time. The asset manager ranking table clearly shows just how volatile and unpredictable the relative returns of asset managers are over the short term. Each colour represents one of the largest asset managers in South Africa, while each column represents the relative ranking of the managers in each calendar year since we launched the business. We can see from the random distribution of colours, that it is indeed impossible to predict with any confidence which the best-performing manager will be over the next 12-month period, purely based on performance over the most recent 12-month period. An investor that allocated capital to Manager A based on strong performance in 2008 would have been disappointed by poor relative performance during 2009 and 2010. If the investor capitulated in 2011 and switched out of the strategy in search of better returns, the investor would have missed out on the strong performance delivered by Manager A during the year. It does not matter when the investor made the initial investment (whether it is 2008, 2011 or 2013), the pattern repeats itself. Part of the reason for this variability, is that investment strategies perform differently during various market and economic environments. Each asset manager has a fairly unique approach to investing that gives rise to manager-

specific risk. An asset manager’s investment strategy does not only determine how an investment idea pertaining to a security or asset class level is evaluated (e.g. focus on earnings growth, quality of management, providing sufficient margin of safety etc.), but also the weight it could carry in the portfolio (extent to which the manager is willing to allocate to the idea). As a result, different asset managers could have very different views or positions on the same investment with the same information at hand. When we launched the business in mid-2007, little did we know that we were about to face the worst financial crisis since World War II. Almost a decade later, investors are still dealing with the after effects of extremely accommodative monetary policies across most of the developed world. How asset managers were positioned to take advantage of the events that transpired over the past decade depended on the managers’ investment strategy. For example, a value-orientated manager had to live with severe underperformance for lengthy periods of time as already cheap resource counters continued to underperform expensive multi-national industrial companies with better earnings visibility and attractive dividend prospects, in a low-yield environment. A benchmark-focused manager, whose process is designed to establish positions in relative terms (underweight versus overweight), typically benefited more than a benchmark indifferent manager from the phenomenal growth of Naspers into a R1 trillion establishment, as the share became a significant holding in the Shareholder Weighted Index (from 1.6% a decade ago to 18.6% at quarter end). The extent to which fixed income investors were affected by the write-down of African Bank debt in 2014 was a function of the managers’ ability to appropriately assess the underlying credit risk and willingness to move down the capital structure for additional yield pick-up.

he UK Government’s decision to hold an early general election in June has some potentially significant economic implications. This is according to UK think-tank, The Centre for Economics and Business Research (CEBR). On the upside, an increased Tory majority, which would almost certainly be the result of an election, will increase economic and policy stability and reduce the current sense of business uncertainty. “The Government’s majority is thin at present and introducing unpalatable policies over the coming years would be difficult without more Tories in Parliament. Increased certainty should feed through into higher levels of business investment, supporting growth in the short term. “This is especially the case with respect to Brexit uncertainty, where Theresa May would have to lay out a more articulated vision to the electorate in the run up to the election.” The CEBR says a colossal defeat for Labour, with the ousting of Jeremy Corbyn, “would also allow a credible opposition party to emerge from the ashes and end the effective one party state that the UK has become.” “This can only be good for the economy. Just as competition leads to better outcomes in business, so too does competition in politics, with credible political parties competing to deliver the policies which best guarantee prosperity for the nation.” There are, however, some economic downsides to an early general election and a larger Tory majority, the CEBR notes. “While the Government increasingly seems to be taking a more moderate (and economically sensible) stance on issues such as immigration, reflecting the realpolitik and need for pragmatism post-Brexit, this could unravel. “Hardliners within the Conservatives could give Theresa May a difficult time over any softening in stance towards Europe. And she could be pushed into taking a hardline stance by the media during the election campaign – expect her to be repeatedly challenged on how and to what extent the Tories will reduce immigration.” According to the CEBR, the politics of Theresa May is markedly different to the metropolitan liberalism of David Cameron and George Osborne. “It is more parochial and more anti-business. There is a risk that, with a bigger majority, she introduces policies which are detrimental to entrepreneurship – from higher taxation to migration restrictions. “This would be the wrong set of policies during an era in which being internationally competitive and attractive are so important.”




31 May 2017

Knowledge is key to reducing risk and costs


he better trucking companies and their insurance brokers understand risk, the better the insurance cover that they can secure – which is why Hollard insists on knowing its trucking clients well. The failure of rail transport services, substantial increases in the cost of spare parts and unit prices linked to the exchange rate are putting huge pressure on trucking insurance, says Grant Carstensen, Head of Business Development at Hollard Broker Markets’ Trucking Centre of Excellence. Coupled with that is intense competition among insurers, he says: “We are all undercutting each other in order to gain market share.” Turning to loss ratios, Carstensen says, one of the main factors is drivers – who make mistakes “and do everything that they shouldn’t”. That said, Carstensen says it is important to take time to understand drivers and what affects them: the pressure placed upon them to perform, poor driving habits, unfamiliar routes, unfamiliar vehicles, driving at night, their health and the condition of their vehicles. “The reality is that these gentlemen are pushed hard, day in and day out,” he says. Hollard, therefore, examines the circumstances around their coverage when deciding on cover: “We want a deeper understanding of all of the factors affecting the insured’s risk” Transport companies are often only interested in keeping wheels turning, and not in identifying and managing risk – which is then the job of the broker, who needs to understand the client, the client’s ever-changing risk profile and financial challenges involved. In other words, the broker must gain a full appreciation of the client’s situation – and central to this is understanding driver error and its route causes. “The first thing that clients do when they can’t afford it, is to stop their insurance,” he said. This then affects overall loss ratios. Recovering from third parties is also a challenge for insurers, who are “happy to accept a 70-80% recovery rate” because settling is preferable to bearing further costs such as litigation. But the financial implications are high – insurers can easily bear a R3- to R4-million loss per truck accident. Positive trends include telematics – but only if transport companies don’t undertake monitoring themselves, and are interested in playing a strong role in its implementation; and the installation of video cameras on trucks, which proactively assist with recoveries and help to monitor driver behaviour. “The problem [with cameras] is that some owners adopt the stick approach, and not the carrot,” says Carstensen, adding that transport companies should use cameras to educate their drivers and understand them better, instead of as a mechanism used simply to catch them out and “whip” them for infractions. A third positive trend is “recovery assist” technology, which works best when thefts and hijackings are reported within two hours of their taking place. It is imperative that trucking clients are advised to provide quick notification of incidents. Ultimately, Carstensen said, insurers must educate brokers to guide their clients with respect to best practices – and this rather up front at the underwriting stage than after a loss has occurred.

Grant Carstensen, Head of Business Development, Hollard Broker Markets’ Trucking Centre of Excellence

Need insurance cover for social media slip ups?


here are several cases of South Africans posting comments on various social media platforms that they believe are innocent, but which have been deemed inappropriate and offensive by the public. With this in mind, Acuideas and their client SHA Specialist Underwriters have developed a social media liability cover product – the first of its kind in the country. The Social Liability Insurance Policy (SLip uP) is a product that consumers can purchase to cover the legal fees and damages associated with defending themselves against allegations of privacy invasion or defamation of a third party via social media. “People can quickly find themselves in trouble for their comments on social media,” says Sujeeth Bishoon, Executive Head at Acuideas. “Not only do these comments cause embarrassment, but in some cases they can have devastating consequences in the person’s personal and professional life. For this reason we recommend that brokers talk to their clients about a Social Liability Insurance Policy.” SLip uP is aimed at individuals and their children, and it covers the legal costs of

a person defending themselves against potential defamation suits and the settlement fees if the case is lost. There are specific exclusions where the policy does not cover defamatory or offensive comments that relate to race, religion or culture. Children are often unaware of the consequences of their actions on social media, but with SLip uP, parents can cover these actions. There are also cases where a person is not the originator of the content, but has shared or liked the post, and they can be held accountable for their endorsement. “As communication evolves, it forces the insurance industry to do the same and this is why Acuideas dedicates significant resources to product development. While everyone should realise there are serious consequences to their actions on all social media platforms, this liability insurance gives peace of mind that you are covered when you slip up,” says Bishoon. SLip uP is only available through SHA brokers. It can be purchased as an add-on to an existing domestic portfolio. The product is available for R10 a month, with cover of up to R500 000 a year.

You can’t always choose what happens to you in life, but you can choose

to be healthy

and get rewarded for it

We believe that whether your clients are healthy or living with a chronic condition they have the power to change the way they behave, which is why, we have tailored solutions specific to your clients’ needs and lifestyle.

Here is what’s in it for healthy clients…

Or do you have clients living with a chronic condition?

With Vitality Rating they can receive immediate value through an additional premium discount of up to 15% on qualifying benefits. If your clients are healthy, they can lock-in their Vitality Rating discount for whole of life while being able to earn significant financial rewards over time for managing their health and wellness.

If they are living with a condition that previously prevented them from receiving comprehensive life cover, then the Managed Care Integrator offers qualifying clients the opportunity to get a minimum discount of 10% on their health loadings for life, severe illness and disability cover. If your clients are living with Diabetes, HIV or are overweight you can now offer them a competitive premium through the Managed Care Integrator.





Discovery Life is an authorised financial services provider. Registration number 1966/003901/06. Terms and conditions apply.




Cancer biggest cause of claims


n 2016, Liberty paid out R4.3 billion in valid claims, 13% more than 2015, according to its latest claim statistics. This amounts to R17 million every working day. These statistics reveal concerning trends in health and lifestyle risks with cancer and cardiac and cardiovascular conditions being the main causes. “Many people believe that misfortunes won’t happen to them but when you consider

31 May 2017

the statistics, the importance of insurance protection against debilitating events becomes quite clear,” says Henk Meintjes, Head of Risk Product Development at Liberty. The statistics are telling and highlight the importance of life protection insurance. There are real people behind these numbers In 2016, Liberty developed segments to more accurately represent its customer-base. The segments include Young Achievers, Young Parents, Established Providers and Empty Nesters. “Whether they are just starting out in their careers, celebrating their first born child, or planning for their retirement, it is our intention to develop solutions and services that allow our customers the flexibility and assurance to handle life’s challenges,” explains Meintjes.  Cancer was the main cause for claims for all segments other than Empty Nesters. It stood at 15.2%

of claims for Young Achievers, 24.4% for Young Parents, 26.2% for Established Providers and 23.31% for Empty Nesters. The most common type of cancer for women was breast cancer and for men, it was prostate cancer. Liberty’s Chief Medical Officer, Dr Philippa Peil says: “We have seen this trend ever since we started reporting on our claim statistics in 2006. There are a number of reasons such as lifestyle choices, our diets, lack of physical activity and genetic markers. Given the increasing rate of cancer claims, it is important for one to take serious care of one’s body and to identify any serious illnesses as early as possible. Dr Peil recommends that both men and women should take the time to familiarise themselves with their body. “Check your skin for new moles, lumps or whatever doesn’t feel or look right. With medical advancements, early detection can save lives,” she says.  She adds that cancer affects people of all ages. “From age 30, females should take pap smear tests combined with an HPV test until age 65. Clinical breast exams should be done every three years, and annually after age 40. Men and women over the age of 50 should have colonoscopies every five to 10 years, among other tests.”  As a proportion of claims submitted, retrenchment was highest amongst Young Achievers at 11.7% Cardiovascular was the second most common cause overall; 9.0%

(Young Achievers), 14.72% (Young Parents), 22.18% (Established Providers) and 23.67% (Empty Nesters) of paid claims respectively. Strokes or central nervous system disorders also contributed significantly to total claims paid and were responsible for 9.31% of Young Parents’ claims paid and 9.21% of Established Providers’ claims paid. As expected for Empty Nesters, who are generally older, respiratory diseases and disorders were responsible for 7.31% of paid claims. Most motor vehicle accident claims were from Gauteng Although Liberty’s Claim Statistics for 2016 reveal that the biggest cause for claims is health related conditions, many claims are also as a result of accidents. Looking at the data in more detail, motor vehicle accidents made up 10% of claims for Young Achievers. At least 12% of these were for young men and 8% for young women. “Sadly for Young Achievers, 74% of motor vehicle accidents which lead to long term insurance claims at Liberty were death claims. It’s difficult to say from the data whether motor vehicle accidents are becoming more frequent or more severe. But the high paced lifestyle of major cities can lead to higher stress which impacts our health but could also lead to reduced focus on the roads,” Meintjes adds. 

Momentum pays a total of 11 778 claims in 2016 Momentum says its 2016 claim statistics indicate a steady decline in claim pay-outs for critical illnesses in their most advanced stages and a corresponding increase, over time, for earlier stage pay-outs. During 2014, the pay-outs for critical illnesses at the highest severity levels was 58% of the total number of payouts and this declined to 43% of the total critical illness pay-outs in 2016. However, over the same period, the pay-outs for critical illnesses at the lowest severities increased from 10% to 37% of the total number of pay-outs for critical illness claims. George Kolbe, Head of Marketing for Life Insurance at Momentum says: “Early detection of critical illnesses is extremely beneficial for clients because that is when illnesses have the best chance of successful treatment.” Comprehensive critical illness cover is more affordable when selected on cover with tiered claim pay-outs. Being more affordable means that clients can select higher cover amounts without having to compromise on

comprehensiveness of cover while still benefitting from increasing pay-outs if the critical illnesses progress. This highlights the importance of benefit design that provides for breadth of cover as a critical component of clients’ holistic financial wellbeing.

Comprehensive cover without compromise

Kolbe adds: “Traditionally, critical illness cover has focused on the four most common illnesses namely cancers, strokes, heart attacks and coronary artery bypass grafts (CABG). But other critical illnesses like dementia and Parkinson’s disease can have the same financial impact on clients’ lives. Because of the comprehensiveness of Momentum Myriad’s cover, we see more claims paid for events outside of the ‘big four’ claim events than some other insurers, who provide core critical illness benefits, as an option to their clients.”

Critical events are timeless Claim events do not discriminate


against age. In fact, the majority of living benefit claims for 2016 was paid to clients between the ages of 40 and 49 years. Claims in this age group will cause a major disruption to retirement provisions if clients suffer a claim event without adequate risk cover in place.

Multiply clients’ financial wellness

Kolbe points out: “At Momentum we work hard to enhance the financial wellness of our clients. When it comes to claim statistics, this sentiment also rings true because the financial wellness effect on clients, who actively engage with Multiply, is noticeable as

an increased average in life expectancy. “Whereas the average life expectancy for the insured population of SA is 67, the average life expectancy for Momentum Multiply members, on the higher status levels is 89 years; even longer than that of the Japanese population who, at 85 years has the longest average life expectancy in the world.” He adds: “Inactivity and obesity are two major contributors to lifestyle diseases. Wellness and reward programmes that encourage and rewards clients when they are physically active and adopt a healthy lifestyle can help reduce the risk of suffering a claim event significantly.”


31 May 2017


Demystifying five common life insurance myths

Damage to reputation top concern for businesses


rends in economics, demographics and geopolitics along with rapid technology advancements are transforming traditional risks for global businesses, adding new urgency and complexity to old challenges. This is according to Aon’s 2017 Global Risk Management Survey. Damage to reputation/brand remains the top ranked risk by businesses. While defective products, fraudulent business practices and corruption continue to be key threats to reputation, social media has greatly amplified their impact, making companies more vulnerable. Additionally, risks that are traditionally uninsurable are becoming more volatile and difficult to prepare for and mitigate. Dramatically rising in the ranks from number nine to number five this year, cybercrime has now joined a long roster of traditional causes that can trigger costly business interruptions. It is now the top concern among businesses in North America, as the frequency of cyber breaches are increasing and incident response plans have become more complex due to regulation and mandatory disclosure obligations. This trend of disclosure obligations is also being observed internationally, for example with the EU General Data Protection Regulations going into effect in 2018. As a result, cyber concerns will continue to be significant for businesses. Political risk/uncertainties, previously ranked at number 15, has now re-entered the top 10 risk list at number nine. At the same time, risk readiness declined from 39% in 2015 to the current 27%. Interestingly, developed nations that were traditionally associated with political stability are becoming new sources of volatility and uncertainty. This is a concern for businesses, especially those operating in emerging markets. Additionally, according to Aon’s latest 2017 Risk Maps, which cover political risk, terrorism and political violence, trade protectionism, is on the rise while terrorism and political violence ratings are the highest they have been since 2013. “We are living in a challenging new reality for companies of all sizes around the world. There are many emerging influences that are creating opportunity, but at the same time, creating risks that need to be managed,” says Rory Maloney, Chief Executive Officer for Aon Global Risk Consulting. “As the risk landscape

for commerce evolves, businesses can no longer rely solely on traditional risk mitigation or risk transfer tactics. They must take a crossfunctional approach to risk management and explore different ways to cope with these new complexities.” Disruptive technologies/innovation is an emerging risk that participants ranked at number 20 this year but anticipate it to be in the top 10 list of risks by 2020. With the recent introduction and adoption of new technologies, such as drones, driverless cars and advanced robotics, businesses have an increased awareness of the impact of innovation. Respondents from several industries – not just the technology sector – realize the significance of potential disruptors from within their own industry as well as outside their industry. Noteworthy Findings: • Moderate global economic growth offered organisations reason for cautious optimism, which resulted in economic slowdown/slow recovery dropping to the number two slot in the top 10 risks list • Increasing competition moved up to number three this year. In many cases, competition has become so fierce that it is increasingly challenging for executives to clearly identify in what industry and with which companies they are competing • Property damage, which was ranked number 10 in 2015, has slipped to number 13. This could reflect changing priorities, as political risk/uncertainties has taken on a new urgency • Distribution or supply chain failure has dropped to its lowest ranking since 2009, falling from number 14 to number 19 • Business interruption is not considered a top 10 risk by companies in the Middle East/Africa, which have historically seen higher exposure to incidents that interrupt business operations • Failure to attract or retain talent could become more pronounced if immigration policies shift in North America and Europe where the tech industries have long been staffed with talented immigrants they attract from around the world. Conducted in the fourth quarter of 2016, Aon’s 2017 Global Risk Management Survey gathered input from 1 843 respondents at public and private companies around the world.


espite increasing awareness about the importance of having life insurance, some consumers remain confused and undecided due to myths that uninformed people spread through the grapevine. “Death is usually the last subject people look forward to discussing over the dinner table. Similarly, life insurance conversations are viewed in the same light and further perpetuated by misconceptions that this form of cover is complex and not easy to take up,” Lee Bromfield, CEO of FNB Life says. Bromfield demystifies common myths that consumers have about life insurance: • Only married people need life insurance – one of the biggest misconceptions about life insurance is that if you are single, don’t have children or still young, you do not need cover. Life insurance caters for anyone that is financially dependent on you in the unfortunate event that you pass away. • Prevailing health issues will prevent you from getting cover – you may pay a slightly higher premium than the average person if you have pre-existing health issues, due to your risk profile. However, if the health condition is well managed, you should have no challenges getting life insurance. For example, there are many people living with chronic diseases such as diabetes, hypertension and asthma that have life cover. Moreover, people that engage in dangerous hobbies and have habits like smoking are also eligible for life cover. • You’ll be subjected to various laboratory tests before getting cover – when taking up life insurance you need to complete a medical examination to determine your risk level. A practitioner will either ask you a few medical questions over the phone or a professional nurse may take blood tests in the comfort of your home or workplace. The process is often quick and efficient. • Wealthy people don’t need life insurance – while every situation is unique, life insurance plays a significant role when wealthy individuals pass on wealth to the next generation. It can give heirs and beneficiaries peace of mind knowing that costs related to winding up a deceased estate are catered for. For business owners, costs related to selling and liquidating the business or transferring ownership can be covered through life insurance. • I have adequate cover through my employer – cover provided by employers often comes with its own terms of conditions and ends when you leave your job. Solely relying on this cover can leave you uninsured and result in you paying hefty premiums if you take cover when you are much older.  “There are quite a number of misconceptions that exist about life insurance in general. If you are looking to take up life cover, it is advisable to speak to a professional to avoid getting misleading and inaccurate information,” says Bromfield.




31 May 2017

Corporate wellness remains a contributor to productivity levels According to a research study conducted by Occupational Care South Africa, the leader in workplace health and wellness in Southern Africa, absenteeism costs the South African economy around R12 million to R16 billion per annum. An estimated 65% of a company’s health-related costs can be attributed to absenteeism and ‘presenteeism’; a strategic wellness workplace programme can reduce both. It has become imperative for employers alongside the healthcare fraternity to design wellness strategies that create a culture of well-being to assist employees in taking charge of their health and lifestyles. “Corporate wellness programmes have existed for a while, but have largely focused on occupational health aspects and were more oriented to blue collar industries. We still need to see great improvement in the white collar sectors where employee wellness has deteriorated and lifestyle diseases are more prevalent than ever, thus resulting in increasing losses for organisations,” says Chris Luyt, Bestmed, Executive Head of Marketing and Distribution. Lifestyle diseases in the workplace are mostly attributed to the following factors: unhealthy lifestyles, such as inactivity, poor nutrition, poor exercise, poor health and poor performance. Another element is tobacco use and frequent alcohol consumption, which lead to the prevalence of chronic diseases such as diabetes, heart disease and chronic pulmonary conditions. These conditions have become a major burden as they lead to decreased quality of life, premature death, disability as well as increased health care costs. “We believe that these can be overcome, when individuals also begin taking

responsibility to ensure healthy living,” adds Luyt. It is proven that when employees are empowered with information and technology, they tend to make smart healthcare choices that contribute to healthier lifestyles. This is where the employers are encouraged to take strides in understanding that the well-being of their employees is not just about physical health but more about their lifestyle choices and ensure that sufficient wellness programmes are in place. Great wellness programmes require teamwork and personalisation and they should include aspects such as stress management, nutritional knowledge, health screenings, safe exercising, disease management and support groups, to name a few. Luyt explains that an increase in productivity levels are required in order to curb the upward trend of disengaged employees in the workplace. “At Bestmed, preventative healthcare is a key focus and we roll out numerous programmes to encourage the adoption of a healthy lifestyle with our members. All these initiatives are centred around our wellness pillars which encompass every aspect of an individual’s life and are personalised to suit different needs. They include Be Active, Be Safe, Be Nutri-wise, Be Happy and Be Fin-fit”, says Luyt.

Chris Luyt, Executive Head of Marketing and Distribution, Bestmed

Genesis’s defamation case against the CMS thrown out


enesis Medical Scheme’s defamation case against the Council for Medical Schemes (CMS) has been thrown out of court. Furthermore, the medical scheme was rebuked for engaging in costly litigation. Genesis recently brought an urgent application before the Pretoria High Court, asking the court to order the CMS, to remove, within 24 hours, a number of statements from its website. The statements related to the scheme’s noncompliance with the Prescribed Minimum Benefit (PMB) Regulations following complaints by its own members. The argument raised by Genesis before the High Court was that the statements in question were defamatory. The CMS says it’s pleased with the High Court’s judgment. “The judgment by the High Court bolsters the CMS’s commitment to protect the interest of members of medical schemes at all times”, says Acting Chief Executive & Registrar for the Council for Medical Schemes Dr Sipho Kabane. “As a regulator we have a duty to publish factual information about trends and developments in the medical scheme industry, including observations on any conduct that may have a negative impact on members of medical schemes, or the industry itself. The publication of information regarding Genesis Medical Scheme’s disregard of a WE HAVE A DUTY TO judgement by PUBLISH FACTUAL the Supreme Court of INFORMATION Appeal (SCA) ABOUT TRENDS AND regarding the DEVELOPMENTS payment of PMBs can therefore never be viewed as defamation,” Dr Kabane adds. “Our position is guided by the provisions of the Medical Schemes Act, No. 131 of 1998, regarding the payment for claims on medical conditions which fall within the classification of PMBs. Our concern remains that members of Genesis have been left financially exposed and may in future still be financially unprotected regarding payment of PMB treatment in private hospitals by Genesis.” The High Court says in its judgment that the statement that members of Genesis have been left financially exposed and may in future still be financially exposed regarding the payment of PMB treatment in private hospitals, is correct. It concludes that the statements published by the CMS in this regard were true and in the public interest. The scheme’s application was subsequently dismissed with costs. The dispute regarding the scheme’s selection of public facilities as designated service providers is still pending before the Appeals Committee of the Council.

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31 May 2017



Mastercard unveils biometric card


astercard has unveiled the next generation biometric card, combining chip technology with fingerprints to conveniently and safely verify the cardholder’s identity for in-store purchases. South Africa is the first market to test the evolved technology, with two separate trials recently concluded with Pick n Pay and Absa Bank. A cardholder enrols their card by simply registering with their financial institution. Upon registration, their fingerprint is converted into an encrypted digital template that is stored on the card. The card is now ready to be used at any EMV (Europay, MasterCard and Visa) card terminal globally. When shopping and paying in-store, the biometric card works like any other chip card. The cardholder simply dips the card into a retailer’s terminal while placing their finger on the embedded sensor. The fingerprint is verified against the template and – if the biometrics match – the cardholder is successfully authenticated and the transaction can then be approved with the card never leaving the consumer’s hand. For Absa, the biometric card forms part of the bank’s strategy to test and develop sophisticated technology capabilities designed to improve its payment operations and client service, reduce risk, and make banking easier and even more secure for its customers. “We are very proud to be the first bank in Africa to test – in a real payment environment – the single-touch authentication technology that will unlock the benefits of biometrics,” says Geoff Lee, Head of Card and Payments at Absa Retail and Business Banking. “The technology will effectively enable our customers to rely on their unique fingerprints to make payments in a face-to-face environment. Following the test period, we will make it available to our customers in a way that is affordable, reliable, convenient, and, most importantly, secure.”

Geoff Lee, Head of Payments, Absa Retail and Business Banking

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MoneyMarketing (May 2017)  

Navigating SA's post-downgrade market turmoil. Why invest in unit trusts?

MoneyMarketing (May 2017)  

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