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18 the clieNt the baNkS caN’t Say No to

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head to headSanlam Investment Management • Investec Asset Management14

35

06 like the Steam eNgiNe oN the hillSlowing but listed property is not out of steam

proFileAnton Raath, Chief Executive Officer of Glacier by Sanlam24South aFricaNS are Not SaviNg eNough For retiremeNt28

property iNveStmeNtS FocuS08

FuNd proFileS

taX clarity oN iNveStiNg iN oFFShore iNSuraNce plaNS

3840

INVESTSA4

Writing this towards the middle of October there’s an eerie silence out there, in global

markets and even our own market. We are trying to absorb the possibility of new recessions in the US and Europe. Investors are naturally cautious, maybe confused. That makes the job of financial advisers even tougher. The articles in this issue of INVESTSA offer plenty of material for advisers.

One possible investment puzzling me is the downgraded banks in the UK. Are they worth looking at now that share prices have been slashed? Or is there just too much government debt and other liabilities, some possibly toxic, that the UK banks should be avoided? I don’t know the answer but will keep thinking about it.

This introduces the first excellent feature by Maya Fisher-French – the client the banks can’t say no to. Maya highlights the tougher lending criteria from South African banks and lists steps that can be taken, or avoided, to become that client. Maya also looks at the cost of access, how various costs destroy value for the typical middle income investor and doom them to underperform the JSE. One of the vague costs that need to be targeted and brought down is administration fees.

Our profile is on Anton Raath, CEO of Glacier by Sanlam. He shares some of his long experience in the industry and offers some advice for financial advisers.

I take a look at that often rewarding but recently underperforming asset class, listed property. It seems that part of the problem is that investors don’t fully understand what they are buying. Listed property is more about income than capital gains and, as such, remains a good investment.

I also tackle the myriad problems around South Africa’s retirement funding model. It’s clearly out of date and not working for investors. Other models are suggested. What should be a simple process – saving for retirement – gets very complicated and obstructed along the way. Much of the material came from the Sanlam Benchmark Symposium, which I attended in Durban.

On 4 October, INVESTSA in conjunction with Investment Solutions, held another of its events, this time in Johannesburg. The top class panel discussion, chaired by Maya, centred on the issue of risk. Maya will be providing some in-depth analysis of the issues in the combined December and January issue of INVESTSA.

This brings me back to those troublesome British banks. I think I’ll take a long shot and buy a couple of them. Here’s hoping they work in my retirement portfolio.

Until the next issue, all the best. And thanks for reading INVESTSA.

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INVESTSA, published by COSA Media, a division of COSA Communications (Pty) Ltd.

Just call us Momentum Investments

eeny, meeny, miny, more

INVESTSA6

ShauN harriS

Listed property has not only been a top performer over various time frames for investors, but more importantly has provided a secure source of income. For financial advisers, listed property has been the must have asset class for inclusion in a client’s portfolio. But times change; listed property funds look like they are peaking or have peaked. What does this mean for investors now?

by Shaun Harris

“Given a long-term time frame it will pay off.”

Like the

steam engine on the

hiLLSlowing

but liSted property iS not out of

Steam

7INVESTSA

are rising far quicker than rental levels, suggesting expected returns over the next three years are probably closer to 12 per cent to 15 per cent, acceptable but a long way below the 25 per cent returns investors enjoyed from 2000 to 2010.”

So what is the outlook for listed property? Mariette Warner has recently become manager of the Absa Property Equity Fund. She has won multiple awards in the industry and was previously head of the property franchise and portfolio manager at the Stanlib Property Income Fund. Warner said the outlook for listed property depends very much on what happens to the bond market. “Yields are very similar so you are looking at seasoned portfolio managers and quality portfolios. You have to be very careful. Some portfolios are not great quality.” She underlines what we said at the outset, listed property is about more than growth in capital for investors. A major reason that investors have been in these funds is due to the often growing income stream. That’s where they find a unique advantage in listed property.

Anderson reminds investors of the specific benefits in property as part of an investment portfolio. “The first is that property provides a high level of current income. This means that investors who require a high level of income from their investments, for example retired individuals, are well served by the asset class. Unlike bonds, which also provide a high level of current income, the income from an investment in property will grow at or above inflation over time.”

Another important reason to hold property in an investment portfolio, Anderson said, is because property returns exhibit low levels of correlation with equity returns.”What this means for investors is that including an allocation to property in a portfolio will increase and or reduce the volatility of the portfolio as a whole.” He summarises what

advisers should be telling their clients about the asset class. “Property investing is a long-term endeavour. Investors hoping to make a quick buck will, in all likelihood, be sorely disappointed. An investor with a little patience will enjoy the benefits of the asset class – a high and growing income stream along with capital appreciation in the long term.”

It’s important to note what Anderson emphasises – patience and the long term. Listed property is not a short-term investment, despite what some people seem to believe. As with any investment, and perhaps particularly with property funds, investors need to adopt a long-term view to get the best out of the asset class.

“It’s important to note what Anderson emphasises – patience and the long term. Listed property is not a short-term investment, despite what some people seem to believe.”

Financial advisers also need to keep up to date and engage in ongoing training and education. The P3 Investment Group, which specialises in an alternative approach to buying a buy-to-let property, talks about continuous professional development as a means for advisers to remain abreast of continually changing trends, regulations and technology, as well as improved or new products and services. “The property business investment model is so simple and streamlined that many investors may feel that CPD is not necessary,” said Koos du Toit, CEO of the P3 Investment Group. “Yet though there are no formal CPD requirements in the property investment field,

those property investors who take a professional approach to their property investment portfolios recognise the benefits of continuously improving their knowledge and skills.”

The problem is an overload of information in the system, leading to what he calls information overload and analysis paralysis. Advisers therefore need to carefully select sources of information and make sure that they are credible. “Busy professionals are strongly advised to join an organisation that can be trusted to verify the credibility of information sources. There are a number of organisations that property investors can join to stay on top of their game. This is highly recommended but it’s imperative that you choose a credible, trustworthy organisation with no ulterior motives other than to assist you in achieving your professional goals,” Du Toit added.

In August, the SA Listed Property Index showed a total return of 2.76 per cent. For the quarter it was up 2.19 per cent, showing a total return of 0.82 per cent in the year-to-date. There are a number of funds to choose between; maybe Warner has the best advice. Look at the quality of the fund managers and the portfolios.

Though returns and income are down, property still holds a special place for investors. As an alternative asset class investors should continue looking at property, or stay invested. Given a long-term time frame it will pay off.

The prime investment ranking for property funds is over three years, according to the Morningstar tables. Over that period, 15 listed property funds appeared in the top 25 in the ranking, led by Prudential Enhanced SA Property Tracker with a three-year return of 66.67 per cent. Apart from the income it provided to investors, that’s also solid capital growth. Even the lowest placed fund in the top 25, the Momentum Property Fund, recorded a three-year return of 48.20 per cent. Advisers who placed their clients in property three or more years ago have served them well.

But what now? Like other asset classes, listed property funds have felt the consequences of the turmoil in global financial markets, perhaps worse. There are various reasons for this but one could be investor nervousness about property. Perhaps they fear a bubble in the making.

Asked if listed property can repeat the stellar performance of recent years, Ian Anderson, chief investment officer at Grindrod Asset Management, has a simple reply. “The short sweet answer is not likely, at least not until South Africa’s economic growth can be sustained above four per cent. In the long term, listed property returns are driven by two factors: the initial income yield (that is the next 12 months’ income divided by the current price) and the growth in that income stream.”

Anderson said that with economic growth of four per cent in real terms and assuming inflation is around six per cent, then it is not inconceivable that market rentals could grow by more than 10 per cent per annum. “With listed property companies employing average gearing of around 30 per cent, this would translate into income growth from the listed property sector of around 14 per cent and back to the levels we experienced between 2005 and 2008.” Those income growth rates would translate into expected returns in excess of 20 per cent per annum. “Unfortunately right now economic growth is slowing and operating costs

property iNveStmeNtS: Fedgroup FiNaNcial ServiceS

PROPERTY AND PART BONDS: NO LONgER

COmPETiTiONHow Regulation 28 has opened

up this asset class to investors

The changes to Regulation 28 of

the Pensions Fund Act came into effect

on 1 July 2011 as a regulatory

intervention aimed at diversifying retirement investment portfolios.

8

by Scott Field

9INVESTSA

From an asset management perspective, the two noteworthy changes to Regulation 28 are the ability of a fund to invest up to 15 per cent of its assets in participation mortgage bonds, classified under debt instruments and 15 per cent under immovable property. Previously classified under the same asset class, the differentiation between these two asset classes is encouraging and satisfies a key investment principle of asset diversification. In addition to bearing different characteristics, participation mortgage bonds and immovable property feed comparatively different risk appetites which ultimately satisfy distinct investor needs.

Immovable property, characterised as a moderate risk, moderate return investment vehicle, provides a regular income stream from rental income, coupled with capital appreciation. Dependent on property value, investments typically experience highs and lows defined by the volatile economic climate.

Despite the moderate risk, what makes immovable property such an attractive investment vehicle is the fact that it is tangible. It presents itself as a particularly visible vehicle. Visibility translates to security and thus safety. In addition to reaping the benefits of the security provided by property, funds can invest in immovable property portfolios as an asset class without directly having to own and manage property. While immovable property presents itself as a typical middle-of-the-road investment, satisfying a moderate risk appetite, participation mortgage bonds could be considered appealing to a more conservative risk appetite, for example that of a pensioner.

A participation mortgage bond, also known simply as a part bond, is characterised as a low risk investment vehicle. The low risk stems from the fact that a part bond investment is a debt instrument which holds a fixed Rand value. The debt instrument is secured, with property acting as its security. The value of this characteristic is that capital value is preserved and protected.

Complementing its low risk is the attractive level of income provided by a part bond. The income or returns is interest based and is usually a couple of percentage points below the prevailing prime rate. Thus, part bonds tend to provide a better, more stable return in comparison to other debt instruments, such as money market funds.

The low risk associated with investing in a part bond is further minimised through strict regulation. Regulated by the Collective Investment Schemes Control Act of 2002, part bonds are governed by rules that assure its stability as an investment vehicle. One such rule stipulated by this Act is that no more than 75 per cent of the value of a property to be mortgaged may be lent out. This rule ensures capital preservation, as the 25 per cent that remains in the pool of funds can be used as a recovery mechanism if need be. These characteristics translate quite simply to an investor investing in a secure investment vehicle which boasts a consistency of interest and certainty of capital preservation.

As the discussed characteristics illustrate, immovable property and part bonds do not belong within the same asset class as

they satisfy comparatively different risk appetites. The differentiation between the two, and thus re-classification of part bonds as a debt instrument promotes the prudential investment principle of asset diversification.

While previously, an investor would need to allocate funds to either of the two investment vehicles, an investor now has the opportunity to utilise a high yielding debt instrument, such as a part bond, without limiting the use of immovable property as an investment. By including both asset classes within an investment portfolio, investors are able to benefit from additional diversification, thus satisfying prudential stipulations as set out by Regulation 28.

Scott Field | Executive: Finance, Sales and Marketing at FedGroup Financial Services

“While previously, an investor would need to allocate funds to either of the two investment vehicles, an investor now has the opportunity to utilise a high yielding debt instrument, such as a part bond, without limiting the use of immovable property as an investment.”

INVESTSA10

please outline your investment strategy and philosophy for the fund.The Investec Property Equity Fund is a total return fund which invests into the South African listed property sector. Given that the capital appreciation of property stocks is driven by strong income growth, the fund is exposed to those stocks that we believe are most likely to deliver better than sector average income growth. The fund targets returns in excess of the SA Listed Property Index (SAPY), measured over three years.

The Investec Property Equity Fund has won several awards for performance excellence, including the Raging Bull and Morningstar Awards for best fund in its sector.

What are your top five holdings at present?Currently the top five holdings of the fund by weight are Growthpoint, Redefine, Capital, Resilient and Vukile, while the top five holdings by active weight are Vukile, New Europe Property Investments (NEPI), Rebosis, Growthpoint and Capital.

Who is the fund appropriate for?The Investec Property Equity Fund is suitable for both institutional and retail investors seeking diversification away from bonds, cash and equities and with an investment underpinned by annuity and growing income which can be projected with a degree of accuracy.

have you made any major portfolio changes recently?In our view interest rates are likely to be maintained at low levels for the short to medium term, with possible moderate increases from the middle of next year. With this in mind we continue to have a low cash exposure. No recent major changes to the portfolio have been made, but we continue

to take advantage of appropriate tactical opportunities to enhance performance and have participated in a number of well-priced new listings and capital raisings.

how have you positioned the fund for 2011?The fund has an overweight bias towards those companies and funds that are forecast to show higher than average income growth over the next two years. Given the decision to remain close to fully invested during most of 2011, any cash received from net inflows or distributions is used to take advantage of the current market volatility. Stock selection is focused on those stocks that appear undervalued relative to their long-term valuation metrics.

please provide some information around the individual/team responsible for managing the fund.Investec Asset Management has one of the most experienced listed property teams in South Africa, with four dedicated investment professionals based in Cape Town.

Angelique de Rauville is the portfolio manager with ultimate responsibility for the Investec Property Equity Fund, and has co-managed the fund since its inception in June 2004. She has been in listed property asset management for 14 years, initially as founder and managing director of Provest Management (Pty) Ltd, which was acquired by Investec Bank Limited in March 2003. She is supported in her fund management role by portfolio manager Neil Stuart-Findlay and property analysts Peter Clark and Mabuse Moja.

please provide performance of the fund over one, three and five years (please include benchmark).

Returns are as at September 2011 and are calculated on a true daily time-weighted basis net of fees.

please outline fee structure of the fund.No initial fee is charged for corporate or retail clients. Retail clients pay an annual management fee of 1.25 per cent (excluding VAT).

Why would investors choose this fund above others?We have a long and successful history of generating outperformance in our listed property portfolios, with the Investec Property Equity Fund consistently ranked in the top quartile versus its peers over longer-term periods. We conduct detailed proprietary research and have superior insight into where stocks should be priced. We constantly look to exploit market volatility and take advantage of temporary mispricing in the market.

PROPERTY FUND profileS

annualised returns 1 year 3 years 5 years

ipeF 5.20% 15.68% 16.77%

domestic real estate general

6.34% 14.78% 13.71%

iNveStec property equity FuNd

property FuNd proFileS

please outline your investment strategy and philosophy for the fund.Our investment philosophy – to generate superior long-term risk adjusted returns based on thorough fundamental research. The primary investment aim of investing in listed property is to get income; capital growth comes over time.

Investment strategy

We invest with high conviction in companies or funds that:

• Display quality long-term earning prospects and have defensive portfolios.

• Have a portfolio of assets with the potential to generate above average growth in their rental streams.

• Have proactive management – acquisitions, disposals, extensions, refurbishments and developments.

• Have good tenant, lease and debt profiles.• Are trading at reasonable values relative to their growth prospects.

What are your top five holdings at present?Growthpoint 22%, Redefine 17%, Capital 15%, Resilient 9% and Acucap 5%.

Who is the fund appropriate for?Essentially anyone seeking efficient diversification in a balanced portfolio, with better risk adjusted returns and income stability. More specifically: • Investors seeking a source of income and capital growth over time.• Investors who need to diversify away from equities, cash and

bonds.• Investors who need exposure to commercial property in an

affordable and liquid state.• Investors who need inflation-beating returns over the medium to

long-term.

have you made any major portfolio changes recently?We cut our holding in Emira Property Fund. Emira’s portfolio consists of largely secondary retail and office properties. These properties are struggling in the current property cycle.

We are increasing exposure to Fountainhead Property Trust. Fountainhead has underperformed the sector significantly after announcing the earnings dilutive redevelopment of Blue Route Mall

in Tokai, Cape Town in early 2010. We believe that most of the pain is in the numbers. Fountainhead has a portfolio of dominant and large shopping centres.

how have you positioned the fund for 2011?We have overweight positions in counters that have dominant shopping centres largely tenanted by national retailers, e.g. Resilient Property Income Fund and have corporate tenanted industrial properties, e.g. Capital Property Fund.

We have underweight positions in counters that are exposed to smaller neighbourhood and community shopping centres, e.g. SA Corporate Real Estate Fund and have exposure to hotels, e.g. Hospitality Property Fund. Hotels are struggling due to oversupply, rising costs and a weaker economy.

please provide some information around the individual/team responsible for managing the fund.Portfolio manager: Keillen Ndlovu – BCom (Hons) Finance, CAIB(SA), Property Development Programme.

Ndlovu started his property career in 2004 at Standard Bank Properties working on the leveraged listed property product and partly doing listed property research. He became co-head of STANLIB Property Funds and a full-time fund manager in 2008. He was appointed head of property funds in 2010. Since joining the group, Ndlovu has been part of a successful and consistent investment philosophy and process that has led to the property team winning numerous awards. He currently manages about R14 billion of listed property funds.

please provide performance of the fund over one, three and five years (please include benchmark).Performance numbers as at 30 September 2011.

please outline fee structure of the fund.If an investor purchases the fund as a direct unit trust, then the normal Retail A class fee structure would apply. The maximum upfront fee is five per cent (three per cent to the financial adviser and two per cent to STANLIB) and the total annual fee payable is 1.30 per cent (0.30 per cent to the financial adviser and one per cent to STANLIB). Both fees described are exclusive of VAT. If an investor wishes to purchase the fund via our STANLIB platform or other external platforms, then different fee structures would apply.

1 year (%) 3 year (%) annualised

5 year (%) annualised

STANLIB Property Income Fund

9.71 20.93 19.25

Benchmark: SA Listed Property Index

8.30 18.97 17.43

Outperformance 1.40 1.96 1.82

StaNlib property iNcome FuNd

11INVESTSA

Nedgroup iNveStmeNtS property FuNd

please outline your investment strategy and philosophy for the fund.The fund invests in South Africa’s listed property sector and, as such, provides investors with a high current income yield, income growth at or above inflation over time as well as long-term capital growth in line with that income growth. Securities are selected and weighted in the portfolio based on their current income yield and future income growth prospects. The investment strategy is enhanced by the fund’s small size (the fund size will not exceed one per cent of the market capitalisation of the South African listed property sector), which enables the fund manager to take advantage of opportunities in many of the less liquid securities in the sector, as well as take full advantage of the numerous private placements that are commonplace in the sector. As a result of this strategy, the Nedgroup Investments Property Fund was the only fund in the domestic real estate general category to outperform the SA Listed Property Index in the 12 months to 30/09/2011, according to data provided by Morningstar.

What are your top five holdings at present?1. Growthpoint Properties (20.0 per cent)2. Redefine Properties (16.9 per cent)3. Capital Property Fund (10.4 per cent)4. Resilient Property Income Fund (7.6 per cent)5. New Europe Property Investments (4.4 per cent)

Who is the fund appropriate for?The fund is appropriate for investors looking for the benefits provided by investing in listed property, namely a high current income, inflation-hedged income growth and long-term capital growth. Additionally, listed property has historically provided strong diversification benefits for equity investors, by increasing returns for the same level of portfolio risk.

have you made any major portfolio changes recently?The position in New Europe Property Investments (NEPI) was added recently, giving investors exposure to a security that is expected to grow its income by 15 per cent in Euros over the next three years. NEPI represents the fund’s only direct offshore exposure, but doesn’t compromise the investment strategy as the relationship between the current income yield and future income growth prospects is extremely favourable in a South African context.

how have you positioned the fund for 2011?The fund has remained fully invested in listed property securities, which have provided significantly higher returns than the equity market so far this year. The fund has also benefited from exposure to a number of smaller listed property companies which have significantly outperformed their larger peers so far this year.

please provide some information around the individual/team responsible for managing the fund.The fund is managed by Ian Anderson of Grindrod Asset Management. Ian Anderson has been involved in the management of listed property portfolios since joining Marriott Asset Management in 1996. He left Marriott in 2007 and, as a consultant, provided listed property research and advisory services to a number of asset managers and the Property Loan Stock Association. He joined Grindrod Asset Management in September 2009 as chief investment officer and has managed the Nedgroup Investments Property Fund since inception.

please provide performance of the fund over one, three and five years (please include benchmark).

Source: Morningstar

please outline fee structure of the fund.The fund charges a one per cent service fee (plus VAT) and no performance-based fees are charged.

Why would investors choose this fund above others?Both Grindrod Asset Management (as fund manager) and Nedgroup Investments have identified the significant advantage a smaller asset manager has in delivering benchmark-beating performance in the listed property sector. As a result, the fund’s size will be limited to one per cent of the market capitalisation of the South African listed property sector, while Grindrod Asset Management will limit its exposure to five per cent of the market capitalisation of the South African listed property sector.

1 year to 30/09/2011

Nedgroup investments property Fund

9.7%

benchmark: domestic re general ut mean

6.3%

“The fund is appropriate for investors looking for the benefits provided by investing in listed property, namely a high current income, inflation-hedged income growth and long-term capital growth.”

INVESTSA12

It pays to let reason get the better of you.

D n’t let em tion cre te invest ng bl nd sp ts.

Because people can get emotional about money, they tend to make irrational investment decisions. At Nedgroup Investments

we select top asset managers and monitor them continuously. The result, an independent and objective approach that ensures

sound judgement and helps you achieve your investment goals.

Contact your financial planner, call us on 0860 123 263 or visit www.nedgroupinvestments.co.za

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

78_Blind Spots_FMail.indd 1 7/1/11 10:49:45 AM

INVESTSA14

head to head | SaNlam iNveStmeNt maNagemeNt (Sim)

1. as an asset class, is property still a good investment?

Yes it is. In uncertain times such as we are currently experiencing, investors may consider exposure to less risky asset classes such as cash, bonds and property. Unlike bonds and cash, property also offers growth in addition to the yield. Listed property has shown itself to be a top performer for investors in South Africa over the last few years, outperforming equity returns by 8.4 per cent over three years. Year to date, listed property has performed par with bonds with the ALBI and the J253 (SA listed property index) returning 5.13 per cent and 5.01 per cent respectively. The all share index has lagged behind, returning a total return of -5.36 per cent year to date.

2. listed property has been one of the best performing asset classes in recent years. is there any value left?

Yes, while the listed property sector is now trading close to fair value, investors can still find value in the sector through stock selection. The SIM Property Fund, SIM Balanced, Inflation Plus and Active Income Funds all have exposure to SIM’s top stock picks for this asset class. In relation to bonds, listed property offers not only high yields, but also growth. While property

yields tend to be somewhat lower than yields of bond funds, they do offer investors annual growth in income as a result of contractual rental escalations, which currently range between six and 10 per cent. We at SIM are estimating distribution growth of around six per cent for the SA listed property index over the next 12 months, and a 7.7 per cent clean yield.

3. What is the best way to access property as an asset class; listed, physical or schemes?

In my view, listed property is the most accessible. Not only is it more affordable per unit, it is also more liquid. It also requires less property expertise from the investor as professional management teams manage the assets on behalf of the investors. Investors also do not need to worry about rental collection and other daily management concerns. Listed property offers diversification because you invest in a portfolio of assets that is well spread across property sector and location.

4. if someone is to invest in physical property, what are the important factors to consider?

While my area of expertise is listed property, I believe it is critical that investors look at the following when investing in direct property.

• Location is key: consider developments in the area, both current and potential (supply and demand).

• Find out the acquisition yield, and the cost of funding.

• Quality of the building and of the tenant. • Look closely at the terms of the lease.

Listed property analyst at Sanlam Investment Management (SIM)

S H A L A r a m o k o l o

SANLAM INVESTMENT MANAGEMENT

15INVESTSA

head to head | iNveStec aSSet maNagemeNt

1. as an asset class, is property still a good investment?

Yes, as part of an investor’s broader portfolio of assets. Given the uncertainties evident in both the global and local investment environment, diversification across asset classes is more important than ever, and an investment in property (be it physical or listed) can play an important role in that diversification.

It is, however, important to differentiate between the domestic residential and commercial property markets. SA’s residential market, like many other countries, is largely driven by owner-occupier’s personal needs, such as the desire to own your own home, proximity to work, schools, transport, etc. In general, yields tend to be lower and investors are therefore more reliant on capital growth to drive returns.

The local commercial market tends to be more investment focussed and offers higher yields that are more closely aligned with funding costs. This potentially makes it a more attractive asset class from an investment perspective, particularly during periods of weaker economic activity when capital growth could be limited.

2. listed property has been one of the best performing asset classes in recent years. is there any value left?

Listed property in South Africa is almost entirely focussed on the non-residential market. The sector has had an exceptional run over the past decade, aided by declining bond yields and a more professional approach employed by sector management, which has enhanced distribution growth.

Looking ahead, concerns about both local and global growth mean that interest rates and hence bond yields are unlikely to rise materially in the short to medium term. This creates an environment in which listed property can continue to perform well, underpinned by the significant yield component.

The bulk of returns going forward is likely to be in the form of income derived from the underlying properties, to which a high degree of certainty can be attached. Approximately 80 per cent of this income is contractual in nature, linked to medium/long-term lease agreements with built-in escalations. Hence, this can offer a compelling case for investors given the prevailing level of uncertainty around income and returns in the broader investment environment.

Total returns will be aided by distribution growth, which is forecast at five to six per cent for the next 12 to 24 months. Over time, this income growth should translate into capital appreciation.

Although investors should not expect returns to match the elevated levels achieved in recent years, the combination of an appealing initial yield and reasonable distribution growth provides an outlook where real returns are still achievable for investors going forward.

3. What is the best way to access property as an asset class; listed, physical or schemes?

We believe listed property is a good way to access the asset class as it offers several advantages, which include:• Liquidity, so it is easy to enter and exit the

investment.• Lower transaction costs.• Less capital required to gain exposure.• Instant diversification – a listed property

fund offers exposure to a wide number of properties.

• Investing in listed property is less management intensive. Owning direct property can require a specific management skills set and daily hands-on attention.

• Listed property is a more regulated environment, so investors do have a

Portfolio Manager at Investec Asset Management

N E I L S t u a r t - F i N d l a y

INVESTEC ASSET MANAGEMENT

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5. What are the biggest mistakes investors tend to make with regard to property investment?

Investors in property need to consider the property cycle when investing. They also need to realise that property is a long-term investment. Before making a decision whether to invest in property versus a shorter-term investment vehicle, investors need to thoroughly assess their own needs and limitations. They need to take a close look at their investment time horizon. The profile of the investor is the most important consideration in determining what is best.

6. What is your advice to investors considering property as an investment?

Investors should do their homework. Finding a property broker that is active in the area you want to invest in can also be beneficial as it might be able to help you identify any opportunities. Investors can opt for listed property which offers them property investment exposure, with the added benefit of fund managers who are specialists in property, whose job it is to steward their investments.

degree of protection thanks to the controls implemented by the JSE, auditors, etc.

4. if someone is to invest in physical property, what are the important factors to consider?

Although physical property is not our focus, we can offer the following general guidelines that need to be taken into account:• As per the old adage, ‘location, location, location’ it is important

to understand the dynamics of the surrounding area, which include supply and demand, competitor activity, the proximity of transport networks, the drivers of economic activity in the area and infrastructure (e.g. electricity supply).

• What yield will be achieved and how does this compare to the funding rate?

• How sustainable is the income stream from the property? In other words, take note of the lease terms, strength of the tenants, etc.

• What are the transaction costs, such as broker commission, tenant installation costs, taxes, etc.?

• What funding structure will be employed, i.e. how much capital or equity is required up front versus debt funding?

• Who will manage the property?

5. What are the biggest mistakes investors tend to make with regard to property investment?

Like other investments, property can decline in value. It’s important to understand both the macro- and micro-environmental impacts upon the target property opportunity, thereby establishing whether it’s a relevant point in the cycle to be investing.

Investors can get into trouble if they do not implement an optimal funding structure. When acquiring a property investment, investors should carefully consider their personal circumstances and avoid excessive gearing.

Finally, some investors fail to check up on whether the developers or those managing the property assets are reputable and reliable and also don’t sufficiently analyse the property-specific issues such as the sustainability of the income stream, whether the speciality nature of the property may limit resale opportunities, etc.

6. What is your advice to investors considering property as an investment?

Do your homework thoroughly and don’t be afraid to seek professional advice from, for example, a financial adviser or independent valuer. Investment in property can involve a significant capital outlay, so it is worthwhile gaining as much knowledge as possible before taking the plunge.

SaNlam iNveStmeNt maNagemeNt iNveStec aSSet maNagemeNt

THe clienT THe banks

maya FiSher-FreNch

Five years ago, banks were handing out mortgages like lollipops and customers could opt for 110 per cent home loans and mortgages on second homes. One-below-prime was the starting point of the negotiation and customers who bought houses during that period could qualify for rates as low as two-below prime.

All that has changed dramatically. In the words of one banker, “The days of two-below prime are long gone, we will never lend at those rates again.” Now lending rates tend be prime plus rather than prime minus with a range from 0.5 per cent below prime to three per cent above. Today you have to have a squeaky clean credit record, a healthy deposit, no debt and then maybe the bank will lend to you at their very best rate of one-below prime, reserved only for their best customers.

Two factors have driven this tightening in lending. Firstly, South Africans started to default on their debt repayments having overindulged in the heady lending days before the introduction of the National Credit Act. This left consumers with the highest debt to income level in history peaking at 80 per cent and remaining stubbornly high at around 78 per cent. According to the latest credit figures, around half of credit-active South Africans have fallen behind in their debt repayments. Banks became reluctant to lend to people with impaired records.

“Today you have to have a squeaky clean credit record,

a healthy deposit, no debt and then maybe the bank

will lend to you at their very best rate of one-below

prime, reserved only for their best customers.”

By Maya Fisher-French

can’t say no to

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requirement. So you need to make sure that your other debts are paid on time.

Save a depositAlthough banks are offering 100 per cent home loans, these are in very limited situations and for specific market segments. If you have saved up a deposit this not only makes your home more affordable, but it also shows the bank an ability to prioritise your home payments. It shows a sense of discipline and the fact that you could afford to build up a deposit improves your affordability score.

Make sure you can afford itBased on the requirements of the National Credit Act, the bank has to make sure you can afford the loan and you have to list all your other expenses. The biggest problem with affordability is other debt, usually car repayments. It is a good idea to pay off those debts before applying for a home loan. Marius Marias of FNB Housing Finance said affordability is the number one reason that home loans are turned down. So before you waste your time, find out from your bank what you can afford before you go house hunting. Rhys Dyer of ooba added that affordability also looks at your ability to absorb future interest rate hikes and increases in the cost of living so buying a house at your maximum level of affordability may affect your changes of obtaining a mortgage.

Buy in a good area and pay the right priceThe bank is not going to lend more money than the house is worth. This is a sticky issue with estate agents who claim that the banks are not generous enough with their valuations. FNB is currently

working with estate agents to provide valuations so that the buyer knows that the property would qualify for a loan on that value. In this weak property price environment, it also helps to know that you have not overpaid for your home. Dyer said that the bank would look at the area to see that there is price stability and potential for the property to increase in value.

Speak to your bank but shop aroundDuring the lending frenzy, banks would offer loans to whoever wanted, no matter where they banked. However, there is now a move back to giving preference to their own customers as they have a better picture of the client’s payment and savings history. The banks have different risk appetites; one bank may be lending aggressively while another may be pulling back after being burnt by a higher than expected default rate. So it is still worth shopping around to get an idea of rates and deposit requirements.

Dyer said bank approval rates, if you only approach your own bank currently, vary from between 40 per cent and 60 per cent depending on the bank (average of 54 per cent). Ooba’s average approval rate is currently 65 per cent. This higher approval rate is obtained by taking each customers application to multiple banks to ensure the greatest chance of obtaining a loan approval. Currently, ooba is successful in obtaining an approval from an alternative bank in 23 per cent of cases where one bank initially declined the loan. So almost 25 per cent of customers would not have been successful in getting a loan if they had not shopped around. Dryer added that there is also a significant difference in interest rates ¬– between the lowest priced bank and the highest priced bank varying in excess of 100bps for exactly the same profile of customer.

Shorten your termAs the banks are now required to match your loan to deposits, by selecting a shorter repayment period than 20 years you could reduce the cost of your loan. This is particularly important for someone in their 40s purchasing a home. If you take out a 20-year loan, you will still be paying for it into retirement, so consider a 15-year home loan and base your affordability on that repayment schedule.

Secondly, the implosion of the global credit markets in 2009 increased the costs of credit, which has been exacerbated by the introduction of Basel 3, a global standard that sets solvency rates for banks.

According to Funeka Ntombela, head of home loans at Standard Bank, the price of credit has increased three-fold as depositors demand higher rates to compensate for higher global risk. At the same time recommendations under Basel 3 will require banks to hold longer term deposits for home loans, again pushing up pricing as banks have to pay higher rates for longer dated instruments.

With the odds stacked against you, how do you make sure that you are the client the bank can’t say no to?

Stay credit healthyIt goes without saying that if you have legal action against you, you have a snowball in hell’s chance of getting a loan. Your credit record looks at your propensity to repay your debt. For example, a customer may be able to afford a loan on paper, but repaying debt is not a priority and they tend to miss payments on their other debts regularly. This will be a red flag to the bank. They may still provide you with a loan but you will have a higher interest rate and a higher deposit

“While the banks have more appetite to lend than they

did a year ago, the economic risks are increasing as

unemployment continues as well as inflation.”

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Is it time to buy?

For first-time home buyers, property is the most affordable it has been in years. According to the FNB affordability index, which measures the average house price to the average income, affordability is back to where it was in 2004 as property prices have fallen while incomes have risen.

At the same time, interest rates are the lowest in 30 years making the repayments more affordable. However, you do have to factor in that the mortgage rate in relation to the prime rate has moved up eroding some of that affordability for new homeowners.

At an individual level, buying a home has become a lot more affordable, but this applies only to people who have a job and a good prospect of holding on to it.

Ewald Kellerman, property strategist at FNB Home Loans, said that while the banks have more appetite to lend than they did a year ago, the economic risks are increasing as unemployment continues as well as inflation. Although the Reserve Bank has indicated that it will keep interest rates on hold for now, if inflation becomes a significant problem, the bank will have no choice but to increase interest rates.

First-time buyers now make up 25 per cent of new home loan applications which is a significant increase; however, it is not as easy for existing homeowners to trade out of their existing properties due to weak property prices.

Kellerman added that the requirement for a deposit has slowed down home loan applications from both new buyers and second-time homeowners who are not realising the prices from their existing properties to enable them to put down a significant deposit.

The buying trend is for smaller properties, not only due to affordability on the purchase price, but also due to ongoing running costs of properties with higher electricity, water and rates expenses.

Scarcity of property is driving this trend. Kellerman said Cape Town has always experienced a scarcity of housing due to the geographical nature of the area, but the same pressures are building in Johannesburg as people want to live closer to work due to the increasing traffic congestion.

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“The buying trend is for smaller properties, not only due to affordability on the purchase price, but also due to ongoing running costs of properties with higher electricity, water and rates expenses.”

maya FiSher-FreNch

The cosT of access

History shows us that long-term investing is pretty simple. If you can just replicate the

returns of the JSE, you will have an inflation-beating investment that will grow exponentially through compound returns. It is not timing the

market, but time in the market that matters. The problem is that for most retail clients, especially middle-class investors with average investment

sizes, the returns of the JSE elude us as costs destroy long-term value.

By Maya Fisher-French

Why iT is impossible for reTail clienTs To maTch The reTurns of The markeT

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Many may remember the provocative research by Deutsche Securities analyst Roland Rousseau in 2005 where he was able to demonstrate the destruction of costs on returns. This strengthened the argument for passive investing. A study of share performance over the past 20 years showed that a fund manager would have to outperform the index by 58 per cent just to cover the drag of active costs.

This captured headlines and boosted the argument for passive investments like index trackers and exchange traded funds. It also played into the hands of stock brokers as people were encouraged to manage their own share portfolios. The logic is if you get rid of unnecessary asset management fees (half of fund managers underperform the market) and financial adviser fees, you will improve your return simply by tracking the markets less the costs.

This has driven focus towards asset management fees and advisory fees but it has ignored the significant costs of administration fees. While an asset manager may be able to demonstrate value by providing alpha, a financial adviser by

creating a financial plan, how much should an administrator be paid for allocating funds and issuing a statement?

Take for example Satrix, the largest provider of exchange traded funds. If you invest in the fund you are paying annual management fees of around 0.45 per cent. This is then compared to unit trusts which are charging from two per cent upwards for unit trusts (more if there is a performance fee). However, how do you access an exchange traded fund? If you simply want to invest R500 a month you have to do it through an investment plan as the minimum fee of R100 a trade for most stock brokers makes it too expensive to go the online broker route. If you have a lump sum of R100 000 then you could invest through your stock broker but this also incurs costs.

In the case of the investment plan you will pay an additional annual fee of 0.91 per cent including VAT. So now your annual costs are actually 1.36 per cent for a fund that has no active management. As this is a tracker fund you are guaranteed to underperform the market by 1.36 per cent. If you want to invest R100 000 you could opt for a stock broker. You will pay 1.14 per cent to your broker and a further R265 in mandatory costs like Strate and UST. The monthly admin fee for online broking is around R50 a month excluding VAT so your annual fees will be around R684 a year which comes to 0.68 per cent of your lump sum. However, if you want to sell you will incur the trading fees again. So effectively your trading costs are 2.6 per cent and you will pay 1.13

per cent in annual costs between the broker and Satrix. Again you are guaranteed to underperform the market by whatever costs are incurred.

The same applies for any exchange traded fund range or tracker product. Vladimir Nedeljkovic, head of ETFs at Absa Capital said that while the product providers have been driving costs down, the platform costs have not followed and more pressure needs to be brought to reduce administration.

And we haven’t even started on the costs of linked investment services providers (LISP). Ironically it is actually these service providers that have worked hard at driving down the fees of the asset managers, but now it is time to focus on the costs of their administration. The solution that comes to mind is a serious industry consolidation where economies of scale can be built. Administration is primarily dominated by fixed costs, so the more volumes an administration system is pushing through, the lower the cost per client.

And part of this consolidation has to deal with the plethora of choice – in a market as relatively small as ours the choice is simply not justified. The amount of choice that an investor faces not only makes investing more complex, but it drives up the costs. As Nedeljkovic commented at the recent Sanlam symposium, ETFs have now become too complex. Just like unit trusts we are in need of platforms to blend these ETFs, once again pushing up costs.

As has been said, investing is simple. If you want to increase the returns to the average investor, you don’t need rocket science, you just need to cut costs.

“It is not timing the market, but

time in the market that matters. The

problem is that for most retail clients, especially middle-

class investors with average investment

sizes, the returns of the JSE elude

us as costs destroy long-term value.”

23INVESTSA

proFile | CHIEF ExECUTIVE OFFICER OF GLACIER BY SANLAM

ARa N t o N R A A T HC H I E F E x E C U T I V E O F F I C E R O F G L AC I E R BY S A N L A M

24

25INVESTSA

“With career paths changing more often today than in the past, clients are seeking products that are

more flexible, for example a retirement annuity that allows investors to change contributions as their

circumstances change.”

you have been involved in South africa’s investment industry for nearly 20 years. What are the major changes you have witnessed during this time?

The biggest change has been the move from defined benefit to defined contribution plans. This has resulted in investors having to take full responsibility for their own retirement planning. They’ve become more educated in the process and they’re aware of what’s happening in the global economy.

We’ve also seen a huge amount of product development as companies move away from the traditional life investments to collective investment-based products. With career paths changing more often today than in the past, clients are seeking products that are more flexible, for example a retirement annuity that allows investors to change contributions as their circumstances change.

Coupled with this, there has been increased regulation and we expect this to continue, together with increased fee pressures.

glacier is focused on the affluent market. has the recent global economic crisis had much impact on the investment habits of this segment?

Yes, we think it has. Investors are less trusting and wary of investments that seem too good to be true. We’re also seeing more clients making use of the services of a financial intermediary, whereas in the past they were content with a DIY approach.

Clients are also more conservative with their investments. This is not necessarily a good thing as we expect the current low return environment to persist for many years to come. This will require that investors take a more aggressive approach with their portfolios. Even affluent investors underestimate the amount of money required

to maintain their current lifestyle throughout their retirement.

What are the benefits of dealing with a linked investment service provider (liSp) rather than going straight to a single asset manager?

Linked investment service providers offer so much more than just an investment platform. They also offer financial planning tools to assist with complex decisions that require technical input. As an example, Glacier’s ICE financial needs analysis tool assists intermediaries to model and project their client’s capital and income within their retirement or living annuity.

LISPs also offer diversification across the different asset managers with a wide choice of underlying investment options. Clients can switch easily and cost effectively between these funds on the platform. The wide product range on offer includes tax wrappers that allow affluent clients to minimise their tax liability.

In addition, clients can also view a snapshot of their entire portfolio at any given time. LISPs provide online facilities where clients can perform transactions as well as view all fees and charges pertaining to their investments on the platform. Full transparency, when it comes to fees and charges, is vital so that clients can see what is happening to their hard-earned money. The various facilities on offer also allow clients to plan effectively for various life stage changes.

What advice would you have for financial advisers in the current environment?

We expect regulatory pressure to continue and financial intermediaries will no doubt have felt that the rules of the game are

changing, and the environment is becoming a lot tougher. It will benefit them to partner with a company which can help them serve more of their clients’ needs while growing their business at the same time.

Intermediaries have an important role to play when it comes to educating their clients. They should caution clients against looking only at short-term results. Clients who understand the risk they’re taking on will be more likely to sit tight when market conditions are volatile. These days, people are more active in retirement and also living longer, so there’s a need to remain invested in equities after retirement to ensure continued capital growth. This impacts the advice intermediaries give to their clients. A solid advice process is necessary – one which encompasses researching the options available and selecting the right option to match the needs of the client.

Finally, if you had r100 000 to invest, where would you put it?

There are so many options out there, but I think I’d invest this in an equity-based collective investment fund so that my sons have a starter fund available to them on reaching adulthood.R

blue iNk

sa ReTiRemenTfunding indusTRyand hedge funds a perfecT maTch

The recent high levels of volatility experienced by local and global stock markets have once again highlighted the need for investors to effectively diversify their retirement portfolios.

This is according to Thomas Schlebusch, CEO of Blue Ink Investments, who says investors who wish to diversify their retirement investments should be looking to South African hedge funds, which are currently offering attractive risk-adjusted returns and low volatility levels.

“Investors have previously had negative perceptions of hedge funds due to overseas funds related to Bernie Madoff, Long Term Capital and others. South African hedge funds have performed well, have a high degree of transparency, are highly liquid and help retirement funds to retain value for their members.”

Long touted as an investment class that thrives and can generate positive returns in volatile market conditions, Schlebusch added that hedge funds are not the Holy Grail, but their real benefit is to cut out some of the downside risk through means not available in more traditional funds, and should therefore form an essential part of a retirement fund portfolio.

He said that during the global financial meltdown in 2008, the Blue Ink Hedge Fund Composite, which monitors all hedge funds in South Africa, ended the year two per cent in positive territory. Over the course of 2008, 60 per cent of local hedge fund managers were in positive territory and 30 per cent beat cash returns. “In contrast,

the overall equity market was down by around 23 per cent in 2008, so hedge funds did pretty well. While hedge funds underperformed the overall market in the 2009/10 recovery, they still performed well when compared to cash.”

However, Schlebusch said that hedge funds were not well understood, causing many investors and retirement fund trustees to shy away from them.

“Retirement fund trustees need to educate themselves more about hedge funds, including fund of hedge fund opportunities. South African hedge funds are highly regulated, providing significant protection and peace of mind for investors.”

Thomas Schlebusch | CEO of Blue Ink Investments

“Hedge funds are not the Holy Grail, but their real benefit is to cut out some of the downside risk through means not available in more traditional funds, and should therefore form an essential part of a retirement fund portfolio.”

26

ShauN harriS

SOuTh AfRiCANS ARE

NOT SAviNg ENOugh fOR RETiREmENT

We’ve all heard the horror stories about inadequate savings for retirement. Many people don’t have enough money in retirement to maintain previous lifestyles; and worse, some are so badly funded that they are forced to rely on the state and family members.

But is this all just about bad planning and lack of sufficient savings by people in retirement? A better retirement funding model in South Africa seems part of the problem and new models need to be developed. “The current retirement industry model – developed in a post-Second World War environment when people typically stayed at the same company until retirement – simply isn’t servicing the modern day consumer,” said Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions.

He was speaking at the recent Sanlam benchmark symposium on retirement funding. “While the industry has acknowledged repeatedly that something needs to be done to improve retirement saving levels, education and communication endeavours are not having a strong enough impact. What is needed now is a shift from focusing on improving knowledge to focusing on changing behaviour.”

by Shaun Harris

but maybe it’S the induStry funding model

that’S at fault

“The bottom line though is to get retirement savings right as early as possible.”

INVESTSA28

Part of the problem, he believes, is retirement fund trustees who haven’t fully immersed themselves in the defined contribution (DC) environment and are not doing enough to facilitate an efficient retirement fund system on behalf of the member. “The plight of retirement saving in South Africa isn’t helped by the fact that most trustees view their responsibility to be over when a member retires or withdraws from the fund.”

He added that research shows that 84 per cent of trustees are concerned about how retirement fund members use their retirement benefits, yet only 22 per cent actually have any further involvement once the member has cashed in their funds or retired.

So are there better retirement funding models that could be applied in South Africa? It seems there are moves in that way, though some are predictably vague. “South Africa has very good financial services companies but there is a need to formulate new business models,” said Steven Burgess, professor of business administration and marketing at the University of Cape Town’s Graduate School of Business.

“The Twitter generation thinks and acts in different ways. The industry has to find new ways to communicate with them.” But he added that in many cases, people selling savings products are a generation removed from the people whom they are trying to sell to.

This would typically be individuals in the 25 to 35-year-old grouping, which ironically are doing little towards saving for retirement. The Sanlam survey found that only 17 per cent of the people in this grouping are saving towards retirement.

Another possible model is a move away from a focus on products to a concentration on providing customer-focused solutions. “This can create a revolution in South Africa’s retirement savings environment,” said Viresh Maharaj, group risk actuary at Sanlam Group Risk. “Retirement savings needs to become a personal, family and national priority.”

Better retirement funding models are being looked at abroad, which could be incorporated here. Reinsurer Swiss Re said the substantial increases in life expectancy in recent decades has been consistently underestimated. “The good news that people are living longer has brought with it a massive pension shortfall, which has been exacerbated by traditional methods of forecasting longevity not taking account of certain emerging trends,” said Daniel Ryan, head of life and

health research and development at Swiss Re. “The failure to consider future drivers of mortality in historical predications contributed to employer pension funds under-reserving for longevity risk and other bodies, including governments, not budgeting effectively for funding an ageing population.”

Swiss Re is therefore looking at managing longevity risk through the development of robust, predictive approaches. “Such approaches would use forward-looking scenarios based on social factors, medical treatments and preventative approaches that influence disease,” said Ryan.

Award-winning financial journalist Bruce Whitfield, who has investigated the retirement industry, said the government needs to forcefully encourage South Africans to save for retirement, through changing rules related to preservation of retirement savings. Sanlam research shows that more than 70 per cent of employees cash in their accumulated retirement savings when leaving jobs.

Whitfield said the government needs to consider increasing the retirement age for the state pension. Access for males to the pension was recently reduced from 65 years to 60, making it equal with women. “While the minimum age for the state pension in South Africa has gone down, it’s going up in the rest of the world. In several countries, the current level of 65 is being increased to 67 and may go to 70 in years to come.”

Quoting Finance Minister Pravin Gordhan, Chris Bathembu of South Africa.info reports that Gordhan said over R9 billion a year was currently spent on administering the country’s “fragmented” social security system, saying a better co-ordinated system would offer better protection to vulnerable households.

Many people rely on social security and the upcoming National Social Security System to add more members. Hugh Hacking, umbrella fund product manager at Old Mutual Corporate, said government’s proposed National Social Security System is central to current stakeholder decisions. “Industry stakeholders have to consider future reforms when implementing business plans. Decision makers must also consider the impact of the global economic recession and slower economic growth on the industry as a whole.”

He points to the significant upward trend in retirement ages and, in particular, the Australian model. “In Australia they recently introduced the concept of a phased-in retirement, where individuals would take retirement at the normal age, but return to work in a limited capacity. If you can supplement your income post-retirement, the extra income makes a huge difference to your retirement funding,” said Hacking.

The bottom line though is to get retirement savings right as early as possible. Glacier by Sanlam said that to replace 75 per cent of pre-retirement income you need to save at least 22.5 per cent of your pre-retirement income for a period of at least 30 years. That’s a tough one, but it’s what you have to do.

And should preservation of retirement savings be compulsory? Absolutely.

“The government needs to forcefully encourage South Africans to save for retirement, through changing rules related to preservation of retirement savings. Sanlam research shows that more than 70 per cent of employees cash in their accumulated retirement savings when leaving jobs.”

29INVESTSA

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The past few weeks have seen significant market volatility both locally and abroad, leaving many retirement fund trustees and members in a state of confusion as to what steps they should take to protect their retirement savings.

Some of the factors that contributed to the market volatility include the decision by the US Government to raise its debt ceiling, the US rating downgrade by Standard & Poor’s rating agency and significant concerns across the Eurozone about debt defaults and bailouts for Euro land members.

During times of extreme volatility and uncertainty, it is helpful for trustees to understand and follow the following steps.

•UnderstandyourfundmembershipTrustees should have a detailed understanding of the fund members they represent. This includes age, gender, accumulated credits and contribution rates. Trustees also need to be clear on what the target replacement ratio is and what the effect of changing various factors will have on the replacement ratio. These factors include age to retirement, changing contribution rates and different investment objectives.

• ClearlydefinethefundinvestmentobjectiveTrustees need to be clear on what the investment objective of the fund is in order to achieve the target replacement ratio. The investment objective is usually defined in terms of a return above inflation. Inflation rates and increases in inflation therefore have a significant effect on the fund’s ability to achieve the target replacement

ratio. For example, as inflation increases, so the target investment objective above inflation needs to increase in order to reach the target replacement ratio.

• Clearlydefineandunderstandthefund’s investment strategyThe fund’s investment strategy is the long-term strategy that will enable the fund to achieve the investment objective that will result in members reaching their target replacement ratio. It is extremely important that trustees understand that the investment objective and fund strategy are long term in nature while market volatility and extreme events are generally short term in nature. It can be helpful to communicate investment philosophy such as defend against losses, benefit when markets rise.

•MonitorthefundperformanceTrustees should monitor the fund’s performance on a consistent basis against the investment objective and peer group. Trustees should expect periods when the fund exceeds its investment objective as well as periods when it

lags the objective. Trustees should have a clear communication strategy to members, keeping them educated about the long-term nature of the retirement fund’s investments as well as the reasons behind any shortfalls against the objective in the short term. Trustees should also communicate more regularly with members during periods of extreme events, explaining to members what is happening, outlining the consequences for the fund and reminding them of the long-term nature of retirement fund investing.

“It is extremely important that trustees understand that the investment objective and fund strategy are long term in nature while market volatility and extreme events are generally short term in nature.”

Windall Bekker | Head of Investment Consulting at OMAC Actuaries and Consultants

in the age of turbulence

PRoTecTingReTiRemenT funds

retiremeNt iNveStiNg

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alterNative iNveStmeNtS

A dramatic increase in volatility in the stock market and prevailing negative investor sentiment has resulted in a number of local investors increasingly turning their attention to derivative instruments.

This is according to Andrew Bryson, equity derivatives trader at BoE Private Clients, who says that as a hedging mechanism, derivatives offer a useful means of providing protection against the possibility of falling stock prices and potential Rand depreciation.

“In the equity space clients have looked to purchase put options or short JSE Top 40 futures to provide downside protection to falling stock prices. In the currency space clients have purchased currency futures exposure to foreign currencies against the Rand, to protect their local asset values from a depreciating Rand. At its most basic, a derivative is a financial product whose value is derived from the value of the underlying instrument it is written on. The value of the derivative is determined by movements of the underlying instrument,” said Bryson.

Chris Paizis, head of corporate distribution at Absa Capital, believes that over the last few years the derivatives market in South Africa has evolved significantly with a lot of investment in new products and technology platforms as well as improved regulatory structures.

“These include equity, currency, commodity, interest rate and agricultural futures which see significant volumes pass through their markets each month. For a country like South Africa, which is heavily dependent on its resources sector but has limited sources for capital, commodity derivatives have helped companies by making funding more easily accessible,” said Paizis.

Bryson added that the major advantage of derivatives is that they provide leverage, such that a small movement in the underlying value can cause a large difference in the value of the derivative.

While derivatives are used both for speculative purposes and as a means of

hedging, or mitigating risk in the underlying financial product, Bryson said that current market conditions have boosted the demand for derivatives as a hedge against falling equity prices or the possibility of a depreciating Rand. This is largely a factor of negative investor sentiment, which, he claims, is at levels not seen since 2008.

Paizis commented that many South African investors will remember back to 2008 where the SSF and contracts for difference (CFD) markets (amongst others) were rocked by the global crisis and derivative trades gone bad and will use this (and other market turmoil) as a reason to avoid these instruments.

“Derivatives may have a bad reputation in the press, but you only have to look at the volumes going through the various markets to realise that these events which make the headlines are outlying events and not business as usual for those who know what they are doing. The user needs to understand the value of the underlying asset, the risks they anticipate facing and how much protection they need to buy relative to the risk,” said Paizis.

“Two areas where derivatives can be very helpful are around mitigating risks you don’t want to take in financial markets and secondly it can help change the profile of your debt, which can be a very useful tool for many cyclical industries,” concluded Paizis.

“As a hedging mechanism, derivatives offer a useful means of providing protection against the possibility of falling stock prices and potential Rand depreciation.”

in volaTile markeT condiTionsdeRivaTives THe way To go

aSSet maNagemeNt

Erratic and unpredictable is the best description for global equity markets so far in 2011. South Africa has not escaped the tumult either, with losses worth billions for investors. With no sign of the volatility abating, investors are scrambling to find a way to protect their investments. However, asset managers warn that impulsive adjustments to investments at the height of market turmoil could lead to devastating losses.

YOu CAN’TChANgE SAiLS

in a hurricane

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Recent figures from the JSE have revealed that in the period from January to late September this year, the JSE lost approximately R687 billion – a hard-hitting illustration of the price South African investors have paid for the recent global turmoil. As always, the effect on pensioners will be the most significant. However, contrary to the intuition of many concerned investors, Anil Jugmohan, CFA investment analyst at Nedgroup Investments, warned clients – even those close to or in retirement – not to be tempted to withdraw their savings and pile into cash. Instead, he urged investors to ensure that they have appropriate degrees of capital protection in place which will act as a buffer in times of severe volatility.

“Unfortunately, the nature of market volatility is that there is no warning bell before it happens. Individual investors really find out only after they’re plunged into it. While the philosophy of capital protection mechanisms

will also mean that these managers tend to lag their peers when markets are

performing particularly well, there is a significant pay-off to investors

during times of market stress,” he explained.

Daniel Malan, investment director

at RE:CM echoed this sentiment. He urged investors to remember that uncertainty, volatility and complexity is

always present in investment markets.

“It is not unique or rare in some way and it

does not rear its head like some kind of scary monster.

The facts are that positive and negative price movements

are common occurrences over time and should be expected by

anyone involved in the markets. We believe it would serve investors well

to always, and in fact primarily, concern themselves with protecting their purchasing

power in real terms,” he said.

One message emerges clearly. Now is not the time to be looking to make drastic changes to investment portfolios. Jeremy Gardiner, director at Investec Asset Management, said making changes to your portfolio at this time will most likely see you making emotional rather than fundamental decisions. “You can’t change sails during a hurricane, i.e. the time to adjust your portfolio is when markets are

calm in anticipation of weather coming ahead, and not when you’re in the eye of the storm. What you need to do is correctly identify your risk profile, create a portfolio appropriate to your risk profile and let it ride out any volatility markets present.

“The evidence is mixed as to whether, collectively, market participants can successfully predict such events with any degree of consistency. What’s more important to realise is that these prediction capabilities are actually irrelevant if you want to achieve good risk-adjusted investment returns – which for most people is the main objective of their investing efforts. Investors will be better served to take a valuation-based approach, and structure their strategy accordingly,” he said.

“We just don’t know where this may lead, but the good news is that no-one else does either. We believe, based on the evidence, that owning a reasonably diversified collection of cheap high quality businesses with demonstrable pricing power through full business cycles is sufficient ammunition to weather any set of economic conditions,” said Malan.

However, Gardiner has a darker outlook. “The recent downturn in markets is their way of signalling further weakness ahead. The global economy is slowing; there are significant fundamental issues that need to be resolved; interest rates are at all-time lows; central bank cash is running out, and the ability to stimulate is limited.

“We may well see a double-dip recession in several developed market countries going forward. At this stage, it shouldn’t be as severe as the credit crisis of 2008; however, if the European economies start defaulting like dominoes, anything is possible,” he said.

Gardiner believes that up until now, everyone has been in denial as to the gravity of the situation. “While there has been much discussion about the European debt crisis, there has been very little action and until there is clear evidence that banks are going to be recapitalised and the European Financial Stability Facility is worth trillions and not millions of Euros, things are going to remain bumpy,” he warned.

“We just don’t know where this may lead, but the good news is that no-one else does either. We believe, based on the evidence, that owning a reasonably diversified collection of cheap high quality businesses with demonstrable pricing power through full business cycles is sufficient ammunition to weather any set of economic conditions.”

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Shawn Stockigt, Head: Value Investing, STANLIB

out of favour smaLL caps may offer some vaLue

The universe for small caps is broad and covers stocks across four indices (and two boards). Small cap companies are a proxy for the domestic economy, and relative to large (mainly resource counters) and mid-size (mainly due to the heavy exposure to retail companies) companies listed on the Small, Fledgling and Altx boards have generally performed considerably worse over the past four years despite the domestic economy being in better shape than most global economies.

“You should

buy stocks like you

buy your groceries,

not like you buy

your perfume.”

Companies listed on the Altx board have experienced a complete beating, which in some cases has not been completely unwarranted on the back of management focusing on a higher share price and dabbling in single stock futures rather than focusing on growing shareholders value over the long term. Admittedly Altx was pregnant with companies focused on a continued increase in infrastructure and construction-related spend which has been under tremendous pressure over the past two years.

The case of a few bad apples and valuations stretched to extreme levels has caused companies listed on the latter board to fall out of fashion resulting in selectively some good businesses trading at discount prices which may offer more upside on a medium- to long-term view than their larger counterparts. However, it may take a while longer for investors to trust management of this sector of the market to allocate their capital prudently and act as listed companies rather than the private companies of their past lives.

At present there are some extremely good small and medium cap stocks which are trading at relatively cheap valuations (other than retail companies, which in our view are looking expensive) with much of the bad news already been priced in.

Sector report

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We remain focused on three key criteria namely looking for companies where management act with shareholders interests at heart, patience and companies trading at a discount to our calculated intrinsic value for the business. We believe in the wise words of a famous shrewd investor, “You should buy stocks like you buy your groceries, not like you buy your perfume.”

We like businesses with a high cash conversion ratio, i.e. operating profit relative to operating cash flow and are very fond of businesses which have the capacity to generate consistent free cash flows. Growth businesses or businesses in their early life cycles will utilise cash to grow the business and hence might not generate cash growth in line with earnings growth; but unless they are ploughing back the cash into areas which are giving them a better than the cost of capital return, it will over time have a negative impact on the business and could lead to ruin.

The combination of the above three criteria allows us to invest as true owners of a business; take out any of the above and we lose the safety that comes with a long-term view. For example, without patience we won’t see the long-term unlock of value from management which is aligned with shareholders.

In the small cap space we differentiate ourselves by breaking up stocks on our radar screen into core (anchor) stocks, tactical stocks and what we refers to as ‘blue sky’ stocks. Each category determines a stock’s maximum and minimum weighting. Typically, an anchor stock would comprise all the conventional criteria for inclusion and would be high conviction. At the other end a blue sky stock might be, but not necessarily, an Altx stock with a strong entrepreneurial underlay, pointing to good prospects, but still notching up a solid track record.

Blue sky exposure is required for us to generate alpha in the long term, but we need to guard against serious dilution of the healthy performance of good companies by taking on too much risk in this area.

We like business such as Hudaco, Wilson Bayley, Spur, Ceramics, Advtech, Zeder and City Lodge to name a few. You might get boring earnings growth but it’s consistent and the cash conversion is often great in these types of companies.

• Hudaco has returned an average annualised capital gain of 17.81 per cent a year since 2000 on top of giving a patient investor R26.41 in dividends a share for the same period.

• Wilson Bayley has rocketed from around 500 cents in 2000 to its current 10 000 cents and has given 1 650 cents a share in dividend to boot.

• Spur, which traded at between 150 cents and 250 cents a share 10 years ago, is now worth 1 340 cents a share, and has paid out 486 cents a share in dividends.

• Ceramics annualised return over the past 10 years has not been as great as the likes of a Wilson Bayley but 100 shares bought in 2000 (year-end price, ignoring all costs) would have

cost you R3 600 and today would be worth R11 000 and to comfort you for the relatively slower capital gains, you would have received R4 180 in dividends and a few special dividends along the way due to the cash generative ability of the business.

• Advtech lost almost 50 per cent of its value during 2000 but its recovery from then has been outstanding, returning 550 per cent on an investment made at the beginning of the year despite the 50 per cent crash during the year. The return is even more outstanding if you bought when the stock was most unloved in November 2001; over this period the stock returned over 2 200 per cent in capital gains alone.

• Zeder is another example as one can buy the likes of Pioneer Foods via this vehicle at a discount to its direct listing, plus you get exposure to some solid non-listed agri companies as well.

• 100 shares in City Lodge in 2000 would have cost you R805 (year-end price ignoring all costs) and today the same 100 shares are worth R6 336. On top of the capital gains, you would have received about R2 507 in dividends over the period.

These are the kinds of companies that you want to own for the long term.

Collective Investment Schemes in Securities (CIS) are generally medium to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from Franklin Templeton Investment Funds (“FTIF”). Commission and incentives may be paid and if so, would be included in the overall costs. FTIF are priced on a forward basis and prices are calculated daily. A prospectus is available on request from FTIF. FTIF is regulated in Luxembourg and the FTIF sub-funds available for public sale in South Africa are approved by the Financial Services Board. FTIF is a member of the Association for Savings and Investments of South Africa (ASISA).

*Subfund of Franklin Templeton Investment Funds–a Luxembourg registered SICAV

© 2011 Franklin Templeton Investments. All rights reserved.

FRANKLIN GLOBAL GROWTH FUND*

There’s a world of growth opportunity out there, if you know where to look. With over 500 investment professionals and offices in more than 30 countries, Franklin Templeton offers investors a unique perspective on the increasingly important and complex world of global investing today.

Having navigated up and down markets across the globe for over 60 years, we know how to spot smart growth opportunities that others might miss. Backed by a world-class global research platform, we employ a disciplined, time-tested approach to security analysis that seeks to provide investors with exceptional, risk-adjusted returns over the long term.

To put our global expertise to work for, contact your financial advisor or visit www.franklintempleton.co.za.

opportunitiesFOR GROWTHspan the globe.SODOWE.

ZA_FTI_SPANTHEGLOBE_MAG_210x297mm_INVESTSA_0911.indd 1 10/3/11 9:27 AM

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please outline your investment strategy and philosophy for the fund.We are a bottom-up, high-conviction value manager. We tend to buy stocks that are contrarian in nature (usually unloved), but first and foremost focus on valuations and protection of capital. Our focus is on stocks where we believe the price is significantly below intrinsic value due to factors such as investor sentiment, the impact of news flow and other short-term considerations. Avoiding value traps is critical as is sticking to our philosophy. We tend to perform well in risk averse conditions and tend to underperform in overvalued momentum driven markets.

What are your top five holdings at present?MTN, Anglo American, Sasol, Goldfields and Implats.

Approximately 20 per cent of the fund is invested offshore in a combination of quality defensive stocks trading on attractive valuations (e.g. Roche and Reckitt), as well as certain deep value opportunities (e.g. Supervalu and Billabong).

Who is the fund appropriate for?This fund is suitable for investors seeking defensive qualities and capital growth over the long term and for investors who want to include a pure equity fund in their portfolio.

how have you positioned the fund for 2011?On the domestic front three broad themes come through in terms of the stocks we hold – defensive positions (Goldfields), cheap stocks (Anglo American) and Rand hedges (MTN).

Gold has proved its defensive qualities in times of risk aversion. We hold Goldfields, but not only because of gold’s defensiveness. The

underperformance of gold stocks vs the Rand gold price has been significant over the last couple of years – and while there are operational reasons which partly explain this, we believe the extent of the underperformance has created a buying opportunity.

Turning to cheap stocks, Anglo American stands out, not only has it underperformed its global peers (partly due to SA risks), but it has also significantly underperformed the price of the commodities it produces.

MTN is a good example of a defensive Rand hedge. Its earnings are not cyclical (being similar to a utility) and approximately 70 per cent is derived from outside SA. Mobile voice penetration in their non-SA operations is still relatively low and the opportunity exists to grow their mobile data revenue streams. We also believe that the market is underestimating the strong free cash flow the company will be able to generate and pass on to shareholders over the coming years.

please provide some information around the individual/team responsible for managing the fund.Rajay Ambekar is the portfolio manager for the Discovery Equity Fund at Investec Asset Management. Ambekar joined Investec Asset Management as a portfolio manager in July 2010, with a focus on value/contrarian equity investing.

He started his career as an auditor at Arthur Andersen and KPMG. Thereafter, Ambekar worked at African Harvest which was subsequently acquired by Cadiz. He then joined Prudential where he served as an investment analyst and a portfolio manager in both the institutional and retail space. He holds a bachelor of commerce degree and a post-graduate diploma in accounts from the University of Cape Town. In addition, he is a qualified CA (SA) and a CFA charterholder.

please provide performance of the fund since inception.

please outline fee structure of the fund.The fees for the Discovery Equity Fund (excluding VAT) are an initial fee of 0.25 per cent and fund management fees of 1.50 per cent per year.

Why would investors choose this fund above others?The fund has performed well against peers and this is due to the application of a sound philosophy together with a disciplined and rigorous process of stock selection. Being value investors and contrarian in nature, we are usually interested in stocks that others dislike and therein lies the key to successful long-term outperformance.

FUND profileS

inception(5 November

2007)

one month

Six months

discovery equity Fund 41.69% 0.51% 0.19%

FtSe/JSe all Share benchmark

13.33% 0.32% -2.39%

FuNd proFileS

diScovery iNveSt

please outline your investment strategy and philosophy for the fund.The FTIF Franklin Global Growth Fund seeks long-term capital appreciation by investing principally in equity and/or equity-related securities (including warrants and convertible securities) of companies of any market capitalisation. The investment manager employs an active, bottom-up, fundamental research process to search for individual securities believed to possess superior risk-return characteristics.

The net assets are invested in securities of issuers located throughout the world, in both developed and emerging markets.

What is the fund’s asset allocation?94.92 per cent global equities, 5.08 per cent cash as at 31 August 2011.

Who is the fund appropriate for?Investors seeking a global portfolio of high-quality, sustainable growth companies that the manager feels are well-positioned within expanding industries and burgeoning economies.

Investors with a long-term horizon and interested in the diversification potential of investing in both non-US and US equities.

Investors interested in a higher alpha approach that has the ability to generate higher returns, but may also generate greater volatility.

have you made any major portfolio changes recently?The fund holds roughly equally weighted positions; a typical position size is 2–3.5 per cent, adjusted regularly as markets move, and capped at a maximum of five per cent. Because the team intends to hold stocks for three- to five-year periods or longer, turnover in the portfolio is relatively low at 40–50 per cent. When a stock outperforms, the team typically acts contrary to the market by decreasing the position to be roughly equally weighted in the portfolio. The opposite is also true: when a stock underperforms, the team will purchase shares provided their assessment and conviction supports an increase of their holdings in the company.

please provide some information around the individual/team responsible for managing the fund.Donald G Huber, vice-president and portfolio manager, is the lead manager on the Franklin Global Growth Fund and is responsible for meeting with clients and prospects as well as managing portfolios. Prior to joining the firm, Huber was with JPMorgan Chase and Co. and predecessor organisations for 20 years.

John Remmert, senior vice-president and senior portfolio manager for the Franklin Global Large Cap Team. He is the co-manager of the Franklin Global Growth Fund and is responsible for the management of global and non-US institutional equity portfolios. Remmert has more than 15 years’ investment experience.

please provide performance of the fund over one, three and five years against its benchmark?As of 31 August 2011

“The fund is appropriate for investors seeking a global portfolio of high-

quality, sustainable growth companies that the manager feels are well-

positioned within expanding industries and burgeoning economies.”

FraNkliN templetoN - FtiF FraNkliN global groWth FuNd

1 year 3 years p.a. 5 years p.a.

FRK Global Growth Fund 12.26%-0.59%

annualised2.43%

annualised

MSCI World Index 15.06%-0.71%

annualised0.35%

annualised

39INVESTSA

TaX claRiTyon investing in offshore insurance plans

The ruling deals with an investment by a private individual in a single premium whole life (so called open-ended) investment offered by a foreign insurer (not registered in South Africa). The nature of these policies, both in South Africa and offshore, is that the death benefit and cash value at any time is directly linked to the underlying investment portfolio, which is structured according to the wishes of the investor and is selected, normally, from a wide range of investment linkages.

As with all assurance products, the investor does not directly own the underlying assets in the portfolio but owns the policy, which in turn gives the investor a right to participate in the performance of these assets which are directly owned by the insurer.

In the ruling, SARS determined that despite the fact that the investor did not own the underlying assets, all amounts received or accrued from the investment may, depending on the circumstances, be taxable in the hands of the investor, which no doubt will come as quite a surprise to many investors.

It is well understood that since South African assurers pay income tax and capital gains tax to SARS on behalf of investors via the four-fund approach, generally, the proceeds of policies issued by South African assurers are not taxed in the hands of the investor.

However, in the days before the partial relaxation of exchange controls and South Africa’s re-entry into the global financial markets, many South Africans invested in the offshore equivalent of these insurance products. This was mainly because they did not generate any income streams which would be taxable in

South Africa. Many of these investments were regularised by South African resident investors in the 2003 tax and exchange control amnesty; however, the tax status has up until now remained unclear. To compound the problem many, if not all, of these offshore insurers closed their local offices or faced the obligation of registering in South Africa. As a result it has

become the responsibility of local South African independent financial advisers to pick up the difficult advice burden of these orphan products.

The lesson here is when considering unusual or offshore investments, it is always best to consult with your financial adviser regarding these products; their experience and expertise can assist you and help you mitigate any negative repercussions of uninformed investment decisions in the long term.

A recent binding private ruling by the South African Revenue Service (SARS) serves as a useful reminder that investors need to consider many different angles before entrusting their hard-earned money to an investment scheme.

Gavin Came | Chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern Africa

“It is well understood that since South African assurers pay income tax and capital gains tax to SARS on behalf of investors via the four-fund approach, generally, the proceeds of policies issued by South African assurers are not taxed in the hands of the investor.”

iNduStry aSSociatioNS

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Global financial markets have been extremely volatile since August, almost mirroring the 2008 Lehman Brothers experience. This is as risk aversion continues to increase on European sovereign debt woes as fears of a Greek default intensify and speculation on a possible European banking crisis escalates. Worries of another global recession, led by the US and Europe, have also contributed to increased market jitters. Economic data has continued to turn distinctly negative, dashing earlier hopes that the slowdown was mainly a soft patch. These market fears have seen a sharp sell-off of equities in favour of US and German fixed income, gold and the Swiss Franc, leading to the Swiss authorities capping the currency at 1.20 to the Euro to prevent further appreciation. The Swiss Franc and the gold price have since pulled back, while the Dollar has gained significant strength, particularly against emerging-market currencies, including the Rand.

The Rand has depreciated significantly since August, shooting up to above R8.40/$ in September after remaining relatively stable at around R7/$ for most of the year. Many other emerging-market currencies have also weakened, such as the Brazilian Real, the Hungarian forint, the Polish Zloty and the Chilean Peso. While increased risk aversion and Dollar strength have contributed to this weakness, the sell-off does not necessarily imply emerging markets have become more risky. Even the currencies of countries with very strong economic fundamentals, such as Singapore, have noticeably weakened. The key reason for the sell-off is the liquidity squeeze in Europe, which has

forced investors to move out of emerging markets, particularly ones from which they can withdraw funds with relative ease and speed. The Rand has been among the hardest-hit currencies, a victim of SA’s sophisticated financial markets.

The Rand’s outlook largely depends on the situation in Europe, which seems set to deteriorate further, at least in the short term, particularly given the authorities’ lack of resolve to decisively and adequately address the crisis. There is further risk that the European banking crisis could spill over into the US and UK banking systems if not contained. Deteriorating economic conditions will fuel increased risk aversion in the global financial system, making further short-term Rand weakness probable.

The currency’s weakness shifts SA’s economic fundamentals significantly. The first obvious negative effect is on inflation, adding to already high inflationary pressures from excessive increases in administered prices (such as electricity) and

non-productivity-related wage increases. While deteriorating economic conditions have increased the possibility of a rate cut, the worsening inflation outlook will limit the Reserve Bank’s ability to do so. Although some have argued that a weaker, more competitive Rand would boost economic activity, the currency’s weakness comes against a backdrop of a slowing domestic and global economy, and with that falling commodity prices. Also, the disorderly nature of the currency depreciation will further erode the already deteriorating business and consumer confidence.

Looking further out, fundamentals suggest possible Rand strength on the horizon. For one, the liquidity crisis in Europe only highlights the severity of the solvency crisis in the region. As a result, solvency will become an important investment consideration. Yield and growth will also become important drivers of investment decisions. Therefore, the European debt crisis, low yields in Europe, Japan and the US, as well as an unfolding recessionary conditions in these major economies, make emerging markets (including SA) relatively more attractive. This could shift investment flows back to emerging markets when the search for solvency, yield and growth resumes as market volatility and risk aversion abate. This was the case in 2008, when a sharp depreciation in emerging-market currencies, including the Rand, was followed by a period of strength. SA will benefit from these inflows into emerging markets, which could see the currency recover.

Philadelphia Oliphant | Economist at Investment Solutions

“The Rand’s outlook largely depends on the situation in Europe, which seems set to deteriorate further, at least in the short term, particularly given the authorities’ lack of resolve to decisively and adequately address the crisis.”

randON ThE RuN

philadelphia oliphaNt

To bailouT,OR NOT...TO BAiLOuT!

Political pressure in the EU has postponed the inevitable for months. After running around in circles for a very long time, the EU, together with its strongest economy, Germany, the European Central Bank (ECB) and the International Monetary Fund (IMF) have more or less come to a conclusion. In September, Germany agreed to back the European Financial Stability Fund (EFSF) with an additional €123 billion, demonstrating its commitment to resolving the EU debt crisis. This was a signal the market has been waiting for. This will probably be just one of the first real steps to resolve the issue completely (if that’s possible), but at least it helps to preserve some credibility in European markets in the meantime. Since then, other larger EU economies such as Italy and Spain have also come under pressure again and, no matter how obvious, this bad news has the tendency to send shivers through the markets.

Presently, bailing out struggling EU countries seems to be the only answer. The fine print must just still be challenged and finalised – which will probably drag the process out for a few months longer. Hopefully we will soon know who will contribute to the bailout, by how much and when. This is what the market needs now – surety.

Obviously there are other ways to go about saving Europe from default. Among the possible solutions for the EU debt problem is the creation of Eurobonds. These bonds aim to dissolve the relationship between the creditworthiness of a country and its cost of borrowing. This type of financial instrument could be very valuable in the EU where the normal economic tactics of devaluating the currency to cause inflation can no longer

be used to lessen the burden of debt. The rationale behind these type of bonds is that when pooled, European country debt doesn’t compare that badly to the debt of the US or UK.

According to the IMF, EU debt could reach 88 per cent of GDP in 2011, while debt in the US could be closer to 98 per cent, with the UK trailing close behind the EU at 83 per cent. Looking at debt from this perspective reduces its risk quite dramatically. Liquidity generated through these Eurobonds could support the EFSF when even this fund becomes too small to carry the load.

Of course, the stronger fiscal countries in the EU oppose the idea of Eurobonds. This would mean that their relatively low debt levels would rise substantially, putting the ‘richer’ countries such as Germany in a much weaker economic position. German taxpayers will eventually have to foot the bill as additional borrowing cost would be loaded onto them. Another big drawback of Eurobonds is that it would remove the

pressure on irresponsible governments to put their public finances in order – so, where is the lesson learnt in this?

At the end of the day it seems that a new way of dealing with unrestrained spending is born. Patch up your shortcomings with someone else’s money and be bailed out. Whether the bailout will be free, is yet to be proven. Wouldn’t it be handy if South Africa could also follow this example?

Yes to bailout! This seems to be the only solution to developed market debt problems that have been haunting the global economy since the financial crisis started in 2007. The US economy has used this monetary tactic to save itself from default several times in the past few years and now it appears as if the European Union (EU) will at long last follow suit.

Merina Willemse | Economist at EF Group

“Presently, bailing out struggling EU countries seems to be the only answer. The fine print must just still be challenged and finalised – which will probably drag the process out for a few months longer.”

ecoNomicS

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HOT

Sa’S reputatioN takiNg a kNock iN the Wake oF NatioNaliSatioN callSAccording to the Reputation Institute, South Africa’s improving reputation among the Group of Eight (G8) countries is being clouded by continual threats of nationalisation, concern about crime and the failure to sustain the high visibility and reputation gained after hosting Africa’s first FIFA World Cup in 2011.

Sa dropS iN ecoNomic Freedom raNkiNgSouth Africa has dropped five places to 87th out of 141 countries in a ranking of economic freedom by the Free Market Foundation (FMF), a member of the Economic Freedom Network. The revised ranking was due to the South African Government having a greater say in the economic decisions of its citizens, both in the proportion of State involvement in the economy relative to private ownership, and the regulation of business.

ubS lauNcheS iNveStigatioN iN Wake oF huge loSSGlobal financial services firm, UBS, has launched an internal investigation into the failure of its risk systems following rogue equity trades that cost the firm an estimated $2.3 billion. Following the loss, London trader, Kweku Adoboli, was charged with fraud and false accounting dating back to 2008.

WoolWorthS JoiNS elite Sa doW JoNeS groupWoolworths has become the only South African retailer to be listed on the

Dow Jones Sustainability Indexes (DJSI) – a family of indexes evaluating the performance of the world’s leaders in sustainability. The retailer is also one of only five local companies to be listed on the DJSI, joining

companies such as Sasol, Bidvest and the Nedbank Group.

SaNlam ScoopS aNother FuNd aWard Sanlam Employee Benefits won a communications award at the Institute

of Retirement Funds (IRF) Communications Challenge 2011 for its Sanlam Umbrella Fund. The award was in recognition for the fund’s

comprehensive understanding of its target market and follows awards for Employee Benefits Product Supplier of the Year by the Financial

Intermediaries Association (FIA) and Principal Officers Association’s prize for umbrella fund of the year.

home aFFairS receiveS uNqualiFied auditSouth Africa’s Department of Home Affairs has received its first ever

unqualified audit report since the end of apartheid. The department has been dogged by years of complaints regarding delays in the issuing of

work permits, passports and identity documents.

South aFrica Still uNdecided oN euro boNdS purchaSeAccording to South African Finance Minister, Pravin Gordhan, the country is still undecided on the issue of buying Euro bonds and is currently not in the same position as its partners in the BRICS grouping of emerging market powers who can afford to use their foreign exchange reserves.

sideways

NOT

barometer

INVESTSA44

eveNtS

INVESTSA held its second co-sponsored event with Investment Solutions in October, this time moving on from the Mother City to the City of Gold. However, while Johannesburg may have a glittery name, the talk at the event was far more sobering.

In the current environment, it is perhaps unsurprising that much of this discussion centred on risk – we are once again (as we go to press) in a maelstrom of economic and market turmoil. Like its predecessor, this event carried the tag line Horizons – Challenging the Status Quo and was held at the Sandton Convention Centre in Johannesburg on Tuesday, 4 October. Nearly 200 guests attended from both the asset management and financial intermediation industries.

Once again, a major drawcard was the esteemed panel. Derrick Msibi, managing director, Investment Solutions, kicked off proceedings and was followed by his colleague and well-known economist Chris Hart, chief strategist at Investment Solutions. As always, Chris’s talk was enlightening, yet in the current environment certainly gave one pause for thought.

The rest of the panel comprised a host of well-known figures from the industry: Piet Viljoen, Sunel Veldtman, Muitheri Wahome, Anne Cabot-Alletzhauser and Gavin Came and was chaired by INVESTSA’s Maya Fisher-French.

There were a myriad topics that came under discussion, yet an overriding theme was that of risk and understanding what exactly risk

means to your client. Can investment risk be measured simply by volatility or is it the permanent loss of capital? And what about inflation risk as inflation fears rise and interest returns fall. With personal inflation rate closer to 10 per cent and cash yielding six per cent at best, which is higher risk over the long term: cash or equities?

Among the many other topics under discussion were the ever-present Regulation 28; the role of the financial adviser and what retail investors are really looking for in their planner; and, of course, how best to cope in a financially tumultuous market.

Look out for our combined December-January issue for a special feature by Maya Fisher-French who provides some in-depth analysis of the issues raised at the event.

If you are interested in attending future INVESTSA events, please do contact us to register and we will provide you with all of the necessary details. Not only is there no charge to attend, but FPI members can also claim CPD points

iNvESTSA AND iNvESTmENT SOLuTiONS EvENT ATTRACTS LEADERS Of ThE iNDuSTRY

Brought to you by:

The evolution of wealth

45INVESTSA

“It is unlikely that anyone intentionally set out to borrow more than they should. However, they were given the freedom to decide on the optimal amount they should borrow, given their particular circumstances. Instead, most people borrowed at the maximum amount they were allowed to, as this is an easier question to answer.”

Following the INVESTSA event, Nishaan Desai, retail chief investment officer at Alexander Forbes Retail, sent us the following letter which we wanted to share with the rest of our readers.

I was fortunate enough to attend the seminar on Tuesday and found the panel discussion to be most interesting. What surprised me though was the vehement opposition to Regulation 28 by some of the panellists. A reading of the new Regulation 28 would immediately make clear that it is a significant improvement on the old version. While the Regulation does prescribe limits for asset classes, it moves (albeit slightly) toward a more principle-based regime. The explanatory memorandum describes that retirement funds should engage with the registrar for exemption when the limits may not be in the best interest of members. In principle, I too would favour a regime where there are no rules and individuals are free to select the optimal asset allocations themselves. However, this is based on the assumption that all individuals fully understand the choices available, and equipped to make these decisions. Human decision-making patterns are, however, prone to irrational behaviour.

None of this is new, and was raised by some of your panellists. The reason I am writing to you though, is because I came across a similar example in a book I have just finished, Predictably Irrational by Dan Ariely (which, incidentally, was lent to me by your panellist and my colleague Anne Cabot-Alletzhauser, whom I have copied on this email).

In the book, Ariely discusses the sub-prime crisis, and in particular how individuals ended

up in situations where they were over-indebted. He points out that it is unlikely that anyone intentionally set out to borrow more than they should. However, they were given the freedom to decide on the optimal amount they should borrow, given their particular circumstances. Instead, most people borrowed at the maximum amount they were allowed to, as this is an easier question to answer. He explains it like this: “When we can’t figure out the right answer to the question facing us, we often figure out the answer to a slightly different question, and apply this answer to the original problem.” Even experts in the field that Ariely turned to with his question gave the answer of the maximum amount he should borrow. In fact, other research shows that experts within their fields are susceptible to being overconfident in their abilities.

This type of behaviour is already common in the investment of retirement savings, in my opinion. Most people/financial advisers make their asset allocation decisions based on what the regulation allows rather than what is the ideal one to meet their objectives.

Ariely sums it up best when he says, “You see, in a perfectly rational world, it would make sense to eliminate all limits and regulators from all markets, including the mortgage market. But because we don’t live in a perfectly rational world, and because human beings don’t always naturally make the right decisions, it makes sense to limit our ability to cause damage to ourselves and others. This is the real role of regulations – they provide us with safe boundaries.”

hORizONS EvENT OPENS uP A DEBATE

“

”

INVESTSA46

Most financial advisers are well aware of the benefits of integrating technology into their practices, particularly in the new regulatory environment. However, many are daunted by the number of choices available, and they lack sufficient time to develop a comprehensive technology strategy for their business.

A good place to start is to identify the processes your practice performs, and then map the appropriate technology solutions to those processes. The Institute of Practice Management has identified three main business processes in the typical financial advisory practice:

1. a process that markets for new business or new clientsHow the business identifies new business, builds relationships and markets solutions.

2. a financial planning or investment management processHow the technical work is carried out in the business with the main focus being on creating, implementing, tracking and reviewing financial plans and investment portfolios.

3. a relationship management processHow the business communicates with and educates clients as well as how relationships are managed on a regular basis.

Excellent technology solutions exist to assist with each aspect of these three processes, but it is important to consider your needs holistically as it is often possible to find one solution that ticks all boxes. This month we will focus on solutions for marketing to new clients and managing existing clients. These systems can be found under the banner of customer relationship management (CRM) tools. Next month we will look at IT solutions to support your financial planning and investment management processes – some CRM packages may have financial planning tools built in, but once again, your needs will determine the complexity of the system you require.

When choosing a solution for your practice, there are a number of important aspects to consider.

list your business objectivesMake sure your business objectives are clear and measurable so that you know what you want to achieve by implementing a CRM system. For example, an objective may be to increase retention of current clients by five per cent over the next three years. You may also want to increase your client base by 10 per cent over the same period.

It will be much easier to identify a suitable CRM system if you know what business objectives it should support.

consider which crm system best fits your needsAgainst your objectives, identify what you expect your CRM tool to give you. Is it scalability to help you serve more clients, or efficiency in daily tasks so you can spend more time servicing existing clients and/or looking for new business? Do you want a system that can help you segment your clients to understand them better and market to them more appropriately? Or are you looking for a reporting tool that will aid record-keeping and transparency in your practice, ultimately facilitating business continuity and succession planning?

Once you have identified your objectives and your specific requirements, you can use this information to help you decide what features and functions you need in a CRM system, and thus which solution best meets your needs.

implement the systemIt is a good idea to think about how you will integrate your CRM technology into your practice. How will you motivate your staff to use the new system? Who will train them? Many solution providers offer training as part of their service. Change management is also an important consideration – employees are often reluctant to do things differently. You need to share the benefits of the system with your staff and demonstrate to them how the new system will help you all manage your clients more effectively.

Finally, as with any significant investment, it is important to evaluate regularly whether you are actually getting the value you want from your software.

Sources: Article by Spenser Segal, Practice 101 - Institute of Practice Management.

“Identify the processes your practice performs, and then map the

appropriate technology solutions to those processes.”

This page is sponsored by Allan Gray, an authorised financial services provider. Allan Gray believes in and depends on the merits of good and independent financial advice. Allan Gray also acknowledges the pressure that independent financial advisers face currently and therefore has launched Adviser Services as a support function to all Allan Gray contracted financial advisers. Its goal is to facilitate effective financial advisers’ practices and protect the independence of the financial adviser in the South African market with ultimate benefit to their clients. Adviser Services shortlists third party suppliers based on market research to provide support in identified areas that would support an IFA’s business operations (such as software, compliance, practice management, training and more). Adviser Services performs research and maintains the shortlist of selected vendors on an ongoing basis. All pre-negotiated terms, conditions and fee structures as well as vendor contact details are published on the Allan Gray secure website.

integrating technology into your practice

better buSiNeSS

The September Performance Survey continues to highlight the need to look beyond traditional vanilla asset classes in order to explore opportunities for investment performance.

commoditiesNewGold, which has been trading on the JSE since 2003, comes out tops in many of the performance periods surveyed. In recent times, NewGold has been joined by a number of other exchange listed products giving direct access to investment in physical commodity markets. This asset class is, accordingly, now readily available in liquid, transparent and low cost listed products for investors looking to diversify their portfolios.

propertySometimes called the fourth asset class, this has been available to investors through various products for some time. However, ETFs specialising in passively tracking the listed property index components are becoming increasingly popular, both here and abroad.

industrialsWhile a sector of the equity market, rather than an asset class in itself, the South Africa industrial sector has been a consistent performer for the past number of years. The Satrix INDI 25 ETF has now overshadowed the performance of the All Share and Top 40 indices for a number of years, indicating that exposure to financials and mining shares can add volatility risk to long-term performance.

bondsThe two ETFs tracking the bond index, namely the BIPS Inflation-x and the zShares GOVI, have provided positive performance in all the periods measured over the past two years, a rather different pattern to the more volatile fluctuations in the equity market.

The full Performance Survey can be accessed on www.etfsa.co.za.

MONTHLY SOUTH AFRICAN ETF / INDEx TRACKING PRODUCTS PERFORMANCE SURVEY – SEPTEMBER 2011

etfSa.co.za

mike brown | Managing Director | etfSA.co.zaBest Performing Index Tracker Funds – 30 September 2011 (Total Return %)*

Fund Name Type 5 Years (per annum)

NewGold ETF 23.36%

Prudential Property Enhanced Unit Trust 17.35%

Satrix INDI 25 ETF 14.05%

3 Years (per annum)

Prudential Property Enhanced Unit Trust 19.23%

Satrix DIVI ETF 18.66%

NewGold ETF 16.10%

2 Years (per annum)

NewGold ETF 29.27%

Satrix INDI 25 ETF 18.04%

NewFund eRafi INDI 25 ETF 15.71%

1 Year

Standard Bank Silver-Linker ETN 59.05%

NewGold ETF 41.69%

Standard Bank Gold Linker ETN 40.85%

6 Months

Standard Bank Gold-Linker ETN 33.51%

NewGold ETF 33.23%

zShares GOVI ETF 11.11%

3 Months

Standard Bank Gold-Linker ETN 25.90%

NewGold ETF 25.61%

1 Month

DBx Tracker Japan MSCI ETF 14.82%

DBx Tracker FTSE 100 ETF 6.22%

Source: Profile Media FundsData (30/09/2011)* Includes reinvestment of dividends.

iNduStry NeWS

appointmentS

Novare Investments has appointed Ronnie Retief as head of multi-management at Novare Investments. Retief holds a post-graduate diploma in financial planning from the University of Free State. He joins Novare Investments from Sanlam Multi Manager International where he held the position as senior portfolio manager on both institutional and retail multi-manager portfolios.

Mariette Warner has been appointed as manager of the Absa Property Equity Fund. Warner holds a BSc (Hons) and BCom (Hons) from the University of Cape Town. With multiple awards and 28 years’ experience in the financial services industry, she was previously head of the property franchise and portfolio manager at the STANLIB Property Income Fund.

Glacier by Sanlam has appointed Ignatius Hagglund as head of finance. Hagglund is a chartered accountant and holds higher diplomas in taxation and international taxation. He joined Sanlam in 2007 and has experience in valuations and transaction structuring.

MitonOptimal, the specialist global multi asset management company, has announced the launch of its new institutional asset consulting business in South Africa.

With a 15-year track record of global multi asset management and five years’ domestic experience in the South African retail (collective investment schemes) space, MitonOptimal is well positioned to become a leader in implemented consulting and other business growth opportunities.

Professor Evan Gilbert has been appointed as director and head of international asset consulting for the new business.

Prof. Gilbert said he strongly believes that the value proposition of active asset allocation and implemented consulting, combined with multi management, can only continue to gain immense traction in the local market.

Scott Campbell, managing director and fund manager at MitonOptimal added: “Since we founded this business, we have believed that the value proposition in portfolio management is global diversification and the ability to add asset allocation alpha by tactical decision making and timeous implementation. The team led by Prof. Gilbert and ourselves has the pedigree and enthusiasm to create a new force in the South African institutional industry.”

miTonoPTimal launcHes

insTiTuTional asseT consulTing

business in souTH afRica

PSG Konsult, the independent financial services provider, announced strong results for the six months to August 2011, with headline earnings increasing by a healthy 14.1 per cent from R55.3 million to R63.2 million.

Headline earnings per share also grew by 14.1 per cent to 5.9 cent. The results were achieved on the back of turnover, consisting of commission and

other operating income, rising by 16.5 per cent to R675.3 million.

PSG Konsult CEO Willem Theron said the company, which was on an acquisition trail earlier this year, was satisfied with the results. The group merged PSG Fund Management into PSG Konsult and in May 2011 effectively acquired online unit trust trading platform Equinox and

short-term insurance broker and administrator Pleroma.

“The group’s focus will now be on utilising the synergies between these businesses and to create opportunities. This includes the simplifying of the organisational structure, establishing a single comprehensive asset management brand and centralising of research,” said Theron.

Ronnie Retief

INVESTSA48

Mariette Warner Ignatius Hagglund

Psg financial ResulTs geT THe

THumbs uP

South African hedge funds significantly outperformed equities during the first half of 2011 – a period of severe market turbulence. The Blue Ink All South African Hedge Fund Composite (BIC) showed returns of 2.11 per cent during the first half compared with a negative return of -0.61 per cent by the All Share Index (ALSI) over the same period.

The BIC, which tracks the performance of around 100 hedge funds in South Africa, continued this trend by outperforming the ALSI by more than three per cent in July. This outperformance was achieved with significantly less

volatility levels than the local equity market.

According to Eben Karsten, portfolio manager at Blue Ink Investments, the worst 12-month return an investor who invested in a local hedge fund would have earned over the past three years is just over one per cent, compared to the -37.59 per cent an investor could have lost if invested in the ALSI.

He said that the extreme volatility levels of global stock markets recorded during the first half of 2011 have reiterated the need for investors to maintain exposure to strategies such

as hedge funds and other alternative asset classes that offer a degree of protection in times of market turbulence.

He added that over the past three years, local hedge funds have on average also outperformed the ALSI by more than 10 per cent, with only 2.58 per cent volatility. This is in comparison to the 19.90 per cent volatility recorded in the ALSI. “The three-year total return of 33.38 per cent from local hedge funds illustrates the protection hedge funds offer during periods of stock market turmoil. It’s exactly this kind of downside risk investors avoid by going the hedge fund route.”

49

Absa Capital, the corporate and investment banking division of Absa Bank Ltd, was again ranked Overall Top Bank in the annual RISKSA magazine South Africa rankings survey for 2011, retaining its top spot from last year.

Underscoring their market leadership position in South Africa, Absa Capital was ranked first in a further eight categories, including foreign exchange (overall), risk management advisory and interest rate options and exotics.

The survey forms part of a series of surveys conducted across a range of sectors in the financial and capital markets.

“We are very pleased with these results. The RISKSA rankings are client-driven, bearing testament to the fact that our valued clients benefit from our unique fully local, fully global business model, client-centric approach and innovative product offering,” said Stephen van Coller, chief executive of Absa Capital.

annual Risksa suRvey Reveals absa

caPiTal ReTains TiTle as ToP

oveRall bank

Hedge funds ouTsHine

equiTies in fiRsT Half

A second study of black ownership initiated by the JSE has found that black ownership of the available top 100 listed stocks on the JSE is currently at 28 per cent, exceeding the 25 per cent black ownership target by 2017 laid out by government.

The findings, which align to the Department of Trade and Industry (dti) method, excludes certain categories of ownership, which means that 32 per cent of the market still has to be analysed, indicating that the percentage of black ownership could

in fact be much higher. The top 100 companies listed on the JSE used in the study represented 85 per cent of the total market capitalisation of the exchange and could be used as a proxy for the total market.

Last year’s study revealed that black South Africans held eight per cent of the top 100 companies through direct investment. It was discovered that this year the eight per cent of direct investment remains the same and that black South Africans own a further nine per cent of shares in the top 100 companies mainly through mandated investments.

black owneRsHiP of

Jse eXceeds goveRnmenT’s

TaRgeTs

produCtS

productS

Sanlam Investment Management offers diversified exposure needed across asset classes

With interest rates at historically low levels around the world and bonds looking expensive, Philip Liebenberg, head of absolute returns at Sanlam Investment Management, believes that selected equities still offer the best value for investors in a diversified portfolio that contains cash, bonds and equities.

He said Sanlam Investment Management has two funds that put the emphasis on capital stability and thus are ideal for the current investment climate: the SIM Inflation Plus Fund; and the SIM Low Equity Fund. Both funds aim to protect capital from downside risk while still giving investors the opportunity to participate in the potentially superior returns delivered by equities.

The SIM Inflation Plus Fund is structured to deliver absolute returns in excess of inflation over rolling three-year periods. The fund manager also invests on the basis that the fund should consistently deliver a positive return over rolling 12-month periods. It offers a blend of equities, international assets, inflation-linked bonds, property and money market instruments. Through having some exposure to credit, it is able to outperform money market returns.

Meanwhile, the SIM Low Equity Fund aims to achieve capital stability, growth and income

generation. It cannot hold more than 40 per cent in equities in terms of asset allocation and invests in a blend of equities, international, property, money market and bonds. Currently the fund has 30 per cent in equities and can take advantage of value opportunities that arise.

Fundamental indexing – a first from Plexus

A new type of indexing known as fundamental indexing has been licensed to Plexus by California-based Research Affiliates. The enhanced RAFI methodology (RAFI) uses fundamental accounting measures of company size (including sales, cash flow, book price and dividends) rather than market capitalisation in index construction. The index is then further enhanced (eRAFI) by incorporating additional factors such as quality of earnings and financial distress, along with more frequent rebalancing in comparison to a traditional index.

“The RAFI methodology provides all the benefits of traditional market cap-weighted indices, including diversification, liquidity, low turnover and competitive fees, while generating incrementally higher returns with lower volatility than comparable market cap-weighted indices,” said Paul Stewart, managing director of Plexus Asset Management.

By avoiding the inherent valuation bias of market cap weighting, he says RAFI strategies have outperformed market cap-weighted index strategies by as much as 2.0 per cent per annum in the US and by more than 2.5 per cent per annum internationally over extended measurement periods.

According to Stewart, back-testing the eRAFI methodology on the JSE from 1993 to September 2011 delivered synthetic returns of over 19 per cent per annum as measured by the Plexus Absa Capital eRAFI Overall SA Index. The market as a whole achieved 14.5 per cent per annum.

“Not only did the eRAFI methodology add outperformance (i.e. so-called alpha) of more than five per cent per annum, but this was also achieved at reduced levels of volatility.”

50

51INVESTSA

tough times ahead for italian economy after S&p downgradeRatings agency Standard & Poor’s downgraded Italy’s credit from A+ to A and kept its outlook on the country as negative, saying weakening economic growth and political uncertainty have dented Italy’s financial stability. Prime Minister Silvio Berlusconi said the Italian Government is undergoing preparations for interventions to balance the budget in 2013.

britain to spend £7 billion to safeguard retail operations from risky investmentsThe Independent Commission on Banking announced that Britain’s banks need to protect their retail operations from riskier investment banking units and increase capital levels to protect taxpayers from future crises. The announcement was made by Chancellor George Osborne, who said the proposal would cost the industry £7 billion a year.

russia soon to be the next member of WtoRussia will soon be the newest member of the World Trade Organisation, provided its southern neighbour, Georgia, stops blocking its accession. Georgia requires Russia to give guarantees that trade relations between both countries will be transparent and only then will they consider negotiations. Russia has been trying to join the WTO since 1993 and is the only major economy that is still not a member of the trade group.

Fitch warns Spain of possible downgradeSpain’s credit ratings could be downgraded, according to Fitch Ratings, as the country’s regions battle to reach deficit-reduction targets due to poor economic growth. Currently the country holds a rating of AA+ with a negative outlook. The agency warned that a slowdown in growth in European countries would make it more difficult for Spain to meet its 1.3 per cent 2011 growth forecast.

egypt applies for loan from amFEgypt has asked the Arab Monetary Fund (AMF) for a loan to support its balance of payments to cover its immediate needs of about $7 billion, according to Finance Minister Hazem El Beblawi. This comes after the country refused to accept further loans from the International Monetary Fund (IMF) or the World Bank. Instead Egypt is reaching out to international investors and partnerships in order to promote economic growth.

Swaziland’s fiscal crisis deepensLandlocked Southern African country Swaziland has been urged by the IMF to make further budget cuts after it accepted a R2.4 billion ($324 million) loan from South Africa in August. Swaziland was unable to borrow money directly from the IMF after failing to meet conditions attached to their non-financing IMF staff-monitored programme.

Japan proposes major tax hikeNew Japanese Prime Minister Yoshihiko Noda is looking to implement a programme of austerity, including major tax increases. The temporary 10-year increase in income and regional taxes are measures aimed at accumulating 11.2 trillion Yen ($US146 billion) to help cover reconstruction costs for the March 2011 earthquake and tsunami that crippled much of northeastern Japan.

Swiss to cap Franc’s rise as a result of currency warSwitzerland has been forced to take immediate action to halt the rise of the Franc on the world’s foreign exchanges due to the ongoing crisis in the Eurozone. The Swiss National Bank said the current massive overvaluation of the Swiss Franc poses a threat to the Swiss economy and carries the risk of a deflationary development.

Sa ranked second highest among bricS countries in global competitiveness index South Africa has been ranked second highest among the Brics countries in a global competitiveness index for 2011–12 after moving up four places to 50. The index, compiled by the World Economic Forum (WEF), covers 142 countries. Among the BRICS countries, China outperformed SA with a rating of 26. Brazil ranked 53, India 56 and Russia 66.

Women in Saudi arabia get the voteSaudi Arabia has moved to give women the right to vote and to stand for election; however, the change will kick in only after four years following the current local elections. Earlier this year, a number of women were arrested in Saudi Arabia after being caught driving on the city streets. While it is not illegal for women to drive, they are not issued with licenses.

INVESTSA52

Sporting events play a significant role in modern culture, bringing fans together from across the world. This was evidenced by the huge interest in the 2011 Rugby World Cup, which led many South Africans to kit themselves out in Bokke jerseys for the games.

South Africa may not have walked away with the title this time, but these events can sometimes have more than one winner – with those who keep hold of precious memorabilia sometimes netting themselves a tidy profit.

While mementoes from the Rugby World Cup may prove lucrative in the future, it seems nothing beats soccer in terms of desirability and investment potential. With more than three billion supporters, soccer is the most popular team sport worldwide making it a lucrative market for investments, too. According to Paul Fraser, from Paul Fraser Collectables, football memorabilia is a growing market and has huge potential. “Not only are people buying a great memory, they’re also buying a superb display piece, and a great investment for the future.”

Here are a few of football’s most valuable items ever sold.

the Football association challenge cup – £278 400

The most expensive football memorabilia ever sold is the FA Challenge Cup that was presented to Lord Kinnaird in 1911 to celebrate his 21st anniversary as president of the Football Association. The item was sold by Christie’s in May 2005 for a whopping £278 400.

replica Jules rimet trophy – £254 500

Since the start of the World Cup in 1930, two trophies have been given to the victorious team: the Jules Rimet Trophy from 1930 to 1970, and the FIFA World Cup Trophy from 1974 to the present day. The second most expensive piece of football memorabilia is a replica of the Jules Rimet trophy sold for £254 500.

Nobby Stiles’ World cup Winners medal – £188 200

The 1966 World Cup Winners Medal awarded to Nobby Stiles was sold for £188 200 in September 2010 and ranks as the third most valuable piece of football memorabilia. Stiles sold the medal, together with a European Cup winners medal awarded when playing for Manchester United Football Club and the shirt he wore for that game, to raise money for his family. The medal was bought by Manchester United Football Club where Stiles spent the majority of his career.

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they Said...

“This is really horrific to put it mildly. I’m

surprised that it is this bad. What you see

is general weakness coming through from

the slower world economy and loss of

competitiveness of local products – partly due

to the strong Rand and partly due to escalating

production costs.” Nedbank economist Nicky

Weimar on the plunge in manufacturing and

mining output.

“The growth scenario looks much worse; one

would say that growth is stagnating. We are

witnessing a growth slowdown across OECD

countries.” OECD (Organisation for Economic

Co-operation and Development) chief

economist pier carlo padoan on the outlook

for economic growth in developed countries.

“In order to solve the climate crisis we have

to go far. It’s easy to see slow progress and

get discouraged that anything is possible

but the Berlin Wall came down in a day. We

have the capacity to transcend our limitations

and constraints and do great things. Always

remember we have everything we need,

with the possible exception of the political

will, but political will is itself a renewable

resource.” al gore, former US vice-president,

global environmental activist speaking at the

Discovery Invest Leadership Summit.

“Risks are elevated and time is running

out to tackle vulnerabilities that threaten

the global financial system and the

ongoing economic recovery.” The

imF in its Global Financial

Stability Report.

“How asset managers protect capital in a

downturn market has a very significant effect

on long-term performance and should not

be ignored. Over the long term, the winner

is not the investor who makes the most when

the markets go up, it’s the investor that loses

the least when the markets go down.” linda

eedes, senior analyst at RE:CM, a value-based

asset manager, on selecting an asset manager.

“China might be having some kind of

pullback, and in Europe we don’t know how

we’ll swing with the sovereign debt issue.

There are concerns of a global slowdown,

and we don’t have any data to suggest we

won’t have a double-dip (recession).” Jeffrey

Friedman, senior market strategist at MF

Global in Chicago.

“We should not cave in under this dictatorship

of ratings agencies, whose transparency is in

serious need of improvement.” French Foreign

Minister alain Juppe on Standard & Poor’s

one-notch cut in Italy’s credit rating.

“This is great news. Now it is time to remove

other barriers like not allowing women to drive

cars and not being able to function without

male guardians.” Wajeha al-huwaider, a

women’s right activist, on Saudi Arabia’s move

to allow women to stand for election and vote.

“The current approach in Europe has been

that of kicking the can down the road. The

European crisis could be worse than Lehman.

You have a banking crisis – banks are

undercapitalised and have not restructured

properly.” Nouriel roubini, economics

professor, NYU Stern Business School speaking

at the Discovery Invest Leadership Summit.

“South Africa does have alternatives to

the ruling party … there are eight political

parties in our Parliament.” Political economist

moeletsi mbeki, who also said ANC

politicians realise that they will not be in power

forever and “are lining their pockets”.

a selection of some of the best homegrown and and international quotes that we have found over the last four weeks.

54

19963 Satrix DiviAd 297x210R.indd 1 10/08/2011 15:47