Blue Chip Journal - March 2019 edition

Issue 71 • March/April 2019 

www.bluechipjournal.co.za 

Let the investor 

The South African Journal of Financial Planning 

beware 

How concentrated markets can 

trap fund managers 

Next generation thinking 

Innovate around the needs of young investors 

A changing profession 

Behavioural science and financial planning

Financial Services 

Look beyond the 

here & now 

2019 

When you’re planning ahead, you need 

the complete picture to make sound 

financial decisions. Updated for 2019, 

L e x i s N e x i s F i n a n c i a l S e r v i c e s t i t l e s 

give you direct access to the most 

comprehensive and up-to date content, 

so you can make vital recommendations 

with complete confidence. 

LEXISNEXIS.CO.ZA/STORE-FS

Momentum is a division of MMI Group Limited, an authorised financial services and credit provider. 

CONTENTS 

6 ON THE MONEY 

Making waves this quarter 

12 IN THE LION'S DEN 

How a concentrated market like the JSE can trap fund managers 

14 SHORT-TERM RISK FOR REWARDING RESULTS 

Despite the negative sentiment of 2018, volatility provides opportunities for 

long-term returns 

18 BUILT TO LAST 

On value investing and the value of diversity 

20 EXERCISE VIGILANCE 

Where to from here for equity markets? 

22 BUBBLE AND BOOM 

Short the Dow, bank on China 

Rewarding career opportunities to 

make a difference in financial planning. 

Are YOU target-driven, goal oriented and want to determine your own income? 

Then read on… 

Momentum Financial Planning is one of the most successful and recognised providers of 

financial services in South Africa. Passionate about enhancing clients’ financial wellness, we 

are looking for equally passionate individuals to help us realise this goal. 

Not qualified? We will provide you with the expert knowledge and professional skills you 

will need, and support you to obtain the sought-after Certified Financial Planner® (CFP) 

qualification for a rewarding career in the financial services sector. 

If you are interested in becoming a knowledgeable coach and trusted partner for ordinary 

South Africans to create enough money for their life’s journey, send your CV today to 

mfpintouch@momentum.co.za. 

momentum.co.za 

24 MEDICLINIC, TONGAAT, FAMOUS BRANDS, ASPEN... DISCOVERY? 

When cash flow signals risk 

The South African Journal of Financial Planning 

A changing profession 

Behavioural science and financial planning 

Issue 71 • March/April 2019 


Let the investor 

beware 

How concentrated markets can 

trap fund managers 

Next generation thinking 

Innovate around the needs of young investors 

Issue 71 

March / April 2019 

26 SHIFTING CLIMATE, SHIFTING OPPORTUNITIES 

New investment possibilities emerge 

30 A COACHING WAY OF BEING 

To survive disruption, help clients understand themselves 

34 PLANNING TO SUCCEED 

Succession is a function of automation and education 

36 TALKING ABOUT MONEY 

Money stories reveal our relationship with money 

ISSN 1682-8666 

No article or any part of any article may be reproduced without the prior written 

permission of the publishers. The information provided and opinions expressed 

in this publication are provided in good faith, but do not necessarily represent 

the opinions of this publication, the publisher or the editor. Neither this 

magazine, the publisher or the editor can be held legally liable in any way for 

damages of any kind whatsoever arising directly or indirectly from any facts or 

information provided or omitted in these pages or from any statements made 

or withheld by this publication. The publishers would like to express thanks to 

those who support this publication by their submission of articles and with their 

advertising. All rights reserved. 

38 EMOTIONAL RESCUE 

Stopping your clients from sabotaging their own financial futures 

40 SERVING THE NEXT GENERATION 

Financial planning has to make a big transition 

Pages for paid-for material are 

labelled ‘advertorial’, ‘profile’ 

or ‘cover profile’ 


1

FOREWORD 

The way forward for the FPI 

As you know, 2018 was a tough year for the FPI. I’m pleased to tell you that we’ve formulated 

a new strategy and enhanced our governance processes. The FPI Board has 

since undertaken appropriate measures which are cemented internally to ensure our 

stakeholder engagements and relations remain intact. The withdrawal of the examination 

body, which highlighted gaps in our governance processes and policies overall, allowed 

for more introspection on what our core focus areas should be. A more prudent approach was 

actioned which would allow us to focus on our core function, being a professional body. 

We remain committed to protecting our status as the only CFP® designation provider in South 

Africa. We’re committed to our members, professionalising the industry, and growth through 

uniting financial planners throughout the country. 

Celebrate change 

One of our greatest industry challenges is the need for diversity and inclusion. We want to weave 

diversity and inclusion into all our operations – to enhance our employees’ emotional commitment 

to their roles, to improve their performance, and to strengthen our brand. 

Our membership statistics tell a story that needs to be addressed: Only 16% of our members 

are black, and only 36% are female. Of this 36%, only 20% are black. More than half of our 

members are over the age of 55. South African financial planners are leaders in many ways, but 

there’s a critical need for an industry succession plan, alongside the succession plans of individual 

businesses. 

Although many industry bodies have invested significantly in training black financial advisors, 

we haven’t been able to retain those advisors, which suggests that these isolated interventions 

don't work. At the FPI, we’re committed to leading a cohesive approach to creating a demographically 

diverse industry. As part of this process, we’re arranging presentations to high-school 

2 www.bluechipjournal.co.za

students and undergraduates at various universities. We want to raise the profile of the profession and highlight 

the incredible opportunities available should you choose to pursue a career as a financial planner. 

Our drive for inclusion also applies to the people we serve. A recent survey by Sanlam revealed that a staggering 

92% of South African retirees do not have an adequate amount of capital to live on. We have a duty to 

assist those people. 

Commitment to education 

The Centre for Professional Development is no longer an entity on its own, but a division within the FPI. Our CPD 

offering is a trusted and valuable resource, and this structural change allows us to deliver the service more costeffectively. 

It remains an essential part of our value proposition to our members. Also, by offering CPD packages 

including webinars to others in the industry, we will undoubtedly strengthen our expertise and credibility in CPD. 

The CPD cycle started on 1 June 2018 and ends 31 May 2019. With our new CPD Membership category, we are now 

enabled to serve the industry to meet their CPD requirements. We deliver Continuous Professional Development 

(CPD) events that add value and improve the knowledge, skill and ability of all delegates who attend. These events 

are delivered face-to-face and online. For more information, please visit https://www.fpicpd.co.za 

Get involved 

After standing in as acting CEO for the past eight months, I’ve set the stage for a dynamic, forward-thinking CEO 

to join our team and lead us into a successful future. Please spread the word to industry leaders, and email us at 

events@fpi.co.za if you’d like to present at schools or universities, or partner with us on the mentorship programme 

on membership@fpi.co.za. I look forward to positive change. 

Regards, 

Stephanie Pillay 

Chief Operating Officer and acting CEO

ED'S NOTE 

Disruption begins at home 

For several years now, disruption and innovation 

have been the buzzwords du jour at every 

industry event across the economic spectrum. 

From agriculture to aviation, from frisbee 

manufacturing to financial planning, the concerns all boil 

down to effectively the same thing: the way things has 

been done up until now has been rendered obsolete by 

advances in technology locked in a feedback cycle with 

consumer expectations. Steve Jobs may have created the 

eco-system in which the contemporary consumer now 

swims, but the digitally empowered consumer is now 

in the driving seat. This counts triple for the so-called 

millennial generation and exponentially more for the 

emerging Generation Z. 

What this means for service providers of every stripe 

is heightened urgency in adopting and adapting to 

the appropriate technology. What is the appropriate 

technology? Therein lies the rub. If you are not close to 

your consumer, you will have no idea what technology is 

appropriate. It may be the case that the solution to your 

particular problem is not even technological. A systems 

innovation could be required. Or a change in mindset. 

Consensus is emerging across industries that the 

consumer, customer or client has to be the reason that 

companies innovate for. This wisdom coincides with a 

growing swing in financial planning to a client-centred 

approach that combines coaching and behavioural 

economics. This shift is also reflected in the contents of 

this issue of Blue Chip. 

Editor: Greg Penfold 

Art Director: Brent Meder 

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www.bluechipjournal.co.za

REAL RETURNS, 

LOW VOLATILITY 

Launch of the Laurium Income Prescient Fund 

Laurium Capital launched the Laurium Income Prescient Fund on 1 March 2019. The fund 

aims to achieve inflation-beating returns with controlled risk and low volatility. 

Target return of inflation +3% p.a 

Aims to avoid drawdowns over a rolling 3-month period 

Visit www.lauriumcapital.com today 

We know Investments 

T +27 11 263 7700 E laurium@lauriumcapital.com 

www.lauriumcapital.com 

Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up as well as down as past performance is not necessarily a guide to future 

performance. CIS’s are traded at a ruling price and can engage in script lending and borrowing. A schedule of fees, charges, and maximum commissions is available on request from the Manager. There is no guarantee 

in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF) (Pty) Ltd is 

registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Limited, Registration number: 2007/026029/07 is an authorised Financial Services Provider 

(FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochures and application forms please go to www.lauriumcapital.com

On the money 

Making waves this quarter 

Launch of the Laurium Income Prescient Fund 

Fixed income fund manager J-P du Plessis has joined Laurium Capital, the boutique 

asset manager which manages several hedge and long-only strategies in South 

Africa and the rest of Africa. In the past, Laurium has focused predominantly 

on equity, but with the growth in its multi-asset funds, has decided to extend 

its expertise by adding a fixed income specialist to its investment team. Du 

Plessis, who joined Laurium at the beginning of January 2019 from Prescient, is 

managing the Laurium Income Fund, launched 1 March 2019 using his 20 years’ 

financial markets experience to further enhance Laurium’s product offering and 

performance. 

The Laurium Income Prescient Fund is a multi-asset income fund. The fund 

is for investors who aim to obtain real returns but with low volatility. The fund is 

focused on compounding real returns over time while minimising the potential 

for drawdowns. 

• The fund’s benchmark is 110% of STeFi call 

• The fund’s target is to produce inflation + 3% returns 

• A secondary target is to avoid drawdowns over a rolling three-month period. 

Contact Laurium Capital for more information on laurium@lauriumcapital.com or 

011 263 7700. 

Laurium's new fixed income fund manager J-P du Plessis 

Strong risk-adjusted returns 

Fairtree Hedge Funds take the silverware 

Two Fairtree hedge funds won in their nominated categories in the 10th 

Hedge News Africa Awards held in Cape Town in February. 

By category, fixed income hedge funds were the strongest, adding more 

than a median 10% for the second consecutive year, followed by marketneutral 

and quantitative funds, which gained a median 6.18%. Multi-strategy 

funds ended the year 4.14% higher while equity long/short protected against 

the downside with a median decline of 1.79%. 

Against the back drop of complicated markets with an emerging-market 

exodus causing volatility, and a string of corporate landmines challenging 

managers, the funds managed by Jean Pierre Verster and Stephen Brown 

delivered strong risk-adjusted returns over the measured periods. 

Fairtree was nominated in five categories: 

• Long/short equity: Fairtree Protea Equity Long Short SNN Retail Hedge 

Fund and Fairtree Protea Worldwide Flexible Equity SNN QI Hedge Fund 

• Multi-strategy: Fairtree Wild Fig Multi Strategy SNN QI Hedge Fund and 

Fairtree Woodland Multi Strategy SNN QI Hedge Fund 

• Five-year Performance: Single-Manager: Fairtree Assegai Equity Long 

Short SNN QI Hedge Fund 

• New Fund of the Year: Fairtree Protea Equity Long Short SNN Retail 

Hedge Fund 

• Fund of the Year: Fairtree Protea Equity Long Short SNN Retail Hedge 

Fund. 

The awards are based on risk-adjusted returns for the 2018 calendar year, 

using an established methodology that comprises net returns as well as 

Sharpe ratio as a measure of volatility. 

To qualify for a nomination, funds had to average a minimum of 

R80-million in assets under management in that strategy throughout 

the calendar year.

We couldn’t 

grow your trust 

without first 

growing your 

money. 

Since 1993, we’ve grown the long-term savings of millions 

of South Africans by doing one thing and one thing only, 

investing with a long time horizon. Never losing focus and 

never giving up on our goal, we grow our clients’ money 

into real long-term wealth. 

To invest your money today, speak to your 

Financial Adviser or visit coronation.com 

48648/E 

Coronation is an authorised financial services provider. Trust is Earned

ON THE MONEY 

Shining bright 

BrightRock releases upbeat results 

Following the recent annual results 

announcement by its majority 

shareholder, Sanlam, needs-matched 

life insurer BrightRock has released an 

update on its business performance 

across its multiple risk product lines. 

From a zero base at its product launch 

in March 2012, BrightRock has grown 

rapidly, increasing its market share 

to 12% of the market for large risk 

policies sold by independent financial 

advisers – making it the fourth-largest 

provider in this market based on new 

business volumes. 

During the 2018 financial year, 

BrightRock maintained its position as 

the fastest-growing provider in this 

segment, achieving strong organic 

growth. Total premium income across 

its businesses increased by 43% year on 

year and annualised premium income of 

R433-million was activated in 2018. This 

is despite tough market conditions – the 

category saw just a 12% increase in the 

number of risk policies sold between 

July 2017 and June 2018. With reporting 

season still underway, it is too early to 

provide definitive figures but indications 

are that many insurers have experienced 

single-digit growth in risk policy sales and 

an increase in first-year risk policy lapses 

during 2018. 

According to Schalk Malan, BrightRock 

CEO, a key driver of the company’s growth 

has been the increased uptake of its 

needs-matched offering by independent 

financial advisors (IFAs) operating in the 

upper income segment. The company 

currently has more than 4 200 accredited 

IFAs distributing its product nationwide. 

In particular, its permanent disability 

cover is making significant inroads in this 

market. 

Cautious optimism 

Private equity remains agile 

The 2018 Deloitte Africa Private Equity Confidence 

Survey (PECS) indicates that there is cautious 

optimism as private equity (PE) continues to be 

an agile asset class, navigating tough geopolitical 

and macro-economic conditions across Africa. The 

annual survey was conducted between August 

and November 2018 throughout the Deloitte 

Africa network, with a focus on PE activity in East, 

Southern and West Africa. A total of 77 surveyed 

participants included both General Partners (GPs) 

and Limited Partners (LPs). 

“In this survey we focused on respondents 

from three regions across Africa with operations, 

activities, and knowledge in each of these regions,” 

says Clinton Wolder, Deloitte Southern Africa 

Financial Advisory Partner. “Our forward-looking 

survey posed questions to respondents that 

would provide valuable insights into how private 

equity practitioners currently view the African 

private equity landscape, as well as their future 

expectations.” 

It is clear from the 

responses that the PE 

industry is expected 

to weather the storm 

of ongoing economic 

challenges, such as 

Southern Africa’s 

subdued GDP growth, 

while positioning itself 

to take advantage of 

anticipated growth 

opportunities. With 

many key African 

economies expected to 

grow, the overarching 

message from 

practitioners is that 

the investment path 

should be trodden with 

cautious optimism.

110319v5 © IRESS 2019 

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ON THE MONEY 

Improved market opportunities 

Promising investment prospects, despite risks 

Gradual improvement in South Africa’s public sector prospects, which could drive an 

uptick in economic growth in the years to come, has led Old Mutual Investment Group 

to steadily reduce the exposure of its actively managed balanced fund offering to 

global markets such as the US, and increase allocations to South African asset classes. 

According to Graham Tucker, Manager of the Old Mutual Balanced Fund, while 

growth in the US is still good, it is going to be increasingly challenging to maintain the 

current level of growth. 

Tucker believes that South Africa is currently in a better position compared to last 

year this time and is making incremental progress. Therefore, combined with attractive 

valuations in select areas, he is seeing increased opportunities. 

Old Mutual Investment Group does, however, acknowledge that there are risks 

facing South Africa, not least of which is Moody’s, the last of the three ratings agencies 

to still assign an investment grade to the country’s debt, which is scheduled to 

announce its rating decision at the end of March. Moody’s said on 21 February, a day 

after Finance Minister Tito Mboweni delivered his 2019 budget speech, that it did not 

believe the decision to increase the expenditure ceiling by R16 billion over three years 

would weaken the credibility of South Africa’s fiscal policy. 

Keeping up with change 

LexisNexis handbook is a must-have 

The 2019 edition of the 

SA Financial Planning 

Handbook is a musthave 

reference for 

any financial planner. 

There have been 

numerous regulatory 

changes since the 2018 

edition was published 

(in particular those 

made by the Financial 

Sector Regulation Act 

and the Taxation Laws 

Amendments Acts 

of 2018). Keeping up 

with these changes 

has become increasingly onerous for financial planners. This 

handbook has been updated to end December 2018 and 

provides expert insight into the changes as well as providing 

relevant case law and examples which allow the planner to 

apply the information in a practical context. Compiled by a 

team of experts, this handbook covers all aspects of financial 

planning and is recognised as the official textbook for postgraduate 

qualifications in financial planning. 

For more information visit: store.lexisnexis.co.za 

Brace yourself 

Expat tax is coming to South Africa 

An amendment to the South African Income Tax Act, which will have hard-hitting 

consequences for South Africans working outside South Africa, will come into force in 

March 2020. South Africans earning an income abroad should be considering their options. 

Up until now, South Africans working abroad for more than 183 days (of which 60 days are 

consecutive) were able to earn income free of South African tax. Since the enactment of this 

amendment, South Africans are now required to pay tax in SA of up to 45% of their foreign 

employment income once it exceeds ZAR1-million (approximately US$75 000) per annum. 

Although this threshold may seem reasonable, employment income for this purpose 

includes allowances and fringe benefits like the provision of housing, security and flights, 

among other things. It is also likely that pension contributions will be included in the 

threshold. 

(Sovereign Trust SA)

MAKE THE RIGHT CHOICE IN 

EMERGING MARKETS 

Build wealth by investing in 

emerging and frontier market 

based companies that are identified 

as being undervalued and offer 

potential for above average share 

price appreciation. 

Neal Smith 

Portfolio Manager 

of the Denker Global 

Emerging Markets Fund 

DISCOVERING OPPORTUNITIES 

BUILDING WEALTH 

+27 (0) 21 950 2603 service@denkercapital.com www.denkercapital.com 

Sanlam Collective Investments (RF) (Pty) Ltd is a registered and approved Manager in terms of the Collective Investment Schemes Control Act 45 of 2002 

(CISCA). A schedule of fees can be obtained from the Manager. Maximum fund charges include (incl. VAT): Advice initial fee (max.): 3.45%; Manager initial fee 

(max.): 0.00; Advice annual fee (max.): 1.15%; Manager annual fee (max.): 1.55%; Total Expense Ratio (TER): 1.74%. The fund may from time to time invest in 

foreign countries and therefore it may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, 

settlement, and the availability of information.

In the lion's den 

How a concentrated market like the JSE can trap fund managers 

Are all equity markets created equal? Does an 

investment process which works in one market 

naturally extend itself to another? In this article 

we explore the limitations which investors have 

when attempting to apply their investment process in a concentrated 

equity market such as South Africa, and the traps 

they are prone to falling into. 

Fund management is an artful science which has evolved 

over the past 100 years or so. At the heart of every 

investment product lies a process, a philosophy and a 

supporting set of assumptions around which the prospect 

of "outperformance" is sought and promised. 

Examples which most investors will be familiar with 

include "value investing", "growth investing" and more 


FUND MANAGEMENT 

recently "quality" investing. Then there 

are managers who seek positive earnings 

revisions as a source of outperformance, or 

those who are biased to smaller companies 

due to information inefficiency opening up 

the performance opportunities. 

Fund managers have been driven to 

define these philosophies very clearly, 

in part by a consulting industry keen 

to neatly categorise the personalities 

managing investments, but also because 

fund management at its heart is both art 

and science. Providing a logical intellectual 

framework to manage investments helps 

to provide structure to the oftenvague 

nature of investing. But are fund managers 

too quick to assume that what works in 

a large, global, liquid market is easily 

transportable to a small, concentrated 

market like we have in South Africa? 

Evidence tells us that this is the case, 

and there are important consequences 

for selecting fund managers and the 

evaluation of their performance potential. 

Whichever route the manager takes 

in developing their philosophy, they also 

need the market in which they operate to 

provide a viable foundation. What we find 

locally is that managers who define themselves 

in strict philosophical terms are 

prone to investment traps given the small 

size of our market – the assumption of the 

"viable foundation" does not necessarily 

hold. This is a poor outcome for the purists; 

it means that an intellectually sound, yet 

strictly defined investment philosophy may 

not be viable in certain investment markets 

such as ours. 

Small market breadth imposes constraints 

in two ways: by limiting the physical 

number of opportunities which align with 

the investment philosophy (poor diversification 

outcome); and by creating structural 

investment cycles which preclude certain 

investment approaches from performing 

well (poor performance outcome). 

Consider this example 

Manager A follows a "deep value" investment 

process, only buying companies 

which are significantly cheap in isolation. 

Risk is defined as "overpayment" and 

"permanent capital loss". This manager is 

value seeking and aims to deliver outperformance 

when mean prices revert to the 

higher values relative to current prices. 

The JSE at any given time has around 

100 investable shares for a reasonably 

sized asset manager. Consider that for 

the average portfolio, at least 30 shares 

are desired for diversification reasons. 

For Manager A, a diversified portfolio is 

possible when the market on the whole is 

trading within the realms of fair value and 

there are around 50% of shares trading 

below fair value (ie 50 opportunities). 

However, as the market becomes 

increasingly expensive, the range of opportunities 

starts to narrow. In the period 2012 

to 2015, for example, this market behaviour 

meant that a genuine deep value manager 

staying true to their philosophy would 

struggle to find 20 such shares, and would 

hold a concentrated, poorly diversified 

portfolio of shares – in this case across the 

platinum sector – the only "cheap" sector at 

the time. While it solves Manager A’s need 

for "value", it exposes the investor to the 

lack of diversification which results. 

In a large, liquid global market we see 

the exact same philosophy applied, but 

with a superior opportunity set where 

diversification is always achievable simply 

due to the vast number of instruments 

which are investable. This provides the 

foundation needed for a strict investment 

philosophy to prevail. 

The downside to this for local investors 

is that deep structural underperformance 

is likely to occur at some point, unless the 

manager is able to compromise on their 

philosophy (which they are less inclined to 

do, lest they be found out by the investment 

community). In addition, the cost of an 

investment error is massively heightened 

due to the lack of diversification and the 

analytical certainty required for a "high 

conviction" position. This "high conviction" is 

what many investors seek these days, but its 

buyer beware – it can mean "undue risk" too. 

Peter Foster, Chief Investment Officer, 

Fundhouse 

What we have seen in the industry of 

late is fund managers compromising on 

their investment philosophy to lessen the 

impact of the small concentrated market 

we have in South Africa. This also serves 

business interests well – a larger capacity 

to manage investments, less cyclical underperformance 

and a wider opportunity set. 

The downside for investors? The prospect 

of mediocre investment returns. Value 

managers are now calling themselves 

"quality value" for example. 

Where does this leave us? We know that 

managers who compromise are worse than 

those who don’t, but managers who strictly 

define their process are prone to small 

market anomalies. Interestingly, this is the 

basic argument for passive indexation in 

South Africa: access to a concentrated portfolio 

of shares (the top 10 shares account 

for 50% of the total market value!) which 

has all of the investment philosophies 

embedded in it at all times is a reasonable 

prospect considering the company. 

There are only two aspects we can 

control with respect to our investments: 

to understand what it is we are buying, 

and to understand the structural risks 

of the market and how this may impede 

future returns. By matching these two 

pieces of information, it is possible to 

help balance risk in a client portfolio, 

and access the performance potential 

of good fund managers without taking 

undue risk. ■ 


13

Source: FactSet, DataStream, Bloomberg, Goldman Sachs Global Investment Research. All figures are daily USD total returns since 1970 


Short-term risk for 

rewarding results 

Despite the negative sentiment of 2018, volatility 

provides opportunities for long-term returns 

The US/China trade war and 

political events across the world 

have driven negative sentiment 

towards the global emerging 

market sector. Volatility is a characteristic 

of emerging and frontier markets, and 

one that provides opportunities for longterm 

returns. For investors, the most crucial 

lesson is therefore to remain patient 

despite the shorter-term uncertainty. 

Emerging markets have attractive 

valuations and benefit from powerful 

long-term growth drivers 

Why should you consider an investment 

in emerging markets? Emerging markets 

are currently attractively valued because 

they have de-rated considerably relative 

to developed markets. They are also 

the beneficiaries of powerful long-term 

growth drivers. Emerging markets now 

have the lion’s share of global GDP and the 

International Monetary Fund (IMF) expects 

emerging markets and developing economies’ 

share of GDP to increase at an even 

faster pace going forward. As countries 

move up the development curve their 

stock markets typically grow. This results 

in a rising ratio of market capitalisation to 

GDP. Put simply, emerging market stocks 

should continue their long-term trend of 

outperformance going forward. 

The IMF expects emerging markets 

and developing economies’ 

share of GDP to increase 

Source: IMF 

A number of other factors bode 

well for emerging market growth 

1. Positive demographics and rapid 

urbanisation 

Unlike developed markets where ageing 

populations provide strong headwinds 

to economic growth, emerging market 

economy populations are typically 

much younger and grow at a faster 

rate. The trend of rapid urbanisation 

is also very positive because growing 

cities tend to dominate global economic 

activity and have considerably 

higher disposable incomes and wealth. 

If emerging markets can support their 

demographic and urbanisation advantage 

with good economic policies as 

well as access to education and healthcare, 

they can unlock what is known as 

their ‘demographic dividend’, which will 

be a powerful driver of future growth. 

2. An abundance of natural resources 

3. Optimal diversification benefits 

Historically, emerging markets have 

been excellent diversifiers. Although 

emerging markets generally remain 

somewhat more volatile than developed 

stock markets, investors should 

be able to achieve greater diversification 

benefits and improved risk profiles 

over time by adding emerging markets 

to their portfolios. The following table 

looks at how adding emerging markets 

to a portfolio can deliver better longterm 

risk/return outcomes. 

Diversifying a portfolio with emerging 

markets offers the possibility of 

better risk/return outcomes 

A great diversifier 

Emerging markets - excellent diversification benefits 

1 

MSCI 

EM 

15 909%* 

10.9% p.a. 

MSCI 

World 

1 793%* 

6.2% p.a. 


Source: FactSet, DataStream, Bloomberg, Goldman Sachs Global Investment Research. 

History shows that if you embrace the risk and vola4lity in emerging markets the rewards 


Most emerging markets bounced 

back strongly in January 

After a difficult December where most major 

indices declined into bear territory, markets 

around the world bounced back strongly 

in the first month of 2019. The interesting 

part was which markets did best: Brazil was 

up 18% for the month, Russia was up 13% 

in dollar terms, and the MSCI China Index 

showed substantial growth, despite all the 

talk of a slowdown in that country’s economy. 

Out of the key emerging market economies 

only India was relatively flat. The other three 

major emerging economies all outperformed 

developed world markets. A bounce back 

from depressed levels? Possibly. But it also 

might be the sign that something more 

interesting is starting to happen. 

The greatest turnaround 

potential seems to be in Brazil 

Much criticism has been aimed at the new 

president, Jair Bolsonaro, but the finance 

minister, Paulo Guedes, is a free-market liberal 

who has promised a tough programme 

of privatisation and reform. He plans to bring 

the budget back under control following a 

decade of irresponsible spending and economic 

mismanagement. He has also vowed 

to sort out the pension system and return a 

raft of major industries to the private sector. 

Russia is rising again, and India 

continues to develop rapidly 

with progressive tax reforms 

Although expansion forecasts of just under 

2% for Russia this year are still fairly dismal, 

it’s at least a positive move forward. With 

the US beginning to lift some of its sanctions, 

there’s a possibility of Russia growing 

stronger again. India continues to develop 

rapidly, expanding by 7.5% in 2018 and 

with a similar growth rate expected for this 

year. Prime minister Narendra Modi has just 

pushed through some of the biggest tax 

system reforms in the country’s history. 

These include a massive simplification 

of federal and state taxes, a doubling of 

the amount earned before income tax is 

payable, and a shift to direct sales taxes. 

This may well free India from a once overbearing 

and bureaucratic government. 

China is set to expand by 6-7% 

Every CEO in the world is blaming China for 

a slowdown and softening profits, but the 

fact remains that China will expand by a further 

6-7% this year, in line with performance 

over the past five years. Industrial production 

is stable, and a buoyant stock market is 

allaying fears of an imminent collapse. 

The current favourable prices of 

emerging market companies are 

exciting for long-term returns 

When you invest, the price you pay for an 

investment is critical to generate long-term 

returns. Constructing a portfolio of highquality 

industry- and sector-leading businesses 

that are run by superior management 

teams are two critical factors. However, good 

companies like this don’t often become available 

at a price that is attractive. This is currently Nigel Barnes, Head of business 

the position that emerging markets are in, development, Denker Capital 

The which current provides favourable exciting prices upside of emerging potential market over companies are exci4ng for long-term 

returns 

the next few years. Examples are businesses Looking ahead: volatility creates 

When The current you invest, favourable the price prices you of pay emerging for an investment market companies is cri3cal are to generate exci4ng for long-term 

returns. such as Construc3ng Samsung and a porUolio Alibaba of (the high-quality Amazon of industry- opportunities and sector-leading for active businesses investment that 

are When China), run you by where superior invest, one the management can price clearly you see pay teams the for an declining are investment two cri3cal managers is factors. cri3cal to However, generate to create good long-term wealth companies 

like returns. price 

this 

trendline 

don’t Construc3ng oVen 

and 

become 

the a porUolio beginning 

available of high-quality of 

at 

a 

a 

positive 

price that industry- is 

If 

aFrac3ve. 

everyone and sector-leading This 

plays 

is currently 

their businesses the 

part, that there is no 

posi3on are run by that superior emerging management markets are teams in, which are two provides cri3cal exci3ng factors. upside However, poten3al good companies over the next 

few like recovery this years. don’t in Examples the oVen early become are weeks businesses available of 2019. such at a as price Samsung that is and reason aFrac3ve. Alibaba why This (the is the Amazon currently improvement of the China), in the 

where posi3on one that can emerging clearly see markets the declining are in, which price provides trendline performance exci3ng and the upside beginning poten3al of of the a posi3ve over emerging the next market 

recovery few Samsung’s years. in Examples the downward early are weeks businesses of trend 2019. such as Samsung and sector Alibaba cannot (the Amazon be maintained. of China), This will 

where one can clearly see the declining price trendline and the beginning of a posi3ve 

Samsung’s recovery 

appears 

in 

to 

downward the 

be 

early 

turning 

weeks trend of appears 2019. to be turning 

allow active managers the opportunity to 

search the emerging world and discover 

Samsung’s downward trend appears to be turning strong investment opportunities to 

build wealth. However, it’s important 

to remember that it certainly won’t be 

without some volatility, so be prepared 

and wait patiently for your reward. 

Source: factset 


There Source: are factset signs of a recovery in Alibaba’s price 

There are signs of a recovery 

There in Alibaba’s are signs price of a recovery in Alibaba’s price 


History shows that if you embrace 

the risk and volatility in emerging 

markets the rewards come 

Outperforms developed markets 

Short-term volatile, but long-term outperform 

EM compared to DM 

Relative equity performance index in log terms 

MSCI 

MSCI 

EM 

World 

15 909%* 

1 793%* 

10.9% p.a. 6.2% p.a. 

Looking Source: factset ahead: vola4lity creates opportuni4es for ac4ve investment managers to create 

wealth Source: factset 

2 

If Looking everyone ahead: plays vola4lity their part, creates there opportuni4es is no reason why for the ac4ve improvement investment in managers the performance to createof 

the wealth emerging market sector cannot be maintained. This will allow ac3ve managers the 

opportunity If everyone plays to search their the part, emerging there is no world reason and why discover the improvement strong investment the opportuni3es performance tof 

build the emerging wealth. However, market sector it’s important cannot be to maintained. remember This that will it certainly allow ac3ve won’t managers be without thesome 

vola3lity, opportunity so to be search prepared the and emerging wait pa3ently world and for discover your reward. strong investment opportuni3es to 

build wealth. However, it’s important to remember www.bluechipjournal.co.za 

that it certainly won’t be without some 

vola3lity, so be prepared and wait pa3ently for your reward. 

15

TRUMP, BREXIT 

AND AN INCREASED 

NEED FOR INVESTMENT 

CERTAINTY 

Two months in and it has already been an eventful 2019. 

The world feels trapped between Trump and Brexit, with 

uncertainty putting strain on economies everywhere. 

Myriad macroeconomic factors are catalysing global 

market volatility, with a host of local issues compounding 

pressures at home. 

With electricity hogging headlines, plus 

election hype building, there’s a sense of 

overriding anxiety. Add to that the fact that 

people are seeing their hard-earned cash lose 

value in a short period, and it’s no wonder 

that many are making knee-jerk reactions 

regarding financial decision-making. That’s 

why now’s the time, more than ever before, 

for intermediaries to: 

1. Encourage clients to ‘stay the course’. 

The most important principle of long-term 

investing is to ‘stand by’ even when times 

get tough. 

2. Stay engaged during the ‘bad times’. 

That’s when your clients need regular 

conversations and reassurance. 

3. Be willing to look at alternatives. It might 

be necessary to step away, re-evaluate and 

combine investment options for optimal 

outcomes. 

WHO IS YOUR CLIENT, REALLY? 

Given uncertain market conditions, it’s critical 

to establish what kind of client you’re working 

with. In terms of risk analysis, what end risk 

behaviours do you expect from your client? 

Correct profiling is imperative to ensure the 

‘right’ portfolio. There have always been two 

kinds of clients: those who have been in the 

market for a while, experienced ups and 

downs, and understand the need to ‘stay the 

course’ in the hope things will get better. Then 

there are those who see a 5 to 6% drop in their 

capital value and want to get out of the market 

and into something else. 

WHY SUCH NEED FOR 

CERTAINTY? 

Increasingly, people are seeking guarantees. 

And it’s not really surprising. Many clients 

have been dismayed by returns over the last 

few years and are simply unwilling to take a 

chance any more. That’s when they opt to 

exit investments in search of more explicit 

guarantees. At times like these, the role of an 

intermediary is absolutely pivotal. 

Opting out of the market entirely can mean 

converting what may have been a short-term 

paper loss scenario into an actual loss. Or it 

could mean selecting a solution that foregoes 

a certain level of expected returns in favour 

of certainty. Back in 2008, when the last 

recession hit, we saw an upsurge in people 

seeking these kinds of products. Now, we’re 

seeing a similar kind of natural migration.

“ 

Our recently 

launched Retirement 

Income Planner is the 

ideal way for you to 

take your client on 

the journey, making 

complex decisions 

suddenly seem simple. 

“ 

IT’S TIME FOR TOUGH TALKS 

For intermediaries, this can bring about 

tough conversations. Small losses can often 

be countenanced by clients. But when 

it’s sustained losses plus a particularly 

poor year of returns, it’s hard to convince 

someone to ‘stay the course’. Even though 

having the right mix of assets in a portfolio 

usually means eventually coming out 

trumps. 

The bottom-line is how essential 

it is to understand exactly what 

your client is looking for. 

WHAT’S YOUR CLIENT’S 

NUMBER ONE CONCERN? 

If the primary concern is the loss of capital, 

there are numerous solutions available with 

explicit guarantees or where there can never 

be a negative drawdown. If the big concern 

is a loss of returns, then there are solutions 

available that will provide a certain level 

of guarantee. Another big thing for clients 

is the opportunity for offshore exposure. 

Frequently, people seek structures that 

combine capital security with all the 

benefits from exposure to international 

market growth – without the risk of currency 

volatility. That rand-dollar difference can 

cause chaos! Glacier has a number of 

solutions to address this need, like the Glacier 

Capital Enhancer. 

In the case of the retired client, many may be 

looking for a guarantee of income or some 

level of capital security – or a combination 

of the two. Retired clients can tolerate a 

reduction in capital, provided the market 

improves in the short to medium term. But 

a reduction in income is immediate. Hence 

the distinction between the client with a life 

annuity versus a living annuity. The client who 

cannot tolerate a reduction in income, even 

over the short term, requires the certainty 

that comes with a guaranteed annuity. 

Versus the client who has leeway to continue 

to participate in the market and wants 

to leave funds for their next of kin. In this 

instance, the living annuity may be the better 

solution. However, it needn’t be a case of one 

or the other. In many instances, a combination 

of the two produces a better outcome for 

the client, in the form of a more sustainable 

retirement income. 

YOUR CLIENTS WANT IT ALL. 

HERE’S HOW TO GIVE IT TO 

THEM 

In most cases, South Africans need to secure 

a certain level of income for non-discretionary 

expenses, and want some income for those 

other ‘nice-to-haves’. And, of course, many 

want the opportunity to leave a financial 

legacy. It’s a question of how to structure 

a portfolio to do all that. That’s where our 

recently launched Retirement Income Planner 

proves invaluable in assisting intermediaries to 

select the best retirement income option for a 

particular client’s needs – centred around the 

level of protection and sustainability required. 

It’s the ideal way for you to take your client 

on the journey, making complex decisions 

suddenly seem simple. See the Glacier 

intermediary website for more detail. 

Speak to your Glacier representative for 

more information or visit www.glacier.co.za 

Glacier Financial Solutions (Pty) Ltd and Sanlam 

Life Insurance Ltd are licensed financial services providers

BOUTIQUE FUNDS 

Built to last 

On value investing and the value of diversity 

In the 21 years that she has spent in 

the industry, Perpetua Investment 

Managers’ co-founder and chief 

investment officer Delphine Govender 

has witnessed profound transformations 

in the investment landscape, from the 

days when investment management 

was dominated by the institutional 

insurance companies, through the rise of 

the professional mega-managers, to the 

founding of her own boutique firm based 

on the principles of value and diversity. 

Now, with R13-billion in assets under 

management and counting, Perpetua has 

achieved lift-off. We asked Govender for 

insight into her approach. 

She began her career as an analyst at Old 

Mutual Asset Managers, but it was the 

11 years spent at Allan Gray that gave 

Govender the experience she would use to 

launch Perpetua. 

Those were phenomenal times, when 

“South Africa’s most admired asset 

manager” was transforming into the megamanager 

of today. 

“When I joined Allan Gray, its assets 

under management were R15-billion, and 

I was the 58th or 59th employee. When I left 

11 years later, it was close to R450-billion, 

with over 800 employees,” Govender recalls. 

“To have been part of that business and 

to have seen and witnessed that growth 

burst both in assets and as a business was 

a huge learning experience for me both 

from a portfolio manager perspective and 

as a director.” 

However, even though “the easier 

decision was to stay and not to leave”, in 

2011 Govender decided it was time to 

move out on her own. 

The real potential Govender saw in 

looking at the entire South African market 

over the previous two decades was the high 

failure rate among boutique firms. 

“When things are riding high, everybody 

thinks they can start a firm,” she reflects. 

“Two people might set up with a billion 

or two under management, have a great 

performance run and think they’re rockstars. 

Then markets tank, the tide goes out, 

and you see who’s wearing swimming trunks 

or not. The graveyard of dead fund managers 

is quite big and continuously growing. 

“So we asked what we could do 

differently. The opportunity I saw was that 

the market was genuinely missing what 

I call scaled boutiques. This sounds like a 

contradiction in terms because ‘boutique’ 

implies ‘small’, but that’s what we were 

trying to challenge. Our mantra was that a 

boutique is not small per se – a boutique 

is specialised, offering something that’s 

different to what is currently available a) in 

terms of the way we exploit an investment 

opportunity in the market and then b) in 

terms of the way we put our firm together,” 

Govender explains. 

Investing in value 

What sets Perpetua apart from index-based 

investors is that the firm is fundamentally a 

value investor. 

“Simply because a fund manager says 

they work out the value of a share doesn’t 

necessarily mean they are value managers,” 

says Govender. “A value manager works out the 

true worth of a share based on their reasonable 

and realistic assumptions as opposed to 

paying for future optionality today.” 

For Govender, success means protecting 

the money that clients entrust to the fund. 

“The least we want to do is give them back 

their money that’s maintained purchasing 

power,” she explains. “Obviously, we also 

look to exploit opportunities to invest 

that money and grow it in real terms: 

we want to improve the quality of our 

clients’ lives, and what better way than 

in the form of hard-earned savings which 

Delphine Govender 

directly affect the quality of their lives at 

retirement. That’s why we don’t invest 

with the benchmark in mind. If we think 

Naspers is overvalued, we own zero. I am 

not prepared to look out very far into the 

future and pay for all that future profit 

today in the share price.” 

This aversion to the benchmark has 

earned Perpetua its share of criticism, but 

the turn markets have taken has vindicated 

the value-based approach. 

“For the last seven years, it’s been 

particularly tough to be our type of investor 

because the market has been driven by 

more technical things, such as low interest 

rates globally, perception of risk, attitude 

towards risk, bond proxies, growth, etc. The 

huge positive sentiment attached to this 

meant that multiples went way beyond what 

a fundamental investor would normally say 

would be sustainable,” says Govender. 

“Now the tide has shifted towards our 

approach. It’s ended up being the best test 

of what we set out to do.” 

The value of diversity 

Diversity is a value intrinsic to Perpetua’s 

identity. “The South African market is 

incredibly homogenous. We emphasise 

diversity, not just in terms of the South 

African narrative which generally focuses 

on race and gender, but also cognitive 


BOUTIQUE FUNDS 

diversity. Not everybody has to be a 

CA or actuary straight out of UCT,” says 

Govender. 

“We look for three key elements in the 

ideal investment player. One is analytic 

curiosity combined with the humility 

that comes from knowing we don’t know 

everything. Investment is a probabilistic 

endeavour and we’re trying to work out 

different scenarios for the future. 

“The second characteristic is the inner 

drive to protect and grow our clients’ hardearned 

money. We’re not disinterested 

researchers, we’re investors researching 

whether a particular outcome will be a 

good investment or not. 

“The third quality is the relational 

component. What is your level of selfawareness? 

How constructively can 

you relate in a team environment? The 

number-one soft factor that contributes to 

success is whether we are invested in each 

other’s success.” 

''The number one soft 

factor that contributes 

to success is whether 

we are invested in 

each other’s success.'' 

This mutual investment is reflected in 

how teams pool knowledge across areas 

of specialisation. 

“When we discuss global stocks, 

the entire team sits in,” says Govender. 

“Equally, when we discuss global stocks, 

the domestic team sits in because we 

believe there’s a very strong crosspollination 

effect, particularly in the 

current environment. When I started as an 

analyst, it took a good five years for global 

trends to hit our South African companies, 

but the gap is closing fast. 

“Technology now enables the consumer 

base to know what they want faster than 

ever before, so the pace at which adoption 

needs to occur is much faster. As a result, 

we’re finding that when we’re looking at 

global food companies, or global retailers, 

or global banks, etc, we are learning rapidly 

the trends that will manifest in our domestic 

companies. So it’s actually benefiting our 

domestic work, and it’s making the analysts 

excited about what they do.” 

Global vision 

Right from inception, Govender wanted 

Perpetua to have a global outlook. In 2012, 

globally, the boutique tail commanded a 

significantly higher share of assets under 

management than in South Africa, where 

boutiques command 10 to 15% as opposed 

to 35% globally. That 35% represented an 

attractive space to play in. 

“Part of our thinking was to quietly 

build our global capability. Once we had 

earned the confidence of our clients in 

the domestic space, they would trust us 

to deliver on the global side. We made our 

first global hire about four years ago and 

now the global team has six people. As a 

bottom-up stock-picking house, we don’t 

have to cover the entire world; we’ve got 

to work out how we can have an edge and 

be mindful that the majority of our clients 

are South African clients who already trust 

us with their domestic assets. 

“The way we’ve tried to diversify that 

single strategy risk is that everything is tied 

to our core approach of true value equity 

– so we’ve got straight domestic equity, 

domestic multi-asset class, global equity 

and global multi-asset class. Along that 

spectrum, even if domestic equities have 

a tough time, we could still have a global 

strategy that would do well and vice versa.” 

Built to last 

The Steinhoff case proves that homogeneity 

is antithetical to sustainability, 

whereas diversity provides a foundation 

for a lasting legacy. 

“If I look back at the last six years of 

running Perpetua, we’ve often been asked 

why we mainly do not own Naspers and 

Steinhoff. We simply believed they were 

over-valued – but why did so many other 

investors not see that? It’s almost as though 

the board of Steinhoff was constituted of 

the kind of individual that we have almost 

been programmed to perceive as successful, 

so they were above criticism,” says Govender. 

“If you look at the individuals that had 

the highest exposure to Steinhoff in their 

portfolios, I think they almost suspended 

their normal judgment because they were 

blinded by who they were dealing with. 

There was a huge amount of agreeability. 

If one of the richest men in South Africa is 

the biggest shareholder in a company, how 

could you be so audacious as to think that 

you would know better than him? What is 

your track record of wealth?” 

The more diverse the team, on the other 

hand, the more likely it is that the client will 

be looked after. 

“The nature of our industry is that we 

tend to build up star managers, prima 

donnas. This is great for the individual’s 

bonuses and profile, but is it in the interest 

of the client? When a client entrusts their 

money to AN Other, they want to know that 

the inter-generational transfer they were 

promised for the next 20, 30, 40 years will 

actually be delivered. 

“In starting this firm, it was clear to 

me it wasn’t going to be DG Capital, my 

initials – it was going to be something that 

could absolutely outlive me. The name 

Perpetua means enduring so that it could 

be something that we would stick to, to be 

steadfast and then last.” ■ 


19

EQUITY MARKETS 

Exercise vigilance 

Where to from here for equity markets? 

By Quaniet Richards: Head of Institutional Business, Nedgroup Investments 

Chart 2 

Rolling 3 -year real return 

50% 

40% 

30% 

20% 

10% 

0% 

-10% 

The past three years have not been an easy time 

for investors in SA equities. And, with growing 

uncertainty and volatility almost everywhere, it is 

understandable that many people find it hard to 

imagine things turning around. However, the important 

thing to Chart remember 1 in times like these is that SA equities have 

experienced this kind of underperformance before. 

Chart 1 below plots the three-year per annum real 

return (return less 8% inflation) for local and international asset 

classes in rands and shows that all the asset classes except 

6% 

5,6% 

domestic bonds and cash have underperformed inflation, 

4% 

while domestic bonds was the only asset class to have 

2% 

1,3% 

outperformed inflation plus 3% and 5%. 

Chart 1 

3% real return: 60 months 

40% 

Source: Morningstar 

-10% 

3-year annualised 0% real return vs SA Inflation (5.47%) as at 31 December 2018 

-6,7% 

SA Listed Property 

Index 

1,3% 

SA Listed Property -0,9% 

Index 

-4,3% 

Domestic 8% Equity Domestic Property Domestic Bond -5,3% Domestic Cash Global Equity Global Property Global Bond Global Cash 

All Bond Index STeFI Call MSCI All 3 Country Years FTSE Barclays CPI+3% Global US 3 month CPI+5% CPI+6.5% 

6% 

5,6% 

World EPRA/NAREIT Bond Index deposits 

Developed Property 

Index 

Domestic Equity Domestic Property Domestic Bond 

4% 

Domestic Cash Global Equity Global Property Global Bond Global Cash 

Chart 2 

Rolling 3 -year real return 

50% 

30% 

20% 

10% 

0% 

3% real return: 61 months -6% 

-8% 

ARE THE FUNDS 

YOU INVEST IN 

INDEPENDENTLY 

RATED? 

FUND RESEARCH 

BESPOKE MODEL PORTFOLIOS 

OFFICES IN SA AND THE UK 

www.fundhouse.co.za 

Fundhouse Investment Advisors (Pty) Ltd is an authorised 

financial services provider. FSP 43960

HEDGE FUNDS 

Bubble and boom 

Short the Dow, bank on China 

Two very important trends 

are set to dominate hedgefund 

strategy in 2019 – the 

all-too plausible prospect of a 

recession, and the rise in popularity of 

the Asia Pacific region as a destination 

for hedge fund allocation. 

Rumours of a recession in 2020 

or 2021 are rife – according to Nobel 

Prize winner Robert Shiller, the wheels 

will come off in the next 18 months. 

One hedge fund has a strategy to 

capitalise on the looming end of the 

economic cycle. 

Crescat Capital LLC was one of 

2018’s best-performing hedge funds, 

with a consistent track record of 

outperforming the S&P 500 Index 

(its Global Macro Fund returned 41% 

last year alone). Crescat global macro 

analyst Tavi Costa told Bloomberg that 

they expect the recession to come 


HEDGE FUNDS 

sooner than that. Warning signs include 

a potential bubble burst indicated 

by a glut of stocks sold by corporate 

insiders. CNN reports that executives 

are selling their own company stock 

at a rate of 5:1 compared to buyers, 

with 2 600 executives selling shares 

in February – the highest level in two 

years. While those investors also sold 

heavily in early 2017 and 2018 while 

the S&P 500 kept going up, Crescat 

clients were told that “the third time 

should be the charm for the stubborn 

U.S. market”. 

According to Crescat, measurement 

of “multiple yield spreads across the 

curve from Fed Funds to 30-year 

Treasury bonds” revealed that “45% 

of the curve is inverted” – a situation 

that resulted in asset bubbles 

disintegrating “[t]he last two times 

the credit markets had such a high 

distortion”. The close-to 19% rebound 

in global stocks in 2019 is dismissed as 

little more than a bear-market rally – 

insider selling is a tell-tale sign that a 

rally is running out of steam. 

This sentiment is echoed by 

MoneyStrong founder Danielle 

DiMartino Booth, quoted by CNN 

as saying, “History is replete with 

examples of major recoveries 

following big sell-offs, many of which 

turn out to be head fakes otherwise 

known as bear market rallies.” 

If this prediction is accurate, the 

rational question is what to do about 

it. According to Crescat’s Costa, the 

answer is to bet against the Dow: 75% 

of the firm’s strategy is based on going 

long on gold in yuan terms and shorting 

global equities. Trade visualisation is 

modelled by means of the MSCI World 

Index in models to visualize trades; 

for its short position, the firm bets 

against selected individual stocks and 

exchange-traded funds. 

“Soon the buy-the-dip mentality 

and bull-market greed will turn to fear. 

Selling will beget more selling. That’s 

how bear markets work,” Crescat wrote 

to its clients. “There is so much more 

ahead to profit from the short side of 

the market. The bear-market rally is 

running out of steam!” 

Investor influx expected for 

China-focused funds 

If the wise money is on shorting the 

Dow, it’s also safe to bet on China. The 

Financial Times reports that hedge fund 

investors are looking to Asia for the 

best opportunities to make money this 

year and are planning to increase their 

allocations to managers who know the 

region – and know China in particular. 

According to a new Deutsche 

Bank survey of 425 allocators from 

28 different countries, pension funds, 

sovereign wealth funds, endowments 

and other investors with substantial 

hedge fund holdings are seeking out 

managers “able to deploy bread-andbutter 

hedge fund strategies such as 

equity long/short investing in Asian 

markets”, with China equity long/short 

being 2019’s second-most popular 

hedge fund strategy. 

Europe has ceded its place as the 

world’s hottest investment region 

to the Asia Pacific area. Some 36% of 

investors will allocate more funds to 

managers trading in Asia Pacific this 

year; 26% are going to allocate more 

to China-focused managers; and 20% 

plan to increase their exposure to 

global emerging markets. 

Survey respondents manage or 

advise on hedge fund assets amounting 

to US $1.74tn, which represents more 

than half the industry’s total assets under 

management. Respondents included 

allocators working for sovereign wealth 

funds, public and private pension funds, 

insurance companies endowments, 

foundations and consultants. 

The FT quotes Marlin Naidoo, 

Deutsche Bank’s global head of capital 

introduction and consulting (a unit 

that works with prime brokerage to 

bring hedge fund clients and investors 

together), as saying, “A lot of what we 

used to see was allocators being very 

skewed to developed markets,” said. 

“In the last few years, there’s been a 

catalyst to look elsewhere. People 

have spent less time in Asia and 

they’re starting to look now.” 

According to Naidoo, the Hong 

Kong Exchange’s announced launch 

of MSCI China futures, combined with 

an increase in stock inventory, has 

afforded hedge funds easier access 

to the Chinese market. ■ 


23

DEBT RISK 

Mediclinic, Tongaat, 

Famous Brands, 

Aspen… Discovery? 

When cash flow signals risk 

Royce Long, Portfolio Manager, 

Obsidian Capital 

One of the upsides of being a hedge fund manager is 

that excessive risk can be viewed as an opportunity, 

rather than a perennial enemy as it is in the long only 

space. Too much risk and we can take a bet against the 

share price. These risks come in many shapes and sizes, but one in 

particularly has risen to infamy of late. Its name is debt. 

The first four companies that comprise the heading of this piece 

have all suffered as a result of over-gearing. To be sure, debt is 

often a necessary cog in growing a business. It only becomes problematic 

when the earnings needed to service it are insufficient. 

Eventually that hole needs to be plugged via rights offers or asset 

disposals – don’t hold the equity under this scenario. 

SA corporates have done exceptionally well to grow their earnings 

in what has been an anaemic economic landscape for some 

years now. But one by one, these businesses are converging to the 

growth rate of our economy. We’re on the lookout for companies 

that are facing these earnings headwinds, coupled with elevated 

debt levels. If they happen to be highly rated, even better. 

Mentioning Discovery and "short" in the same sentence may 

be bordering on blasphemy for some people. But there is nothing 

emotional about our trepidation 

around their earnings, and more 

specifically, their cash flow. In 

their most recent set of results, 

they included a shareholder 

cash-flow statement that illuminated 

our concerns. Alongside 

are the cash-flow figures before 

investing and financing activity: Source: Discovery 2019 Interim Results 

The weak cash conversion ratio is what intrigues us. The valuation 

of Discovery clearly indicates that investors expect vigorous 

growth, but that magnitude of growth requires capital expenditure, 

and if you’re not generating enough cash then you must 

borrow to finance it. You can’t pay people with profits; only cold 

hard cash will do. 

Because Discovery’s cash generation is so poor, they are 

having to borrow more. At the end of the 2017 financial year, 

Discovery’s debt-to-equity ratio stood at 26%, which has 

climbed to 37% as per their first half of 2019 results. If one 

adjusts the ratio for issues such as capitalised expenses and 

reinsurance – as we feel is prudent – the debt levels as per traditional 

measurements can be materially higher than the figures 

mentioned above. 

There is considerable discourse among investors as to the 

appropriateness of how Discovery recognises its earnings. Simply 

put, the Discovery bulls are betting that nascent ventures like 

the Discovery Bank and Ping An will spit out enough cash, in the 

near future, to make the debt problem go away. The aggressive 

accounting may, under this scenario, pass by like a ship in the night. 

The question the bears are asking is will these white knights 

arrive before investors start paying 

FY 2017 FY 2018 H1 2019 

Profits from Income Statement 4,495 5,735 2,326 

Non-cash items (648) 782 472 

IFRS to EV adjustments (3,419) (4,182) (2,222) 

Cash flow before Investing & Financing 428 2336 576 

Cash conversion ratio 10% 41% 25% 

attention to what is unquestionably 

and unemotionally a cash-flow 

problem? Add to that the elevated 

valuation and the recent implosion of 

other debt-burdened SA equities that 

ran into earnings problems, and you 

have yourself what we would deem a 

risky situation. ■ 


ADVERTORIAL 

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Obsidian is invested in its investors 

Investment returns are driven by many 

different factors, some predictable, 

some not. Knowing what works in the 

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for what you can’t control, comes from 

spending years engrossed in the fascinating 

machine that is financial markets. 

Richard Simpson and Royce Long, who 

founded Obsidian Capital in 2007, have 

been managing money together for 25 

years. Prior to the entrepreneurial leap to 

start Obsidian, they were both an integral 

part of the team that built RMB Asset 

Management into an institutional business. 

Their journey at RMB was an experience 

they both treasure deeply because of the 

varied investment strategies they were 

exposed to, setting the foundation for the 

multi-asset investment philosophy that 

they live by today. 

Testament to their belief of diversifying 

across asset classes is their significant personal 

wealth invested in the funds they 

offer to investors. The Obsidian team that 

supports Richard and Royce share this 

belief and are also invested alongside those 

who have partnered with us. 

We are first and foremost an investment 

business concerned with generating 

returns in excess of inflation for our investors. 

However, our desire to protect capital 

means that we place substantial weight on 

managing the risk we have in our portfolios, 

remembering always that what happens 

to investors’ money, happens to ours. 

Our culture is one defined by respect 

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and for each other. ■ 

Strictly speaking, 

they’re both birds. 

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Obsidian Capital is an authorised financial services provider.

CLIMATE CHANGE 

Shifting climate, shifting 

opportunities 

New investment possibilities emerge 

Climate change – like any type 

of disruption – has disparate 

impacts on people, places and 

things. It can also have disparate 

impacts on corporations and investments. 

Krzysztof Musialik explores how climate 

change has impacted the global economy 

and has created new potential investment 

opportunities in the realm of the emerging 

market landscape. 

We truly live in a global economy, and 

climate change – including its causes 

and potential impacts – has been one 

of the biggest issues of discussion and 

debate today. It’s a galvanising topic, but 

one that has the potential to create many 

disruptions around the world, as well as 

potential opportunities. And emerging 

markets are front and centre. 

The rise of emerging markets 

One thing that’s not up for debate is the 

rapid rate of growth of emerging markets 

over the past few decades, leading to 

some impressive transformations. 

However, this explosion of growth and 

development in emerging markets has 

also led to increasing pressures on the 

environment. China is now regarded as 

the second-largest economy in the world 

only behind the United States and is a 

global leader in a number of areas. In the 

40 years since Deng Xiaoping led China’s 

economic reform to embrace a “socialist 

market economy,” there has been tremendous 

growth in wealth in China, moving 

millions of people out of dire poverty and 

dramatically improving the quality of life 

in the country. This, of course, has been 

positive, but rapid growth and industrialisation 

can come with consequences, particularly 

in areas such as environmental 

degradation and climate change. 

Of course, China certainly isn’t the only 

emerging market to experience rapid economic 

growth and development. Of the 

top 10 largest economies today, three are 

in emerging markets, and growth rates in 

emerging markets overall are expected to 

outpace those of developed markets this 

year and beyond.1 

Market liberalisation and globalisation 

have led to tremendous growth in consumption 

both in emerging and developed 

markets. (See chart below). 

Growth of a global consumer culture 

Once largely a developed-market designation, 

a new middle class has emerged in 

emerging markets. And these consumers 

have more discretionary income to spend. 

Take air travel, for example. In 1978, there 



were 378-million global airline passengers 

– today, there are 4-billion.2 In 1978, China 

saw 1.5-million passengers travel by air, 

while 2017 saw more than 551-million air 

passengers. The growth in air travel comes 

with corresponding consequences – more 

aircraft results in more fuel usage and more 

greenhouse gas emissions, which can be 

detrimental to the environment. 

There are many examples of how 

globalisation and increased trade have 

contributed to a rise in consumption of all 

types of consumer goods. Clothing is one 

example. Americans buy five times more 

clothes today than they did in 1980 – and 

if you live in the United States or Europe 

and look at the tag on your blouse or shirt, 

the odds are high its origin isn’t your home 

country. Of the world’s top 10 producers of 

textiles and clothing, eight are in emerging 

markets.3 

Textile production requires large 

amounts of water and creates polluting 

emissions. With today’s emphasis on “fast 

fashion” it can also result in a lot of waste. 

Emerging markets are supplying 

many goods and services that power the 

world. Increased production of goods 

requires more electricity, and this electricity 

has been produced mainly by 

burning fossil fuels. Global coal production 

increased from 3.3-billion short tons 

in 1980 to 8.2-billion short tons in 2010.4 

While China leads in coal production, 

the Chinese government has been promoting 

green-energy policies, including 

the use of solar. Global use of coal has 

been declining in recent years, but nonetheless, 

it remains a substantial source of 

electricity generation. 

The cost of growth 

While growth and development no doubt 

benefit many people across the world, 

often a solution to one problem brings 

another one. While millions of people 

have emerged from poverty, our dependence 

on fossil fuels has arguably led to 

climate change, which is now generally 

perceived as one of the biggest risks to 

the global economy and the world as a 

whole. Emissions from the use of fossil fuels 

are generally accepted as a 

key contributor to climate 

change. 

Climate change brings 

serious impacts to the investment 

world, too. We see four 

types of risk associated with 

climate change and its influence 

on investments. 

Long-term risks which 

may impact the competitive 

position of whole countries 

or even regions in the global economy. 

According to the World Bank, climate 

impacts could push 143-million people 

across three developing regions to become 

“climate migrants,” who are forced to leave 

their homes in search of more viable 

habitats.5 And, food supplies could also be 

significantly pressured. Low-lying coastal 

regions are vulnerable to sea-level rise 

and the increased occurrence of intense 

storms. This would impact a country like 

Bangladesh, for example. Another example 

would be West Africa, which is dependent 

on cocoa production. Climate change 

could make it impossible to grow cocoa in 

this region in a few years’ time, and it may 

have to shift towards other crops as a result. 

“Climate-smart” agriculture could prove a 

necessity for certain crops to survive – and 

could also represent interesting investment 

opportunities. 

Short-term impact on commodity prices 

due to adverse weather events. Adverse 

weather events are becoming more frequent. 

The scientific community at large 

generally regards changing ocean-current 

patterns amid the changing climate as 

a contributor to these weather changes. 

For example, coking coal prices soared in 

2011 as a result of heavy floods in Australia, 

which is one of the world’s largest coking 

coal exporters. The World Economic 

Forum’s 2019 “Global Risks Report” puts 

extreme weather conditions and climate 

change policy failures as the risk with the 

biggest threat over a 10-year horizon.6 El 

Niño and La Niña are periodic changes in 

Pacific Ocean sea surface temperatures that 

impact weather across the globe, with both 

positive and negative effects. While not 

new, they can become more powerful and 

unpredictable with climate change. El Niño 

is usually negative for a country like India, 

as it tends to bring lower-than-average 

rainfall during the monsoon season, which 

is critical for Indian agricultural production. 

Peru also suffers from a negative impact on 

its fisheries. On the flip side, North America 

tends to see milder El Niño winters and a 

country like Argentina in South America 

could see a boost in soybean production. 

Short-term impact on 

certain companies 

Changing weather patterns impact 

many businesses. In December 2018, for 

example, German chemical company BASF 

warned of considerably lower profits amid 

record-low Rhine river water levels, which 

weighed on its business that year. The 

company ships its products using barges 

on the river, so low Rhine river water levels 

constrained use of this cheap transport 

mode. Major apparel companies focus on 

promoting fall fashion collections several 

months in advance of the colder-weather 

season. However, milder and/or shorter 

winters have changed customer behaviours. 

People postpone winter clothing 

purchases or do not make them at all – not 

needing as many heavy coats, woollens 

and the like. Sometimes apparel companies 

have to make painful adjustments in the 

form of inventory write-downs, so there’s 

been a rise in a buy-on-demand model 

and transitional collections. Shifting temperatures 

and precipitation of course also 

impact the price of the raw commodities 

used to produce fabric and can impact 

emerging-market economies, which, as 


27


noted previously, are leading exporters of 

these goods. 

Greenhouse gas emissions may be taxed 

which would decrease companies’ profitability. 

The idea here is to reduce demand for 

products whose production process leads to 

heavy greenhouse gas emission. Examples 

would be cement production or air travel, 

which emit noxious substances into the 

environment. By taxing such products and/ 

or services, demand would in theory be 

reduced and at the same time companies 

would invest in more “green” technologies 

to offer the same product and/or service, but 

with less impact on climate. 

Part of the ESG equation 

Environmental, social and governance 

(ESG) factors are integrated into our 

investment analysis, and climate change 

is a key theme we are monitoring. We are 

aware of the potential risk that climate 

change poses to profits of companies we 

invest in. And, we think the fight against 

climate change will only intensify going 

forward. This may mean additional costs 

or a gradual shift in the business model 

for some companies. 

For example, for high-impact sectors or 

downstream products that are large CO2 

emitters, this would be a key area we would 

evaluate in regard to impact on operating 

models, as scientists believe CO2 emissions 

are a primary cause of climate change. The 

fight against climate change doesn’t only 

impact coal production or electricity generation. 

Cement production and airlines, for 

example, are also heavy CO2 emitters. 

That doesn’t mean, however, there is 

no case for investing in these types of 

companies. 

As part of our investment approach, we 

examine how any ESG risk will impact a 

company’s ability to generate sustainable 

earnings. In addition, we actively engage 

with company management on best ESG 

practices, among other factors. 

In the case of a cement producer, we would 

look to invest in companies with the most 

advanced technology that can limit CO2 

emission. Airlines have a big carbon footprint 

and may be forced to pay for the CO2 they 

emit, drawing a distinction between those 

with older, less efficient fleets and those 

with newer, more efficient ones. Those with 

higher CO2 emissions costs may pass them 

on to customers, which could decrease the 

demand for airline travel on certain carriers. 

Part of our ESG analysis involves awareness 

of these types of issues as we make our 

investment decisions. We strive to integrate 

ESG factors alongside our financial analysis as 

we assess both opportunities and risks within 

potential investments. This fundamental 

research provides an additional tool to differentiate 

between companies, in our view. 

Opening up new opportunities 

Climate change is not only about risks. It 

also creates potential opportunities. One 

obvious one might be companies in the 

clean-energy space. A shift towards renewables 

also brings the need to create viable 

electricity storage solutions. We see companies 

in South Korea and China as likely 

leaders in battery development for electricity 

storage and for electric vehicles 

Another area we see with potential 

is sensor designers and manufacturers. 

Cellular communication 5G technology 

and the Internet of Things will likely 

improve the accuracy in tracking the use 

of resources like water and electricity. In 

addition, there has been a growing need 

for the elimination of waste, whether 

through recycling or water treatment, 

for example, which we think represents 

another area of opportunity. 

These are just a few examples of opportunities 

climate change could create; we 

think there will be more as the world realises 

the risks. But really, that is true of any 

change – there are always people, places 

or industries that are displaced until new 

solutions emerge. And we are optimistic 

that they will. ■ 

References 

1. International Monetary Fund, data as 

of 2018. There is no assurance that any 

estimate, forecast or projection will be 

realised. 

2. World Bank: Air transport, passengers 

carried. International Civil Aviation 

Organization, Civil Aviation Statistics of 

the World and ICAO staff estimates. Data 

as of 2017. 

3. World Trade Organization, world textile 

and apparel trade, 2017. 

4. US Energy Information Administration, 

global coal production, data through 

2010. 

5. World Bank, “Meet the Faces of Climate 

Migration,” March 19, 2018. 

6. World Economic Forum Global Risks 

Report 2019. The report presents 

the results of our latest Global Risks 

Perception Survey, in which nearly 

1000 decision-makers from the public 

sector, private sector, academia and 

civil society assess the risks facing the 

world. 

Krzysztof Musialik, senior vice 

president, Franklin Templeton 

Emerging Markets Equity 


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PRACTICE MANAGEMENT 



A coaching way of being 

To survive disruption, help clients understand themselves 

There is much talk of the tsunami 

of regulation and robo-advice 

that is about to hit the industry. 

This raises the key question of 

what the role of the financial planner 

will be going forward. To answer this 

question fully, I think there are actually 

three questions to consider. 

How real is the tsunami? 

RDR probably felt like a tsunami for financial 

planners in countries like the UK and 

Australia. South African financial planners, 

however, are more fortunate. Requirements 

like the FAIS Act, TCF and regulatory 

examinations have prepared the way for 

RDR to land gently. Moreover, regulation is 

actually a boost for any reputable financial 

planning business. Warren Buffett loves 

investing in businesses that have a “moat” 

around them, something that protects 

their core proposition from competitors. 

Coke is one of Buffett’s many successful 

investments. A “secret” recipe has been 

the moat to protect this investment. 

Arguably, regulation is that moat for 

financial planners. It makes the barriers of 

entry higher and higher. In effect, therefore, 

the regulatory tsunami is probably more 

of a gentle wave that has already started 

breaking. 

The robo-advice wave is different. The 

thing about any technology evolving is 

that, like a tsunami, it takes no prisoners. It 

simply destroys existing players or changes 

the rules of the game. Digital photography 

destroyed Kodak. Amazon is destroying 

retail shops, one shopping centre at a 

time. Uber has smashed taxi companies 

and making many people re-think why 

they even own cars. Very few industries 

are immune to the technology tsunami. It 

is real. 

According to a Vanguard study, 

technology will impact “basic” skills like 

recording information, and “repetitive 

skills” like getting and processing 

information, monitoring, and scheduling. 

Advanced skills such as maintaining 

relationships, interacting with the 

public, persuading outcomes, applying 

knowledge, strategising, solving problems, 

thinking creatively and assisting or caring 

for others are likely to remain the domain 

of the human being. 

Much of a financial planner’s service 

embraces basic and repetitive skills. 

Machines are already doing this work. 

A 2018 World Economic Forum Report 

on the Future of Jobs estimates that 

by 2022, machines will do more than 

60% of administration work and 60% of 

information and data processing. The 

report also suggests that machines will 

do almost 40% of communicating and 

interacting and up to 30% of so-called 

“advanced tasks” like reasoning and 

decision-making. 

If you combine the technology threat 

with the thrust of regulation across the 

world to treat clients fairly, financial 

planning is ripe for a disruption of Uber 

proportions. After all, a robot has no 

incentive to line its own pockets, so any 

advice it offers is likely to be conflict free, 

or at least can be programmed that way. 

How will the technology tsunami 

impact financial planners? 

The good news is that the World Economic 

Forum report suggests that the role of 

financial planners and investment advisors 

will remain stable. In other words, they 

won’t become redundant. However, it 

depends on what sort of financial planner 

you are. 

Thirty years ago, financial planning 

was very much a sales-oriented business. 

The perspective that insurance is sold, not 

bought, underpinned an industry that 

rewarded intermediaries with commission 

on the sale of products. The legacy of this 

perspective is that many clients today 

still struggle to see any value in financial 

planning itself but rather in the products 

that are sold to them. 

Not all financial planners are sales 

people. Over the last 20 years the industry 

has been evolving into a profession. The 

establishment of the Certified Financial 

Planner® Professional mark bears 

testament to this. But this alone will not 

protect financial planners. We are already 

seeing how the medical profession and 

the legal profession are bearing the brunt 

of the technology revolution. According 

to the World Economic Forum report, 

many lawyers will become redundant, 

as will sales agents and even financial 

analysts. On the medical front, research 

already shows that robots are better at 


31


reviewing scans and X-rays than human 

radiologists. 

If we think that financial planning is 

somehow going to ride out the roboadvice 

tsunami, we had best beware of 

having a Kodak moment. Already there is 

a local financial institution that provides 

a compelling robo-advisory service 

that includes investment advice and 

implementation at an all-in fee of 0.57%. 

And for those financial advisors who see 

great service as a key part of their offer, this 

same institution can now open an account 

with a client within a matter of minutes 

with only an ID document needing to be 

uploaded. 

The challenge that technology presents 

is that you can buy almost any financial 

product on the Internet, at very low cost. 

This brings into question the role of the 

financial planner and their value add. A 

2016 survey of financial planners in the 

US highlighted that their number one 

challenge was to communicate their value 

add to clients. Regulatory change promises 

fee transparency. Robo-advisors promise 

to add great value. Having a relevant, 

clearly articulated value proposition that 

clients will pay for will be the number one 

challenge for financial planners all over the 

world. Doing what robo-advisors can’t do 

will help meet this challenge. 

One such task is to get to know the 

client as a human being. A client can tell 

a robo-advisor that they want to save for 

retirement, save for a holiday or save for 

their children’s education. The problem, 

at this stage, is robo-advisors can’t help 

clients prioritise appropriate wants and 

needs. This can only happen through 

meaningful conversation. Once a client 

decides what they want or need, a roboadvisor 

is fantastic. But how do they decide 

what’s really important to them? How do 

they know if their wishes are being driven 

by real needs or just their personal money 

history? Money goes to the core of our 

beings. We develop relationship with 

money from an early age. We also have 

relationships with other human beings that 

involve money. 

The fact that many existing roboadvisors 

offer clients the opportunity to 

phone a real person while engaging with 

them suggests that there is a place for real 

people in the financial planning process. 

But what is their role exactly? 

What are the implications for the 

future role of the financial planner? 

As professionals and advisors, financial 

advisors are experts. Their job is to 

give advice. However, human beings 

are complex – and there is a growing 

recognition that effective advice demands 

as full an understanding of a client as 

possible. The problem here is that clients 

often don’t have a full understanding of 

themselves. They often don’t know what 

their own priorities are or how to articulate 

them. Nor are they clear on the potential 

consequences of the choices they make. 

Consequently, the role of the financial 

advisor is surely first to help the client 

understand themselves. This helps 

the advisor and client build a shared 

understanding of the client’s situation. It’s 

like tilling the soil before you plant the seed. 

Advice lands best on well-prepared ground. 

Take the story of a real client Rose (not 

her real name). In 1999, just before the peak 

in the tech bubble, she held just over R1m 

worth of shares in a well-known technology 

company. This was her retirement savings, 

and she was very loyal to the share. She 

had worked at the company for some 

time. Rose’s financial advisor at the time 

recommended that she sell her shares and 

invest in a diversified portfolio. Tech bubble 

or no tech bubble, this was very sensible 

advice. But it didn’t land. Rose could not 

bring herself to sell the shares. 

The tragedy of Rose’s story is that when 

the tech bubble popped, Rose’s shares feel 

to less than a 20th of their value at the 

time the advisor gave her the advice. The 

problem with the advice is that the ground 

had not been prepared for the advice to 

land. The advisor had not helped Rose 

understand herself and her own needs. 

Her dream for her retirement was to buy a 

smallholding and do organic farming. The 

advisor gave great financial advice. But this 

was something a robo-advisor could have 

done. Rose really needed a reason related 

to her life, rather than an investment 

rationale to make the right decision. The 

advisor’s task was to help Rose determine 

how much money she needed to fulfill 

her retirement dream, not to have an 

investment discussion about diversification 

and concentration risk. 

Many practitioners and experts 

suggest that the key value add of the 

financial planner is already behavioural 

coaching. Vanguard’s research talks about 

the “advisor alpha”, and suggests that of 

the 3% additional value an advisor can 

add to a client’s portfolio, 1.5% of that 

is through behavioural coaching. US 

financial advisor Nick Murray, author of the 

book Behavioural Investment Counselling, 

believes the value add of Behavioural 

Coaching is closer to 5%. 

For financial planners who want to 

survive the robo-advisor and regulatory 

Tsunami, the message seems clear. Adopt 

a “coaching way of being” with your 

clients. This means helping your clients 

understand themselves. Let them solve 

their own life riddles first. That way, when 

you give them the financial advice to 

support their life decisions, they will own 

that advice, and unlike Rose, will almost 

certainly implement it. ■ 

References: 

The Future of Jobs Report 2018, Centre 

for the New Economy and Society, World 

Economic Forum 

Putting a value on your value: Quantifying 

Vanguard’s Advisor Alpha; Francis M. 

Kinniry Jr., Colleen M. Jaconetti, Michael A. 

DiJoseph, FA, and Yan Zilbering; Vanguard 

Research, March 2014 

Rob Macdonald, Head of Advisor Services, 

Fundhouse 


All Things Behavioural 

Financial Advice 

A Conference By Advisers, For Advisers 

Financial planning is a noble profession. Some say it is the 

most important profession of the 21st Century. 

But we face an almighty challenge. Advising people on what 

they need rather than what they want has never been easy. 

Behavioural coaching is the single most important way that a 

financial planner adds value. 

Humans Under Management exists to promote, highlight and 

build on the work that great advisers are doing in developing 

their behavioural financial advice practices. 

This isn’t a fad or a phase - this is who we are. 

Individually we can’t, together we can 

Date: 

10 September 2019 

Cost: 

R1 500 

Venue: 

Allan Gray Auditorium, 

V&A Waterfront 

Grab your tickets at: 

www.humansundermanagement.com/ 

southafrica 

“Having been to HUM London 2018, I have no doubt that this will be 

the most relevant and important conference that any financial adviser 

in South Africa attends in 2019. Practitioners and experts go to the 

heart of every financial adviser’s work, engaging with human beings 

around their lives and their money. Don’t miss it! “ 

Rob Macdonald, Head of Adviser Services, Fundhouse

SUCCESSION 

Planning to succeed 

Succession is a function of automation and education 


SUCCESSION 

Financial regulations are increasing 

in scope and complexity at a rapid 

rate in South Africa. The effect of 

this is to exclude greater numbers of 

South Africans from the advice industry at 

a time when there are increasing numbers 

of qualified, professional advisors entering 

the industry. Moreover, these advisors have 

been taught the correct way of financial 

planning and are looking for professional 

careers, in other words they don’t want 

to become product pushers selling lousy 

products for large product providers. 

If I consider the way regulations are being 

drafted and implemented in South Africa, 

I would guess that the regulators are keen 

to eliminate the role of small financial 

planning firms in SA. This seems woefully 

myopic for a number of reasons. Small 

financial planning firms can be a source 

of employment to graduates leaving university 

as well as a source of much-needed 

financial education and advice to large portions 

of the SA population who have never 

been exposed to investments before. If 

regulators aren’t careful the independent 

advice industry will be eliminated via death 

by regulation. 

Automate and educate 

I believe the only way that quality financial 

planning businesses will be able to 

survive and grow in this environment 

is if they automate as many functions 

within their business as possible. That 

means they need to narrow the range of 

product providers and select them differently. 

Personally, I would make automation 

a key criterion when selecting a 

product provider. As an example, does 

the product provider offer an automated 

FICA process? In addition, how manual 

is the new business and review process 

for clients? I also believe you need to 

find client relationship management 

(CRM) and financial planning tools that 

will enable clients to complete as much 

of their personal information online as 

possible. We also need to begin forcing 

product providers to provide client data 

to financial planning tools in an automated 

fashion so that we don’t need to 

manually request the information in the 

laborious and unproductive way it works 

now. If regulators really cared about clients, 

they would force this data integration 

via regulation. Currently, I believe the 

large product providers are resisting data 

integration as it suits them to retain clients 

who are not being serviced correctly. 

Financial planning firms will need 

to segment their clients carefully and 

ensure that they service clients profitably, 

which might mean they need to 

reduce the number of clients they service. 

This is a natural consequence of the 

spate of new regulations being forced 

on the industry. 

My advice to all financial planners when 

they ask how they should grow their businesses 

is to spend time educating clients 

about financial planning. The more you 

educate your clients, the more trust you 

build. In addition, your unplanned meetings 

with clients will reduce in frequency as 

their understanding of markets improves 

and their need to be pacified in stormy 

markets is reduced. 

I recommend to every advisor who is 

over 50 years old to employ a high-quality 

financial planning graduate so that you can 

begin training them to service your clients. 

It is silly and inefficient to get new financial 

planners to generate clients for the 

business. The best source of new clients 

is always the established, senior financial 

planners. New financial planners can 

more easily be taught to service clients 

and ensure that they provide the correct 

ongoing advice. Pay these new financial 

planners a monthly salary with an annual 

bonus based on client retention. That way 

they will be remunerated to look after clients 

and not to sell them lousy products to 

earn upfront fees. 

Advice to regulators 

I wish the regulators would take President 

Ramaphosa’s commitment to small 

businesses more seriously. Large product 

providers like banks and insurance 

companies do not have a great history of 

providing good financial advice to clients. 

Rather create legislation that makes it easier 

to operate small-scale, efficient financial 

planning businesses and force product 

providers to automate FICA processes and 

the provision of client data to all financial 

planning platforms in a uniform fashion. For 

far too long, regulators have allowed large 

product providers to lobby them to create 

high barriers to entry for small advisors and 

new product providers. More to the point, 

why don’t regulators contact some highquality 

financial planning firms to find out 

how we work and what impediments we 

face from you and the product providers. 

Blindly following the UK and Australia in 

the way they have damaged the financial 

planning industry is simply not smart. ■ 

Warren Ingram, Galileo Capital 


35

FINANCIAL PLANNING 

Talking about money 

Money stories reveal our relationship with money 

Financial health. It’s so much more 

than living within a well-planned 

budget, saving and investing for 

your eventual retirement. Holistic 

financial wellbeing is about having a 

conscious and purposeful relationship 

with money. 

We have all met clients whose earnings 

match their self-worth, who save (and 

spend) according to their values and 

goals. Those who fully believe that money 

enables them to live the life they envision 

for themselves. That would fall into the 

spectrum of a healthy relationship with 

money. 

Unfortunately, we have all met clients 

whose earnings, or lack thereof, can be 

related to poor self-esteem. Those who feel 

unworthy of money, or simply so fearful 

that they don’t (or won’t) have enough that 

they end up making irrational decisions 

when it comes to spending and saving. 

That’s the unhealthy relationship. 

As financial planners, we are poised 

to expand our value offering to clients 

beyond the functional. We have the ability 

– and above all the duty – to help them 

realise how beliefs and attitudes towards 

money can impact their relationship with 

money. By guiding our clients towards 

having a more positive and healthy 

relationship with money, and then 

building their Financial Plan around what 

they truly value, we can take them to the 

point that they suddenly have a plan that 

they are both financially and emotionally 

invested in. 

Talking about money is a 

vulnerable conversation 

Meeting with a financial planner can be 

a very stressful experience. Clients can 

feel exposed when having conversations 

around why they are saving, how much 

they have and how much they still need 

to achieve their ambitions. 

Being able to accurately advise clients on 

savings, investments and retirement funds 

is already an inexact science – but it’s much 

trickier if you don’t fully understand what 

their values are. 

How clients transact in the financial 

space is largely based on what they feel 

their money means to them. This in turn 

drives their behaviour around money. How 

they save, invest and spend – even how 

they earn – all relates to their relationship 

with money. 

Start by asking your client what 

money means to them 

A good place to start a courageous 

currency conversation is by asking: “What 

is the money for?” This should give you an 

indication of what values your clients hold 

dear. Furthermore, it will give you a deeper 

insight into their relationship with money. 

I have met clients who are so fearful 

of not having enough that they make 

irrational investment decisions when 

the markets fall. Others have hefty bank 

balances, yet still feel anxious that their 

money will run out. 

If you are able to guide your client 

through the process of what money means, 

what it’s for, and then build the financial 

plan around that, it will go a long way 

toward alleviating unnecessary stress and 

anxiety when it comes to implementing 

the plan. 

Everyone has a money story 

A worthwhile exercise to help clients 

understand their relationship with money 

is to delve into their money story. 

A money story is how you think, 

behave and communicate about money. 

It also reflects the relationship you have 

with yourself. The difficult part about 

money stories is that they are often 

subconscious. Neuroscientists estimate 

that 95% of our behaviours and beliefs are 

pre-programmed into the subconscious 

mind, operating on autopilot. The 

story you tell yourself about money 

becomes your internal monologue and 

is continuously repeated until it becomes 

your life journey. 

When I ask about my clients’ money 

stories, I encourage them to think back 

to their first impactful money memory 

in order to understand the roots of their 

behaviour. Many of our behaviour patterns 

and belief systems are imprinted in the 

first years of life. Some of the first money 

memories that my clients have shared 

range from “you have to work hard for your 

money” and “easy come easy go” to “you’ll 

never make it on your own”. 

One common theme I encounter is 

the fear of poverty. One doesn’t actually 

have to be poor for poverty to be the 

story. I even have wealthy clients who feel 

poverty-stricken. 

Stories have to do with your perception 

of reality and not necessarily reality itself. 

A story like this can be destructive and 

is often bedded in self-worth, or more 

accurately, the lack thereof. 

Stories are powerful. If we believe 

our own stories, they will come true. If 

you keep telling yourself that “you’re just 

getting by” or that you “will never be debtfree,” 

then that is how the story of your 

life will go. 

Making sense of money stories 

Once you understand your client’s money 

story, it becomes clearer why they behave 

or transact in a certain way. Based on this 

information, you can begin a process of 

helping your client analyse whether this 

story is based on reality or fiction, and 

whether their current relationship with 

money is based on a belief from the past. 

It is a very empowering experience to let 

go of unhealthy money patterns that no 

longer serve a purpose. 


FINANCIAL PLANNING 

Kim Potgieter, Marketing and Life Planning 

Director, Chartered Wealth Solutions 

This process is helpful in putting money 

in its proper place as an enabler. Then we 

can progress to focus on the financial plan 

to enable the client’s vision of the life they 

want to live. 

You, your client and money stories 

Most people feel embarrassed when 

sharing their true feelings about money. 

These beliefs are very deeply held and are 

often not about money at all, but rather 

about their relationship with themselves. 

Financial planners can heighten a client’s 

awareness about their money beliefs and 

take them though the journey of how 

early money memories impact on their 

money stories today. Not only will this 

be beneficial to the client, but you as the 

planner will be able to understand the 

many emotions that drive your client’s 

behaviour with regards to money. 

Guiding the process of programming 

a new set of beliefs that enable clients 

to make healthy and meaningful 

money decisions will be beneficial to 

both of you. ■ 

If you would like to explore money stories 

further, please visit www.kimpotgieter.co.za 

for a series of Courageous Currency articles on 

understanding and changing your relationship 

with money. David Krueger, author of The 

Secret Language of Money, is a wonderful 

source of wisdom on money stories. Visit his 

website called Mentorpath® and look out for his 

soon-to-be published book on Money Stories. 

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INVESTMENT GROUP 

DO GREAT THINGS EVERY DAY 

The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group (Pty) Ltd Holdings approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide advisory 

and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are 

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otherwise stated. Sources: Old Mutual Alternative Investments; African Infrastructure Investment Managers (AIIM); Old Mutual Specialised Finance; Futuregrowth Asset Management.

INVESTMENT SOLUTIONS 

Emotional rescue 

Stopping your clients from sabotaging 

their own financial futures 

Carl Richards is a very wise man. 

As he has often pointed out1 a 

successful investment outcome 

is as much about successful 

investing behaviour as it is about owning 

successful investments. Financial advisors 

must help their clients make the right 

decisions about how to save part of their 

current income to provide for their future 

consumption needs. This leads to advisors 

and clients spending a lot of time trying 

to answer: “Who is the best investment 

manager in South Africa?” or “Which is 

the best investment fund?” What is not 


INVESTMENT SOLUTIONS 

always appreciated is that good investing 

behaviour is probably even more important 

than these questions. 

The most important principle of good 

investing is to accept that the future 

is unknown and make any investment 

decisions accordingly. This has several 

important implications: firstly, once the 

appropriate investment solution has been 

identified for the goal in mind, always 

stay invested; secondly, any portfolio 

must be diversified effectively. Effective 

diversification means holding multiple 

asset classes, and then, within each asset 

class (where possible) holding more than 

one investment strategy (or style), and 

then finally, more than one asset in each 

of the strategies. Thirdly, a rebalancing 

strategy that is consistently implemented 

is required. The final rule of good investing 

behaviour is make sure there are enough 

liquid assets to meet any short-term cash 

flow needs. Having to sell illiquid assets (eg 

direct property) either at what could be a 

poor market for them, or where a major 

discount is required to turn them into 

cash in a hurry, can negatively affect an 

otherwise successful investment portfolio. 

The real problem advisors face is as 

simple as these rules may seem to be, 

their clients generally don’t follow them. 

This is because investors are human 

beings – they have emotions and decisionmaking 

biases that work against them 

in terms of achieving good investment 

outcomes. These emotions include overconfidence, 

fear, greed and regret, while 

the biases include (among others) loss 

aversion, mental accounting, herding and 

anchoring. This combination of emotions 

leads to several very common destructive 

patterns of investing behavior, namely 

investors commonly stay in safe but 

low-returning investments (for example 

cash) for too long, as the threat of losing 

money is too painful (particularly if this has 

happened in the recent past). However, 

when individual asset classes (for example 

equities), investment strategies (for 

example value) or individual instruments 

(for example Naspers) perform well 

investors eventually decide to buy them. 

Unfortunately, this is usually after a good 

portion of this outperformance has already 

been achieved. When this pattern reverts 

itself (as it always does), the investors 

tend to cling to their investments for far 

longer than they should. This is due to 

the emotional attachment to their past 

decisions – nobody likes admitting they’re 

wrong, after all. Moreover, crystallising 

losses is very painful, so it’s easier to hold 

on in the hope that matters will improve 

in the future. 

As people tend to make investment 

decisions focused on their anxietyadjusted 

returns (instead of their riskadjusted 

returns), the returns they 

experience are very different to those they 

need to get. A recent study by Dirk Louw 

of the North West University2 showed 

that South African investors typically 

have a drag of 1% annualised over the 

investment horizon caused by the poor 

investing behaviour discussed above. This 

research shows that, during the 2008/2009 

Global Financial Crisis, more than half of 

the investors in the sample acted in a way 

that destroyed value. 

While anybody can (in principle) follow 

the rules of good investing, professionally 

managed multi-asset class portfolios would 

be a good solution for most advisors and 

their clients. However, there are two 

different types of portfolios in this space, 

namely traditional balanced portfolios, 

managed on a peer-relative basis, and 

outcome-based portfolios, constructed 

to deliver on the investor’s specific goals. 

While seemingly similar, there are some 

important differences between these two – 

particularly when taking investors’ potential 

for self-destructive behaviour into account. 

Firstly, from a philosophical perspective, the 

outcome-based portfolios tend to have a far 

stronger focus on managing the probability 

and extent of short-term losses than their 

balanced competitors. Secondly, the 

probability of achieving the outcomes of 

the investor is different for these portfolios. 

Recent research3 compared the probability 

of achieving a real return target, using the 

average asset allocation of the balanced 

portfolio population compared to portfolios 

managed explicitly on an outcome-based 

Professor Evan Gilbert, Momentum 

Investments and University of Stellenbosch 

Business School 

philosophy. The outcome-based portfolios 

were between 14% and 17% more likely to 

achieve the return target, depending on the 

return target. In addition, their drawdowns 

(loss of capital over short-term periods) 

were lower. 

Financial advisors’ primary responsibility 

is to manage their clients’ emotions through 

turbulent times and the negative behaviour 

that often follows. Appropriate investment 

solutions are those that minimise the 

potential for bad investment behaviour. This 

means minimising the effect of short-term 

market turbulence, while still maximising 

the probability of achieving the longerterm 

investment goal. Outcome-based 

multi-asset class portfolios are explicitly 

designed with these in mind and the 

evidence suggests they are more likely to 

deliver satisfactory outcomes for advisers 

and their clients. 

Outcome-based investing is about 

helping investors realise their long-term 

goals – helping them turn their bucket 

lists into checked lists. No matter what the 

markets do or how trends shift, investors 

are able to achieve their best possible 

outcomes. ■ 

1. See, for example: 

https://behaviorgap.com/blogs/articles/ 

outperform-99-of-your-neighbors 

2. See 

https://orcid.org/0000-0002-4761-0485 

3. Available from the author. 


39

DISRUPTION 

Serving the next 

generation 

Financial planning has to make a big transition 

Financial planning is wrestling with 

the difficult transition of moving from 

being part of an industry to becoming 

a profession in its own right. 

In the former, it was relied on (and 

remunerated handsomely) to distribute 

the financial products of publicly listed 

companies. In the latter, I propose, it 

will be rewarded fairly for emotional 

work that leads to meaningful lives, 

transformed families, and changed 

communities. 

For those not wanting to make the 

transition (who likes change?), the future 

is looking bleaker by the day. The value 

propositions of most financial advice 

businesses have largely been commoditised. 

Access to investment products? Now 

available to the public online. 

Access to information? Every potential 

client has all the world's information in their 

pocket. 

Access to financial planning software? 

Online tools are becoming more and more 

sophisticated. 

How, to paraphrase a certain Mike, in 

Ernest Hemingway’s novel The Sun Also Rises, 

change happens "Gradually, then suddenly." 

What will hasten this change, and mark 

the end for those hankering after the past? I 

propose that this change will be accelerated 

by the largest transfer of wealth the world 

has ever seen. 

A recent Cerulli report predicts that in 

the US alone, a total of $68-trillion in wealth 

is to be transferred over the next quarter 

century by nearly 45-million households. 

Generation X (currently aged 39 to 53) is 

expected to be the primary beneficiaries 

but, as the oldest "millennials" are about 

to turn 40, Generation Y (those aged 23 

to 38) cannot continue to be dismissed as 

entitled trouble-makers. 

“This multigenerational shift in wealth 

will reshape the wealth management 

landscape and will force firms to alter their 

existing business models and services,” an 

analyst at Cerulli said. 

It remains to be seen whether the 

engagement and service propositions 

offered to the Silent Generation and Baby 

Boomers will be attractive to Generations 

X and Y. 

These groups are the first to grapple with 

the need to take personal responsibility for 

their retirement. Based on the available 

statistics, as well as experience with 

clients, they are not on track for a dignified 

retirement. They need your help. 

Instead of forcing our current service 

models onto these groups, consider how 

they engage with other services in their 

lives. The have witnessed, and welcomed, 

the shift from a product-centric to a servicecentric 

economy. Music, movies, books, and 

software available on-demand, and almost 

always as a subscription service. 

The technology stack currently deployed 

by financial planners falls woefully short of 

the mark in comparison. 

Client service that consists of reams 

of paper, back-and-forth emails to find a 

meeting time, and high turn-around times 

to document advice in order to please the 

regulator? We'll need to do better to engage 

busy families who are already overwhelmed 

by the pace of life. 

Financial planning that obsesses about 

planning for retirement? Yes, busy families 

in their 30s and 40s need to make provision 

for their future but these clients have many 

other needs that require us to show up with 

care. These include life transitions involving 

relocation, children, promotions, side 

projects and lifelong learning goals. We may 

even need to consider whether our view of a 

traditional retirement is something that the 

client aspires to. 

However, as we plan for change, let's not 

lose sight of the power we have to change 

lives. The good we do will echo through 

generations to come. 

Under pressure to stay relevant, let's 

remember the things that never change. 

As Jeff Bezos said, "I almost never get the 

question: 'What's not going to change in the 

next 10 years?' ... you can build a business 

strategy around the things that are stable in 

time ... When you have something that you 

know is true, even over the long term, you 

can afford to put a lot of energy into it.” 

Most discussions about the differences 

between generations fail to acknowledge 

that at a fundamental level we all want the 

same thing: to live a meaningful life with 

dignity, be financially independent as we 

age, and leave a legacy to those we love. 

On this foundation we can build a 

sustainable future for our profession. ■ 

Pierre Taljaard, Certified Financial 

Planner, Fiscal 


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Blue Chip Journal - March 2019 edition

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