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31 May 2018 |

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The rise of the discretionary fund manager


n South Africa, the use of discretionary fund managers (DFM) by independent financial advisers (IFAs) is growing. It’s been predicted that most of the smaller IFA practices will eventually partner with DFMs as a result of an increasingly complex market and challenging regulatory environment. Significant scale is needed for IFAs to run their own investment process in line with the ever-tightening industry regulations – something that the average South African advisory practice simply cannot afford to do.



Passive makes a lot more sense in developed countries such as the US Page 13

It’s therefore expected that the country will see a similar trend to that observed overseas, especially considering South Africa’s imminent implementation of the Retail Distribution Review (RDR), which closely resembles the RDR model implemented in the United Kingdom in 2013. Regulatory scrutiny on how IFA client investments are compiled has risen drastically, and the demand on advisers to properly research and justify these decisions has necessitated a different approach. “Over time, it has become apparent that IFAs are finding it increasingly difficult to undertake the asset management required to assist clients to achieve their investment goals,” says Alex Funk, CEO of Cinnabar Investment Management. “The truth of it is that there is now such a plethora of investments available, both here and globally, that a small independent firm simply

South African advisers prefer medium-sized funds for their clients’ portfolios Page 15

does not have the infrastructure and time to perform the continuous due diligence that is required to understand each fund’s investment philosophy, the calibre of its team and its performance compared to the benchmark – as they are required to do in the RDR.”  In response to this problem, says Funk, DFMs came to the market, offering to provide the in-depth financial analysis to enable financial advisers to comply with regulations and, in the end, deliver the best results for their clients. “Most DFMs make use of model portfolios that are not regulated, so it’s hard to say how much DFM assets are growing. We’ve taken a guesstimate of our big competitors and we reckon that the DFM market is well over R200bn in terms of assets. Obviously, the unit trust market seems to be closer to two trillion rand so DFM assets are only a small part, but much larger than they were five years ago.” Continued on page 2


Laurium Balanced Prescient Fund We see things differently. Our nimbleness as a boutique asset manager and differentiated investment approach, allows us to capitalise on a broad range of opportunities that can be executed quickly.


Launched 9 December 2015, the Laurium Balanced Prescient Fund is ranked 5/140 funds in the South African Multi Asset High Equity Sector since inception to 31 March 2018, with a cumulative return of 21.8% after fees (8.9% annualised) vs median peer cumulative return of 9.5% (3.9% annualised). (Source: Morningstar 31/03/2018)

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Laurium is an authorised financial services provider (FSP No 34142).Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. Performance has been calculated on the A1 class using net NAV to NAV numbers with income reinvested. Highest rolling 1-year return since inception of 19.8%. Lowest rolling 1-year return since inception of 3.5%. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please go to *Source: Morningstar 31/03/2018




31 May 2018

Continued from page 1

Funk thinks the take-up of DFMs by IFAs has been considerable. “The more I speak to IFAs, the more I see that they either have an existing DFM or they’re in discussions with a DFM. It’s definitely becoming more common practice, probably because it’s been so widely discussed in the UK and we tend to follow – with a five-year lag – what the UK does.” The terms of agreement between a financial adviser and a DFM need to satisfy both parties. “We sign a service level agreement with all our clients upfront, setting out who is responsible for what,” says Funk. “The agreement clearly distinguishes between category one advice, which is your normal financial planning; and category two investment advice, which the DFM is providing. Importantly, the IFA’s client – the end user client – never really has interaction with us. We don’t form part of the advice process, we don’t get involved in financial planning.” DFMs do, however, encounter some obstructions, Funk observes. “As already mentioned, DFMs are not properly regulated, their model portfolio performance is not published and thus, there is a lack of transparency relating to their performance.  “Another issue is that these model portfolios are inefficient with regard to the price of the underlying investments. Investors have no option to negotiate better rates – and rates have a cumulative effect on the performance of any investment.  “Furthermore, model portfolios are not unitised and thus, create a capital gains tax liability whenever the portfolio is rebalanced or changed.”  To avoid some of these roadblocks, Funk says it is advisable to use a DFM that offers a unitised model portfolio, or Fund of Funds. “This structure will avoid the capital gains tax issue and also allow for some negotiation on the costs associated with the underlying funds. In addition, Fund of Funds price and performance is published and widely available, thus ensuring performance transparency. This makes it easy to identify poor performance.”  However, moving to the Fund of Funds model is not the whole solution because the interests of the financial adviser and the client are still not fully aligned.

“The adviser’s fees are wholly unrelated to the performance of the client’s portfolio,” says Funk. “Of course, a responsible adviser with a long-term outlook would always want to do the best for his or her client, but in the final analysis, his or her fee is not tied to how well the investment performs.”  There is, however, a relatively easy way to create a direct link between the performance of the client’s portfolio and the financial adviser’s reward. “Allow the financial adviser to invest in, and gain part-ownership of the DFM – and ultimately, the asset manager that owns the unitised model portfolio or Fund of Funds. At a stroke, the financial adviser suddenly has skin in the game because his or her reward (his or her dividend from the shares in the company) is directly linked to the performance of the client’s portfolio.  “In addition, as shareholders in the asset management firm, financial advisers are much closer to the investment team and its thinking, and they will be privy to the details of how the portfolio is constructed. They can relay this detailed information to their clients and, as needed, feed client input back into the whole process.”  Funk stresses that none of this compromises the independence of the advice and research produced by the asset management firm. “Its sole focus is on assessing the strategies, teams and performance of the funds it deals with – it is the financial adviser who then makes use of this skilled resource to assist him to invest his clients’ money.  “In short, this approach means that financial advisers are better able, and better incentivised, to ensure their clients’ outcomes are improved. And that’s good news for both parties.”

Alex Funk, CEO, Cinnabar Investment Management



he horror of cancer becomes dreadfully apparent when the disease strikes a close friend or relative. I speak from experience when I say this. I recently attended a briefing on Liberty’s claim statistics for 2017. Cancer remained the leading cause for claims. Cancer also affected all age and social groups. The top three cancers were female breast cancer, prostate cancer and colon cancer. This has been a recurring trend for the past three years. According to Liberty Medical Officer Dr Thabani Nkwanyana, the good news is that cancer treatment is widely available and effective. Treatment works best if the cancer is detected earlier rather than later, so regular check-ups with a GP are highly recommended. It appears that as many as 70% of known causes of cancer are lifestyle related – and therefore avoidable. The experts tell us that diet, exercise and avoidance of smoking are key factors. Recent research, however, has discovered some surprising ways of cancer prevention, such as filtering tap water, (to avoid carcinogens and hormone-disrupting chemicals), avoiding the dry cleaner (it’s claimed that a solvent used in traditional dry cleaning may cause liver and kidney cancers), using a mobile phone only for short calls (because phones emit radio frequency energy), avoiding unnecessary scans (high doses of radiation can trigger leukaemia) and paying attention to pain. But what if cancer is inherited? I refer specifically to Lynch syndrome. Also called hereditary nonpolyposis colorectal cancer syndrome, Lynch syndrome greatly increases the risk of colorectal and endometrial cancers. While it affects thousands of people every year, sadly, most of those who have it don’t know about it. Knowing the medical history of one's family is vital. Janice @MMMagza

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Life’s not about what can go wrong, but what can go right. And a lot can go right if you have the peace of mind knowing who you love is taken care of. That’s why Hollard created one-of-a-kind insurance products to help secure a better future for everyone, no matter their income level. To learn how we’re ensuring better futures every day, visit


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31 May 2018


How did you get involved in financial services – was it something you always wanted to do? I studied Business Science (Finance Honours) at the University of Cape Town (UCT) and enjoyed the economics and finance streams of the course the most. I was intrigued by the dynamics of markets and felt drawn to the complexities of financial markets in particular. After UCT I was fortunate to get an opportunity at a fledgling asset management company and was thrown in the deep end in terms of company analysis and portfolio management, which gave me a good grounding for my career. What makes a good investment in today’s economic environment? A great management team and a competitive advantage to deliver sustainable growth. When investing in a listed company, investors are implicitly placing both their capital and their trust in the company and, most importantly, in the company’s management team. The ideal for the long‐term investor is to find a company with a shareholder (both large and small) centric culture whose staff understand and respect that they are ultimately custodians of all shareholders’ hard-earned capital.

What was your first investment and do you still have it? I recall that my first investment on the JSE was in a junior platinum miner, Eland Platinum. As I remember, Eland Platinum was eventually sold to Xstrata in 2007 for about R100 a share and delisted. After paying about R7 billion for the miner in 2007, I see that Xstrata (now Glencore) sold the miner for R175 million in 2017. Some serious value destruction on their part. What have been your best – and worst – financial moments? My best financial moment was the purchase of my first apartment in the Cape Town City Bowl in about 2005. The timing was fortunate and I managed to get an early foot in the door in the robust market witnessed since. From there I was able to benefit from the appreciation, and leverage the purchase to make a few more acquisitions over the years. My worst investments were made when I was drawn into the new listing boom in the mid2000s. It was early in my career and very good lessons were learnt over the ensuing period.


Do you own Bitcoin? If not, why not? No. I am quite sceptical by nature, so I tend to avoid ‘investments’ which are hyped to be the ‘next best thing’ or ‘game changers’. In my opinion, the frenzy and rapid price appreciation witnessed in Bitcoin are significant warning signs.

UPS & DOWNS Last month, Pick n Pay released its results for the year ending 25 February 2018. The food retailer reported that its headline earnings per share (HEPS) grew 7.1%, with diluted HEPS up 7.7%. Trading profit was up 4.9%, with the trading profit margin unchanged at 2.2%. In the first half of the year, Pick n Pay implemented a voluntary severance programme (VSP) which improved efficiency and productivity, but had a once-off cost of R250m in severance

payments. Excluding these VSP payments, trading profit for the year was up 19.3%, with its trading profit margin improving from 2.2% to 2.5%.  

Two of the country’s biggest private school chains, Curro and AdvTech, lost 3 881 pupils last year, according to a report in the Sunday Times. This is mainly due to many parents being unable to afford the high fees. The report also states that the prestigious St John’s College recently handed out notices for payment

of outstanding debt to 15 parents. Pridwin Preparatory School told the newspaper that it was unable to fill its Grade 1 classes this year, with the principal stating that “the economy has certainly impacted some of our families”.

VERY BRIEFLY Ashburton Investments, the asset management arm of the FirstRand group, has appointed Nkareng Mpobane as the new Chief Investment Officer of long-only Fund Management. This role will cover the entire long-only fund range, including South Africa, Jersey and Luxembourg. Ms Mpobane joined Ashburton Investments in 2012 and has been instrumental in the success of the fund management business, the company says. “She has over 13 years’ experience in the investment industry and has been integrally involved in both the local and offshore investment processes. Prior to joining Ashburton Investments, Nkareng worked in RMB Private Bank Portfolio Management for six years, managing private clients, institutional clients and trust portfolios,” Ashburton Investments adds. In the next few weeks, Ashburton Investments will also be appointing a Chief Investment Officer of Private Markets. This role will include responsibility for the unlisted asset classes such as private debt, mezzanine finance, private equity and direct property. Financial advisory and wealth management firm GTC has announced its acquisition of Financial Administration Solutions (FAS), a retirement fund administration business. In line with GTC’s organic and acquisitive growth strategy, this transaction adds management expertise to the GTC stable, as well as scale in terms of retirement fund members and assets, the company says. FAS is a wellestablished retirement fund administrator based in the Western Cape, with more than 20 years’ experience in the industry. “We are delighted to welcome the FAS team to our group. The team’s considerable experience will add significant support to our administration capability,” says Gary Mockler, GTC’s Group CEO. Sasfin and Saxo Capital Markets SA (SCMSA) management have acquired SCMSA from Saxo Bank, subject to certain precedent conditions. “This is a landmark transaction for all parties concerned and for Sasfin in particular, as it continues in its quest to become a meaningful player in the global fintech space through partnerships with other meaningful APIs,” the parties said in a statement. “In a global landscape of digital technology that enables more efficient, client-centric service, Sasfin has embarked on a number of key projects to ensure that clients are better served. It will deliver on solutions to help them grow their businesses and wealth, and provide services to new markets. As SCMSA is already positioned as a premium capital markets provider, focused on delivering technology solutions to a broad spectrum of clients, the transaction will enable Sasfin’s clients to access a broader range of securities than what is currently available, locally and internationally, via mobile, web and desktop platforms or state-of-the-art portfolio management systems.” According to Michael Sassoon, CEO of Sasfin, SCMSA enables investors to access global markets seamlessly: “Sasfin has been working with Saxo Bank for many years. This deal further strengthens our association. Saxo Bank makes investing and trading globally accessible to the everyday investor through simple, cost-effective and userfriendly tools.”




To benefit from the power of consistency, visit Consistency is the only currency that matters.

*Best Fund House: Larger Fund Range, Morningstar Awards, 2016, 2017, 2018. Prudential Investment Managers (SA) (Pty) Ltd is a licensed financial services provider. Copyright Š 2014 Morningstar. All Rights Reserved. The information, data and opinions expressed and contained herein are proprietary to Morningstar and/or its content providers and are not intended to represent investment advice or recommendation to buy or sell any security; are not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this Rating, Rating Report or Information contained therein.




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31 May 2018

RICHARD RATTUE Managing Director, Compli-Serve SA

When facts become advice


he definition of ‘advice’ is wide and it is vital that key individuals and compliance officers are able to interpret this formula correctly. Equally important are the activities that are not deemed to be advice for the purposes of the Financial Advisory and Intermediary Services (FAIS) Act, contained in provision 3 (a) (i). Should you only be deemed as dispensing factual information as defined in the Act, then you are not giving advice and are free from the advice-related provisions. However, if not giving advice, you may still be found to be offering an intermediary service and, as such, remain bound into the Act. Let us start at the beginning, where the first introductory provision of the FAIS Act defines ‘advice’ in terms of the Act. It is perhaps fitting that this should be the first one as this definition goes to the core of the Act in that, should you be deemed to be giving advice under the Act, a majority of the underlying provisions would apply. Let’s look at some facts; we can say that factual information is ‘objectively ascertainable’ (ie its truth and accuracy can be reasonably verified). Advice is more complicated. In effect, we cross the line when we become subjective in our opinions and intend to influence a person into making a decision in relation to a financial product or class of products. The intention to influence and guide can either be actual or inferred, and one should always examine the context of the communication that takes place. For example, the mere mention of a financial product does not constitute advice. The intention to guide and influence may be inferred from the manner in which a statement is presented or from the surrounding circumstances. It is not possible to avoid providing advice by simply stating that you do not do so at the start of a conversation, and then cross the line. By way of a simple example, a client visits a local branch of their bank with R10 000 to invest. The client asks for the various rates of interest and is given the information by the teller. So far, so good as only factual information has been provided. The teller then tells the client about “attractive rates” that are available on deposits where the term exceeds six months. The line has been crossed as it is a matter of opinion whether the rates are attractive and the teller could reasonably be regarded as trying to influence the client into a specific direction. This simplest of examples shows how easy it is to wander over the advisory line. The recently gazetted Fit and Proper amendments now allow for ‘low advice’ and ‘execution only’ scenarios, which bring further clarity to the levels of advice and their respective regulatory requirements. Companies must ensure that those staff members dealing directly with customers are licensed correctly, are properly trained and know where their role with a client begins and ends.

FRANCOIS DU TOIT, CFP® Director, Francois du Toit Consulting and Technology

All you need to know about the new CPD requirements


he Financial Sector Conduct Authority (FSCA) Notice 194 of 2017 became effective on 1 April 2018 – and that means continued professional development (CPD) is now a reality (or it will be from 1 August 2018). Financial services providers (FSPs) now have the responsibility to maintain and update the knowledge and skills of their key individuals (KIs) and representatives (REPs) to ensure they remain competent by adhering to the minimum CPD requirements. An important requirement is that the CPD activities that are undertaken must be appropriate for the activities of the KIs and REPs. For example, doing CPD on retirement benefits – if one is not licensed for retirement benefits or authorised to oversee services rendered for retirement benefits – will not be of any advantage and you will not qualify to utilise the CPD points attached to such a CPD event. Who must comply with CPD requirements? The Board Notice makes it clear that the CPD requirements apply to all FSPs, REPs and KIs. However, there are some cases where the requirements will not apply: • A category 1 FSP, its REPs and KIs that are licensed, appointed or authorised to render or manage or oversee financial services rendered for long-term insurance sub-category A and/or friendly society benefits only; or • A representative of a category 1 FSP that is appointed to only render a financial service in respect of tier 2 financial products and/or render an intermediary service in respect of tier 1 financial products. What will qualify for CPD? Board Notice 194 of 2017 sets out various requirements that must be met. For an event or activity to qualify for CPD, such activities must: • be relevant to the function and roles of the KIs and REPs • contribute to skills as well as professional and ethical standards • address identified needs or gaps in the technical and generic knowledge and in the understanding of applicable laws • consider changing conditions in relation to the products for which the FSP is licensed. In addition to the above, CPD providers and activities must be accredited by a professional body, such as the Financial

Planning Institute or the SA Institute of Tax Professionals. This body must also allocate an hourly value to the activity (or part thereof), and it must be verifiable. Product-specific training or studying towards a recognised qualification does not count for CPD purposes. What are the CPD requirements? The minimum number of CPD hours that are required for each 12-month cycle depends on what the FSP, KI and REPs are licensed for: • single subclass of business within one class of business must complete six hours of CPD activities (eg motor policy only under short-term insurance: personal lines) • more than one subclass of business within a single class of business (eg motor policy and property policy under short-term insurance: personal lines) must complete 12 hours of CPD activities • more than one class of business (eg short-term insurance: personal lines and long-term insurance) must complete a minimum of 18 hours of CPD activities. The number of CPD hours can be prorated or adjusted (reduced) in specific circumstances, such as being authorised, approved or appointed during a CPD cycle or being sick. Planning and recording CPD Each CPD cycle will run from 1 June to 31 May of the following year. Competence registers must be updated within 30 days of the end of a CPD cycle. FSPs must establish and maintain policies and procedures on CPD that include training plans for each CPD cycle.




31 May 2018

KEN NEWPORT Fiduciary and Tax Specialist, Sanlam Private Wealth

Cross-border estate planning: it’s complicated


outh Africans with assets in multiple jurisdictions or family members living in more than one country often find themselves kneedeep in a quagmire of complexities relating to cross-border estate and tax planning. Expert advice is crucial in dealing with potentially onerous and conflicting requirements and laws applicable in different jurisdictions. As more South Africans choose to invest at least part of their wealth offshore, and family members move across borders to either live, study or work, multi-jurisdictional estate planning has become increasingly challenging. Each country generally has its own distinct succession and applicable inheritance tax laws. In addition, there may be a mismatch of factors used to determine tax liabilities in different jurisdictions – such as domicile (permanent home), deemed domicile, applicable law, tax residence, habitual residence, and nationality.  This often means some assets – or none of them – may be taxed in a particular country, while some may be taxed twice or even more often in other instances. To try to resolve such issues, some countries have entered into double tax treaties and are members of the Hague Convention, which seeks to address conflicts that may arise as a result of the differences between domestic laws. This is, however, a highly complex area of expertise – even when there is a double tax treaty in force, there is often limited tax relief.   Laws of succession Succession laws also play an important role in cross-border estate planning. For example, under common law, immovable property forming part of the worldwide estate of a person domiciled in South Africa may be bequeathed under our country’s laws to any person without restriction. In terms of the succession laws of certain other jurisdictions, however, immovable property will usually vest in the children of the deceased, even though the latter’s will states that the

asset has been left to a third party. Spousal exemption also doesn’t always apply in all jurisdictions, the US being a prime example. Under South African law (Section 4(q) of the Estate Duty Act of 1955), the value of all property accruing to a surviving spouse, either in terms of a will or by intestate succession, is deductible from the estate of the deceased for the purposes of estate duty. But where a South African holds US assets, even if these assets are left to his or her spouse, only the first US$60 000 will be exempt from US estate tax unless the surviving spouse is a US citizen.   Drafting one or more wills It’s clear that drafting wills from an international perspective can be highly complex – expert advice should be sought in determining whether one or multiple wills are required. The European Succession Regulation (known as Brussels IV) has gone some way towards alleviating potential issues in the European Union – the assumption is that a single will can govern a family’s worldwide estate.  For some jurisdictions a separate will may be a sensible solution, but it doesn’t always solve all the issues, especially if it hasn’t been drafted correctly. The drafter needs to ensure, for example, that a will dealing with assets in one jurisdiction doesn’t inadvertently revoke another will dealing with assets in another jurisdiction, either in part or in its entirety.  Another challenge is that a will drafted in one jurisdiction may not be recognised as valid in another. The doctrines of automatic revocation in certain jurisdictions by marriage or civil partnership, or even by the birth of a first child, should also be considered.  These complex matters can be addressed only when all the facts are known and can be thoroughly examined. A comprehensive estate plan can then be compiled along with carefully drafted wills, taking into account all relevant jurisdictions and the various elements applicable to each.

KIM HUBNER Head of Business Development and Marketing, Laurium Capital

Consistency is what counts


o investors benefit from managers who maintain their designated investment strategy on a more consistent or less consistent basis? The decision-making process that an investor undertakes before selecting a professional asset manager is multi-faceted and extremely complex. The premise, of course, is the inherent belief that the investor will be better off with professional management than if he or she had allocated the assets directly, after the fees paid to the asset manager. It is not surprising, then, that the investment performance of fund managers has received considerable focus by academics and industry practitioners alike for many decades. The evidence suggests that investment style consistency does, indeed, matter. Managers who commit to a more consistent investment style are less likely to make asset allocation and security selection errors than those who attempt to “time” their style decisions. It is also easier for external parties (discretionary fund managers, multimanagers, consultants, etc) to evaluate managers with consistent styles. Since better managers want to be evaluated more precisely, maintaining a style-consistent portfolio is one way that they can demonstrate their superior skill to potential investors. Since the start of Laurium Capital in 2008, our investment philosophy and process have remained unchanged. In the turbulent times that we live in, it is more important now than ever before to consistently apply this philosophy and process, and not get distracted by short-term noise. Our philosophy is fundamental at the core, and is complemented by macro and opportunistic trades, which are explained below in more detail. Bottom up The crux of all our investment processes starts with fundamental analysis. This bottom-up approach focuses on analysing the underlying key drivers of a business. This includes a business assessment (company management track record, industry analysis, risk factors to the business, regulation and environmental, social and governance factors), financial analysis (profitability, financial structure, cash generation) and finally, absolute and relative valuations. We seek to identify companies whose share prices differ materially from our estimate of intrinsic value, based on through-the-cycle, normalised cash flows and earnings, and where we think that there is a catalyst for the company’s share price to revert to our estimate of intrinsic value over the medium term. Top down Identifying and taking advantage of economic cycles and market trends is an important contributor to the generation of superior long-term investment returns. Forecasting macro factors is notoriously difficult to do, so the risk of being wrong must be acknowledged and managed. Trading Laurium Capital also employs a trading strategy. The market is right most of the time, but regular inefficiencies arise in the short term. Shorter-term inefficiencies may present trading opportunities, irrespective of a company’s intrinsic value. These opportunities often arise due to large flows of money, news flow and emotions, structural inefficiencies, corporate actions and other special situations or events. At its core, Laurium Capital looks to do one thing and one thing only: to create superior returns for our clients through consistent superior portfolio management.


31 May 2018

INSIDER CHRONICLES TIM HUGHES Non-Executive Director, Warwick

Responsible business is good business


here is one, and only one, condition attached to social responsibility on the part of business: to use its resources and engage in activities designed to increase its profits, as long as it stays within the rules of the game – in other words, as long as it engages in open and free competition without fraud. This is the essence of economics Nobel Laureate Milton Friedman’s doctrine, so influential in corporations and, indeed, governments of the 1980s. Understandably, Friedman’s views were attacked and continue to be condemned, particularly by those who contend that such unfettered capital accumulation leads to wealth being concentrated in the hands of the few at the expense of the many. These critiques are substantiated by the fact that today, the wealthiest 1% of the world’s population controls some 50% of global wealth. Conversely, 70% of the world’s population owns some 3% of global wealth. Yet, while the inadequacy of the minimalist Friedman doctrine is obvious, its core argument retains currency. Shareholders entrust their wealth in the hands of the management and directors of a company and, as such, the primary responsibility of the corporation is to provide a safe, risk-adjusted return to its shareholders. Conversely, when the CEO of an internationally listed South African corporate ‘success story’ spends tens of millions of rand on race horses by using the paper wealth created by false accounting, he not only destroys the reputation of his corporation, but he also materially impoverishes the hundreds of thousands of ordinary people (shareholders) who invested in his paper stable through their pension funds. This is the antithesis of corporate social responsibility.

While difficult to capture crisply, the Financial Times defines the term ‘corporate social responsibility’ (CSR) as “a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders”. Notably, CSR is not simply philanthropy. ScottishAmerican industrialist Andrew Carnegie captured the essence of philanthropy when he said: “The duty of the man of wealth is to consider all surplus revenues which come to him simply as trust funds, which he is called on to administer, in a manner best calculated to produce the most beneficial results for the community.” The Bill and Melinda Gates Foundation is perhaps the closest contemporary approximation. CSR hinges on good workplace, marketplace, community and environmental practices by the company. CSR makes good business sense and can be fully justified in purely business, rather than ethical, terms. CSR can, and does, enhance the reputation of the company, which, in turn, can have a positive qualitative and material impact. Companies often claim that their reputation is one of their most valued assets, with good reason. Corporate reputation embraces qualitative and quantitative elements. In qualitative terms, a good reputation translates into client trust, quality recruitment, brand loyalty and better stakeholder relations. Materially, CSR should aid sustainable profitability, ceteris paribus. Corporate South Africa need no longer see CSR as an insurance policy, a guilt premium or a coercive isomorphism. Rather, it should be embraced as an essential component of any sustainable corporate business model.

Investing in fine art in SA


ccording to the AfrAsia Bank South Africa Wealth Report 2018, the global top-end art market is valued at about US$75bn. African art accounts for about US$1bn of this, with US$450m (R5.5bn) held in South Africa specifically. According to in-house indices, South African fine art prices have risen by 28% over the past 10 years (in US$ terms). Global fine art prices have risen by 12% over the same period. Leading South African artists (in terms of price) include: • Irma Stern – Currently the most valuable South African artist. Fetches up to R30m per painting. Average price of about R5m.  • Maggie Laubser – Currently fetches up to R5m per painting. Average price of about R600 000. We expect the value of her paintings to rise heavily going forward, possibly matching Irma Stern prices in the near future.  • JH Pierneef – Average price of about R800 000 per painting. Can fetch up to R20m. • Alexis Preller – Average price of about R600 000 per painting. Can fetch up to R10m. • Gerard Sekoto – Average price of about R400 000 per painting. Can fetch up to R5m. • Hugo Naude – Average price of about R300 000 per painting. Can fetch up to R2m. • William Kentridge – Average price of about R800 000 per painting. Can fetch up to R5m. • John Meyer – Average price of about R300 000 per painting. Can fetch up to R3m. The report’s picks for the future include (ie expected to fetch similar prices to artists above in the near future): • Adriaan Boshoff  • Stefan Ampenberger  • Branko Dimitrov  • Roberto Vaccaro (sculpture) • Portchie • Isabel le Roux




31 May 2018

Continued top performance by index tracking funds

Index tracking Exchange Traded Funds (ETFs) and unit trusts appear regularly in the top five performers of all 1 300 collective investment schemes in South Africa,” says Mike Brown, Managing Director, “Index tracking passive investment strategies obviously do not mean accepting lower investment returns, as these products more than compete with the best performing funds in the South African industry.” Brown says this is astonishing because: • There are now 1 200 plus actively managed unit trusts versus less than 100 passively managed index tracking ETFs and unit trusts in South Africa. So, the actively managed industry is more than 10 times the size of the passive industry. • The mandate for actively managed investment funds is to outperform their relative benchmark index. Passive funds have the mandate of only delivering the total return of the index. • The appearance of indextracking funds in the top five of all collective investment schemes, for periods ranging from three months to 10 years, suggests that passive management works for all time periods. Active managers often say that over time, they will outperform the benchmark indices – this is not borne out by the facts. • An index effectively measures the average return for investing in a certain sector of the market or asset classes. “Accordingly, you would expect index-tracking investment products to provide returns around the average, or to be in the middle of the pack, compared with actively managed investment products. The ranking of so many index-tracking products in the top five performing collective investment schemes is a sad indictment on the active investment industry.” In South Africa, index investing has been allocated a disproportionately small percentage of assets, a phenomenon which is not easily explained, says Chris Rule, Head: Product and Client Solutions at Coreshares. “If an investor were to focus on the evidence available, an index investment

is an intelligent choice,” he adds. Evidence-based investing is a philosophy of making investment decisions based on scientific analysis and thorough research. If one described investing as part science, part art, an evidence-based approach focuses on the science of investing. “Indexation has been a major beneficiary of the growth in evidencebased investing, given that the major

Simply put, the greatest certainty of any investment is the costs charged. For example, if Manager A charges 0.2% and Manager B charges 1.2%, we know with absolute certainty that every year Manager A will have a 1% advantage over Manager B. The evidence: The structural cost advantage of indexation is absolutely unavoidable; this is amplified by the power of compounding returns.

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value propositions of indexation are grounded in evidence (the science of investing) rather than future promises (the art of investing). Most importantly the benefits of an index approach are meaningfully more repeatable and predictable than the uncertain promise of outperformance,” he says. Rule believes the following aspects are the key pieces of evidence that should encourage investors to make indexation a significant part of their portfolio: • Cost matters hypothesis (CMH): Gross returns minus costs equal the net returns delivered to investors The cost matters hypothesis is a term that was originally introduced by John Bogle, founder of Vanguard.

Morningstar Research, both locally and globally, has concluded that the single largest determinant of a fund’s future success is the costs it charges. (1) • Index fund return is above average : ‘Arithmetic of Active Management’ Investing is a ‘zero sum game’ (one investor’s gain is exactly equal to another investor’s loss), which means that before costs average active rand invested must equal the before costs return of the market index. This concept is best explained by Nobel-winning economist William Sharpe in what he refers to as the “Arithmetic of Active Management” which states: “(1) before costs, the return on the

average actively managed dollar will equal the return on the average passively managed dollar; and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.” The evidence: The index less costs is consistently above the average active fund. By including an index investment in your portfolio, you increase the probability of achieving above average peer group returns without taking on additional manager risk. • Fund selection dilemma (unreliability of future promises) The challenge for investors selecting active funds is the low probability of selecting the outperformers. When selecting more than one manager, as is common practice, this challenge amplifies. The evidence: Of the general equity active funds available on average, only 18.27%(2) will outperform in a three-year period. By increasing the number of active funds in your portfolio, your probability of selecting only outperformers reduces from 18.27% for one manager through to 0.58% when three managers are selected – a massive drop in odds from less than one in five to a less than one in 100 chances of selecting outperformers exclusively. “Globally, the increasing use of indexation has been a function of the overwhelming evidence supporting it. The South African evidence is no different, but the money has not followed. We position index investing as a focus on the evidence and that due to the certainty and predictability of the advantages of indexation, it should form an important (core) part of one’s active and passive mix,” says Rule. (1) Fees as a Predictive Tool of Outperformance -Kyle Cox, Morningstar, April 2017 (Local) and Predictive Power of Fees: Why Mutual Fund Fees Are So Important - Russel Kinnel, Director of Manager Research, Morningstar, May 2016 (Global) (2) Source: S&P Dow Jones Indices LLC and Morningstar. Average of active outperformers from the SPIVA South Africa report from June 2014 to Dec 2017 in six-month intervals.

May 2018 | VOLUME 1


Weathering the storm (page ii)

MUA celebrates 30 years in business (page iv)

King of Insurance (page vi)




The impact of catastrophe losses on the South African insurance landscape


only had to pay out R174m from its own funds – the balance was paid through Santam by its reinsurer. But the increase in frequency and size of catastrophe events has forced global reinsurers to reconsider their business arrangements with South atastrophe events caused an estimated African insurers. “We used to have one catastrophe US$135bn in insured losses in 2017 as every few years, but in recent times, we have hurricanes, severe weather and wildfires experienced a few events every year,” says Cheng. destroyed property and possessions worldwide. He explains that events during 2017 have hurt many South Africa was no exception as fires in the global reinsurer earnings and expects this may Western Cape, floods in Gauteng and KwaZuluinfluence the pricing, risk appetite and reinsurance Natal, and a massive hailstorm in Gauteng tested capacity in coming years. local insurers to their limits. Local insurers lived “Large catastrophe losses could require that our up to their promise by paying out billions of rand reinsurers increase their reinsurance premiums, with to both individual and business policyholders to a consequent increase in the amount we spend on compensate them for the losses suffered. reinsurance,” agrees Melville. Insurance brokers could The Oxford Dictionary defines ‘catastrophe’ as face higher renewal premiums on their portfolios, and an event causing great and usually sudden damage policyholders could face higher renewal premiums or suffering a disaster. “From an insurance on their policies as a result. “If reinsurers enforce point of view, a catastrophe involves multiple ‘stricter’ reinsurance terms, local insurers are forced to claims arising from a single event, or a series of accept a bigger part of the risk for their own account – events, occurring over a finite period, usually increasing the financial risk and possibly resulting in several days,” says Michael Cheng, Chief Risk higher premiums to policyholders,” adds Welthagen. and Underwriting Officer for Hollard Insurance. Seelan Naidoo, Head of Property and Engineering “The event can be man-made (for example, fires at Allianz, says both insurers and reinsurers have been or a riot) or natural – think of severe hailstorms, forced to revaluate their exposure to catastrophe-type floods, earthquakes and tornadoes.” events. “Insurers – and therefore policyholders – were Santam, South Africa’s largest negatively affected by increases in short-term insurer, paid out reinsurance pricing from their treaty BOTH INSURERS more than R1.4bn in catastrophe reinsurers, specifically due to loss claims in 2017, making it the AND REINSURERS activity in 2017. worst experience in the insurer’s HAVE BEEN 100-year history. Old Mutual FORCED TO Insure estimates the total damages suffered following the Knysna REVALUATE THEIR disaster to have amounted to EXPOSURE TO R5bn, while Hollard reports that CATASTROPHElosses from the October 2017 flooding in KwaZulu-Natal and TYPE EVENTS Gauteng could reach R1.8bn. “The burden of catastrophes has increased significantly in the last few years – hail dominated the claims landscape in 2015, flooding in 2016 and the Knysna fires in 2017,” says John Melville, Head: Risk Services at Santam. You need some basic insurance knowledge to understand the consequences of frequent catastrophe events, starting with the relationship between an insurer and a reinsurer. “An insurer has risks that it wants to protect against, and will therefore buy ‘insurance’ with a reinsurer to cover those risks,” says Cheng. “The whole idea of arranging reinsurance is to spread your risk and not expose your own company to possible bankruptcy if a catastrophe happens,” says Johan Welthagen, Head of Claims Support Services at Old Mutual Insure. In other words, reinsurance is insurance for an insurer. A very basic example of reinsurance in action can be found in Santam’s 2017 Integrated Report. Santam received claims totalling R823m from its policyholders following the Knysna fires, but because it had reinsurance contracts in place, it



31 May 2018

“In some cases, treaty capacity was reduced, directly affecting insurers’ ability to carry on normal business activities,” he says. Major catastrophes, such as the Knysna fires, have made policyholders more aware of the precautions they can take to reduce losses. “The cost of claims can be reduced if the policyholder maintains their property adequately. Simple actions, such as clearing gutters for rainfall or installing fire protection – such as fire extinguishers or sprinkler systems – for larger commercial risks, can lead to a reduced loss in the case of a catastrophe,” concludes Melville. But some catastrophes, such as earthquakes, cannot be mitigated against, except perhaps during construction. Many insurance companies send SMS messages to warn policyholders of imminent threats. “We can warn policyholders of impending storms and urge them to take precautionary measures such as avoiding driving in storms, getting indoors for safety and moving vehicles under cover,” says Cheng. Traditional insurers also encourage their brokers to guide policyholders on how to prevent or reduce damage due to insured loss events. Gareth Stokes is a professional freelance journalist and writer who specialises in the financial services industry. He is the co-author of the book Short Term Insurance in South Africa, which gives a comprehensive overview of the South African short-term insurance sector. The second edition of the book goes to print in July 2018. Visit for more information.

IS GREATNESS RANDOM, OR THE COMING TOGETHER OF PURPOSE? The world’s great mountains have forever drawn adventurers to their peaks. But we are more in awe of the hidden power below where forces collide, causing continents to rise. It’s how we choose to harness the forces at hand that set us apart. The greater the challenge, the greater our inspiration. As a business enabler, the Fulcrum Group offers bespoke lending, investment and management services, specialising in insurance markets. We drive ourselves to create products and services that make a difference – no matter how big or small your business challenge. Because we believe there is always a better way.


31 May 2018

MUA CELEBRATES 30 YEARS IN BUSINESS MoneyMarketing spoke to MUA CEO Dawie Loots as the company marks its 30th year in the insurance industry



he Fulcrum Group provides a point of support or leverage to help insurance intermediaries develop and grow their businesses. The company offers bespoke lending, investment and management services, specialising in insurance markets. Fulcrum was established in 2012, although it has existed in various iterations since the early 1990s. The management team come from a diversity of backgrounds in the insurance and finance industries, and have notched up years of experience – time enough to develop a thorough understanding of both industries, and in particular, the niche where they overlap. “At the end of the day, brokerages, insurers and underwriting management agencies (UMAs) are businesses, just like IT companies, media houses, doctors’ practices and football clubs,” says Fulcrum CEO Pete Gordon. “And, like any other business, they need systems, capital, market information and advice on regulatory and legislative matters – issues that often detract from what our industry is so good at, which is focusing on people and relationships.” The Fulcrum Group provides support and services specifically for organisations in the THE INSURANCE insurance industry. This includes assistance in the fields of premium collections and INTERMEDIARY payments, premium financing, specialist MARKET HAS lending, private equity, treasury and VERY SPECIFIC technology. And, while all businesses may need assistance in these areas, the insurance REQUIREMENTS intermediary market has very specific requirements. Gordon uses specialist lending as an example: “In this day and age, the broker or UMA requires specialist and bespoke financing solutions to address some of the industry-specific issues they are faced with under the new insurance regulatory regime,” he says. “Our deep understanding of the insurance market, particularly in the intermediary space, allows us to provide innovative and relevant financing solutions to meet our clients’ exact requirements, no matter how complex they may be.” Gordon says the offerings of traditional, generic financing institutions are just that: generic. “More often than not, your bank will have very little understanding of your business model, the industry you operate in, regulatory requirements, market opportunities, the dynamics of intermediating between insurance companies, clients, regulators, reinsurers and all the other players in the game,” he says. And that’s just on the capital side. “Then you’ve got premium collections, solvency management, investment options, IT systems – these are all things that our industry deals with on a daily basis that have the potential to distract from the business at hand, which is essentially client relationships. And this is where Fulcrum comes in, as we have the expertise to provide advice, solutions and support in all these areas.” Pete Gordon,

CEO, Fulcrum


MUA was established in 1988 under the name, Motor Underwriting Agency. How did the company evolve into what it is today? As an underwriter focusing on the needs of a discerning client base, MUA developed a very high level of understanding of what our clients need when it comes to insuring their specialised assets. Initially, our offering was limited to the bespoke insurance of high-value, executive, classic and exotic vehicles. By serving the needs of this part of the market very well, we realised that our clients typically live in unique, high-value and bespoke homes, and by gaining a thorough understanding of the lifestyle of these clients, we realised that their need for insurance extended to beyond what was available in the conventional market. For that reason, we developed a full personal product line. Launched in 2006, it gives our clients access to an all-risk based policy which, in addition to their vehicles, also provides specialised cover for their homes and their contents – which can include rare and very valuable collectables, such as art, jewellery, watches and antique furniture. These sorts of assets require a specialised approach to insurance and if not addressed with the necessary level of care and expertise, can leave clients in a position where they are not enjoying the most appropriate cover. MUA offers a professional building and home contents valuation service that provides clients with the assurance that assets are correctly valued and properly insured.   For many years, MUA has had a solid relationship with Hannover Re. Can you elaborate? Through Hannover Re’s strategic investment company, Lireas Holdings, it owns the majority shares of MUA. This places us in the presence of a very reputable and successful international reinsurer. Not only does that mean we have the financial support of a large multinational corporate, it also allows us access to reinsurance markets which is crucial when it comes to insuring high-value property.   Describe the relationship MUA has with its brokers. MUA is very proud of the relationships we’ve built with our valued brokers over the course of 30 years. We are firm believers in the value of relationships and see our association with our brokers as partnerships. We take the time to listen to the needs of our brokers and our clients, we keep our doors open and we see the value in personal interaction with our brokers – even in a digital world, there is no replacement for good old-fashioned ‘face time’.  A typical MUA broker shares this passion for the industry and for their clients, and is their clients’ trusted adviser.   What has been your top-selling product in the past five years? As mentioned previously, MUA started as a motor-only underwriter in 1988 and introduced full personal lines insurance to the market in 2006. Whilst we are still regarded as specialist motor underwriters (specifically when it comes to classic and exotic motor vehicles), we have seen phenomenal growth in our non-motor book of business. This attests to our skill as an insurance provider of choice, catering to the demanding needs of the executive and high net-worth market.  In 2016, we also launched a product aimed at a level just below the executive client. We acknowledged the need for a quality product, coupled with our reputation for a personalised service, for clients who are not yet at the executive level. This product has also been very successful.   The short-term insurance industry can be a rather crowded place, yet MUA has operated a successful business for 30 years now. To what do you attribute this? Without a doubt, to the dedication and passion of those people who’ve been personally involved in this business over 30 years. Back in 1988, the insurance industry was a vastly different landscape and the term ‘digitisation’ did not exist. Our primary skills as specialist underwriters for the high net worth market were gained during this ‘pre-digital’ period, and we are excited about the future of the business as we get to apply these invaluable skills in combination with the remarkable technological Dawie Loots, advancements available today. CEO, MUA


We approach each risk with the precision and innovation to exceed your client’s expectations. Our underwriting and claims specialists have provided customised solutions to evolving and complex risks for 30 years.



mua_insurance | | 0861 682 467

MUA Insurance Acceptances (Pty) Ltd is an authorised Financial Services Provider (FSP No. 37947) underwriting on behalf of Auto & General Insurance Company Limited, an authorised Financial Services Provider (FSP No. 16354).


JOHN ANDREWS Head: Technical and Underwriting, PPS Short-Term Insurance


ften, the purchase of a home is a family’s biggest asset. Therefore, it is essential to ensure that you take out a comprehensive building policy. Also, it is a good idea to appoint a reputable insurance broker to help you choose and understand the specific covers that suit your individual needs. Here are some key points to consider when buying building insurance: The sum insured – must represent the new replacement cost of the building and not the market value. It must also include replacement amounts for outbuildings, boundary walls, gates, tennis courts, swimming pools, paving and any other fixtures, fittings and improvements at the premises. In addition, allowance must be made for professional fees, debris removal costs and escalations in the new replacement value during the insurance year. Average/underinsurance – this clause forms part of the building insurance policy contract. It states that if, at the time of loss or damage to the building, the sum insured shown in the schedule is less than the replacement value at risk, then your insurers will only be liable for such proportion of the loss or damage as the sum insured bears to the replacement value of the building

31 May 2018

WHAT TO CONSIDER WHEN BUYING BUILDING INSURANCE (as defined above). In other words, if you pay four-fifths of the premium, insurers are only liable for four-fifths of the claim. Property definition – most building policies will define what constitutes the building. It is important to ensure that all fixtures/fittings/improvements (etc) are covered. For instance, you may own a generator and a dispute could arise at the claims stage about whether this is classified as a fixture or not – if the policy definition does not include the mention of generators, insist that your broker adds this item into the definition before the policy commences. Defined (insured) events – The building insurance policy will specify what is covered. It is important to understand these defined events, which generally include – but are not limited to – the following: • Fire, lightning, explosion, earthquake • Storm and all types of water and flood damage, including the resultant damage • Bursting of geysers and the resultant damage • Impact damage • Theft and malicious damage (fixtures/fittings). Some building policies cover all accidental damage to the building

other than that which is specifically excluded. These are termed ‘All Risk’ policies. Liability cover – you must ensure that your policy provides cover for claims made against you, as the building owner, by third parties – arising from accidental injury, illness or death to persons, or damage to third party property. These claims are usually for substantial amounts and if cover is not in place, you will have to foot the bill yourself. For example, if someone visiting your home was injured and you were found to be legally liable for the injury as you’re the building owner, you would have to pay the damages – unless you have liability insurance in place. Extensions/additional covers – whilst most building policies extend to cover a myriad of other minor types of eventualities (each with its own limit) associated with the building, some of the important ones to consider are: • Rent (this item is in addition to the sum insured) – in this instance, the policy covers the rent payable and/ or receivable, as the case may be, if the building is damaged by a defined (insured) event and, as a result, the building is not fit to live in. This is usually limited to about 25% of the sum insured and ends when the building is suitable to live in again,

KING OF INSURANCE A crown worn with pride When King Price brought the decreasing premium model to the market six years ago, not many in the industry thought the company would last the year. But, here it is, not just surviving, it is thriving. “In fact,” says Rhett Finch, director and CFO, “in these six short years we’ve evolved from being king of price to being king of insurance. And it’s a crown we wear with pride.” In this time, the royal kingdom has watched its brand evolve, grow and find its way into hearts, homes, businesses and communities throughout South Africa and Namibia. Its offering has expanded from the world-first decreasing car insurance that it launched with, to include cover for buildings, home contents and portable possessions, as well as businesses, engineering works, communities and cyber risks, which it insures exclusively through brokers. But, says Finch, one thing that hasn’t changed, and won't change, no matter the company’s rate of growth, is its commitment to providing awardwinning royal service, every time, all the time.


“We’re serious about making sure that every single member of our royal family feels special every time that they talk to us. And when we talk about our royal family, we mean our broker partners and your clients, too.” Finch, as overseer of the King Price broker business, is also serious about making it easy for the company’s partners to do business with it. “We’re committed to building long term, integrated relationships, and we focus on providing flexible solutions. We’re here to guide you through legislative and regulatory changes. We communicate in easyto-understand language. And, we make our training relevant, interesting and even fun. Because while we don’t take ourselves too seriously, we take what we do very seriously.”

once the building is reinstated or repairs are completed • Professional fees and debris removal costs – the policy covers these costs too, provided that the sum insured is adequate and calculated correctly • Subsidence and landslip • Accidental damage to fixed machinery (this is usually offered as optional cover at an additional premium) – it covers any form of accidental damage to pool or residential borehole pumps, gate motors (etc), and is subject to certain exclusions such as wear and tear. Exclusions – all policies carry a number of exclusions. It is important to understand these so that you know when the policy will not respond favourably to loss or damage to the building. These generally include, but are not limited to, loss or damage arising out of or from: • Demolition, alteration, construction or cleaning • Wear and tear, or gradual operating causes • Weeds or roots • Chipping, scratching, disfiguration and discolouration. The ‘All Risk’ policy, mentioned in the defined events point above, would include a longer list of exclusions.

King Price has won many awards over its sixyear existence for service, innovation, the way it communicates, and more. A recent addition to this list of accolades is the award, Best Data Quality for the Insurance Industry, given to it by the SA Credit and Risk Reporting Association, the non-profit governing body which evaluates and distributes datasets to providers such as TransUnion. This means, that the insurer is securing its relevance and competitiveness into the future. As the age of artificial intelligence and machine learning dawns, data is critical. But, says Finch, quality data is king. And that’s what it has. “King Price also has an ever-expanding portfolio of personal, business, community and engineering insurance products designed to cover just about every eventuality that your clients may face,” adds Finch. “We’ve got their backs, their businesses, their bakkies and their Rhett Finch, Director and CFO, bling. And everything King Price else, too. 24/7.”


31 May 2018

PETER JENNETT Chief Executive Officer, Centriq Insurance



outh Africa’s cell captive insurance market is well placed – or, in some instances, better placed than the traditional insurance market – to contribute to the country’s economic growth. But the challenges lie in the potential restrictions on ownership of cells and the outsourcing of business within the insurance sector. This begs the question: How do we broaden access to the insurance underwriting sector and protect customers at the same time? The key to growing a country’s insurance sector, and hence its economy, lies in providing more people with a wider variety of quality products and services. Well-regulated outsourced models, like those offered by some of South Africa’s cell captive insurers, allow us to do just that and create jobs at the same time. A well-run cell captive insurer provides the regulator with the regulatory oversight it requires, in the sense that the cell captive insurer is responsible for all business written on its licence. For this reason, the cell captive provider is ultimately responsible for the market conduct of its underwriting partners – and hence, the quality of the products being developed, provided and distributed to insurance customers. With the barriers to entry into the insurance market already high, we should be cautious not to:

• increase these barriers • limit the number of quality operations that can enter the market • make the costs so prohibitive that only a few large players can survive. We need to create an opportunity for small, wellmanaged underwriting operations to access the benefits of an insurance licence, thereby making an important contribution to both the economy and employment rates in the insurance sector. Cell captive insurers provide the core capital and oversight that is needed to protect the consumer and give comfort to the regulator. Cell captive insurers are, furthermore, well placed to facilitate the entry of smaller players into the underwriting space. With its predominantly outsourced model that consists of syndicates (individual cells) with a broad variety of owners that outsource to managing agents and, in turn, to various cover holders, Lloyd’s of London is a good example of what is essentially an international cell captive insurer. The Lloyd’s syndicate model – in effect, a cell captive model – has proven to be hugely successful. In 2017 there were 85 syndicates, managed by 56

managing agencies that collectively wrote £33.6bn of gross premiums. With that said, it is evident that Lloyd’s will continue to make a phenomenal contribution to the United Kingdom’s economy. If we think big, there is no reason we cannot create a similar market place in South Africa. We need to embrace the cell captive concept and encourage the growth of responsible capital supporting quality underwriters via a business outsourcing model. Cell captive insurers provide South Africa with the perfect vehicle to broaden access to participating in insurance opportunities, without major barriers to entry. This is something South Africa has been trying to achieve for a number of years without enough success. Overall, it is imperative that South Africa’s cell captive insurers continue to look for the right underwriting partners, backed by adequate capital. A well-managed outsourcing model not only provides excellent value to customers, but also creates a healthy marketplace for small business to thrive. Through this model, access to insurance underwriting is broadened, while ensuring that customers remain protected.

In an uncertain financial climate, our client-centric approach of developing strong relationships with partners and clients, while boasting a deep understanding of their business, helps us to create personalised insurance solutions. With expertise in Alternative Risk Finance, Underwriting Management, Alternative Distribution and Affinity, many companies entrust us with their unique insurance needs.


011 268 6490 | Centriq’s insurance subsidiaries are authorised financial services providers




NEIL BEAUMONT Business Development & Global Accounts Manager, Chubb Insurance South Africa



onsulting with a professional insurance broker is essential when insuring valuable jewellery, says Aon South Africa. The broker will assist clients with a proper needs analysis and explain the terms, conditions and any exclusions that may exist on an insurance policy. Aon South Africa provides the following advice to make sure jewellery is correctly insured and should a loss be suffered, that the claims experience will go smoothly with the insurer:     • Make sure the valuation certificate is up to date - insurers require valuation certificates that are dated prior to the loss or damage to prove the value as well as ownership of an item of jewellery.  It is highly recommended to have valuation certificates updated at least every two years and that jewellery is insured for its current replacement value.  • Insure jewellery on an All Risks basis – jewellery should be insured under the ‘All Risks’ section of a personal insurance policy.  Some policies cover all risks under the household contents section of the policy, which offers worldwide cover up to certain limits for items that are taken out of the home and are worn.     • Keep jewellery in a locked safe when not worn the majority of insurance policies have a safe warranty where the insurer requires an item of high value to be kept in a locked safe when not worn.  This means that if a ring worth R55,000 is left on a bedside table and the item is lost or stolen, there may be no cover.   • Insure before leaving the store - arrangements should be made that when the jewellery leaves the store, it is already covered. The worldwide assets all risks (WWAAR) cover automatically covers jewellery under the household contents section subject to the sum insured being adequate. • When on holiday, be extra vigilant – travellers are often targeted by criminals as people often let their guards down when in ‘holiday’ mode.  It is advisable to make arrangements with the hotel for access to a safe to store valuable items.   • Personal safety always comes first – just like hijackings, the likes of Rolex gangs and criminals targeting people in their driveways and homes after following them from a public place to steal their jewellery is an unfortunate reality.  Remember that personal safety trumps all material possessions which can be replaced. {VIII}

31 May 2018

outh African organisations are increasingly focusing their growth strategies beyond the country’s borders. Yet these new growth strategies are creating complex new risks for organisations which demand sophisticated crossborder insurance solutions. Structuring an efficient, cost-effective insurance programme for cross border risks requires a solid understanding of the local market and evolving regulatory environment. Traditionally, risk managers and insurance buyers have largely focused on whether a local jurisdiction permits insurance from unlicensed insurers to insure local risks – known as non-admitted insurance. As a result of increased capacity and expertise in the local African insurance market, regulators are fast changing their stance on non-admitted insurance coverage as well as exportability of premium and risk out of their respective countries. According to Neil Beaumont, Business Development & Global Accounts Manager at Chubb Insurance South Africa, the primary purpose of a global insurance programme is to maximise global insurance capacity and minimise cost, whilst maintaining centralised control over risk management and risk transfer practices. Global insurance programmes offer organisations a consistent global approach to coverage terms, conditions and financial limits while augmenting the ability to consolidate loss information, thus enhancing loss control practices and procedures. “Structuring a global insurance programme requires an in-depth understanding of the transactional elements of cross-border insurance, particularly as this relates to local tax and insurance regulatory requirements,” Beaumont says. “The structure should carefully consider the relevant regulatory regime of each jurisdiction. The reality is that the world is not as interconnected and homogenised from an insurance regulatory perspective as we might wish it to be. With no global standard for insurance regulation or a consistent application of insurance law worldwide, a compliance analysis of local regulations governing insurance is critical. “Risk managers and insurance buyers also need to consider that global programmes have evolved beyond the standard compliance question of whether insurance is ‘admitted or non-admitted’ in a given territory. They need to be thinking about their multinational risks and where they can best access available, dynamic capacity not only for core lines such as property, general liability, marine or directors and officers but increasingly also specialty lines such as business travel, group personal accident, cyber, environmental liability and stand-alone terrorism protection,”

Typically, multinational organisations have pursued three different routes when it comes to insuring their multinational risks: • The first is to make insurance and risk management the responsibility of each subsidiary in the form of separate, unrelated insurance policies. However, this means that the multinational parent has no control over the process and the quality of cover. • The second approach is for the multinational company to adopt a single insurance policy worldwide that covers both parent company and all subsidiaries. This approach has many flaws, most significantly compliance with incountry regulations and tax laws. • The third option, and the most practical and effective solution, is the structuring of a global insurance programme or a controlled master programme that comprises a global network of local policies that are integrated through reinsurance. The programme starts with a global insurer and broker that can reinsure and provide a local insurance policy for the parent company, its subsidiaries and affiliates in each of its operational regions. A global insurance programme provides for compliance with complex regulatory and tax regimes, the ability to pay claims locally and efficiently and control over risk management practices. Some key considerations for risk managers and insurance buyers to keep in mind when structuring a global insurance programme include: • Know your corporate structure: how is the business organised globally— is it a partnership, subsidiary, wholly/partially owned etc? • Location of claim and payment: where is the claim for the parent/subsidiary best paid and not paid? • Breadth of local policy coverage: are there coverage gaps in local policies even when local policies are deemed compliant and how can the gaps be best addressed? • Ancillary agreements: are there non-insurance contracts that may influence what is or is not covered in the insurance contract? • Transparent service: can the client/referring broker view/download local policies, view/ download claims and access local contacts, including local brokers, for specialty lines such as cyber, business travel, terrorism, environmental liability, in addition to multinational core lines of business such as property, general liability, marine and directors and officers?

What is Craftsmanship ? SM

To be crafted is to meet exacting standards. It’s the human touch that combines art and science to create something unique.

© 2016 Chubb. Coverages underwritten by one or more subsidiary companies. Not all coverages available in all jurisdictions. Chubb®, its logo, Not just coverage. Craftsmanship.SM and all its translations, and Chubb. Insured.SM are protected trademarks of Chubb. Chubb Insurance South Africa Limited is an Authorised Financial Services Provider (FSP No. 27176).

We tend to think about craftsmanship in terms of physical things: fine wine, classic cars, custom furniture and iconic structures. But what about the underwriting of insurance to craft protection for your unique and valuable things? And the service behind that coverage when you need it most — like claims and loss prevention? For your business. Your employees. Your home. The people you love. Things that need a particular kind of protection and service. The kind Chubb provides. Not just coverage. Craftsmanship.SM

Not just insured.

Chubb. Insured.


You own it, we’ll insure it

FSP no. 43862 | T’s and C’s apply


31 May 2018

ANDREW PADOA Portfolio Manager, Sasfin Wealth


ack Bogle launched the world’s first index fund in 1976. He firmly believed that buying the index and just holding it would prove to be a better investment than trying to outperform the index by picking stocks. This passive investment strategy has, over the past five years, seen a huge surge of inflows, but with it come a number of questions: • Why did it take 40 years for it to gain popularity? • Is the shift from active to passive structural or cyclical?

The passive investment strategy … the answer to a ‘safe’ retirement? • Has it only been successful because global markets have been on a momentum rally for the past few years? The answers to these questions will take time for us to figure out. In the meantime, we have to build portfolios that are most appropriate for clients. This may include a combination of active and passive, as both have their advantages and disadvantages. What I like about passive investments is that they allow investors exposure to a particular market at a low fee. Previously, the cost for an equity index fund was just under 1% in South Africa. This is far too expensive if you consider Vanguard in the US has an index tracker with a 0.07% fee. The good news is that fees are starting to come down and I have seen 0.10% to 0.25% fees in South Africa. We are catching up with international trends. The challenges of passive investing Many investors believe passive investing is a ‘safer’ investment. This is not the case. If the market falls 40% and your passive investment tracks the market, expect your investment to fall 40% (before fees). All a

PIETER HUGO MD, Prudential Unit Trusts

passive investment does is track the underlying index. If you invest in passive investment tracking the Top 40 index, you have 22% weighting to Naspers, more than 10% exposure to Richemont, and 8% exposure to Billiton. So, 40% of the investment is made up of three shares. You must decide if this is a safe investment or not. Passive makes a lot more sense in developed countries such as the US, where the share with the highest weighting is under 4% of the index, and the index consists of many shares. You are, therefore, not making any large stock-specific bets. Many equity-focused passive investments use market cap weighted indices. This means shares that have outperformed tend to have larger weightings in the index. Shares that have underperformed have their weightings reduced in the index or are removed from the index entirely. This amounts to buying high and selling low – the opposite of what an active manager tries to achieve. But are the portfolios all that different? The issue with active management is not active management as such. The issue is that a large number of active

managers will build a portfolio very similar to the index and charge an active manager’s fee to do so (closet indexers). If you want to do active management, active managers need to really be active and hold a portfolio that is different to the benchmark. Otherwise, they add little value. In order to outperform the index, active managers need to build portfolios different to the index. Is passive investing the answer to a ‘safe’ retirement? It is not the answer, but nor is active management. A combination of the two may be the most appropriate for clients. However, the most important thing is to determine what market risks the client is exposed to – and determine if these are the correct risks the client needs in order to achieve their objectives. Does the correct risk involve investing in stocks or bonds, or in a combination of the two? Or should one invest in the Top 40 index or the MSCI World index? At the end of the day, we need to ensure that the client can achieve their retirement objective. That is the first goal. Then we can work backwards and determine whether active, passive or a combination of the two is the most appropriate.

Introducing Prudential Global Funds

South African investors are now able to invest in Prudential’s new range of global funds, Prudential Global Funds ICAV (Irish Collective Asset Management Vehicle). The new funds have been launched with the aim of bringing our clients an improved investment management proposition, in partnership with M&G Investments, our London-based parent company within the global Prudential plc group. M&G is one of the UK’s largest and longest-established investment houses. The Prudential Global Funds’ range of four US dollar-denominated funds are specifically designed for South African investors and managed by THE US-DOLLAR an experienced FUNDS WILL team of portfolio BE AVAILABLE managers at M&G Investments with FROM ALL OF a strong, longTHE LEADING term global track OFFSHORE record. One of the lead portfolio INVESTMENT managers is Marc PLATFORMS Beckenstrater, AVAILABLE IN SA formerly the

Chief Investment Officer at Prudential South Africa. Marc previously managed the offshore investment portfolios of our South African funds. The M&G team uses Prudential South Africa’s same successful investment process, with valuations and fundamentals at its core. They don’t try to forecast the macroeconomic future, but instead capture opportunities through a prudent, disciplined and repeatable framework. Their active management approach, like ours, exploits both shorter- and longer-term opportunities, identifying when assets are mispriced to add value to client portfolios. This approach has been tested over many years across a range of market conditions, resulting in strong client returns. Some of the main considerations we had in choosing Ireland as the domicile for the Prudential Global Funds were ensuring the absolute safety of our clients’ money, benefitting from the best service providers in the world, and operating in a market protected by a highly respected regulator. Other significant factors included its use of English (to ensure client-friendly documentation) and its globally recognised European fund standards that provide a robust framework for risk management, risk diversification, regulation of

service providers and the safekeeping of assets. Equally important is the aspect of competitive costs. Leveraging off of M&G Investments’ large-scale and long-standing relationships, as well as Prudential’s global brand, we have been able to negotiate attractive fees with service providers to ensure a lower impact on the final costs for our clients. This will be reflected in the funds’ competitive total expense ratios (TERs). The four US-dollar denominated funds are the Prudential Global Equity Fund, the Prudential Global Balanced Fund, the Prudential Global Inflation Plus Fund and the Prudential Global Bond Fund. Investors will have exposure to the Prudential group’s best investment views across a wide range of geographies, industries and companies. Additionally, to show how much confidence we have in their performance, we are using them as global building blocks for many of the South African funds that we manage ourselves. Our client portfolios that have global exposure within their mandates, including our unit trusts, will invest directly in them. The US-dollar funds will be available from all of the leading offshore investment platforms available in South Africa, and for those who prefer rand-based investments, our three existing global unit trusts give investors the same underlying global exposure.



31 May 2018

Unit trusts after the Steinhoff debacle MoneyMarketing spoke to Investec Asset Management's Deputy MD, Sangeeth Sewnath and Investment Director, Louis Niemand about the effect on investors of the Steinhoff debacle Investors say that their mood has soured towards unit trusts postSteinhoff. What do you make of this? “It is understandable how the events that transpired with Steinhoff can scar investors and make them negative towards investing generally,” says Sangeeth Sewnath, Deputy MD, Investec Asset Management. “And whilst there are several checks and balances from a regulatory, governance and due diligence perspective to avoid such incidences, the reality is that they may occur for varying reasons from time to time. However, the short-term impact of one or two specific stocks should not detract from the real benefits of longer-term investing.”  He says investors have various ways of saving and investing. These include cash deposits, money market investments, equities, bonds and a combination of these options. “In many instances, cash can be even more valuedestroying than an equity portfolio should an investor have a long-term horizon or a long-term cost for which they are investing. “Unit trusts are a means of accessing these investments by pooling investors’ assets, and provide many benefits (such as fee sharing, access to various investments, tax, transparency and regulatory oversight, to name a few) that make them more suitable than investing directly in shares and bonds or

only using cash. Unit trusts have the added benefit of requiring diversification, which ensures that if an event like Steinhoff occurs, the extent of the loss is limited.” Did unit trust regulations mitigate losses? “When you’re investing in equity or debt instruments, there is always an element of risk,” says Louis Niemand, Investment Director, Investec Asset Management. “However, by their very nature, unit trusts offer investors a diversified portfolio which aims not to expose them to too much company-specific risk. In addition to unit trust regulations, and given how narrow the South African stock market is, we have actively engaged our clients in the general equity strategy and have switched the benchmark against which the portfolio is managed to a SWIX (shareholder weighted) capped index. “This further limits exposure to a specific stock. At an uncapped index level, your company-specific risk can be enormous. Take Naspers as an example: If you use the FTSE/JSE ALSI as your benchmark, it has a 20% weighting in the index. The regulations would allow for an allocation of up to 24% in the stock, which could mean almost a quarter of the entire portfolio comprises one stock. For us, such a huge allocation to a single company would introduce massive company-specific risk.” 


He says that, given the high concentration risk of South Africa’s fairly narrow stock market, funds following a passive investment strategy potentially expose investors to large company-specific risks. “Should there be fraudulent activity in a large stock – and because it is fraudulent, it cannot be predicted – investors can suffer significant losses.”  As an aside, he adds that it is worth pointing out that despite the collapse in the share in December last year, Steinhoff has been one of the top five contributors to returns to the Investec General Equity Strategy over the past five years and generated significant outperformance for investors over this time. “We actively increased our weighting to Steinhoff in 2012 and 2013, Sangeeth Sewnath, during which period Deputy MD, the share went from Investec Asset about R25 a share to a Management peak of R90 a share in early 2015. It was one of our biggest positions until the first quarter Louis Niemand, of 2015, after which we Investment started to sell down our Director, allocation as valuations Investec Asset became stretched.” Management

2018/04/18 5:46 PM


31 May 2018

Discovery Invest’s Balanced Fund outperforms over all periods


he Discovery Balanced Fund has enjoyed top quartile performance over one, three, five, seven and 10 years to the end of February 2018.* • Ten years: 9.98% (benchmark: 8.19%) • Five years: 10.78% (benchmark: 8.37%) • Three years: 6.24% (benchmark: 4.09%) • One year: 10.85% (benchmark: 7.3%) The benchmark for this fund is the peer group average. The Discovery Balanced Fund’s range invests in a blend of assets, such as equity, bonds, cash and property, allowing investors to take advantage of the benefits of diversification. We aim to keep the funds within specified risk ranges and, at the same time, maximise the potential for growth. We look for shares that are reasonably priced, with expectations of positive, sustainable earnings growth. The share selection considers macroeconomic conditions and whether there will be broader acceptance of the investment opportunity from investors. The key formula Fund manager Chris Freund says an active approach to both asset allocation and asset selection has been key in contributing to returns.   “Over the past few years, we were more cautious in terms of our outlook and positioning in domestic growth assets, such as equities. Our preference has been global equities, where we generated significant returns for our clients. That said, over the past few months we have become more constructive on the outlook for South Africa,” he says. Looking forward, the fund managers remain positive about the outlook for global growth but are on the constant look-out for signs of economies (and markets) overheating, which could bring an end to the multi-year bull market investors enjoyed globally. Freund says that on the domestic front, management is very pleased with the changes seen on the political front, which should be positive for future growth expectations.  Investment style The investment team for the Discovery Balanced Fund’s range uses the earnings revision investment style. This is where the fund manager chooses to invest in companies that are trading at reasonable valuations, where expected future earnings are being revised upwards. Current fund positioning The Discovery Balanced Fund currently retains a fairly healthy allocation to domestic bonds with little exposure to domestic property and offshore bonds.    From an equity perspective, the unique investment philosophy has ensured that this fund delivers consistent returns, providing investors with a great investment opportunity. We select companies that are receiving positive earnings revisions and that are trading at reasonable valuations. We have chosen to maintain a significant exposure to domestic listed counters that will continue to benefit from the improving global environment (examples include Mondi, Naspers, Richemont and specific resources such as Anglo American), where earnings are receiving positive revisions.   In the rest of the portfolio we currently have exposure to specific ‘SA Inc.’ counters, where earnings expectations continue to improve against a more optimistic domestic backdrop. Some of our key holdings include Standard Bank, Mr Price, Foschini and Imperial. The top five holdings currently are Naspers, Standard Bank, Anglo American, First Rand and Richemont. *Sources: Investec Asset Management and Profile Data. All performance figures are as at 28 February 2018, sourced from Profile Data. Disclaimer Nothing contained herein should be construed as financial advice and is meant for information purposes only. Discovery Life Investment Services (Pty) Ltd: Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. uploads/2018/04/Disclaimer.pdf

Chris Freund, Fund Manager, Discovery Balanced Fund

SHAHEED MOHAMED Product Development Manager, Allan Gray

How financial advisers choose unit trusts


ast performance is just one of several factors that financial advisers in South Africa say they consider when it comes to choosing which unit trusts to invest in on behalf of their clients. Along with relative performance of the unit trust (to its peer group), risk measures and the investment style of the manager, these four top attributes account for only 50% of their overall decision. Responsible investing is at the bottom of the list. These were some of the findings of an in-depth research report by Shaheed Mohamed, Product Development Manager at Allan Gray, who surveyed more than 400 financial advisers in South Africa to identify attributes that financial advisers consider when selecting unit trusts for their clients’ portfolios. “There are over 1 350 locally registered unit trusts in South Africa,” Mohamed said. “Faced with that level of choice, most investors turn to independent financial advisers (IFAs) to make the decisions for them.” An IFA’s existence in the industry is dependent on their offering regulatory-compliant advice; yet there is no regulatory blueprint to aid them in their product selection for clients. So, how do they make their choices? This was a question Mohamed set out to answer. “We noticed that in different market cycles, the flows into funds differed. It therefore didn’t surprise me that performance was an important reported criterion for advisers choosing unit trusts,” he said. “Looking at relative performance, I was surprised that advisers were not more cognisant of the benchmarks rather than the peer groups – different benchmarks and funds are managed differently across categories.

“Advisers reported relying on a variety of factors, but when we analysed their clients’ actual behaviour using fund flow data relative to performance, they tended to allocate money based on recent performance. Worryingly, this sub-optimal investor behaviour was more pronounced among investors in our lower risk Stable Fund than in our Balanced or Equity Funds.” While the participants in the study were advisers, its findings are relevant to investors, asset managers and product providers.  Mohamed was pleased to see that advisers reported placing more of an emphasis on longer, meaningful performance periods rather than shorter periods.  The study further revealed that ‘growth’ is the investment style of choice, followed very closely by ‘value’. Most trust was placed in managers with tenure of more than seven years, holding a CFA qualification. South African advisers also prefer medium-sized funds for their clients’ portfolios – although it is worth noting that performance is not dependent on size.  “Advisers reported that they consider a variety of factors, including long-term performance and the qualitative aspects of a fund. Examples of this include a consistent investment philosophy, a sound investment process and an experienced investment team. Yet our research shows that even people who have an adviser tend to rely on short-term performance to pick unit trusts. “It is important to note that, like fund managers, not all advisers are created equal. Investors should ask the IFA what process is followed when selecting unit trusts for their clients’ portfolios,” said Mohamed. 




MEYER COETZEE Director, Prescient Investment Management

31 May 2018

Understanding the relationship between risk and return




Sculpture by Beth Diane Armstrong

t is all too easy for individuals working in the • Money Market, being lower expected returns but investment industry, like me, to overlook the with very little capital risk. fact that even though our clients might very • Equities, being ‘growth’ assets that are expected to well be highly skilled in fields outside of ours, we provide the highest long-term returns, but where conveniently assume they understand what we mean capital values can fluctuate quite a bit over the when we refer to concepts like ‘risk adjusted returns’ shorter to medium term. or even just ‘risk vs returns’, and how that links to the • Balanced, which comprises a combination of the unit trust universe. We are often caught up in jargon two categories above – eg 65% equities and 35% and should, from time to time, ask ourselves whether money market. we are part of the problem or part of the solution. So here goes – Risk vs Return 101. For now, we ignore asset classes like property, The first universal concept in investments is that bonds, equity sectors or offshore investments, there is no ‘free lunch’. That broadly means that etc. A useful way to understand the concept of investments where capital is guaranteed will not risk vs return, especially within the framework of deliver eye-watering returns. To increase your return investment horizons, is to draw ‘return funnels’. expectation, you need to be willing to take on more These show graphically the expected range of risk, which just means that you must be willing to annual returns that an investor can expect from an also potentially lose some of your money. The higher asset class over various future horizons, where the the returns you want, the more you should be willing benefits of averaging tends to smooth longer-term to lose if things turn out against you. returns for assets that fluctuate more in value, such The relationship between expected returns and as for equities. expected risk (as measured by volatility in returns) From diagram 1, we see that a Money Market is generally positive – ie to increase your expected fund is not expected to lose money ever, as all bars returns, you need to accept more risk. Investments are above 0%, so it is considered safe. Conversely, that generate the most return per unit of risk are equities can lose about 30% of your capital over called efficient – that’s where you want to be because one year (diagram 2). you get more bang for your buck. However, over the full cycle, equities are expected So far, so good. The question is now: How do I to return between 10% and 25% pa, whereas the practically apply this to the unit trust industry? ‘safe’ money market is expected to return between The Association for Savings and Investment South 6% and 9% pa. Balanced funds provide a suitable Africa (ASISA), which is the representative body to compromise between the two – healthy long-term which most investment managers in South Africa returns without the ride being too wild. belong, has an extensive fund classification standard. That is why we generally say that one should It groups funds in a manner that strives to help invest money that you will need relatively soon investors understand the difference between funds (for next year’s holiday) in a money market fund – better, amongst other things. The standard comprises because it offers stability – and long-term savings three tiers. The first tier splits funds based on the (for your child’s university education) in equities geographical region that the underlying assets reside because you can expect to get the highest return in (eg South Africa vs offshore); the second looks while you can ride out the volatility that can at broad asset classes (eg cash funds vs equity); and occur over the shorter term. For all else, consider finally, tier three goes into more detail within the balanced funds. broad asset class groups (eg cash vs bond funds). Now that most readers are confused, I’ll try to Prescient Investment Management (Pty) Limited is an authorised simplify. Let’s assume that all funds can be classified Financial Services Provider (FSP 612). as one of the following: Prescient Money Mktg 1-4 Tortoise Ad_r3.pdf 7/19/17 10:29:17 AM


Full Cycle


Full Cycle


Full Cycle




At Prescient, we’re in it for the long run. In fact, our first clients are still


our clients. They trust our proven, pragmatic approach; something we call


QuantPlus ® . It’s how we invest – in the past, today, and in the future.



T o k n o w m o r e a b ou t a n y o f ou r p r o d u c t s a n d s e r v i c e s , v i s i t w w w . p r e s c i e n t . c o. z a



31 May 2018



t is crucial for purchasers of insurance cover to familiarise themselves with policy restrictions, says the Ombudsman for Long-Term Insurance, Judge Ron McLaren. The majority of complaints received by his office relate to the rejection of claims due to death during the waiting period and claims being refuted due to a pre-existing condition.  “It appears from these complaints that the complainants were often unaware of the policy restrictions applicable to the cover. It is important for an applicant for a policy to know exactly what the policy will cover.  “If a consumer does not know what exactly is covered and what is excluded, expectations are raised which are not fulfilled. This can leave a claimant in a financially precarious situation and can also cause distress after a claim is rejected,” says Judge McLaren. He also cautions that when a policy is sold over the telephone, the applicant must concentrate throughout the telesale and ask questions when something is unclear.  Waiting period Most funeral policies have a waiting period, during which the life insured is covered only for accidental death. Even if the life insured dies one day before the end of the waiting period from natural causes, the policy benefit will not be payable. It is important for the policyholder to understand when the waiting period will end. It could be at the end of a defined period, such as at the end of six months; or it could be after a defined period and the payment of a certain number of premiums. The waiting period usually also applies after a policy is reinstated after it had lapsed. A complaint that came before the Ombudsman concerned the death of a policyholder during the waiting period.  The insured took out a policy covering his own life, as well as the lives of certain members of his family. The premium payer was not the policyholder himself but the complainant, who was also the nominated beneficiary. He paid the premiums via a deduction on his salary.  Premiums had to be paid monthly in advance. Provision was made for a 15-day period of grace for late payment of the premium before it would lapse. The conditions of the policy provided that, upon a reinstatement of the policy, a fresh waiting period of six months would apply. The premium fell into arrears in March, after the premium payer instructed his employer to cease making deductions from his salary. As a result, the policy lapsed. In the same month, the premium payer sent a letter to the insurer, requesting cancellation of the policy because of his financial problems. The premium payer’s employer nevertheless continued to forward premiums to the insurer from April onwards. These were retained

by the insurer. As a result, the policy was exclusion clause, the insurer’s contention was reinstated. Nevertheless, a fresh waiting period that for its purposes, his diabetes as a preof six months came into operation. existing condition had been the cause of his The policyholder died during the new hospitalisation. waiting period. The complainant assumed Judge McLaren says that vital to the solution that the insurer did not respond to his letter of the dispute was that the pre-existing of cancellation and condition exclusion clause did not that the policy was, require that the condition must be IF A CONSUMER “a direct or indirect” cause, as some therefore, still intact.  Judge McLaren says DOES NOT KNOW such clauses are worded.  it was quite clear that “On the contrary, its wording WHAT EXACTLY because the insured required only that the claim event IS COVERED died within the new must be ‘as a consequence’ of the prewaiting period, the existing condition for the exclusion AND WHAT IS death claim could not to apply. This meant that the preEXCLUDED, be upheld. existing condition would have had It was also pointed to be the main cause – sometimes EXPECTATIONS out to the complainant called the dominant, or proximate, ARE RAISED that a premium payer or actual or effective cause – and not WHICH ARE NOT simply a lesser contributory cause. has no right to cancel the policy because he “In the insurer’s email to our FULFILLED was not the owner of office, it was stated that ‘the cause the policy. The insurer nevertheless returned of hospitalisation was due to sepsis’, and that premiums paid after March.  the complainant’s diabetes was a ‘contributing It is also vital for policyholders to factor’ to the sepsis. Both of these statements understand the pre-existing condition clause. were, of course, correct. But the submission that followed was that his standing on a nail Pre-existing condition clause had not been the direct cause of his admission Life policies issued after no medical to hospital. underwriting, or after limited underwriting, “The office’s unanimous view was, often have a pre-existing exclusion clause however, that the diabetes had not been inserted – either for a determined period or the proximate cause of the hospitalisation,” for the entire term of the policy. If a claim Judge McLaren adds. event happens and it has been caused by the In the Certificate of Medical Attendant pre-existing condition during the applicable that accompanied the claim, the doctor period, no claim will be payable. concerned said, in response to the question The scope of the wording of the pre-existing “Direct cause of hospitalisation?”, that it was exclusion clause can determine whether the “Right foot sepsis after standing on a rusted exclusion applies to events which are only nail”. In answer to the further question, directly caused by the pre-existing condition, “What are the contributing factors that led to or claim events caused both directly and hospitalisation?”, he mentioned diabetes and indirectly by the pre-existing condition hypertension. and where the pre-existing condition is a Judge McLaren says those two answers alone contributory cause. made the matter clear – it was the sepsis (after A recent complaint arose out of a life policy standing on the nail) that was the direct cause that also covered hospital expenses. The of the hospitalisation, and the diabetes was policy contained a pre-existing condition only a contributing cause.  exclusion clause. “The main cause was, therefore, not the The complainant stood on a rusty nail on complainant’s diabetes. On the contrary, it 27 January. After the wound became infected is clear that had he not stood on the rusty and developed into sepsis, he was admitted nail, and had he not thereafter developed the to hospital on 30 January. On 11 February, sepsis, there would have been no question of his right lower leg was amputated below the hospitalisation.” knee. His claim for the hospital expenses was In these circumstances the clause did rejected by the insurer on the basis of the not serve to exclude the insurer’s liability. exclusion clause. The insurer accepted the Ombudsman’s The relevant portions of the clause provided preliminary determination. that: “Hospitalisation as a consequence of preexisting conditions as defined herein…will not be covered.” For this purpose, it defined “a preexisting condition” as: “Sickness ...contracted by an insured person ...which existed prior to the initial commencement date of (the) policy”. It was not in dispute that the complainant Judge Ron McLaren, had been a diabetic for 16 years, since before Ombudsman for he took out the policy. In relying on the Long-Term Insurance


Understand policy restrictions – Long-Term Insurance Ombud





31 May 2018

75 is the new 65

ne of the myths driving our approach to financial planning today is around the outdated assumption that our clients will retire at 65 and live until 90. In reality, people are living longer, healthier lives and there are many who see no reason to retire at the traditional age. Therefore, many individuals today are re-evaluating the usual approach to work and retirement, and may work past 65. Yet, despite this, much of the thinking around retirement planning is still based on the assumption of working until 65 and living to 90. A study by Nick Buettner, an adventurer, HOW DO YOUR entrepreneur and public CLIENTS MAKE speaker affiliated with FINANCIAL the US-based Blue Zone PROVISION FOR project, found that working longer may LIVING LONGER? actually be good for your health and longevity. “A person is 30% more likely to die in the year he or she retires than during their last year of work, not because they take up risky activities, but because they have lost their sense of purpose.” Others simply can’t afford to retire and are faced with one of two options when the time comes: either accept a much lower standard of living or

continue working. Whatever the reason, whether it is by choice or necessity, many of your clients will continue working past their expected retirement age. This has implications not only for your clients’ retirement planning, but also for the decisions they make to protect their monthly income. It’s vital that they choose risk cover that allows for the possibility of working past their expected retirement age – yet twothirds of income benefits we’ve accepted over the past year still have a cease age of 65 or younger. The second part to this myth is that we assume we’re going to live to 90. We know people are living longer than ever before. In their book, The 100 Year Life, Andrew Scott and Lynda Gratton write about how people born today will live to 104. And with medical advances, improved nutrition and education, our lifespan continues to grow. So, how do your clients make financial provision for living longer? This can be done through a combination of working longer and saving more. But how do we get our clients to save more in an economic environment where many are battling simply to make ends meet every month? We believe that one way is by taking a fresh approach to risk planning through protecting your monthly income with a combination of income and

lump sum benefits across all three risk events (disability, critical illness and death). Typically, income benefits are significantly cheaper than the lump sum equivalent. We tested a scenario using a 35-year-old male earning R30 000 per month and with a salary inflation of 6.5% as an example. If he invested his savings over 30 years, it would add a further 3.5 times of his annual retirement spend to his retirement savings, simply by changing the way he looked at risk planning. And if that same individual also worked to 75, his retirement income would last him to past 100. The combination of these two things – working longer and saving more – would extend the period for which he received income by anything between 12 and 16 years. Risk planning and investment planning aren’t two separate conversations. They are inextricably linked and your approach to one can have a significant effect on the result of the other.


31 May 2018


edical schemes have a responsibility to build reserves to protect members in the event of higherthan-usual claims trends, such as those the industry experienced in 2016. But they must also ensure that members find value in their healthcare cover at all times. Striking the right balance is essential for protecting members’ interests and consolidating the growth of the scheme. “Whoever said ‘the sky is the limit’ is clearly unfamiliar with South African private healthcare providers’ billing practices, as these continue to soar astronomically,” says Mark Arnold, Principal Officer of Resolution Health Medical Scheme. “In the absence of healthcare pricing ceilings or a framework for healthcare funders to collectively negotiate a tariff structure with healthcare providers, medical schemes must become increasingly creative in the allocation of benefits to remain competitive without relying on steep annual contribution increases or eroding reserves.” In its last financial year,

Resolution Health has more than doubled its solvency ratio since 2012 to reach close on 16%. “We have achieved this while keeping contribution increases to a minimum and well within the annual industry average,” says Arnold. “We at Resolution Health have remained true to our members by actively increasing the benefits that are most important to them.” Arnold points out that the public largely views medical scheme membership as a grudge purchase, which makes it even more critical to emphasise an approach and value offering that's relevant to members. “When annual contribution increase time comes around, we know the importance of keeping increases to a minimum. This is reflected in our efforts to contain non-healthcare expenditure as far as is practical for a scheme of our size. This, while ensuring that maximum value is obtained for every healthcare rand spent,” he adds. “One aspect of this is implemented through engineering our benefit options to provide cover where it is most likely to match the needs of members,

which is revealed through careful analysis of claims patterns. We align our options to suit every member at each life stage without loading benefits that are largely superfluous to the needs of our target market.” Additional value is created for members through one of the most sophisticated technology and managed care systems available, which has assisted Resolution Health to achieve among the industry’s lowest claims per beneficiary ratios. “This is made possible through the managed healthcare systems we use, which have been designed to proactively protect members’ health while ensuring that members’ benefits are used effectively and correctly by providers to optimise available benefits and avoid wastage. “Like all medical schemes, Resolution Health operates on a not-for-profit basis. Our competitive advantage rests in the tangible benefits we are able to deliver that are directly relevant for the families and individuals we provide healthcare cover for, and in our commitment to

contain contribution increases as far as practically possible, without compromising the sustainability of the scheme,” he explains. “Our members know that we will not compromise on the richness of the benefits they find most meaningful, nor undermine the security they enjoy as Resolution Health members, as we will not deplete reserves for the sake of a short-sighted reprieve on contribution increases. “Thanks to our member-focused approach to prudent management of scheme resources, our forecasts indicate that our reserves will reach approximately 20% by the end of this year. In this current financial climate, and against a background of soaring healthcare inflation, this, we believe, is a noteworthy achievement,” Arnold says.

Mark Arnold, Principal Officer of Resolution Health Medical Scheme

The top five gap cover claims


ven the most comprehensive medical aids won’t foot the bill for every procedure, hospital stay, treatment or specialist fee. To ensure that South Africans are not left out of pocket, selecting the right gap cover for their needs helps to cover them in the case of medical expense shortfalls. Gap cover is certainly not only needed for rare dread diseases or exceptional circumstances. In fact, the most common claims are for conditions that affect a large number of South Africans.   The top five types of claims that Turnberry Gap Cover processes for its members are: • Caesarean sections (average claim value = R6 797.57) As an increasing number of women opt for Caesarean sections as their preferred delivery approach, the longer hospital stays have placed pressure on medical aid schemes. Added to this, input costs for the gynaecological profession have skyrocketed in recent years (malpractice insurance, for instance, has surged 925% in the past eight years). The result is that fewer gynaecologists are practising obstetrics these days, pushing up the prices for consumers and medical aids. Gap cover comes in as a very handy way to help cover these medical expense shortfalls, as families welcome new life into their home.

• Gonarthrosis (average claim value = R7 072.11) Gonarthrosis (osteoarthritis of the knee) is a type of joint disease that results from the breakdown of joint cartilage and underlying bone. Individuals with this surprisingly common condition often find that their medical aid requires a co-payment, which should be served by a gap cover policy. • Breast cancer (average claim value = R4 842.69) Cancer can have devastating emotional and financial consequences for affected individuals and families. Some statistics suggest that breast cancer affects as many as one in eight women, and it certainly has an impact on the lives of millions of South African women. Gap cover should come to the rescue for medical expense shortfalls for radiotherapy, chemotherapy, surgeries, mastectomies, reconstructions and biological cancer treatments like Herceptin.  While the average claim value looks relatively low, it needs to be taken into account that patients could be required to pay this amount monthly to their healthcare providers should their medical aid benefits be depleted. • Impacted wisdom teeth (average claim value = R2 861.07) Consider that dentistry often isn’t comprehensively covered by medical aid schemes. For dental and maxillofacial

surgeries, gap cover often helps to ensure that customers are not left out of pocket. • Rotator cuff injury (average claim value = R6 261.30) This injury, in the shoulder joint tendons and ligaments, makes the top of the list of the five most common claims. Not only do the orthopaedic bills tend to run way over what medical aids are willing to pay, but the anaesthetist bills often catch consumers by surprise. Whether or not they’re an active, sporty type, it’s important for consumers to ensure that the right gap cover policy is in place to cover this type of injury.   While it’s certainly hoped that all of the five conditions above may be avoided, the reality is that they are alarmingly common among many South Africans. A broker or financial adviser will know best how to select appropriate gap cover policies to suit the needs of clients.


Responsible resource management key to medical scheme growth





31 May 2018

CHINA’S GREAT WALL OF DEBT BY DINNY MCMAHON The world has long considered China a juggernaut of economic strength, but since the global financial crisis, the country’s economy has ballooned in size, complexity and risk. Once dominated by four stateowned banks, the nation’s financial system is a tangle of shadow banking entities, informal financial institutions and complex corporate funding arrangements that threaten growth, stability and reform efforts. The country has accumulated so much debt so quickly that economists increasingly predict a financial crisis that could make Brexit or Greece’s economic ruin seem minor, and could undermine China’s ascent as a superpower. Earlier this year, President Xi Jinping issued an urgent call for reform that gives the country until 2020 to transform its economy – a vaguely-defined objective that most economists agree is unrealistic. Whether or not China will be responsible for the next global recession, as some experts forecast, the fate of its economy will have far-reaching consequences for


the rest of the world. Yet the inner workings of China’s financial system are still very much a mystery to most outsiders. Now, more than ever, as the country’s slowing economy is being felt around the globe, it is essential to understand how China allowed its economy to become so mired in debt. China’s Great Wall of Debt is a penetrating examination of the country’s opaque financial system and the complex factors that have brought the country to the brink of crisis. The book is anchored by stories of China’s cities and its people as author Dinny McMahon explores the country’s ghost cities, zombie companies, start-ups and regulatory institutions, and explains how things got so bad, why fixing the problems is so hard and what the economic outlook means for China and for the rest of us.

COUNTER MENTOR LEADERSHIP BY KELLY RIGGS AND ROBBY RIGGS This book is the result of over 25 years of combined experience from Kelly and Robby Riggs. It’s dynamic, occasionally irreverent but always insightful as the father (boomer) and son (millennial) writing duo describe their work with organisations grappling daily with multi-generational conflict. Through their collaboration, Kelly and Robby share their very different perspectives on the same problems most companies are still dealing with, but haven’t had the courage or the tools to address. The issues covered include a shocking lack of leadership skills; the culture-killing generational divide that is demolishing many companies; and the stunning, often unrecognised impact of technology on the workplace.


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In this, their debut book, the authors: • Discuss today’s workplace dynamics, including the changes in communication modes, the influx of technology, and the impact of millennials and digital natives • Explain how a one-sided approach to leadership focused on ‘managing’ millennials is grossly insufficient, resulting in an inability to attract and retain critical young talent • Explore the new challenges of leadership inherent in the explosion of technology. These include time compression, distractions, complexity and the pace of change • Reveal how old leadership challenges persist, and explore how the younger generation will expose those challenges more than ever • Detail the Counter Mentor Leadership model and prescribe specific tactics and techniques for addressing both old and new leadership issues.

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MoneyMarketing May 2018  

The May issue of MoneyMarketing focuses on the rise of discretionary fund managers, as well as unit trusts in the post-Steinhof era. The pub...

MoneyMarketing May 2018  

The May issue of MoneyMarketing focuses on the rise of discretionary fund managers, as well as unit trusts in the post-Steinhof era. The pub...