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66437 INVEST SA.indd 1 28/03/2011 14:09

May 20116

There’s more than a touch of nervousness in the air. Share prices on the JSE remain jittery and we are hearing of some asset managers who

have been switching large parts of their portfolios into cash. Clearly, they expect something to happen at sometime.

If and when that something happens, clients will become very nervous and that is when financial advisers will have to draw on all their skills and experience to help make rational investment decisions. The next few months could be telling. The most tangible fears for advisers now are rising rates of inflation and interest rates. There are two schools of thought on this. One is that a properly structured investment portfolio should be able to ride out the changes. The other is that now is the time for portfolios to be adjusted.

We deal with the topics in this issue. Head-to-Head has Jonathan Myerson of Cadiz Asset Management and Roeloff Horne of MitonOptimal debating how best retirees can benefit from the expected interest rate increases. Market jitters are covered in the asset management section where investment experts look at the black swans that have emerged all over the world and what this means for the JSE.

Maya Fisher-French sounds an alert on investing in empowerment deals and, in her second feature, looks at who’s getting what in the feeding chains. Some of the findings may surprise. Miles Donohoe assesses the impact of the Japanese disaster on financial markets and gets some expert views. There are

some important lessons to be learned. He also looks at the likely boost for alternative investments, particularly local hedge funds, from the amended Regulation 28. On a related theme, this month’s profile is on Thomas Schlebusch, CEO of fund of hedge funds manager at Blue Ink Investments.

I look at the growing range of investment products being developed for Muslim clients, whose religious beliefs preclude investment in many of the large companies listed on the JSE. Options now extend beyond unit trust funds. I also look at the dangers of investing in and owning companies that deal with government. Big contracts are signed for large amounts of money. Then payment isn’t forthcoming.

I’m sure there’s a lot of information you can use in this issue. Despite the apparent nervousness, there are always investment opportunities.

If you have specific questions or issues you think we should be looking at, let us know and we’ll do our best.

May the fear not be with you; until next time.

letteR fRom tHe editoR

LETTER FROM THE

editoR

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Communications Pty (Ltd). The mention of specific products in articles or

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by this journal or its publishers in preference to others of a similar nature,

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EDITORIAL

Editor:Shaun [email protected]

Features writers: Maya Fisher French Miles Donohoe

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Editorial head officesGround floor | Manhattan Towers Esplanade Road Century City 7441phone: 0861 555 267 or fax to 021 555 3569www.comms.co.za

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Hedge funds to get a

boost from Regulation 28

but what does it mean for pension funds?

FINALLy RECEIVE SEAL OF APPROVAL

By Miles Donohoe

9May 2011

Previously pension funds could allocate only 2.5 per cent of their capital into what was known as the ‘other’ category which included both hedge funds and private equity.

The new amendments mean that pension funds will now be able to invest up to 15 per cent of their capital into other asset classes. In total, 10 per cent can be allocated to hedge funds – with a maximum of 2.5 per cent in a single hedge fund manager – while a further five per cent can also be invested in other alternatives such as private equity and other unspecified investments.

Industry estimates have suggested that this change in regulation – which potentially gives retirement vehicles the opportunity to quadruple their exposure to hedge funds as well increase their exposure to other asset classes – could see the local hedge fund industry grow from its current level of about R30 billion to as much as R250 billion (equivalent to 10 per cent of the R2.5 trillion pension fund market).

However, Thomas Schlebusch, CEO of Blue Ink Investments, the fund of hedge funds manager, said this is unlikely to happen immediately. “The R250 billion target is an absolute best case scenario. In the short term, we don’t expect to see a massive change in allocations to hedge funds, however, this will have a significant impact in the long term.”

Schlebusch added that the take-up of the full allocation to hedge funds will be a gradual process for many retirement funds. “There is still a lot of education that needs to be done in order to convince those operating in the industry to increase their exposure to hedge funds and other alternative asset classes. In the past, as an unregulated asset class, it was not possible for hedge funds to solicit investments.”

Carla de Waal, head of funds of hedge funds at Novare Investments, said the formal inclusion of alternative investments in pension fund legislation will mean that they can no longer be merely written off as an unregulated asset category that does not require any further analysis. “Prudent investors should consider all of their investment options under the wider range of asset categories in the new Regulation 28, not least to ensure they comply with their fiduciary duties.”

She added, however, that take-up by pension funds is likely to be a slow process given the mechanics of boards of trustees. “The investment responsibility remains squarely with trustees, even though they might use service

providers and consultants to help them with their investment decisions. So they would still need to be comfortable with any investment and be able to understand the risks involved and how to mitigate these in a portfolio context.”

The education of trustees is often cited as a stumbling block for legislative changes in the industry and it seems that Regulation 28 will be no different. As a result, it is going to be essential for those operating within the alternative space to play their part in educating both trustees as well as others in the industry as to the benefits of alternative asset classes, to ensure that Regulation 28 is implemented effectively.

Magda Wierzycka, CEO of Sygnia Asset Management, notes that few trustees have yet begun to appreciate the impact that this new legislation will have. “Although the regulation remains largely rules-based, it introduces a number of principles which are to govern trustees’ investment policy statements going forward.”

Aside from the impact on the alternative investment industry, Wierzycka said this includes compliance with the spirit of regulation as well as the need to perform appropriate due diligence when making investment decisions. “Boards of trustees seldom go beyond sitting through a beauty parade of asset managers. Few look at the nature of investments and even fewer consider the risks inherent in the strategies employed by asset managers, or indeed the operational structures of such managers.”

For the hedge fund industry, Regulation 28 provides the perfect platform for alternative investment providers to begin engaging with and educating trustees as to the reasons why they should be considering alternative investments, such as the fact that they offer downside protection and diversification.

Unlike their international counterparts, South African hedge funds offer investors downside

protection from the more risky asset classes such as equities.

De Waal said this has helped investors in hedge funds avoid some of the worst of the recent volatility experienced in hedge funds over the last few years. “Most local hedge funds held their ground well during the first half of 2010, preserving capital while the equity markets suffered another drawdown. It is this characteristic of potentially reduced downside when equity markets suffer, that could in particular add value to pension fund portfolios.”

Despite this downside protection characteristic, which is ideal for vehicles such as pension funds, she believes the 10 per cent limit is sufficient. “Hedge funds remain a good portfolio diversifier but the legislated limits are prudent to reduce non-market risk and to reduce counterparty exposure.”

Mako Mapfumo, senior investment consultant at OMAC Actuaries and Consultants, said he expects pension funds to increase their allocation to alternative investments after the introduction of Regulation 28, as many of these funds often tend to look at the limits imposed by regulators as an endorsement of the optimal exposure that their fund should have. “The 10 per cent allocation may not be enough as far as the growth needs of retirement funds are concerned. However, it is fair considering where we are coming from and market conditions. In private equity for example, the SA private equity market is still in its development phases and has capacity.”

He said, however, that the take-up of this allocation will be a gradual process, as pension funds slowly realise that growth is a problem.

Schlebusch said there has already been some interest from pension funds towards utilising their hedge fund allocation. “Pension funds which look to increase their alternative exposure now will have the option to cherry pick the best of the hedge fund industry, however, the danger is that those who continue to sit on the sidelines will be left with a less optimum choice of investments when they do make the call.”

Regulation 28 heralds much change for the retirement industry, with increased exposure to alternative investments being just one of a number of new items on the agenda for trustees.

However, for an asset class that has historically been written off as a risky bet best left to private investment vehicles, the legitimacy that this new amendment brings to hedge funds specifically, perhaps signifies a greater shift in opinion of this asset class in the future.

The amended Regulation 28 of the Pension Funds Act, which will become effective on 1 July 2011, is set to provide South Africa’s alternative investment space with its biggest shake up in years by massively increasing the amount that retirement investment vehicles can invest in this asset class.

“For the hedge fund industry,

Regulation 28 provides the

perfect platform for alternative

investment providers to begin

engaging with and educating

trustees as to the reasons why

they should be considering

alternative investments.”

SHauN HaRRiS

Though small in numbers, the Muslim community in South Africa holds

a significant presence in business. Comparatively speaking it is also a substantial financial market, as are Muslim communities in most other

parts of the world.

IslamIc funds and

InvestmentsFast becoming a sub-investment

class oF its own

May 201110

By Shaun Harris

11May 2011

The problem has been, at least until the last few years, it has been difficult to cater for Muslims on the investment front due to their religious-based belief in Shari’ah law. This strictly excludes earning interest, called riba, or investing in companies where interest plays a major role in the business, specifically banks and insurance companies. Shari’ah law also excludes companies involved in alcohol; stockbroking and asset management in non-Shari’ah approved shares; tobacco; certain entertainment companies involved in non-Shari’ah compliant activities like the conventional music and film industries; night clubs and pornography; pork and other non-halaal products; casinos; and armaments.

On the JSE that would seem to severely limit the universe of Shari’ah-compliant shares. Through the Shari’ah-compliant unit trust funds, of which there are a number available now, it does state that performance is not the main objective of the funds. Rather it is offering a fund suitable for Muslim clients that should offer a total return in line with comparable unit trust funds.

With so many big cap funds knocked out of the fund manager’s universe, the Shari’ah-compliant funds tend to be quite heavily exposed to resources shares. For example, Vladimir Nedeljkovic, head of exchange traded funds (ETF) and index products at Absa Capital, said the screening process from which the Shari’ah Investment Index (launched on the JSE in July 2008) is compiled leaves the funds “heavily slanted towards resources shares, which account for 84 per cent of the index”. He said that oil and gas, represented by Sasol, makes up 10 per cent of the index, telecoms just under three per cent and healthcare and consumer goods about three per cent. In April 2009, Absa Capital launched South Africa’s first Shari’ah-compliant equity ETF. Another Absa Capital product, the NewGold ETF, which invests in physical gold, is Shari’ah compliant.

yet even under these constraints, some of the Islamic funds perform exceptionally well. The latest Morningstar unit trust performance rankings show two Islamic funds amongst the top 25 performers over the six months to 31 March, the Kagiso Islamic Equity Fund with a return of 12,6 per cent and the Old Mutual Albaraka Equity Fund with a return of 11,6 per cent. Both are domestic equity general funds so you would expect a strong tilt towards resources, which performed well over the period. The Morningstar

six-month ranking has a number of resources funds at the top the table.

But the Kagiso Islamic Equity Fund has proved to be more flexible than just a resources heavy general equity fund. Over one year, it lies in sixth place in the Morningstar rankings with a return of 20,7 per cent. Notably the top of the table shows a fair divergence of different funds, so the six-month period was not just a resources story.

In its fund fact sheet to the end of February, the Kagiso Islamic Equity Fund, run by Abdulazeez Davids, shows a large holding in Sasol, making up 10,4 per cent of the portfolio. This is followed by MTN (9,9 per cent) and AECI (5,0 per cent). It is only in position nine in the top ten holdings that the first resources share – Pan African Resources – makes an appearance, comprising 3,9 per cent of the fund.

Even with a limited number of large shares to choose from, Davids has positioned the fund strongly ahead of its benchmark, the Domestic Equity General Funds Mean, over the past six months. It has also beaten the benchmark since it was launched in July 2009.

Islamic funds make strong demands on fund managers due to the constraints with which they are faced. But this can often make the performance of these funds better than the average for the category, for two reasons. The managers are not obliged to hold certain large shares that ordinary general equity funds are virtually forced to invest in because the large cap stocks make up a big part of the index. And secondly, because the Islamic fund managers have less shares to invest in, they will take larger bets on individual shares. If the

fund manager gets stock selection right, the fund will outperform the market and its peers.

But this entails some risk, the funds can be very volatile at times. Symmetry Multi-Managers came up with an answer to this by developing a Shari’ah-compliant fund that’s very similar to a balanced fund. It invests across different asset classes to get a lower risk profile than an equity-only fund.

The problem was that, to make the fund compliant with Regulation 28 of the Pension Funds Act and Shari’ah law, a fixed-income alternative to cash had to be found. Regulation 28 stipulates that at least 25 per cent of a pension fund must be invested in cash or interest-bearing investments.

The answer lay in a sukuk, also called synthetic cash. Meaning ‘certificate’ in Arabic, a sukuk is a structure where a Shari’ah-permissible asset or trading commodity is bought and then sold at a specified value to be settled at a specified date in the future. Sukuk holders, said Symmetry, are entitled to share in the revenues generated by the proceeds of the sale of the underlying assets. Sukuks are used overseas in Islamic funds but Symmetry was the first to offer it in South Africa. They say long-term returns from the fund will be comparable to a traditional balanced fund.

Sanlam Private Investors (SPI) offers a complete Shari’ah-compliant investment service for Muslim clients. Dedicated asset managers can construct investment portfolios for clients and be consulted on the investment process, and how it complies with Shari’ah law.

With what’s on offer nowadays, financial advisers can construct a decent investment portfolio for Muslim clients. The Muslim community is generally quite wealthy and needs investment products, and sound advice on these products.

But it’s not only Muslim clients who will be interested in the Islamic funds and other Shari’ah-compliant investments. Some clients might have a moral problem with companies involved in, say, alcohol and tobacco, and advisers can put them in touch with the Islamic products.

It may also suit a client who wants a bit of diversity to an investment portfolio. As the Islamic funds will often be invested in very different shares to a general equity fund, these funds will provide outperformance at times. An adviser doesn’t have to be Lawrence of Arabia to see the benefits Islamic funds could hold for clients.

“But it’s not only Muslim

clients who will be interested

in the Islamic funds and

other Shari’ah-compliant

investments. Some clients

might have a moral problem

with companies involved in,

say, alcohol and tobacco, and

advisers can put them in touch

with the Islamic products.”

“The latest Morningstar unit trust performance rankings show two Islamic

funds amongst the top 25 performers over the six months to 31 March.”

May 201112

pRofile | CEO: BLUE INK INVESTMENTS

TThomas Schlebusch was appointed the CEO of Blue Ink Investments, the fund of hedge funds manager,

at the end of 2010. INVESTSA caught up with him to find out his view on how the perception of hedge

funds has changed over the years.

t H o m a S S C H L E B U S C H C H I E F E X E C U T I V E O F F I C E R : B L U E I N K I N V E S T M E N T S

13May 2011

“As a fund of fund manager, we have the privilege of dealing with the very best and smartest people the

investment industry has to offer, and the interaction and contact with both the markets and the managers we

deal with makes for a very stimulating environment.”

you were recently appointed Ceo of blue

ink investments. How has the experience

been so far?

It’s been a wonderful challenge. Fortunately,

however, we are a small team who works very

closely together. Our previous CEO has also

laid a good foundation and it’s really been

business as usual.

How different is the role to that of Cio,

which you held previously?

The role is rather more holistic. I now have

insight into all aspects of our business and can

drive direction in all parts of the business as

opposed to only a specific area of expertise.

do you believe hedge funds form an

important part of an investor’s portfolio?

Maybe I’m biased, but in my view they form the

most important part, as this is the section of your

portfolio which should give protection in down

months. Hedge funds also offer that uncorrelated

characteristic to your portfolio, which reduces the

volatility of your returns. Specifically in SA, hedge

funds have proven their worth in a balanced

portfolio of investments.

South african hedge funds are far more

conservative than international counterparts.

do local investors realise this?

This is specifically true in terms of governance

and regulation. We are, to a very large degree,

regulated in terms of our licensing and the

fit and proper requirements to be awarded

these licenses. In terms of governance, the

SA HF industry has always been quite highly

self-regulated. Things like daily transparency

and monthly liquidity are almost unheard of

offshore. Other areas where governance is

good is in terms of the use of independent third

parties such as prime brokers, administrator

and custodians. The investment strategies could

however range from highly conservative to very

aggressive or speculative in nature.

do you think the risk associated with

offshore hedge funds has left South

african investors with a misperception on

the local industry?

Absolutely. The South African industry is

in many ways an example to our offshore

counterparts. In SA, most managers will

provide daily transparency to larger investors.

Liquidity terms in the SA market are much

more favourable than offshore. Hedge fund

fees are significantly lower in SA and we

have not seen some of the ridiculous fee

structures such as four per cent and forty per

cent (management and performance) that

you see offshore. The industry is also far more

regulated than offshore, in the sense that all

managers have to be licensed in terms of FAIS.

Other practices such as naked short selling are

also not possible in the SA market.

what impact do you think Regulation

28 – and the increase that pension funds

can allocate to hedge funds – will have

on the industry?

Hopefully this will be positive for the hedge

fund industry with additional flows to come

our way. One of the challenges will be to

ensure enough ‘good’ capacity with the

better managers. To this extent, Blue Ink is

well positioned with our Incubator fund, long

having taken the lead in finding new talent and

incubating these strategies.

How did you get into the financial services

– and hedge fund – space?

I was fortunate that Sanlam already started

looking at these investment strategies as

far back as in 2004. At that stage I was

involved in investigating the potential of

launching a fixed interest strategy at Sanlam.

Unfortunately, I left Sanlam in 2004 and

the strategy was eventually launched only in

2006, but in a very different guise. I joined

Blue Ink in 2007 to launch the Incubation

drive during that year.

would you recommend a career in

investments, and specifically hedge funds,

to young graduates now?

Career in investments, yes! The markets are

extremely challenging and will humble you

every day. Career in hedge funds, absolutely!

As a fund of fund manager, we have the

privilege of dealing with the very best and

smartest people the investment industry has to

offer, and the interaction and contact with both

the markets and the managers we deal with

makes for a very stimulating environment.

what is your career philosophy or motto?

I don’t really think of what I’m doing as my

career or that this needs a philosophy. This is

what I do, and what I enjoy doing. I like the

people I work with, and I like the challenges

that this environment brings, every day. The

day this changes is the day I will go and look

for a ‘career’!

what are the qualities for a good fund

manager?

We look for managers who have a good

track record either in the traditional asset

management space or in a proprietary

trading banking environment. We like

managers who are risk averse and are able

to use leverage, without betting ‘the house’.

We prefer managers who are prepared to

have a significant personal investment in their

funds, alongside their investors. We also like

managers who are non-emotive and can

change their opinion when the facts change.

Lastly, we like managers who can identify

good positive stories, but who can also

identify negative stories, worth shorting.


How muCH fuRtHeR

Could gold reach a record high at $5 000 an ounce? At least one leading industry figure believes this is possible over the next few years.

Rob McEwen, chairman and chief executive of Canadian mining companies Minera Andews Inc and US Gold Corp, said the price of gold may hit $5 000 per ounce, nearly three times current levels, in the next three to four years. He listed demand from sovereign states, central banks and exchange-traded funds (ETF) as his reasons for the high prediction.

The forecast does not seem completely far-fetched, as gold hit another fresh record high of $1462.30 an ounce (6 April). Many analysts believe rising inflation prospects and concerns about the ongoing sovereign debt crises, which claimed Portugal as its latest victim, was supporting the yellow metal’s rise.

McEwen said gold was in the middle of a super cycle that could end by 2015, adding that the length of the gold super cycle and the $5 000 forecast was based on historical gold prices and the ratio of the Dow stock index against gold since 1970.

Commenting on McEwen’s prediction, Ian Cruickshanks, head of treasury strategic research at Nedbank Capital said: “That’s outright speculation. This $5 000 figure has just been plucked out of the sky and one has to ask on what basis they can make that call. It could simply be a prediction by a gold producer who is attempting to back-up his high-cost low-volume product.

“Maybe one can make a case for gold being at $2 200 an ounce; this is still speculative but not unreasonable. However, I think about $1 500/$1 600 an ounce is more likely as a short-term technical target, but this is based purely on technical analysis rather than geopolitical and other influencing factors,” said Cruickshanks.

However, Cruickshanks added that while the price of gold has gone up a lot in recent years, he does not believe it is particularly expensive. “We’re still in a catch-up mode with other commodity prices such as oil, which has risen far faster. If interest rates go up, the gold price will also definitely go up, along with a slowing of the pace of global economic activity.”

This is in contrast to Henk Potts, director of global investment strategy at Barclays Wealth. “In contrast to the wider investor mood, we believe that precious metal prices look expensive. The cycle of investment demand, which was almost self-sustaining in its own right throughout 2010, is still the predominant driver of prices as geopolitical tensions escalate and improving prospects for the global economy take a backseat.”

He said, however, that the chance of the current rally in gold and silver prices correcting in the short-term looks modest, as investment demand for precious metals remains supportive, even at current high prices.

“But with physically backed gold ETF holdings standing at around the equivalent of seven years’ worth of industrial demand, we expect that once monetary policy tightening starts to take place and interest rates are raised, the lure of holding gold, a non-income-generating safe-haven asset, will likely diminish substantially, causing gold and silver prices to fall in the long term,” said Potts.

It seems there is a real difference of opinion on what gold will do next and how far it can go. Supporting factors appear to remain in place; but as with any investment, those who made some profit on bullion’s record advance may be advised to take a little profit.

CAN GOLD GO?

“Many analysts believe

rising inflation prospects and

concerns about the ongoing

sovereign debt crises, which

claimed Portugal as its latest

victim, was supporting the

yellow metal’s rise.”

May 201114 May 201114

15May 2011

track record of the firm and its employeesSince the alternative asset management industry in South Africa is relatively young, there are a limited number of firms with long track records operating in this niche. Where a long-term track record for a firm is not available, it is important to assess the individual track records of the respective investment professionals involved, including the investment performance of previous funds they might have managed.

lock-up periodsAlternative assets generally have a longer investment horizon than other asset classes. Hedge funds might offer monthly withdrawals, while private equity funds have a much longer lock-up of capital. The investment allocation to this asset class should be seen as a longer-term commitment, but the withdrawal opportunity afforded by the alternative asset manager should not be overly restrictive.

Risk managementDue to the complexity of alternative asset management, investors should investigate whether the required risk management tools, processes and procedures are in place to ensure that the alternative asset manager does not take undue risk and stays within the parameters of the agreed investment mandate.

fees and expected performance over a full market-cycleAlternative asset management firms charge higher fees than traditional firms, on the expectation that the investment returns that the alternative asset manager generates (after fees) will be superior to traditional asset classes on a risk-adjusted basis over a full market cycle. The performance of the manager should be evaluated on a regular basis, to ensure that these fees can be justified. This is especially important during a bear market, where an astute alternative asset manager is paid to ensure that the alternative assets under management do not drop in value to the same extent as comparative traditional asset class investments.

Even if it is decided to invest in alternative assets via a fund-of-funds provider, which would employ their own staff to perform due diligence on the underlying private equity and hedge fund managers, trustees still need to be informed and to ask the right questions in their fiduciary duty as stewards of the pension fund’s assets.

The selection of a reputable alternative asset management firm, which stacks up well against the points above, should give comfort to trustees and consultants that investment expectations regarding their allocation to alternative assets will be met or even exceeded.


wHat tRuSteeS Need to kNow

ABOUT REGULATION 28

“Trustees and consultants will need to consider whether

to increase their investment allocation to private equity

funds and hedge funds.”

With changes to Regulation 28 allowing for a greater investment allocation by pension funds to alternative assets (up to 10 per cent of a pension fund’s assets), trustees and consultants will need to consider whether to increase their investment allocation to private equity funds and hedge funds. In making this decision, trustees and consultants will also need to give due thought to the following pertinent points in selecting which alternative asset management firm(s) to use for the purpose of managing their alternative asset investment:

by Jean Pierre Verster,

36 oNe aSSet maNagemeNt

May 201116

Head to Head | Cadiz aSSet maNagemeNt

1. what are your projections for interest rates in Sa in 2011 and beyond?

After two and a half years of a declining inflation trend supported, to a large extent, by a strengthening Rand, we expect the rate of inflation to start rising. In absence of further Rand strength (and possibly some weakness) cushioning the impact of global inflation and a recovering South African consumer we expect the Reserve Bank to start raising the repo rate by no later than November.

While there is no doubt that an important driver of inflation over the next few months will be oil and food prices, leading some to argue that interest rate hikes will not be required, we are of the opinion that these will be quick to influence all prices.

We expect that higher inflation and a stronger economy over the next 12 to 24 months will require the Reserve Bank to raise the repo rate by three per cent by the end of next year.

2. what are the challenges presented by interest rate hikes for pensioners?

Interest rate hikes usually follow an increase

in the rate of inflation as the South African Reserve Bank is mandated to ensure that it remains within the three to six per cent target band.

Therefore, the biggest risk to pensioners is that the Reserve Bank does not keep to its mandate and allows inflation to rise above the upper band. If this is allowed to happen and the increase in the rate (and amount) of interest they receive does not keep up with the rate of inflation, the value of pensioners’ money (purchasing power) declines.

3. what are the opportunities presented by interest rate hikes for pensioners?

Investors in general, and pensioners in particular, should be most concerned about real investment returns (and the purchasing power of their savings). If pensioners are invested in fixed rate instruments and inflation rises, then their real return will decline. Opportunities usually arise towards the end of the interest rate hiking cycle when pensioners can fix the interest rate they receive at a higher rate. During the interest rate hiking cycle, it is all about conserving the value of savings.

4. Should advisers be reconstructing clients’ portfolios in light of the possibility of a higher rate cycle? if so, how?

Given that the focus should be on maintaining the real value of savings it is advisable to move out of fixed deposits and into investments that offer a variable interest rate which moves in tandem with the Reserve Bank’s policy rate.

This is achieved by investing in those instruments (such as inflation-linked bonds) or funds (such as absolute yield or inflation plus funds) that focus on real returns.

Having said this, however, it is important to point out that markets are forward looking and therefore one should not wait for interest rates to rise before implementing the necessary strategy. That could be too late.

Head of Fixed Interest at Cadiz Asset Management

J O N A T H A N m y e R S o NCADIz ASSET MANAGEMENT

Talk is increasingly turning towards expected interest rate hikes in the latter part of 2011. INVESTSA asks two experts for their views on how retirees should position themselves ahead of these increases.

17May 2011

Head to Head | mitoNoptimal aSSet maNagemeNt

1. what are your projections for interest rates in Sa in 2011 and beyond?

Capital markets often price-in future expectations and this time is no different. The Forward Rate Agreement (FRA) market is pricing a rate hike in September 2011 of 0.5 per cent and a further 0.5 per cent in the first quarter of 2012. We believe that the market is accurate in predicting a 0.5 per cent rate increase in 2011, but the MPC may need to evaluate the offshore market’s reaction to such a decision as offshore investors may continue to find our government bond yields attractive to re-invest in SA. This and below trend domestic economic growth may put rates on hold for longer than what the market currently expect.

Longer term, we do not believe that interest rates will soon see anything close to nine to ten per cent in money markets. Our view is based on the low return that developed market cash and bonds will need to maintain to generate sufficient economic growth and stability in consumer/government debt levels.This may lead to a continued search for

yield in emerging markets, which may keep our rates lower for longer as our SA Rand remains stable. We do not expect inflation to rise beyond the three to six per cent target band set by the SA Reserve Bank as a stable Rand may reduce the effects of oil and food price inflation that is imported to SA.

2. what are the challenges presented by interest rate hikes for pensioners?

The challenge will depend on the pensioner’s existing portfolio. If his portfolio has 100 per cent exposure to SA government bonds, he/she will experience a capital loss over the period of rate hikes – this does not apply to fixed term SA retail bonds offered by the Reserve Bank. Investors in SA Government retail bonds will not receive any benefit from higher interest rates as these bonds are fixed term bonds.

Pensioners in money market accounts or fixed deposit will experience a welcome relief from low interest rates and enjoy a higher taxable income. The largest challenge for pensioners is to generate long-term capital growth at low levels

of risk to protect his/her income against inflation over time.

3. what are the opportunities presented by interest rate hikes for pensioners?

If rates spike up by two to three per cent from here, pensioners may want to fix their income yields for a period to secure their income in the next three to five years. The danger is that rates increase by more than two to three per cent due to an inflation surprise as a result of oil or food price shocks. We do not necessarily subscribe to locking-in yields over the longer term because we prefer to have access to liquidity as we have learned how quickly our world and circumstances changes.

4. Should advisers be reconstructing clients portfolios in light of the possibility of a higher rate cycle? if so, how?

We suffer to understand how any adviser will find sufficient time to reconstruct all his/her client portfolios every time an economic or cataclysmic event forces such a change in asset allocation. Advisers

Director and Fund Manager at MitonOptimal Multi-Asset Management

R O E L O F F H o R N e

MITONOPTIMAL ASSET MANAGEMENT

May 201118

5. How are the various asset classes typically affected by interest rate hikes?

As a rule of thumb, the main asset classes are affected as follows:

Equities – negative Bonds – negativeCash – positiveProperty – negative

It is important to note, however, that these asset classes will behave differently during the course of the interest rate cycle. For example, equities generally perform well in the early stages of the hiking cycle as the economy is growing strongly. Only later on, when it becomes evident that higher interest rates will lead to a weaker economy, will equity prices will come under pressure. Furthermore, within equities, different sectors behave differently during the stages of the hiking cycle.

Similarly, fixed rate bonds will perform poorly during the early stages of the hiking cycle, but once it is clear that the rate of inflation will start to moderate as a result of the interest rate hikes, they will perform strongly.

6. what do you think the impact on the Rand will be once rates start rising?

Ordinarily one would expect the currency to strengthen as interest rates rise, given that foreigners would be inclined to buy the Rand for the higher yield it offers. However, there are many other forces that determine the value of the currency such as global demand for our exports, import demand, and the rate of domestic economic growth.

As the South African economy continues to strengthen and domestic demand increases, the level of imports will increase, bringing with them demand for foreign currency which could weaken the Rand.

Therefore, considering that the Rand is already overvalued, it is difficult to see it benefiting from higher interest rates.

normally plan investor portfolios carefully to service the income and capital growth needs according to the investor’s risk capacity, risk and return objectives. These smart advisers will then select a number of qualified multi-asset managers to actively manage these objectives. Although many pensioners/investors and advisers are sufficiently qualified to manage their own portfolios, we do not believe that they have the time and stomach to do it themselves.

5. How are the various asset classes typically affected by interest rate hikes?

As mentioned earlier, capital markets often adjust prices ahead of the event and many times behave totally opposite to what we learn from efficient market hypothesis. In other words, the market may buy the rumour and sell on fact. Normally, the capital value of longer dated government and corporate bonds is affected negatively. Financial shares are also impacted due to lower potential earnings due to potential higher debt defaults by consumers.

Cash instruments will offer a higher yield, while local equities may not be affected negatively as the balance sheets of our Top 40 companies have relatively low debt levels.

6. what do you think the impact of the Rand will be once rates start rising?

It is impossible to predict the SA Rand exchange rate as it is one of the most traded currencies in the world. We do not foresee any blow-out of the Rand in the near future due to the continued potential for global investors to buy our attractive cash yields while our government debt levels remain at acceptable levels to offer low default risk.

We expect a stable Rand for 2011.

Cadiz aSSet maNagemeNt

mitoNoptimal aSSet maNagemeNt

etfSa.co.za

The latest Performance Survey highlights the following:

• The Satrix INDI 25 ETF, which tracks an index basket of industrial, retail and manufacturing companies, provides consistently good returns with relatively low risk, measured by volatility and tracking error. It tops the one-year and five-year performance tables and is in the top three for three years.

• A dramatic return to the top performer stakes in the first three months of this year has been made by the ETFs tracking international markets. The DBX tracker ETFs, which are listed on the JSE as inward investments and trade in Rands, provide low-cost exposure to global markets and are ideal Rand hedges. The DBX EuroStoxx 50, a portfolio of blue chip shares listed on European stock markets, gave a 13,56 per cent return for the three months to end March 2011, followed by the DBX USA (8,04 per cent) and DBX FTSE 100 (7,50 per cent) funds.

• The BettaBeta EWT 40, issued by Nedbank Capital, which tracks an equally weighted index of the Top 40 shares on the JSE, in comparison

with the usual market capitalisation Top 40 indices, covered by Satrix 40 and BIPS 40, was the best performing top forty portfolio over the past 12-month period. The equally weighted technology is designed to reduce volatility by equally spreading the investment portfolio and reducing risk through diversification and a balanced portfolio. The BettaBeta EWT 40 ETF provided a 15,87 per cent return for the year ended March 2011.

The BettaBeta EWT 40 ETF listed only last February, so enters the one-year performance survey for the first time. Its superior performance could cause the industry to reconsider index tracking technologies which look at alternatives to market capitalisation weighting strategies.

mike brown | Managing Director, etfSA.co.za

INDEX TRACKING ETF AND UNIT TRUST MONTHLy PERFORMANCE SURVEy -MARCH 2011

Best Performing Index Tracker Funds – March 2011

(Total Return %)*

Fund Name Type 5 years (per annum)

Satrix INDI 25 ETF 15,44%

Prudential Property Enhanced Unit trust 13,05%

Stanlib Index Fund Unit trust 12,34%

Satrix Top 40 ETF 12,19%

3 years (per annum)

Satrix DIVI Plus ETF 17,35%



1 year


NewFund eRafi INDI 25 ETF 20,85%


BettaBeta EWT 40 ETF 15,87%

3 Months

DBX Tracker EuroStoxx 50 ETF 13,56%

DBX Tracker MSCI USA ETF 8,04%

DBX Tracker MSCI FTSE 100 ETF 7,50%

1 Month


Satrix FINI 15 ETF 2,74%

NewFunds eRafi INDI 25 ETF 2,70%

Source: Profile Media FundsData (31/03/2011)* Includes reinvestment of dividends.

For more information or details, please contact the undersigned. mike brownManaging Director, etfSA

Phone: 011 561 6653E-mail: [email protected]

maya fiSHeR fReNCH

SHould youR CLIENT INVEST

iN empoweRmeNt dealS?

by maya fisher-french

May 201120

21May 2011

BEE share schemes can be a great way for previously disadvantaged investors to buy shares on the JSE as they are usually offered at a discount. However, don’t assume

that just because it is a BEE deal that you should invest in it, especially if it is structured as a loan. you need to do your homework first.

According to Cora Fernandez, CEO at Sanlam Private Equity, an investor needs to understand exactly what the scheme entails. What many investors may not realise is that the scheme often involves a loan which has to be paid by dividends. you are also locked into the deal for many years.

“Be careful when it comes to how deals are structured. Sometimes it will be better for you to buy shares at the full price, if you’re not intending to stay in for the long haul,” said Fernandez.

If the share scheme is geared the investor pays a deposit and the rest is funded through a loan which is repaid by dividends. For example, the MTN zakhele deal was structured such that R102.40 is raised for each zakhele share issued. The zakhele investor contributes R20, MTN donates R16 and zakhele borrows R66 at rates linked to prime. The funding cost was around eight per cent, but this increases or decreases depending on changes in the prime rate.

At the same time, the investor cannot sell the shares for six years, although trading between eligible MTN zakhele shareholders will be allowed after four years.

Investors need to realise that if they bought shares that were geared, they will receive no dividends and therefore are investing purely on the hope that the share price will increase sufficiently to provide a return. The risk is if interest rates increase dramatically and the dividends can no longer service the loan, or the company’s earnings are weaker than expected and the company is unable to maintain the level of dividends.

That said, companies appear to be ensuring that the deals will work out. Mpho Mojalefa, senior trader at Barnard Jacobs Mellet said that both MTN and Sasol have paid more generous dividends since their empowerment deals. This could be a result of pressure to make sure the deals work.

Mojalefa added that it is important to realise that investing in empowerment deals isn’t a get-

rich-quick scheme. This is because it’s difficult to trade BEE shares (their liquidity is not high) and because investors are locked in for a long period, it’s best to view these transactions as a long-term investment.

trading bee Shares

The JSE recently announced its BEE Share Scheme Trading Facility which forms part of the JSE’s main board and has been created for companies wishing to list their BEE share schemes. Trading is restricted to BEE-compliant persons (black people or groups defined by the BBBEE Act). These shares trade at a discount, but for good reason.

The Sasol Inzalo BEE ordinary share scheme is the first scheme to be listed and investors are now able to sell their shares to other BEE-compliant people. This particular scheme was not geared and investors paid cash but received a discount in exchange for not being able to trade freely for 10 years.

However, the offer allows for individuals to trade shares with other black people before the 10-year period is over. Although investors were able to trade in the over-the-counter (OTC) market, having a trading platform which shows bids and offers makes it a lot more transparent and the investor knows they are receiving or paying a market-related price.

This opens the question of whether your client should buy Sasol Inzalo shares if they missed the initial offering or want to add to their current holdings.

Currently the shares trade at a 15 to 25 per cent discount relative to the ordinary share

price, due to the lock in period and the limitations on trade. When the lock-in period expires, the full value will be unlocked into Sasol’s ordinary shares. It is expected that the discount will start to close nearer to the expiry date in 2018.

If your client buys it only for the discount, then they may as well invest in cash. Over the next seven years, they will make more than 20 per cent from a fixed deposit. If, however, the view is that the oil price is going sky high and that this price movement has not yet been fully priced into the Sasol share price, then an opportunity to get a 20 per cent discount is not to be sneezed at.

The JSE is in discussion with other companies who have BEE structures and are interested in listing them. Unfortunately the JSE is not at liberty to discuss which companies these are. However, if your client wants to build up a share portfolio and can take advantage of the discount offered on a share he or she would normally have bought – then watch the bourse with interest.

“According to Cora Fernandez,

CEO at Sanlam Private

Equity, an investor needs to

understand exactly what the

scheme entails. What many

investors may not realise is that

the scheme often involves a

loan which has to be paid by

dividends. you are also locked

into the deal for many years.”

Questions to ask before investing in a bee share scheme

1. What is the potential return I am looking at?

2. What are the historic earnings of the company? And the historic growth? What can I expect over the next five years from this company?

3. What is the historical dividend yield of the company and what do analysts expect in terms of future dividends? How many cents/Rands will I receive per share?

4. How will the debt be paid off on a monthly basis? What is the financing structure of the deal? you might pay R110 for a share and the annual interest is R12 a year, but the dividend is only R8 a year, so where is the remaining R4 going to come from?

5. How much has the share price grown by over the past three years or so?

6. What kind of discount are the BEE shares being traded at? If you are locked into an investment for seven years, compare what would happen if you invested your money on a call account and earned interest on it, or if you got the value of the underlying share price.

May 201122

JapaN teaCHeS tHe leSSoN of tRue diveRSifiCatioN

JapaNteaCHeSTHE LESSON OF TRUE DIVERSIFICATION

By Miles Donohoe

23May 2011

In the two days following the disaster, the Japanese stock market lost 16.3 per cent of its value and in total more than $1 trillion was wiped off the value of stock markets around the world as fears mounted that the crisis, coupled with concerns of a nuclear disaster, could trigger another global financial meltdown.

As the crisis unfolded and panic selling showed little sign of easing, Atsushi Saito, president of the Tokyo Stock Exchange, appealed for calm from investors, saying: “I would appreciate it if all investors and trading participants would respond in a calm and orderly manner.”

As it turned out, equity markets did respond and recovered pretty quickly, particularly non-Asian equities. If anything, the crisis signified once again the dangers of clients reacting to short-term market movements. This is something that financial advisers know all too well. However, in South Africa it seems panic was kept to a relative minimum.

“The events in Japan actually precipitated a rally shortly after the disaster,” said Mark Cliff, investment specialist at PSG Asset Management. “From the mid-February highs, the JSE ALSI lost about nine per cent, before rising by nearly the same amount by the end of March this year and the Japanese TOPIX index lost 21 per cent before rallying by no less than 12 per cent.”

Dr Prieur du Plessis, chairman of Plexus Asset Management, also said his company did not experience a stampede from clients in the wake of the crisis. “Markets had already begun to pull back from their February 2011 highs on the back of the turmoil in the Middle East and North Africa (MENA).”

He said the unrest that has been dominating this region is actually a far bigger threat to the global economy than something like the Japanese crisis. “A prolonged worsening of the MENA situation could result in the oil price increasing further, which will pose a serious headwind for global growth.”

Likewise, Warren Ingram, director of Galileo Capital, said there was little panic from clients as the event was largely portrayed by the media as a natural disaster rather than an economic one. “I think the media focus will shift over time to the economics of the disaster and this might lead to more concern on the part of investors.”

Ingram said, however, that the disaster in Japan should not be looked at as a market event such as a buying or selling opportunity. “This is one of those times that you should sit on the sidelines and let events take their course. The real economic effects of this event might be felt only in the next six to 12 months.”

Japan’s role in the world economy has in fact been steadily shrinking. In 1994, prior to the Kobe earthquake, the country’s GDP was worth 17.9 per cent of world GDP. By 2009 this had shrunk to 8.7 per cent. This compares with China’s economy, which contributed 2.1 per cent to world GDP in 1994 and grew to 8.6 per cent in 2009. Last year, China surpassed Japan as the second biggest economy in the world, second only to the US.

Much of the impact from the Japanese crisis is likely to be felt internally. The government has estimated that the total economic impact could cost anywhere between $190 billion and $300 billion. With the government also facing a yet to be quantified fall-out from the nuclear power plant crisis, including compensation claims, the long-term impact for Japan will be huge.

Charles de Kock, senior portfolio manager at Coronation Fund Managers, said that while no one could have foreseen the occurrence of these events (Japan and MENA), financial advisers and clients are often faced with difficult and unwanted surprises. “It is our task as professional asset managers to build portfolios in such a way that they can withstand tsunamis, wars, urban terror or other disasters.”

De Kock said key to being able to manage such surprises is ensuring that a client has proper diversification within one’s investment portfolio. “A well diversified portfolio has the ability to withstand all kinds of events.”“Diversification is a way of reducing an investor’s risk and we thus advocate portfolios which are sufficiently diversified so as to reduce risk. Diversification can take place between asset classes as well as geographically and a good fund manager will be able to manage these risks for their fund’s investors,” said Cliff.

Clearly clients who are properly diversified across a range of asset classes should in theory have far less reason to panic when a crisis occurs.

However, there is a potential danger that some investors may believe going offshore to one region, say obtaining Europe or US exposure, will provide sufficient diversification from SA equities. In fact, there has even been an emphasis by some local asset managers to extol the virtues of particular developed market equities.

“As we have seen from what happened in Japan, being overly concentrated geographically can be a danger in itself,” said Cliff.

Du Plessis added, however, that for those investors who do not have exposure to Japan within their overall portfolio, now would be a good time to start. “Besides the fact that the Rand is at a good level for making foreign investments, there are some buying opportunities after the recent sell-off. However, as the potential for further downside in equity prices cannot be ruled out, we would not advocate making the investment as a one-off lump-sum. Rather adopt a phasing-in strategy over the next few months.”

A crisis of any kind normally results in good investment opportunities presenting themselves, yet for investors who are properly diversified from the outset, not only should they already have some exposure to a range of geographies, but importantly, they should also have less reason to panic when a crisis does rear its head, wherever that may be.

“Diversification is a way

of reducing an investor’s

risk and we thus advocate

portfolios which are sufficiently

diversified so as to reduce risk.

Diversification can take place

between asset classes as well

as geographically and a good

fund manager will be able to

manage these risks for their

fund’s investors.”

The Japanese earthquake and consequent tsunami that wrought havoc in the country in mid-March also unsettled investors as panic selling ensued, resulting in the Japanese stock market

suffering its worst fall since the crash of 1987.

SHauN HaRRiS

THE DANGERS OF DEALING

WITH GOVERNMENT

By Shaun Harris

NO MONEy,NO BUDGET,

No paymeNt

May 201124

25May 2011

For many companies, government is a big client. It spans all levels of government and a number of different departments. The work done for government is varied, from information technology (IT) projects to large infrastructure projects. At present, the most important area is providing affordable housing for millions of people still living in informal shacks. It’s also the most contentious area. Government signs big contracts with building companies to construct hundreds of houses. Then it simply doesn’t pay.

It’s a danger zone financial advisers have to be aware of, both for clients who might own a business dealing with government and when it comes to selecting shares for an investment portfolio. On the (sadly fairly rare) occasion when a large project is completed and government pays on time, it’s great for the company concerned. Profits are boosted which often translates into improved share price performance, increased dividend payments and at times special dividend payments. Everyone is happy, not least shareholders and investors.

This will obviously attract clients to investing in those companies. But if the company is highly dependent on government for work, advisers need to keep a wary eye on what’s going on.

In recent interim results, which turned deeply negative, infrastructure related company Accéntuate issued a few warnings. Accéntuate makes and distributes infrastructure supplies and has a separate maintenance division.

It said its results came amidst the worst period for the construction industry in the past 40 years. Part of the problem, it added, was “government’s poor investment in infrastructure”. That is a problem after government has promised to improve infrastructure at many levels, from roads to rail links. But if budgets are tight and government feels it cannot spend, it cannot really be blamed.

But it gets worse. Accéntuate went on to say: “Compounding this situation is government’s lack of timeous payment for projects completed.” Accéntuate’s poor financial results cannot be fully blamed on government. But it is a factor, especially for a relatively small, AltX-listed company like Accéntuate.

At least it had the nerve to take off the gloves and thump out what part of the problem was. Many companies don’t, afraid of offending whatever government department it is dealing with and jeopardising future contracts. So these companies keep quiet and put up with late or no payments, stretching cash flow and putting the business under pressure.

IT group Gijima is another example. It’s hard to work out exactly who was at fault over its apparently escalating bill for overhauling the Department of Home Affairs’ IT system. But in the end, government refused to pay. Gijima

disputed this, which involved legal action and additional costs which knocked interim results into the red.

Settlement has now been reached between Gijima and Home Affairs, which has agreed to pay R2,3 billion for the work done. Gijima had already spent R1,4 billion on the project so the settlement must be a relief. But amongst other things, it involved Gijima taking a R375 million write-off, part of the reason for the bad financial results. From an investment perspective, the dispute didn’t do Gijima’s share price any good, down about 40 per cent over the past year and only recently starting to recover. yet investors were clamouring after the shares when the company signed the contract with Home Affairs. Wonder if any financial advisers issued a word of caution here?

One of the worst recorded cases was between the Department of National Housing and construction company Sea Kay. It was pushed to the edge of liquidation because government just didn’t pay for low-cost housing projects already completed.

Late in 2009, a dejected executive director Gerry Holtzhausen said: “The reality is that government is just not paying. We’ve issued summons for R133 million in the Western Cape and R100 million in Gauteng.”

Non-payment meant Sea Kay was forced to take a R128 million loan from the National Housing Finance Corporation, with a string of conditions attached. It then came under pressure to start repaying the debt, but could not until it was paid for the housing projects. Settlement was finally reached with the corporation under an order of court. Though not confirmed, one allegation was that the company was not paid because money was

diverted for building the Gautrain. Sea Kay’s share price has gone nowhere the past year.

The most bizarre case of non-payment must have been between the Department of Land Affairs and Crookes Brothers, mainly a sugar cane producer that also grows other fruit, and farms cattle and crocodiles on the side. It goes back a few years when the department, under the land redistribution process, signed an agreement to buy Crookes’ Komati Estate for R200 million.

It was valuable cane land but Crookes accepted that land redistribution had to be done. It also consulted the local communities who would be the new owners of the land and reached an agreement to lease back the land, so Crookes could continue sugar farming and the communities would have a source of income. It seemed an ideal solution. The only problem was Land Affairs did not pay.

And the apparent explanation? It was simply that the budget had run out. It told Crookes it would try and pay when it received the new budget.

So Crookes was facing some cash flow strain and the local communities were probably starting to doubt the deal they had agreed to with the company. Crookes went the legal route, which was finally resolved in June last year when the department paid the R200 million. Shareholders who endured the strain were finally rewarded with a special dividend payment.

But it goes on. Crookes is now again taking legal action to try and claim the interest on the late payment, which it says is due under the sale agreement. Interest is a not too meager R24,5 million. Good luck to Crookes, it could again be a long wait.

The list could go on but the point is clear. Be very wary when a company relies heavily on government work. For clients who want to invest, the best advisers can do is carefully check out the payment history of the government department concerned. And warn the client about the dangers of non-payment.

If a client has a business dealing with government, a watertight contract is essential. Get lawyers to carefully check it out. If government doesn’t pay, at least the contract should ensure ultimate payment. But the client might have to wait a long time.

“Be very wary when a

company relies heavily on

government work. For clients

who want to invest, the best

advisers can do is carefully

check out the payment

history of the government

department concerned.”

wHo deSeRveS wHat - maya fiSHeR-fReNCH

wHo deSeRveS wHatIN THE FEEDING CHAIN? by Maya

Fisher-French

May 201126

27May 2011

A couple of months ago, I was speaking to

a niche asset manager who was lamenting

the costs of white labelled unit trusts for

investors. He was talking specifically about

his fund which outsources its administration

to one of the large platform providers.

His frustration lay in the fact that although

he only charged 35 basis points per

annum, it was costing the investor

anywhere up to 185 basis points per

annum due to the various layers of fees.

Investors then looked to him to deliver that

figure above the benchmark in order for

them to justify investing their funds with him

and not in a tracker fund.

However, of that total fee, he was receiving

the smallest portion. In the case of this fund,

the platform’s administration fee was 50

basis points and the adviser took an annual

fee of between 50 to 100 basis points.

He argued that he adds the most

value and does the most work. It

is his outperformance (or potential

outperformance) that would build his

clients worth, yet he has a 185 basis point

hurdle before he even begins.

Robert Walton, CEO of RMB Unit Trusts,

said that asset managers usually take

10–50 basis points (plus a performance

fee in some cases, depending on the risk

profile and complexity of the mandate)

while financial advisers usually take

50–100 basis points depending on the

clients investment size and other factors.

So on a R100 000 investment, an asset

manager takes R100 to R500 per annum while

an IFA takes R500 to R1 000 per annum.

In terms of value, surely the asset manager

adds more relative value than the IFA and

should therefore receive the lion’s share of

the fee?

Potentially a sound argument; but then I

was working on an article about pension

preservation. Rowan Burger of Liberty

spoke about the value of an adviser who

convinces their client not to cash in their

pension fund.

It made me realise that whether that fund

delivered 10 or 15 per cent, it would still deliver

a zero return if the money was not invested.

This turns the whole idea of value on its head.

How much savings your client will have will be

determined primarily by how much, and for

how long they saved, rather than by the relative

performance of the fund.

In an interview for another publication, I

spoke to a man who was five years from

retirement and had decided to sit down with

a financial planner to consolidate his finances

and understand where he was positioned for

retirement. Amazingly he had enough money,

not because he had ever really thought about

it, but because whenever his broker knocked on

the door, he took out another investment policy.

We can debate the costs of this method, but the

reality is that without that knock on the door, his

situation would have been a lot worse.

This is where the real value of an adviser

lies, in getting people to save. It is not

only valuable to the individual who finds

themselves comfortable in retirement, but

also at a national level where savings are

now at dire levels which is limiting the

country’s ability to invest and grow.

The challenge remains, however, for the

industry to be seen as a professional

service and to demonstrate the value

that a good adviser brings to the table,

because the alternative is to introduce

compulsory savings, negating the need

for a sales force, which is something the

government looks ready to consider.

And in terms of what a fair fee is, Walton puts

it in a nutshell when he says of the R100 000

investment, “Come to think of it – they get paid

less than an hour’s work if they were to charge

out a professional fee, especially the asset

manager who actively manages this fund all

year long – quite a bargain.”

“It made me realise that whether that fund delivered 10 or 15 per cent, it would still deliver a zero return if the

money was not invested. This turns the whole idea of value on its head. ”

May 201128

While investment conditions for defensive assets have deteriorated considerably over the past year, the opposite is true for risk assets. Company earnings have rebounded strongly on the back of the recovery phase and prospects for earnings growth appears to be good. In addition, equities are relatively cheap compared with other asset classes. Emerging markets are also generating growth rates substantially higher than the developed world. While investment into the emerging markets may have become a crowded trade, there remains growth and yield on offer.

The bottom line is that a rotation is now underway in financial markets away from defensive assets and towards risk assets. The fundamentals support this trend, as bonds are facing headwinds while equities are enjoying tailwinds.

However, risk has not vanished. The European debt problem might abate in the short term, but the longer term problems remain – governments have promised more than what their tax bases can deliver and there is no political or electoral will to turn away from a headlong progression to bankruptcy. This is inevitable even if not imminent. All controls over both monetary and fiscal policy in the US appear to have been lost and inflation has begun to surface as a problem in the global economy. The BRIC countries have led the global recovery and it is in China and India where inflation has become a problem. Policy efforts are being shifted to deal with this threat and this means that growth from these countries may well slow down. Middle East destabilisation has added to

inflationary risks with higher oil prices.

A key market response to the risk events stemming from Japan and the Middle East has been Dollar weakness, providing evidence that risk aversion is losing dominance with respect to investor sentiment.

The risk factors remain serious and deserve caution from investors. But the tide has turned, at least in the short term, where the risk trade is back. Equity markets can be expected to exhibit strength while fixed income struggles for the next few quarters. While the rotation back into risk assets continues, commodity prices can also be expected to move higher and emerging market currencies continue to strengthen.

Chris Hart | Chief Strategist: Investment Solutions

fiNaNCial maRketMETAMORPHOSIS

CHRiS HaRt

“The bottom line is that a

rotation is now underway in

financial markets away from

defensive assets and towards

risk assets.”

The global financial crisis has placed investor nerves on edge. This has been reflected in the patterns of investor flows in the global financial system where

defensive assets such as bonds and cash have enjoyed the inflows, while riskier assets such as equities have been avoided. The past two quarters have seen a shift in behaviour. The risk trade is coming back. Policy efforts by the US Federal Reserve of QE (quantitative easing) and other central banks have resulted in the global financial system becoming swamped with excess liquidity, accessible at very low cost due to interest rates being close to zero.

The inflow of investment into defensive assets has resulted in bonds becoming expensive. At the same time, default risk has risen due to government over indebtedness in the developed world. The inflation cycle has also turned and has become a problem especially in countries where exchange rates are managed against the USD. Effectively this means that the outlook for returns on defensive assets has diminished.

29May 2011

what is ‘practice management’?

‘Practice management’ covers all

aspects of managing and growing a

financial advisory practice.

It involves learning about, understanding

and implementing international best

practice in a way that:

• Increases your business profits

• Makes your practice more efficient

• Improves client satisfaction

Most importantly, its goal is to ensure

that your business is sustainable and has

a life and future that is independent of

you as an individual.

key points for effective practice management

you and your practice

Effective practice management will enable you

to change the way you work within your practice.

you will be able to:

• Define and standardise the service delivery

process

• Refine your processes

• Align strategy and delivery

• Identify revenue opportunities

• Ensure your plans are profitable

• Manage your time effectively

you and your clients

Strengthening client relationships is key to a successful

advisory business. Effective practice management will

enable you to:

• Understand and measure client value

• Find and retain profitable clients

• Strengthen existing client relationships through more

frequent and better communication

• Link client value to client activity

you and your staff

Practice management involves developing strong

working relationships within your office. you need to

make sure you and your staff are working productively

and effectively. Effective practice management will

guide you to:

• Share your vision with your staff

• Delegate effectively

• Organise your team to focus on high-value activities

• Develop productive working relationships and

practices with your team members

• Employ enough support staff

• Outsource where possible

“Strengthening client

relationships is key to a

successful advisory business.”

betteR buSiNeSS

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 being 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 short lists 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 short list 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.

May 201130

fuNd pRofileS

please outline your investment strategy and philosophy for the fund.

To state our key message: We don’t blindly follow benchmarks. We don’t follow the crowd. We take a common sense approach and invest in the best companies run by the best people.

This is a fund investing in the emerging giants of China and India. It is important to note that we have no market-cap bias, and happily invest in the largest to smallest companies as long as they meet our investment selection criteria.

who is the fund appropriate for?

Investors who are genuinely long term and are willing to accept investment risk. These are volatile markets offering fantastic growth opportunities in the world’s most dynamic region.

please provide some information around the team responsible for managing the fund.

The Asia team consists of three people whose sole focus is on the equity markets of Asia.

Jonathan Schiessl is head of Asian equities and has been at Ashburton in this role for nearly 12 years. Prior to Ashburton, Jonathan worked in the City of London for a number of years and is one of a few Asian investment managers with experience of these markets prior to the Asian crash of 1997. The team also consists of Craig Farley, investment manager who has been working with the team for over five years and more recently Simon Finch, who joined the team a couple of years ago.

please provide performance of the fund over one and three years.

why would investors choose this fund above others?

The fund is a unique offering in South Africa, catering to investors who want exposure to the re-emerging giants of China and India. Having both countries in one fund is advantageous as they are remarkably complementary markets and economies. Investors can get the best of both markets, while at the same time reducing risks associated with overly high sector and individual stock exposures that are inherent in single country indices in these markets.

fuNd PROFILES

01/12/06 - 31/12/10

(Since launch)one year three years

Ashburton Chindia Equity 27.57 16.68 -18.29

MSCI World TR USD -1.82 12.34 -12.33

“We don’t blindly follow benchmarks. We don’t follow the crowd. We take a common sense approach and invest in the best companies run by the best people.”

ashburton Chindia equity fund

This copy has been re-run from the May issue after an extraneous line was included by mistake. We apologise to Ashburton for the error.

peregrine – big Rock Capital fund


The Peregrine Group, a pioneer in alternative investments in South Africa, has some of the longest running South African hedge funds in its stable. One such fund is the Big Rock Capital Fund which has a track record starting in January 1999 and to date has never lost investor’s capital over any calendar year. Moreover, the strategy has achieved positive monthly returns in 81.6 per cent of the 147-month period since inception, generating a compound annual return after fees of 17.4 per cent. The strategy focuses solely on JSE equities looking for relative value pairs so that the fund’s returns are not correlated to any market movements, up or down.

who are the fund’s typical investors?

Most of the investors in the Big Rock Capital fund are institutions but there are some high net worth investors who understand what a hedge fund allocation can bring to their overall portfolio. The fund currently has capacity of approximately R100 million and thereafter it will soft close to new investors.

please provide some information around the individual/team responsible for managing the fund.

The Big Rock Capital strategy is managed by a team of five investment professionals with founder and portfolio manager, Lars Piepke, being

based in New zealand. The rest of the portfolio management team is split between New zealand, Australia and South Africa. “The team is in a unique position” said Leila Kuhlenthal, head of capital introduction at the Peregrine Group in Johannesburg. “Not many investors can say that their portfolio has coverage 24 hours a day, five days a week.”

please provide performance of the fund (including benchmarks).

please outline fee structure of the fund.

A fixed annual management fee plus an outperformance fee over the hurdle rate.

For more information please visit www.peregrine.co.za, or call +27 (0)11 722 7560

ytd % 3 years(ann %)

Since launch (ann%)

Big Rock Capital 3.7% 12.3% 17.4%

Benchmark 1.4% 8.7% 10.7%

119120 Peregrine Sharper REPRO 4/5/11 10:54 AM Page 1 C M Y CM MY CY CMY K


The Oasis Crescent Income Fund is a Shari’ah-compliant income unit trust fund with the primary objective to protect capital and to provide income from a selection of high quality Shari’ah-compliant instruments.

what are your top five holdings at present?

The holdings consist of high quality short- and long-term Shari’ah-compliant instruments that are supported by assets with strong and sustainable cash flows and high quality issuers.


Over the past 14 years, Oasis has been working tirelessly with the South African regulators, including Treasury and the Financial Services Board, to effect changes in legislation to ensure that high quality and fully regulated Shari’ah savings products are made available to South African citizens. The Oasis Crescent Income Fund is suitable for investors who want to protect their capital and earn a competitive income in a Shari’ah-compliant manner.

How have you positioned the fund for 2011?

If we combine the inflation pressure from food and oil with the increasing labour cost due to high real wage settlements in South Africa during 2010 and high increases in electricity tariffs, the inflation risk to the upside remains high. If this is accompanied by any Rand weakness, inflation will increase substantially more than expected and South African income yields will move higher which will create attractive opportunities. The Oasis Crescent Income Fund is well positioned to take advantage of these opportunities.


Adam Ismail Ebrahim is the chief investment officer (CIO) of Oasis Group Holdings (Pty) Ltd. He currently serves as a member of the Collective Investment Schemes Advisory Committee to the Minister of Finance in South Africa. He has been responsible for the management of the successful Oasis Crescent Equity Fund in South Africa which has an excellent track record and a current fund value of R4.5 billion.

please provide performance of the fund over one, three and five years.

The fund was launched in May 2010.


The annual management fee of the Oasis Crescent Income Fund is 0.30 per cent excluding VAT.

why would investors choose this fund above others?

The Oasis Crescent Income Fund is the only regulated Shari’ah income unit trust fund in South Africa and it provides a competitive income in a Shari’ah-compliant and liquid unit trust structure.

may – dec 10 % ytd – mar 11 Since launch

(cum)

Oasis CrescentIncome Fund

3.5% 1.5% 5.0%

“The Oasis Crescent Income Fund is suitable for investors who want to protect their capital and earn a competitive income in a Shari’ah-compliant manner.”

oasis Crescent income fund

May 201132

kagiso asset management – islamic equity fund


The fund’s investment philosophy is based on the distinction between a company’s fundamental value and its share price. The fundamental value of a company is fairly stable and should increase over time as a portion of annual profits are reinvested in the business. Share prices, however, tend to be quite volatile and could result in over- or under-valuation relative to the fundamental value of the company. The fund uses a bottom-up, fundamental research strategy, together with a Shari’ah-filtering process to exploit the mispricing opportunities between share prices and fundamental values.

what are your top five holdings at present?

Sasol, MTN, Mondi, AECI and Tongaat Hulett


The fund is suitable, but not exclusively, for Muslim investors seeking a Shari’ah-compliant portfolio of South African equities. Investors who are in their wealth build-up phase and require little income yield and who are able to withstand short-term market fluctuations in pursuit of maximum total returns over the long term.

How have you positioned the fund for 2011?

The fund is currently defensively positioned with underweight positions in mining resources and cyclical industrial shares and overweight positions in defensive industrial shares. This fund position is in line with our view that certain sectors of the domestic equity market are currently overvalued.


Abdul Davids is a CFA charterholder and the portfolio manager of the Kagiso Islamic Equity Fund. Abdul has 13 years’ investment experience with significant knowledge of the media, telecommunications and industrial sectors.

please provide performance of the fund over one, three and five years.The fund was launched on 13 July 2009.

Source: Morningstar


The fund has a fixed annual management fee of one per cent and no performance fees. In addition, financial adviser fees are negotiable to a maximum of three per cent initial fees and annual trail fees ranging from a maximum of one per cent p.a., where the initial fee is less than 1.5 per cent; or a maximum of 0.5 per cent, where the initial fee is more than 1.5 per cent. Kagiso Asset Management does not share in any of the adviser fees.

3 months to 31/03/11

6 months to 31/03/11

1 year to 31/03/11 Since inception

domestic eq general agR Rank agR Rank agR Rank agR Rank

kagiso islamic equity 2.4 6 12.6 2 20.7 2 22.9 8

mean/Count 0.3 86 8.4 86 13.3 85 19 84

“The fund uses a bottom-up, fundamental research strategy, together with a Shari’ah-filtering process to exploit the mispricing opportunities between share prices and fundamental values.”

33May 2011

May 201134

The first quarter of 2011 was

dominated by a series of crises

globally, which hit the world on

every front: economic, political and

natural disaster. These included the

European debt crisis, political unrest in the Middle

East and Africa, and severe floods in Australia,

the earthquake in New zealand and then the

devastating earthquake and subsequent tsunami

that hit Japan. Already on an upward trend, food

and energy prices were sent higher by some

of these developments. Fortunately, the global

growth backdrop had been steadily strengthening,

providing some resilience against the sentiment

and real impacts of the above events.

In particular, global manufacturing has been very

strong – a classic V-shape recovery has been in

evidence, and this has been broad-based across

both developed and emerging markets. This

has clearly supported growth and jobs, and has

been a particular boon for manufacturing-centric

economies; for example, German growth and

jobs have performed beyond expectations due to

the performance of its manufacturing sector.

The flip side of this, however, has been continued

strong demand for industrial commodities, as well

as the manufacturing sector reaching capacity

constraints before other sectors. Both these factors

have added to global price pressures.

The positive global growth momentum acted

as a significant support for SA exports, with the

result that SA recorded a sizeable trade surplus

(R28 billion) in 2010. This limited the current

account deficit to 2.8 per cent of GDP last year

(from four per cent in 2009 and five to seven

per cent in the preceding three years). In the final

quarter of 2010 in particular, the current account

deficit was a very narrow 0.6 per cent of GDP.

However, while the deficit was the lowest since

the third quarter of 2003, it was also the first time

since then that the deficit was not fully funded by

capital inflows.

A deficit is only small if it is easy to fund. There

seems to be a significant level of complacency

about a wider current account deficit this year,

with the general perception seeming to be

that (say) four to five per cent of GDP is not a

problem. But our expectation of 4.6 per cent

equates to around R135 billion. That is a large

amount of money if funding is not forthcoming,

and we thus remain concerned about Rand

vulnerability as the year progresses.

Apart from a few short-lived bouts of weakness,

the Rand has remained very resilient so far, which

has helped dampen some of the effect of global

inflation pressures on the domestic inflation

rate. However, despite the Rand’s strength, it is

undeniable that global pressures are starting to

make themselves felt.

The most immediate and clear impact comes

from fuel prices, where the April petrol price

hike (also including other levies/taxes) will see

the retail price of petrol 23 per cent higher than

its recent low in September 2010. Food price

inflation, while still low at consumer level, has

clearly turned up sharply and recent PPI data

indicate more to come.

The SARB so far is indicating the usual response to

commodity price shocks: that it will not respond to

first-round effects, but will wait to see if there are

second-round effects before responding.

While this is a textbook response, it is one that

worries us. To begin with, food prices (more

so than petrol) usually do have second-round

effects, because of the importance of food in

low-income earners’ spending baskets and

therefore there is a consequential impact on

wage negotiations. Secondly, because wage

negotiations are already high relative to

consumer inflation – it is still early in the wage

season but settlements so far seem to be coming

in at double or higher than latest CPI numbers.

And last, but definitely not least, we are

worried that we are beginning from a point

where we have very easy monetary policy,

which makes it easier for second-round effects

to take hold.

On the SARB’s own inflation forecast, the

(forward) real repo rate is slightly negative at

the moment – a situation we simply do not

believe is justified against a background of near

four per cent growth rates, and where inflation

pressures are building. And, as in the US,

breakeven inflation rates (inflation expectations

derived from the bond market) have been rising,

presumably as investors worry about inflation

outcomes in light of continued easy policy. In

SA, most breakeven inflation rates are now

above the upper bound of the three to six per

cent target range.

Our own expectation is that inflation will breach

the upper end of the target later this year, that

second-round effects will become more obvious,

and that the SARB will start raising rates before

year-end.

eCoNomiCS

CRiSeS domiNate THE FIRST QUARTER

Chantal Valentine | Economic and Fixed Interest Strategist at Coronation Fund Managers

“The most immediate and clear impact comes from fuel prices, where the April petrol price hike (also including other levies/taxes) will see the retail price of petrol 23 per cent higher than its recent low in September 2010.”

35May 2011

Roger Birt | Head: Guaranteed Investment, Old Mutual Corporate Funds

RetiRemeNt iNveStiNg - RogeR biRt

The ever-present volatility in the

equity markets highlights the

need for investors to ensure their

investments are appropriate for

their risk profiles, generally defined

by age, or rather, time to retirement, or if they

are already in retirement.

According to Roger Birt, head of guaranteed

investment portfolios at Old Mutual Corporate,

volatility refers to the measure of uncertainty or

risk attached to the size of fluctuations in the

value of an investment. High volatility suggests a

fearful market.

To give an indication of the current level of

volatility, at the height of the recent financial

crisis, the South African Volatility Index (SAVI),

which is a key measure of the volatility in the

domestic equity market, recorded 58 points

on 27 October 2008 and since then was

on a downward trend, reaching a low point

of 19 on 6 April 2010. However, the SAVI

accelerated with the European Debt Crisis in

April 2010, measuring above 30 points in the

middle of the year. Since then, the SAVI has

generally remained in the more comfortable

20 to 25 point range, although recently

recorded close to 28 points in March 2011.

While a lower SAVI level is more comforting,

levels of investor fear will continue to be

correlated with increasing market volatility, and

this presents dangers for members not correctly

invested in line with their risk profiles.

“The danger of this is that members who are too

aggressively invested can be severely affected by

dips in the market,” he said.

A retirement investor close to retiring mainly

faces what is known as exit risk and, as such,

Birt recommended that the primary focus of the

investment strategy should be the protection of the

accumulated retirement savings.

“Investors who are too aggressively invested given

their risk profile, will lose a significant portion of

their retirement savings in the event of a dip in

investment markets. Furthermore, given that the

time to retirement is short, these losses are unlikely

to be recovered,” he said.

Birt warned that a loss in retirement savings

close to retirement, which may be incurred in

a matter of months, will mean that retirees will

receive a lower income for the rest of their lives

in retirement. “In some instances, this lowered

income may be insufficient to meet living costs

and therefore a delayed retirement may be

forced.” On the other hand, the main risk to

investors who are too conservatively invested is

that the returns on his or her savings turn out

to be lower than expected and that ultimately,

retirement may happen with too little savings to

provide for the rest of his/her life by buying a

life annuity.

In retirement a living annuity may rather be

considered, in which case the risk of living longer

may not be ‘insured’ as is the case with a life

annuity. A living annuity exposes annuitants to

investment and longevity risk, but the possibility

of improvements in savings levels could be

foreseen. In this scenario, balancing the risk and

growth needs is even more critical.

Birt stressed that it is important to take into

account the risk profiles of investors when looking

at how conservative or aggressive investments

are. “Generally speaking, younger members

can afford to take more risk and prefer more

aggressive investments as they can ride out any

severe dips in the market as they have more years

to recover. The risk of being too conservatively

invested is the greatest for younger members. A

similar philosophy applies to members opting for

a living annuity after retirement; however, the need

to balance growth and risk is stronger.”

The point is that at no matter what the age,

there is always a risk of being too conservatively

invested. It is also true that, at no matter what

the age, there is always the risk of being too

aggressively invested (for example, a young

member could be very risk averse by

nature, and would therefore not

want to tolerate negative

returns).

For investors, it

is important to

take both these

elements into

account, and

to ensure that

products are

researched

that offer both

growth and

protection.

The Old Mutual

Absolute Growth

Portfolios are examples of

products that not only provide

both these elements, but also

allow a choice through offering

varying levels of protection with

accompanying return targets.

The products are available for

retirement funds, as preservation

vehicles, for individuals saving in

their own capacity for retirement,

and as living annuities.

kNow youR RiSk PROFILE IN VOLATILE MARKETS

“The point is that at no

matter what the age, there

is always a risk of being too

conservatively invested.”

May 201136

There are black swans flying in from all angles in 2011.

This is according to Russel Loubser, outgoing CEO of the

JSE who believes that the recent natural disasters around

the world, political tension throughout the Middle East and

debts concerns in Europe do not bode well for the JSE’s

prospects this year.

Loubser said: “This year is not looking good as far as I’m concerned. It’s

going to be a really tricky twelve months.”

This sentiment is echoed by Matthew de Wet and Trevor Garvin from

Nedgroup Investments, who said, in a recent research paper, that while

the local market has been a good place to be invested, indications are the

local market is now showing signs of being expensive.

“The average P/E for the JSE All Share Index over the past 20 years

has been around 14.5. The current P/E of the market is over 17 –

which in statistical terms is more than one standard deviation above

the long-term average. Simplistically, this would indicate that the

market is now showing signs of being expensive,” said De Wet.

De Wet and Garvin warn it is unlikely that the next five

to 10 years will be as good. According to the pair, if

the P/E reverts to average levels over the next five to

10 years, it will reduce ‘average’ equity returns by

between two to four per cent p.a. over the period.

Furthermore, because the dividend yield is currently

two per cent lower than the long-run average, the

contribution to total returns from dividends is also

likely to be lower.

“A more likely scenario over the next five to 10 years is

for local equity markets to produce returns in the region

of inflation above two per cent to four per cent pa,

which is lower than what we have become accustomed

to over the last decade,” explained Garvin.

Wayne McCurrie, portfolio manager at RMB, said

however that while the local equity market is above what

is considered fair value, in the shorter term, a collapse of

the market is unlikely, given excess liquidity.

“The market may in fact rally further from this point,

but should this occur, it will then enter expensive

territory. Banking shares appear to us to have the

most relative value. As an investment house, we are

underweight domestic equity. There’s huge bad debt

unwinding in the banking sector and that’s why we

think the banks will rise.”

According to McCurrie, emerging market equities are probably on par

or more expensive than developed market equities. “Emerging markets

may continue to outperform (and the chances are that they will, given the

better growth prospects) but unlikely to be at the same extent. Given this

view and our view on the Rand being overvalued on a medium term view,

we have increased our global exposure to the maximum that we are able

to,” he said.

blaCk SwaNS make 2011 AN UNCERTAIN PLACE TO BE

“While the local market has

been a good place

to be invested,

indications are

the local market

is now showing

signs of being

expensive.”

aSSet maNagemeNt NewS

iNflatioN

According to government figures, inflation (consumer price index) remained unchanged in February at 3.7%. However, with fuel costs heading back towards their record highs and the spectre of increased electricity and toll gates looming, clients can be forgiven for

thinking that their wallets are being hit harder than ever.

Marize Pieters, an investment analyst at Glacier by Sanlam, said that with South African interest rates at their lowest level since 1974, a cash investment is returning a meagre positive real (after inflation) return.

“Given looming inflationary pressures, with inflation expectations on the rise, cash will probably deliver negative real returns in future if interest rates are not hiked in conjunction with rising inflation,” said Pieters.

According to a number of other asset managers, investors – and pensioners in particular – should prepare themselves now for higher inflation in the months ahead as current low levels are simply not sustainable.

Simon Pearse, CEO of Marriot Asset Management, said that inflation has a profound impact on the lifestyle of income-dependent investors. “As a result, inflationary expectations should form an integral part of a retirement plan. Factors which will contribute to rising inflation in the years ahead include structural inefficiencies within the South African economy and rapidly rising commodity prices.”

Pearse added that a reasonable expectation for inflation over the longer term is for it to average at least seven per cent. “Such an expectation will help investors ensure that they do not pay too much for an income stream giving them a reasonable chance of generating an acceptable level of return over and above inflation from an investment.”

Roy Stephenson, annuity actuary at Old Mutual Corporate, added that South African pensioners should aim to make use of the investment tools available to them in order to protect themselves from the current high levels of market volatility, which could also impact on inflation.

He points to the South African Volatility Index (SAVI), which increased by more than 50 per cent during the second quarter of 2010, as indicating dangerous levels of volatility for pensioners.

“It is here where the benefits of inflationary protection and smoothing returns from year to year become even more valuable to pensioners, because they are shielded from excessive market volatility,” he said.

– THE MOST DANGEROUS DETRACTOR FOR PENSIONERSStephenson recommends selecting investments tools that enable pensioners to share in the investment returns made on the underlying annuity portfolio by way of annual increases to their pensions. “The aim of these products is to provide annual increases to help combat the negative effects of inflation.”

aSSet maNagemeNt NewS

“According to a

number of other

asset managers,

investors – and

pensioners in

particular –

should prepare

themselves

now for higher

inflation in the

months ahead

as current low

levels are simply

not sustainable.”

37May 2011

May 201138

baRometeR

property syndication reduces income payments for its investorsPICvest, one of South Africa’s biggest property syndication managers, announced to its investors that its income would be reduced to 6.5 per cent per annum, having previously been paid out between 10 per cent and 12.5 per cent, effectively reducing investor earning by between 40 to 50 per cent. About R4.5 billion is currently invested in the syndications administered by PICvest.

debt burden piles more pressure on Sa householdsThe credit profile of South Africa’s 18,51 million debtors worsened in the three months to December 2010, suggesting that the tentative recovery seen in early 2010 may take longer and may be at risk if interest rates rise again. The number of credit users with ‘impaired’ records (three or more months overdue) rose to 8,61 million from 8,49 million in the previous quarter, according to National Credit Regulator figures.

thirty-month oil price high raises local fuel price to almost R10 a litreUnrest in North Africa and the Middle East has created more bad news for consumers as the single biggest fuel hike hit locally. Motorists will be forced to fork out a further 54 cents a litre for petrol, taking the cost to a 30-month high at just shy of R10 per litre. Economists also predict more petrol price increases on the horizon.

local banks forecast to lead stock rally

RMB Asset Management has predicted that banks will lead

a rally in South African stocks that may last 18 months, as

record-low US interest rates spur emerging-market gains.

The fund manager also forecast that stock gains will be

spurred by earnings growth of as much as 30 per cent.

ppS members receive R2 billion

PPS, the financial services mutual company that offers

financial services products to graduate professionals,

announced that for the second consecutive year, its

200 000 plus members received over R2 billion in

allocations to their policyholder Surplus Rebate Accounts

(SRA) in 2010.

Coronation takes top investment award

Coronation Fund Managers was named Best Large

Fund House at the 2011 Morningstar South Africa Fund

Awards. The fund management company received the

award in recognition of consistent performance delivery

across its entire fund range between 2008 and 2010.

government launches one act, delays another

The Consumer Protection Act was finally launched (after missing its o

riginal deadline of October 2010) on 1 April, but the introduction

of South Africa’s new Companies Act, which was scheduled to launch on the same date was abandoned only hours before its deadline.

A new date is yet to be confirmed by government.SIDEWAyS

39May 2011

Japan quake – the costliest natural disaster in the worldThe Japanese Government has estimated that the damage to houses, roads, utilities and businesses caused from the earthquake and tsunami, which hit Japan on March 11, could climb to as much as R2.1 trillion.

property investors focus on asiaInvestment in the global commercial property sector will rise between five to ten per cent in 2011 to $606 billion, though attention is increasingly being paid to Asia’s property markets. Cushman and Wakefield’s International Investment Atlas said the main countries profiting from this trend will be the larger markets such as Japan, Hong Kong and Singapore.

portugal debt crisis worsensPortugal finally succumbed to its mounting debt crisis and requested a bail-out after months of uncertainty, making it the third EU country to request financial aid from the European Union. The country said it has missed its deficit target. Prime Minister Jose Socrates said parliament’s rejection of austerity measures in March worsened the situation, making the request “inevitable”.

libya says gaddafi remains a unifying forceThe Libyan Government said it remains open to political reform but warned that current leader Muammar Gaddafi should stay in power to help mitigate a similar power vacuum to that which has been engulfed Somalia and Iraq.

wealthy uS youth turn to facebook for financial adviceWealthy investors under the age of 50 no longer trust the advice of financial advisers. According to a survey by Cisco of more than 1 000 investors with at least $500 000 in assets, more than half of this group would rather use social networking as a tool to find investment advice.

zim to nationalise country’s minesThe zimbabwe Government will nationalise more than half of the country’s key resources sector by setting up a sovereign wealth fund to own 51 per cent stakes in mining companies. The move is likely to discourage foreign investment and will hit foreign mining houses including Rio Tinto, which runs a diamond mine in the country.

ireland fires unfit bankersIreland’s banks have replaced many of their chief executives after reckless lending and careless governance brought them close to collapse and forced the government into accepting a bail-out from the EU.

brazil says no to downgrade on investment ratingBrazilian Finance Minister Guido Mantega has announced that downgrading Brazil would be a mistake, following comments by credit rating agency Standard and Poor’s managing director for corporate and government ratings in Brazil, Milena zaniboni, who warned that if the country failed to fulfil its primary surplus target of 2.9 per cent GDP growth in 2011, a downgrade might be necessary.

New Ceo starts at Nigerian bourseNigeria’s Stock Exchange has a new boss after Oscar Onyema, who joins from the American Stock Exchange, began work at the bourse as its new CEO saying he has “developmental plans for the market”. Sacked NSE director general Ndi Okereke-Onyiuke is still in court challenging her ‘unlawful removal’ from office.

uS executives’ bonuses to be deferredUS regulators have proposed that top executives working for financial companies have half of their bonuses deferred for at least three years. The deferred bonus would then be tied to the performance of the company. The new rule will apply to companies with $50 billion or more in assets such as Bank of America, JPMorgan Chase, Goldman Sachs Group and Morgan Stanley.

SNippetS | tHe woRld

May 201140

iNduStRy NewS

APPOINTMENTS

Diversified financial services group Sanlam has

appointed three new independent non-executive

directors to the group’s board as well as that of

its subsidiary Sanlam Life Insurance. They are

Philisiwe Buthelezi, Philip de Villiers Rademeyer

and Christiaan Gerhardus Swanepoel.

Ms Buthelezi is currently the CEO of the National

Empowerment Fund and brings a diverse

knowledge of banking, capital markets and

international investment to the board.

Rademeyer joined Sanlam in 1998 as financial

director. Although he retired from Sanlam on

31 October 2006, he has served on several

Sanlam business boards and committees in a

non-executive capacity.

Swanepoel joined Sanlam in 1972. He became

chief actuary on 1 January 1990 and remained

in that position until he retired in 2005.

The current deputy chief

executive of JSE Limited, Nicky

Newton-King, will be the first

woman to run the 123-year-old

institution when she assumes the

position of chief executive at the

end of this year.

Russell Loubser, the long-standing

chief executive of the JSE, who has

been in the position for 15 years,

will remain at the helm of the bourse

until the end of the current financial

year in December.

Newton-King has been Loubser’s deputy

for eight years and will join the ranks of

female chief executives including Maria

Ramos at Absa, Cynthia Carroll at Anglo

American and Nonkululeko Nyembezi-

Heita at ArcelorMittal South Africa.

When asked why the board made the

announcement some nine months ahead

of the hand-over, Loubser – who said he

would not be retiring from business at the

end of the year – commented that the JSE

wanted to demonstrate that it had thought

very carefully about the matter.

fiRSt female CeoTO HEAD UP JSE

Philisiwe Buthelezi Philip de Villiers Rademeyer Christiaan Gerhardus Swanepoel

Offshore investment manager Ashburton has

announced its Ashburton European Equity Fund

retained the Morningstar Category Award for Best

Europe Large Cap Fund at the annual Morningstar

Fund Awards, held in Cape Town in March.

The Morningstar Awards recognise the funds

that have added the most value within their

peer groups for investors over the past year and

longer term.

Adam Benzimra, business development

executive for Ashburton, said: “We are

delighted to win this award for the second year

in a row. It highlights Ashburton’s ability to

produce consistent returns through our active

and flexible investment process.”

This is the second award that Ashburton has

received in recent months, with its Replica Euro

Asset Management Fund achieving recognition for

Best Offshore Global Asset Allocation Fund for the

third year running at the Raging Bull Awards held

in January.

aSHbuRtoN euRopeaN eQuity fuNdWINS MORNINGSTAR AWARD

41May 2011

Futuregrowth Asset Management was recently

awarded the 2011 Global Pensions Award for

Socially Responsible Investing (SRI).

Global Pensions, which hosted its 10th annual

Global Pensions Awards, is the only international

magazine serving the institutional pension funds

industry across the world.

Futuregrowth manages five SRI funds: the

Infrastructure and Development Bond Fund,

the Development Equity Fund, the Community

Property Fund, the SRI Balanced Fund and the

recently launched Agri-Fund.

According to Global Pensions, every winner

has been singled out by experts in the pension

fund industry for the quality of advice or product

offered to this community.

South Africa’s listed property market is going from strength to strength with further activity in the property fund sector, hot on the heels of a number of new property funds that have been launched over the last year.

After a four-year break, Investec announced it was relisting its property fund on the JSE effective from 14 April 2011. The Investec Property Fund consists of 29 office, retail, and industrial properties valued at R1.7 billion.

Sam Leon, CEO of Investec Property division, said: “We look forward to our return to the listed property sector through the listing of the Investec Property Fund. As big trees grow from small seeds, so too do we see this fund as a platform from which we can grow and expand our asset base and optimise returns in the medium to long term as we have done before.”

Investec said the main purpose of listing was to provide

investors, both institutional and private, with an opportunity to participate over the long term in the income streams and future capital growth, as well as obtaining a spread of investors to enhance liquidity and tradability.

Grindrod Asset Management also launched a new property fund domiciled in Ireland and denominated in US Dollars, in order to help South African investors capitalise on the Treasury’s recent relaxation in the exchange control laws.

“The South African Reserve Bank recently raised the individual offshore investment allowance to R4 million per person per annum, increasing the need for attractive international investment options for South African investors. Hence the creation of this fund,” commented Greg Rawlins, fund manager at Grindrod Asset Management.

The Grindrod International Property Fund is a sub-fund of Sanlam Universal Funds, an open-ended umbrella investment company managed by Sanlam Asset Management in Ireland.

In a further positive sign for the industry, the soon-to-be listed empowerment property fund Dipula Income Fund also announced it is in the process of acquiring two property portfolios worth R800 million as part of its strategy of growing its net asset value.

Incoming CEO Izak Petersen said the acquisition would result in Dipula’s asset value growing from R1,4 billion to R2,2 billion. Dipula Income Fund is a result of a planned merger between Dipula Property Fund and Mergence Africa Property Fund. The merger is expected to be completed at the end of May and the merged entity is also expected to list at the end of May.

DEMAND FOR PROPERTy CoNtiNueS aS fuNdS liSt,

lauNCH aNd aCQuiRe

FUTUREGROWTH awaRded SRi maNageR

of tHe yeaR

May 201142

PRODUCTSetfs become increasingly trendy

Exchange traded funds (ETF) are increasingly gaining a more

prominent place in investor’s portfolios, as evidenced by two

new additions to ETF SA’s platform.

Rand Merchant Bank is now offering its RMB Oil ETNs on

etfsa.co.za. The RMB Oil ETNs trade like any other share

on the JSE offering investors exposure to the price of

crude oil traded on international markets.

The RMB ETN tracks an index developed by RMB,

which references the West Texas Intermediate crude oil

futures contracts, traded on the New york Mercantile

Exchange. The RMB Oil Index measures the

performance of an investment in oil futures.

ETNs are similar to ETFs except that the

underlying pool of assets is owned by

FirstRand, in the case of RMB ETNs,

and not a segregated trust fund, as

in the case of ETFs.

The RMB Oil ETNs

originally listed on the

JSE on 8 December

2010 at R608

per share.

Mike Brown, managing director of etfsa said, “RMB Oil ETN is

an exciting addition to the range of exchange traded products

available to the retail investor. It is a security listed on the JSE

that trades as a spot instrument, like any other share, but offers

the investor access to the oil futures markets, without the investor

having to maintain complex futures and margin requirements.”

In addition, etfsa is also now offering a money market option

for investors for the first time, in addition to its equity, bond,

commodity, property and foreign investment ETFs. The money

market deposit is invested with Nedbank and the current interest

rate, net of the Nedbank fee is 5.45 per cent.

The Money Market Deposit is completely liquid and can be

bought and sold at any time by investors, with no minimum or

maximum investment period required.

financial services continue to go mobile

Following the launch of Renaissance Capital’s new iPhone

research application, South African financial services group

Cadiz has also joined the mobile space with the launch of an

application that aims to provide daily South African indicators,

indices and currency updates.

Indicators are updated every 15 minutes as well as detailed

share price information of Cadiz CDz (listed on JSE), a live

stream of all Cadiz Holdings news and press

releases and a Cadiz Wealth Investor

login for Cadiz Wealth clients.

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May 201144

bmw 760li

Wikipedia, the world’s

web-based, free-content

encyclopaedia, describes

a luxury car as, “a vehicle

with greater equipment,

performance, construction precision, comfort,

design ingenuity, technological innovation or

features that convey brand image, cachet, status

and prestige”. It’s safe to assume therefore, that

the BMW 760Li represents the brand’s highest

achievements in all of the above.

Visually, there is little to distinguish the 760Li

from ‘lesser’ 7 Series models; however, a

clue lies with the ‘L’ designation. The car’s

wheelbase has been lengthened by 140 mm to

a class-leading 3 210 mm, with the resulting

space for the exclusive benefit of the rear

passengers. Exterior highlights are subtle, but

enough so as not to go unnoticed, especially

when wearing the pearlescent Alpine White

paintwork you see here.

Inside, choice materials communicate luxury

and refinement. Stainless-steel door strips with

illuminated V12 emblem greet passengers as

they step aboard, while walnut inlays are set

amongst Nappa leather finishes that feature

meticulous double-stitched seams. An Alcantara

roof lining serves to round off the cabin’s top

class ambiance. Perhaps the only element in

short supply is a touch of character, from which

the ‘clean’ and efficient interior design could

benefit. It goes without saying that interior

space is generous, with enough rear legroom

available to accommodate the tallest of super

models and shoulder room fit for the healthiest

of politicians or corporate execs. The rear

‘comfort’ seats are independently adjustable

and feature ventilation and heating. To shield

rear passengers from the sun, and for added

privacy, electrically operated blinds are fitted to

the rear window and passenger side windows.

The rear seats are also available with an

optional massage function in the backrest.

Packed with a features list as long as the car

itself, a few stand out for their convenience

and safety. BMW’s Night Vision, for example,

uses a thermal imaging camera to improve

visibility and safety at night. The system also has

pedestrian recognition that will alert the driver to

a potential accident by analysing the behaviour

of the approaching individual. Active Cruise

Control with Stop/Go function makes life easier

during highway driving. The cruise control system

monitors and maintains the following distance

between the car in front and, if necessary, will

automatically apply the brakes and come to a

complete stop. The iDrive infotainment system

features a television and each passenger in the

rear has their own 9.2-inch colour monitor,

through which they can access all multimedia

functions via a shared iDrive controller located

within the rear armrest. The rear armrest also

houses a GSM cordless telephone.

The most luxurious 7 Series offers a ride as

smooth as the leather its passengers rest

on. BMW’s Dynamic Damping Control and

Dynamic Drive Control work to achieve

excellent levels of comfort and a surprising

amount of agility for a 5.21-metre-long car

weighing 2.2 tonnes.

Svelte and sophisticated, the BMW 760Li

is a car that delivers opulence reserved for

a privileged few and is best enjoyed with a

chauffeur at the helm. True grace and pace

starting from R1.68 million.

bmw 760li

45May 2011

AND NOW FOR SOMETHING Completely diffeReNt

South African art has gained prominence in recent years, continually setting new records at auctions both here at home and abroad.

Last month, at an auction held at London auction house Bonhams, various South African artworks broke multiple records to the tune of R49 100 000. Giles Peppiatt of Bonhams Auctioneers said, “There was evidence of a highly educated group of buyers in the room and on the phone. They picked the best and paid handsomely for it.”A painting by Irma Stern sold for R34 million which beat her previous record for a painting entitled Bahora Girl which sold for R26.6 million a year earlier.

“This shows a growing appetite for Stern,” said Peppiat. Stern, who was born in the Transvaal, studied art in Germany and travelled extensively throughout zanzibar and Congo. These countries’ cultural influences are obvious in her artwork.

Other South African artists whose work also broke records at the auction were Alexis Peller and Gerard Sekoto who has fast become South Africa’s most influential black artist. Peller’s painting was sold for R8.4 million and Sekoto’s for R6.7 million.

While South African art is reaching new records, it is still some way off international values. Most recently, in March 2011, Picasso’s Nude, Green Leaves and Bust became the most expensive painting ever to be sold at auction for $106.5 million. The anonymous new owner has loaned it to the Tate Modern gallery in London where it will be displayed in the United Kingdom for the first time.

The most expensive painting ever sold, however, is still No. 5 by Jackson Pollock. It is said to have been sold for around $140 million in 2006 by David Geffen, although this was never confirmed by the mystery buyer. Willem de Kooning’s Women III follows closely in second place; it was sold for $137.5 million also in 2006.

SoutH afRiCaN aRtMAKES A SPLASH AT AUCTION

tHey Said...

“(She has) forsaken her political principles

and has become a puppet of the privileged.”

according to a statement issued by the

western Cape aNC, commenting on

patricia de lille being nominated by

the democratic alliance (da) to be its

mayoral candidate.

“Diamond tries to convince tax payers that

the era of remorse and regret within banking

is over, yet he has no shame in pocketing a

seven figure bonus.” trade union general

secretary len mcCluskey commenting on

the Ceo of absa parent barclays, bob

diamond, who pocketed £10.1 million in

salary, bonus and stock last year.

“No one can say there won’t be another crisis

but what we want to do is to mitigate the risks

and fallout that emerge.” ismail momoniat,

the treasury’s head of tax and financial

sector policy, discussing the fact that the

treasury believes the mayhem caused to

developed economies by the financial crisis

was too close for comfort for Sa to ignore.

“We have a duty to ensure that this

country never again resorts to a system

of government which institutionalises

and legalises the domination of one

group by another, whether by race or

ethnic group.” president Jacob zuma,

echoing sentiments once expressed

by madiba, while speaking

at a Human Rights day

celebration.

“This year is not looking very good as far as I am

concerned, there are black swans from all angles.”

Russell loubser, Ceo of the JSe, commenting

on the Japanese disaster, political tension in

North africa, debt concerns in europe and

higher oil prices as not boding well for the

JSe’s prospects in 2011.

“If you hear the stories about the cuts and

still wonder why our country needs to take

these difficult decisions, then look at what

is happening around us; first Greece, then

Ireland, today Portugal. All of them countries

that did not convince the world they could pay

their debts. Two of them countries with smaller

budget deficits than Britain.” uk Chancellor

george osborne, speaking at the british

Chambers of Commerce, on why britain

was right to take austerity measures.

“Have you ever seen an ugly woman in a

blue dress dancing like a monkey because

she is looking for votes?” Julius malema

referring to Helen zille dancing at recent

da voters rallies.

“Without rules, the international monetary and

financial system is incapable of forestalling

crises, financial bubbles and the widening of

imbalances.” Nicolas Sarkozy commenting

on China pushing back against pressure

from paris and washington for swift

reform of a global monetary system.

“Investors with certain personality types,

such as confident alpha males, are often

more prone to making emotional investment

decisions. Unfortunately, these are often

the very people who are least likely to

acknowledge that that they are predisposed

to doing so.” Rob macdonald, head of

consulting and institutional business at

Nedgroup investments

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

46

135946OMUT Ranking the UNit.indd 1 2011/04/13 2:53 PM

investsa may 2011

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