Blue Chip Journal - March 2019 edition

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Issue 71 • <strong>March</strong>/April <strong>2019</strong><br />

www.bluechipjournal.co.za<br />

Let the investor<br />

The South African <strong>Journal</strong> of Financial Planning<br />

beware<br />

How concentrated markets can<br />

trap fund managers<br />

Next generation thinking<br />

Innovate around the needs of young investors<br />

A changing profession<br />

Behavioural science and financial planning

Financial Services<br />

Look beyond the<br />

here & now<br />

<strong>2019</strong><br />

When you’re planning ahead, you need<br />

the complete picture to make sound<br />

financial decisions. Updated for <strong>2019</strong>,<br />

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<br />

give you direct access to the most<br />

comprehensive and up-to date content,<br />

so you can make vital recommendations<br />

with complete confidence.<br />


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


6 ON THE MONEY<br />

Making waves this quarter<br />

12 IN THE LION'S DEN<br />

How a concentrated market like the JSE can trap fund managers<br />


Despite the negative sentiment of 2018, volatility provides opportunities for<br />

long-term returns<br />

18 BUILT TO LAST<br />

On value investing and the value of diversity<br />


Where to from here for equity markets?<br />


Short the Dow, bank on China<br />

Rewarding career opportunities to<br />

make a difference in financial planning.<br />

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

Then read on…<br />

Momentum Financial Planning is one of the most successful and recognised providers of<br />

financial services in South Africa. Passionate about enhancing clients’ financial wellness, we<br />

are looking for equally passionate individuals to help us realise this goal.<br />

Not qualified? We will provide you with the expert knowledge and professional skills you<br />

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

qualification for a rewarding career in the financial services sector.<br />

If you are interested in becoming a knowledgeable coach and trusted partner for ordinary<br />

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

mfpintouch@momentum.co.za.<br />

momentum.co.za<br />


When cash flow signals risk<br />

The South African <strong>Journal</strong> of Financial Planning<br />

A changing profession<br />

Behavioural science and financial planning<br />

Issue 71 • <strong>March</strong>/April <strong>2019</strong><br />

www.bluechipjournal.co.za<br />

Let the investor<br />

beware<br />

How concentrated markets can<br />

trap fund managers<br />

Next generation thinking<br />

Innovate around the needs of young investors<br />

Issue 71<br />

<strong>March</strong> / April <strong>2019</strong><br />


New investment possibilities emerge<br />


To survive disruption, help clients understand themselves<br />


Succession is a function of automation and education<br />


Money stories reveal our relationship with money<br />

ISSN 1682-8666<br />

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The way forward for the FPI<br />

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

a new strategy and enhanced our governance processes. The FPI Board has<br />

since undertaken appropriate measures which are cemented internally to ensure our<br />

stakeholder engagements and relations remain intact. The withdrawal of the examination<br />

body, which highlighted gaps in our governance processes and policies overall, allowed<br />

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

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

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

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

uniting financial planners throughout the country.<br />

Celebrate change<br />

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

diversity and inclusion into all our operations – to enhance our employees’ emotional commitment<br />

to their roles, to improve their performance, and to strengthen our brand.<br />

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

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

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

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

businesses.<br />

Although many industry bodies have invested significantly in training black financial advisors,<br />

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

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

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

2 www.bluechipjournal.co.za

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

the incredible opportunities available should you choose to pursue a career as a financial planner.<br />

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

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

assist those people.<br />

Commitment to education<br />

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

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

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

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

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

enabled to serve the industry to meet their CPD requirements. We deliver Continuous Professional Development<br />

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

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

Get involved<br />

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

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

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

on membership@fpi.co.za. I look forward to positive change.<br />

Regards,<br />

Stephanie Pillay<br />

Chief Operating Officer and acting CEO

ED'S NOTE<br />

Disruption begins at home<br />

For several years now, disruption and innovation<br />

have been the buzzwords du jour at every<br />

industry event across the economic spectrum.<br />

From agriculture to aviation, from frisbee<br />

manufacturing to financial planning, the concerns all boil<br />

down to effectively the same thing: the way things has<br />

been done up until now has been rendered obsolete by<br />

advances in technology locked in a feedback cycle with<br />

consumer expectations. Steve Jobs may have created the<br />

eco-system in which the contemporary consumer now<br />

swims, but the digitally empowered consumer is now<br />

in the driving seat. This counts triple for the so-called<br />

millennial generation and exponentially more for the<br />

emerging Generation Z.<br />

What this means for service providers of every stripe<br />

is heightened urgency in adopting and adapting to<br />

the appropriate technology. What is the appropriate<br />

technology? Therein lies the rub. If you are not close to<br />

your consumer, you will have no idea what technology is<br />

appropriate. It may be the case that the solution to your<br />

particular problem is not even technological. A systems<br />

innovation could be required. Or a change in mindset.<br />

Consensus is emerging across industries that the<br />

consumer, customer or client has to be the reason that<br />

companies innovate for. This wisdom coincides with a<br />

growing swing in financial planning to a client-centred<br />

approach that combines coaching and behavioural<br />

economics. This shift is also reflected in the contents of<br />

this issue of <strong>Blue</strong> <strong>Chip</strong>.<br />

Editor: Greg Penfold<br />

Art Director: Brent Meder<br />

Design & Layout: Tyra Martin<br />

Client Liaison Officer: Linda Tom<br />

Project Manager:<br />

Chris Whales, Global Africa Network<br />

Advertising Executives:<br />

Bayanda Sikiti, Sam Oliver,<br />

Gavin van der Merwe, Jeremy Petersen<br />

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Launch of the Laurium Income Prescient Fund<br />

Laurium Capital launched the Laurium Income Prescient Fund on 1 <strong>March</strong> <strong>2019</strong>. The fund<br />

aims to achieve inflation-beating returns with controlled risk and low volatility.<br />

Target return of inflation +3% p.a<br />

Aims to avoid drawdowns over a rolling 3-month period<br />

Visit www.lauriumcapital.com today<br />

We know Investments<br />

T +27 11 263 7700 E laurium@lauriumcapital.com<br />

www.lauriumcapital.com<br />

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<br />

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<br />

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<br />

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<br />

(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<br />

Making waves this quarter<br />

Launch of the Laurium Income Prescient Fund<br />

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

asset manager which manages several hedge and long-only strategies in South<br />

Africa and the rest of Africa. In the past, Laurium has focused predominantly<br />

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

its expertise by adding a fixed income specialist to its investment team. Du<br />

Plessis, who joined Laurium at the beginning of January <strong>2019</strong> from Prescient, is<br />

managing the Laurium Income Fund, launched 1 <strong>March</strong> <strong>2019</strong> using his 20 years’<br />

financial markets experience to further enhance Laurium’s product offering and<br />

performance.<br />

The Laurium Income Prescient Fund is a multi-asset income fund. The fund<br />

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

focused on compounding real returns over time while minimising the potential<br />

for drawdowns.<br />

• The fund’s benchmark is 110% of STeFi call<br />

• The fund’s target is to produce inflation + 3% returns<br />

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

Contact Laurium Capital for more information on laurium@lauriumcapital.com or<br />

011 263 7700.<br />

Laurium's new fixed income fund manager J-P du Plessis<br />

Strong risk-adjusted returns<br />

Fairtree Hedge Funds take the silverware<br />

Two Fairtree hedge funds won in their nominated categories in the 10th<br />

Hedge News Africa Awards held in Cape Town in February.<br />

By category, fixed income hedge funds were the strongest, adding more<br />

than a median 10% for the second consecutive year, followed by marketneutral<br />

and quantitative funds, which gained a median 6.18%. Multi-strategy<br />

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

the downside with a median decline of 1.79%.<br />

Against the back drop of complicated markets with an emerging-market<br />

exodus causing volatility, and a string of corporate landmines challenging<br />

managers, the funds managed by Jean Pierre Verster and Stephen Brown<br />

delivered strong risk-adjusted returns over the measured periods.<br />

Fairtree was nominated in five categories:<br />

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

Fund and Fairtree Protea Worldwide Flexible Equity SNN QI Hedge Fund<br />

• Multi-strategy: Fairtree Wild Fig Multi Strategy SNN QI Hedge Fund and<br />

Fairtree Woodland Multi Strategy SNN QI Hedge Fund<br />

• Five-year Performance: Single-Manager: Fairtree Assegai Equity Long<br />

Short SNN QI Hedge Fund<br />

• New Fund of the Year: Fairtree Protea Equity Long Short SNN Retail<br />

Hedge Fund<br />

• Fund of the Year: Fairtree Protea Equity Long Short SNN Retail Hedge<br />

Fund.<br />

The awards are based on risk-adjusted returns for the 2018 calendar year,<br />

using an established methodology that comprises net returns as well as<br />

Sharpe ratio as a measure of volatility.<br />

To qualify for a nomination, funds had to average a minimum of<br />

R80-million in assets under management in that strategy throughout<br />

the calendar year.

We couldn’t<br />

grow your trust<br />

without first<br />

growing your<br />

money.<br />

Since 1993, we’ve grown the long-term savings of millions<br />

of South Africans by doing one thing and one thing only,<br />

investing with a long time horizon. Never losing focus and<br />

never giving up on our goal, we grow our clients’ money<br />

into real long-term wealth.<br />

To invest your money today, speak to your<br />

Financial Adviser or visit coronation.com<br />

48648/E<br />

Coronation is an authorised financial services provider. Trust is Earned


Shining bright<br />

BrightRock releases upbeat results<br />

Following the recent annual results<br />

announcement by its majority<br />

shareholder, Sanlam, needs-matched<br />

life insurer BrightRock has released an<br />

update on its business performance<br />

across its multiple risk product lines.<br />

From a zero base at its product launch<br />

in <strong>March</strong> 2012, BrightRock has grown<br />

rapidly, increasing its market share<br />

to 12% of the market for large risk<br />

policies sold by independent financial<br />

advisers – making it the fourth-largest<br />

provider in this market based on new<br />

business volumes.<br />

During the 2018 financial year,<br />

BrightRock maintained its position as<br />

the fastest-growing provider in this<br />

segment, achieving strong organic<br />

growth. Total premium income across<br />

its businesses increased by 43% year on<br />

year and annualised premium income of<br />

R433-million was activated in 2018. This<br />

is despite tough market conditions – the<br />

category saw just a 12% increase in the<br />

number of risk policies sold between<br />

July 2017 and June 2018. With reporting<br />

season still underway, it is too early to<br />

provide definitive figures but indications<br />

are that many insurers have experienced<br />

single-digit growth in risk policy sales and<br />

an increase in first-year risk policy lapses<br />

during 2018.<br />

According to Schalk Malan, BrightRock<br />

CEO, a key driver of the company’s growth<br />

has been the increased uptake of its<br />

needs-matched offering by independent<br />

financial advisors (IFAs) operating in the<br />

upper income segment. The company<br />

currently has more than 4 200 accredited<br />

IFAs distributing its product nationwide.<br />

In particular, its permanent disability<br />

cover is making significant inroads in this<br />

market.<br />

Cautious optimism<br />

Private equity remains agile<br />

The 2018 Deloitte Africa Private Equity Confidence<br />

Survey (PECS) indicates that there is cautious<br />

optimism as private equity (PE) continues to be<br />

an agile asset class, navigating tough geopolitical<br />

and macro-economic conditions across Africa. The<br />

annual survey was conducted between August<br />

and November 2018 throughout the Deloitte<br />

Africa network, with a focus on PE activity in East,<br />

Southern and West Africa. A total of 77 surveyed<br />

participants included both General Partners (GPs)<br />

and Limited Partners (LPs).<br />

“In this survey we focused on respondents<br />

from three regions across Africa with operations,<br />

activities, and knowledge in each of these regions,”<br />

says Clinton Wolder, Deloitte Southern Africa<br />

Financial Advisory Partner. “Our forward-looking<br />

survey posed questions to respondents that<br />

would provide valuable insights into how private<br />

equity practitioners currently view the African<br />

private equity landscape, as well as their future<br />

expectations.”<br />

It is clear from the<br />

responses that the PE<br />

industry is expected<br />

to weather the storm<br />

of ongoing economic<br />

challenges, such as<br />

Southern Africa’s<br />

subdued GDP growth,<br />

while positioning itself<br />

to take advantage of<br />

anticipated growth<br />

opportunities. With<br />

many key African<br />

economies expected to<br />

grow, the overarching<br />

message from<br />

practitioners is that<br />

the investment path<br />

should be trodden with<br />

cautious optimism.

110319v5 © IRESS <strong>2019</strong><br />

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Improved market opportunities<br />

Promising investment prospects, despite risks<br />

Gradual improvement in South Africa’s public sector prospects, which could drive an<br />

uptick in economic growth in the years to come, has led Old Mutual Investment Group<br />

to steadily reduce the exposure of its actively managed balanced fund offering to<br />

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

According to Graham Tucker, Manager of the Old Mutual Balanced Fund, while<br />

growth in the US is still good, it is going to be increasingly challenging to maintain the<br />

current level of growth.<br />

Tucker believes that South Africa is currently in a better position compared to last<br />

year this time and is making incremental progress. Therefore, combined with attractive<br />

valuations in select areas, he is seeing increased opportunities.<br />

Old Mutual Investment Group does, however, acknowledge that there are risks<br />

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

to still assign an investment grade to the country’s debt, which is scheduled to<br />

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

after Finance Minister Tito Mboweni delivered his <strong>2019</strong> budget speech, that it did not<br />

believe the decision to increase the expenditure ceiling by R16 billion over three years<br />

would weaken the credibility of South Africa’s fiscal policy.<br />

Keeping up with change<br />

LexisNexis handbook is a must-have<br />

The <strong>2019</strong> <strong>edition</strong> of the<br />

SA Financial Planning<br />

Handbook is a musthave<br />

reference for<br />

any financial planner.<br />

There have been<br />

numerous regulatory<br />

changes since the 2018<br />

<strong>edition</strong> was published<br />

(in particular those<br />

made by the Financial<br />

Sector Regulation Act<br />

and the Taxation Laws<br />

Amendments Acts<br />

of 2018). Keeping up<br />

with these changes<br />

has become increasingly onerous for financial planners. This<br />

handbook has been updated to end December 2018 and<br />

provides expert insight into the changes as well as providing<br />

relevant case law and examples which allow the planner to<br />

apply the information in a practical context. Compiled by a<br />

team of experts, this handbook covers all aspects of financial<br />

planning and is recognised as the official textbook for postgraduate<br />

qualifications in financial planning.<br />

For more information visit: store.lexisnexis.co.za<br />

Brace yourself<br />

Expat tax is coming to South Africa<br />

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

consequences for South Africans working outside South Africa, will come into force in<br />

<strong>March</strong> 2020. South Africans earning an income abroad should be considering their options.<br />

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

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

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

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

Although this threshold may seem reasonable, employment income for this purpose<br />

includes allowances and fringe benefits like the provision of housing, security and flights,<br />

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

threshold.<br />

(Sovereign Trust SA)



Build wealth by investing in<br />

emerging and frontier market<br />

based companies that are identified<br />

as being undervalued and offer<br />

potential for above average share<br />

price appreciation.<br />

Neal Smith<br />

Portfolio Manager<br />

of the Denker Global<br />

Emerging Markets Fund<br />



+27 (0) 21 950 2603 service@denkercapital.com www.denkercapital.com<br />

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

(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<br />

(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<br />

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

settlement, and the availability of information.

In the lion's den<br />

How a concentrated market like the JSE can trap fund managers<br />

Are all equity markets created equal? Does an<br />

investment process which works in one market<br />

naturally extend itself to another? In this article<br />

we explore the limitations which investors have<br />

when attempting to apply their investment process in a concentrated<br />

equity market such as South Africa, and the traps<br />

they are prone to falling into.<br />

Fund management is an artful science which has evolved<br />

over the past 100 years or so. At the heart of every<br />

investment product lies a process, a philosophy and a<br />

supporting set of assumptions around which the prospect<br />

of "outperformance" is sought and promised.<br />

Examples which most investors will be familiar with<br />

include "value investing", "growth investing" and more<br />

12 www.bluechipjournal.co.za


recently "quality" investing. Then there<br />

are managers who seek positive earnings<br />

revisions as a source of outperformance, or<br />

those who are biased to smaller companies<br />

due to information inefficiency opening up<br />

the performance opportunities.<br />

Fund managers have been driven to<br />

define these philosophies very clearly,<br />

in part by a consulting industry keen<br />

to neatly categorise the personalities<br />

managing investments, but also because<br />

fund management at its heart is both art<br />

and science. Providing a logical intellectual<br />

framework to manage investments helps<br />

to provide structure to the oftenvague<br />

nature of investing. But are fund managers<br />

too quick to assume that what works in<br />

a large, global, liquid market is easily<br />

transportable to a small, concentrated<br />

market like we have in South Africa?<br />

Evidence tells us that this is the case,<br />

and there are important consequences<br />

for selecting fund managers and the<br />

evaluation of their performance potential.<br />

Whichever route the manager takes<br />

in developing their philosophy, they also<br />

need the market in which they operate to<br />

provide a viable foundation. What we find<br />

locally is that managers who define themselves<br />

in strict philosophical terms are<br />

prone to investment traps given the small<br />

size of our market – the assumption of the<br />

"viable foundation" does not necessarily<br />

hold. This is a poor outcome for the purists;<br />

it means that an intellectually sound, yet<br />

strictly defined investment philosophy may<br />

not be viable in certain investment markets<br />

such as ours.<br />

Small market breadth imposes constraints<br />

in two ways: by limiting the physical<br />

number of opportunities which align with<br />

the investment philosophy (poor diversification<br />

outcome); and by creating structural<br />

investment cycles which preclude certain<br />

investment approaches from performing<br />

well (poor performance outcome).<br />

Consider this example<br />

Manager A follows a "deep value" investment<br />

process, only buying companies<br />

which are significantly cheap in isolation.<br />

Risk is defined as "overpayment" and<br />

"permanent capital loss". This manager is<br />

value seeking and aims to deliver outperformance<br />

when mean prices revert to the<br />

higher values relative to current prices.<br />

The JSE at any given time has around<br />

100 investable shares for a reasonably<br />

sized asset manager. Consider that for<br />

the average portfolio, at least 30 shares<br />

are desired for diversification reasons.<br />

For Manager A, a diversified portfolio is<br />

possible when the market on the whole is<br />

trading within the realms of fair value and<br />

there are around 50% of shares trading<br />

below fair value (ie 50 opportunities).<br />

However, as the market becomes<br />

increasingly expensive, the range of opportunities<br />

starts to narrow. In the period 2012<br />

to 2015, for example, this market behaviour<br />

meant that a genuine deep value manager<br />

staying true to their philosophy would<br />

struggle to find 20 such shares, and would<br />

hold a concentrated, poorly diversified<br />

portfolio of shares – in this case across the<br />

platinum sector – the only "cheap" sector at<br />

the time. While it solves Manager A’s need<br />

for "value", it exposes the investor to the<br />

lack of diversification which results.<br />

In a large, liquid global market we see<br />

the exact same philosophy applied, but<br />

with a superior opportunity set where<br />

diversification is always achievable simply<br />

due to the vast number of instruments<br />

which are investable. This provides the<br />

foundation needed for a strict investment<br />

philosophy to prevail.<br />

The downside to this for local investors<br />

is that deep structural underperformance<br />

is likely to occur at some point, unless the<br />

manager is able to compromise on their<br />

philosophy (which they are less inclined to<br />

do, lest they be found out by the investment<br />

community). In addition, the cost of an<br />

investment error is massively heightened<br />

due to the lack of diversification and the<br />

analytical certainty required for a "high<br />

conviction" position. This "high conviction" is<br />

what many investors seek these days, but its<br />

buyer beware – it can mean "undue risk" too.<br />

Peter Foster, Chief Investment Officer,<br />

Fundhouse<br />

What we have seen in the industry of<br />

late is fund managers compromising on<br />

their investment philosophy to lessen the<br />

impact of the small concentrated market<br />

we have in South Africa. This also serves<br />

business interests well – a larger capacity<br />

to manage investments, less cyclical underperformance<br />

and a wider opportunity set.<br />

The downside for investors? The prospect<br />

of mediocre investment returns. Value<br />

managers are now calling themselves<br />

"quality value" for example.<br />

Where does this leave us? We know that<br />

managers who compromise are worse than<br />

those who don’t, but managers who strictly<br />

define their process are prone to small<br />

market anomalies. Interestingly, this is the<br />

basic argument for passive indexation in<br />

South Africa: access to a concentrated portfolio<br />

of shares (the top 10 shares account<br />

for 50% of the total market value!) which<br />

has all of the investment philosophies<br />

embedded in it at all times is a reasonable<br />

prospect considering the company.<br />

There are only two aspects we can<br />

control with respect to our investments:<br />

to understand what it is we are buying,<br />

and to understand the structural risks<br />

of the market and how this may impede<br />

future returns. By matching these two<br />

pieces of information, it is possible to<br />

help balance risk in a client portfolio,<br />

and access the performance potential<br />

of good fund managers without taking<br />

undue risk. ■<br />

www.bluechipjournal.co.za<br />


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


Short-term risk for<br />

rewarding results<br />

Despite the negative sentiment of 2018, volatility<br />

provides opportunities for long-term returns<br />

The US/China trade war and<br />

political events across the world<br />

have driven negative sentiment<br />

towards the global emerging<br />

market sector. Volatility is a characteristic<br />

of emerging and frontier markets, and<br />

one that provides opportunities for longterm<br />

returns. For investors, the most crucial<br />

lesson is therefore to remain patient<br />

despite the shorter-term uncertainty.<br />

Emerging markets have attractive<br />

valuations and benefit from powerful<br />

long-term growth drivers<br />

Why should you consider an investment<br />

in emerging markets? Emerging markets<br />

are currently attractively valued because<br />

they have de-rated considerably relative<br />

to developed markets. They are also<br />

the beneficiaries of powerful long-term<br />

growth drivers. Emerging markets now<br />

have the lion’s share of global GDP and the<br />

International Monetary Fund (IMF) expects<br />

emerging markets and developing economies’<br />

share of GDP to increase at an even<br />

faster pace going forward. As countries<br />

move up the development curve their<br />

stock markets typically grow. This results<br />

in a rising ratio of market capitalisation to<br />

GDP. Put simply, emerging market stocks<br />

should continue their long-term trend of<br />

outperformance going forward.<br />

The IMF expects emerging markets<br />

and developing economies’<br />

share of GDP to increase<br />

Source: IMF<br />

A number of other factors bode<br />

well for emerging market growth<br />

1. Positive demographics and rapid<br />

urbanisation<br />

Unlike developed markets where ageing<br />

populations provide strong headwinds<br />

to economic growth, emerging market<br />

economy populations are typically<br />

much younger and grow at a faster<br />

rate. The trend of rapid urbanisation<br />

is also very positive because growing<br />

cities tend to dominate global economic<br />

activity and have considerably<br />

higher disposable incomes and wealth.<br />

If emerging markets can support their<br />

demographic and urbanisation advantage<br />

with good economic policies as<br />

well as access to education and healthcare,<br />

they can unlock what is known as<br />

their ‘demographic dividend’, which will<br />

be a powerful driver of future growth.<br />

2. An abundance of natural resources<br />

3. Optimal diversification benefits<br />

Historically, emerging markets have<br />

been excellent diversifiers. Although<br />

emerging markets generally remain<br />

somewhat more volatile than developed<br />

stock markets, investors should<br />

be able to achieve greater diversification<br />

benefits and improved risk profiles<br />

over time by adding emerging markets<br />

to their portfolios. The following table<br />

looks at how adding emerging markets<br />

to a portfolio can deliver better longterm<br />

risk/return outcomes.<br />

Diversifying a portfolio with emerging<br />

markets offers the possibility of<br />

better risk/return outcomes<br />

A great diversifier<br />

Emerging markets - excellent diversification benefits<br />

1<br />

MSCI<br />

EM<br />

15 909%*<br />

10.9% p.a.<br />

MSCI <br />

World<br />

1 793%*<br />

6.2% p.a.<br />

14 www.bluechipjournal.co.za

Source: FactSet, DataStream, Bloomberg, Goldman Sachs Global Investment Research.<br />

History shows that if you embrace the risk and vola4lity in emerging markets the rewards<br />


Most emerging markets bounced<br />

back strongly in January<br />

After a difficult December where most major<br />

indices declined into bear territory, markets<br />

around the world bounced back strongly<br />

in the first month of <strong>2019</strong>. The interesting<br />

part was which markets did best: Brazil was<br />

up 18% for the month, Russia was up 13%<br />

in dollar terms, and the MSCI China Index<br />

showed substantial growth, despite all the<br />

talk of a slowdown in that country’s economy.<br />

Out of the key emerging market economies<br />

only India was relatively flat. The other three<br />

major emerging economies all outperformed<br />

developed world markets. A bounce back<br />

from depressed levels? Possibly. But it also<br />

might be the sign that something more<br />

interesting is starting to happen.<br />

The greatest turnaround<br />

potential seems to be in Brazil<br />

Much criticism has been aimed at the new<br />

president, Jair Bolsonaro, but the finance<br />

minister, Paulo Guedes, is a free-market liberal<br />

who has promised a tough programme<br />

of privatisation and reform. He plans to bring<br />

the budget back under control following a<br />

decade of irresponsible spending and economic<br />

mismanagement. He has also vowed<br />

to sort out the pension system and return a<br />

raft of major industries to the private sector.<br />

Russia is rising again, and India<br />

continues to develop rapidly<br />

with progressive tax reforms<br />

Although expansion forecasts of just under<br />

2% for Russia this year are still fairly dismal,<br />

it’s at least a positive move forward. With<br />

the US beginning to lift some of its sanctions,<br />

there’s a possibility of Russia growing<br />

stronger again. India continues to develop<br />

rapidly, expanding by 7.5% in 2018 and<br />

with a similar growth rate expected for this<br />

year. Prime minister Narendra Modi has just<br />

pushed through some of the biggest tax<br />

system reforms in the country’s history.<br />

These include a massive simplification<br />

of federal and state taxes, a doubling of<br />

the amount earned before income tax is<br />

payable, and a shift to direct sales taxes.<br />

This may well free India from a once overbearing<br />

and bureaucratic government.<br />

China is set to expand by 6-7%<br />

Every CEO in the world is blaming China for<br />

a slowdown and softening profits, but the<br />

fact remains that China will expand by a further<br />

6-7% this year, in line with performance<br />

over the past five years. Industrial production<br />

is stable, and a buoyant stock market is<br />

allaying fears of an imminent collapse.<br />

The current favourable prices of<br />

emerging market companies are<br />

exciting for long-term returns<br />

When you invest, the price you pay for an<br />

investment is critical to generate long-term<br />

returns. Constructing a portfolio of highquality<br />

industry- and sector-leading businesses<br />

that are run by superior management<br />

teams are two critical factors. However, good<br />

companies like this don’t often become available<br />

at a price that is attractive. This is currently Nigel Barnes, Head of business<br />

the position that emerging markets are in, development, Denker Capital<br />

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

returns<br />

the next few years. Examples are businesses Looking ahead: volatility creates<br />

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<br />

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<br />

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<br />

like returns. price<br />

this<br />

trendline<br />

don’t Construc3ng oVen<br />

and<br />

become<br />

the a porUolio beginning<br />

available of high-quality of<br />

at<br />

a<br />

a<br />

positive<br />

price that industry- is<br />

If<br />

aFrac3ve.<br />

everyone and sector-leading This<br />

plays<br />

is currently<br />

their businesses the<br />

part, that there is no<br />

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<br />

few like recovery this years. don’t in Examples the oVen early become are weeks businesses available of <strong>2019</strong>. 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<br />

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<br />

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

where one can clearly see the declining price trendline and the beginning of a posi3ve<br />

Samsung’s recovery<br />

appears<br />

in<br />

to<br />

downward the<br />

be<br />

early<br />

turning<br />

weeks trend of appears <strong>2019</strong>. to be turning<br />

allow active managers the opportunity to<br />

search the emerging world and discover<br />

Samsung’s downward trend appears to be turning strong investment opportunities to<br />

build wealth. However, it’s important<br />

to remember that it certainly won’t be<br />

without some volatility, so be prepared<br />

and wait patiently for your reward.<br />

Source: factset<br />

Source: factset<br />

There Source: are factset signs of a recovery in Alibaba’s price<br />

There are signs of a recovery<br />

There in Alibaba’s are signs price of a recovery in Alibaba’s price<br />

Source: factset<br />

History shows that if you embrace<br />

the risk and volatility in emerging<br />

markets the rewards come<br />

Outperforms developed markets<br />

Short-term volatile, but long-term outperform<br />

EM compared to DM<br />

Relative equity performance index in log terms<br />

MSCI<br />

MSCI <br />

EM<br />

World<br />

15 909%*<br />

1 793%*<br />

10.9% p.a. 6.2% p.a.<br />

Looking Source: factset ahead: vola4lity creates opportuni4es for ac4ve investment managers to create<br />

wealth Source: factset<br />

2<br />

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<br />

the wealth emerging market sector cannot be maintained. This will allow ac3ve managers the<br />

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<br />

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<br />

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

build wealth. However, it’s important to remember www.bluechipjournal.co.za<br />

that it certainly won’t be without some<br />

vola3lity, so be prepared and wait pa3ently for your reward.<br />






Two months in and it has already been an eventful <strong>2019</strong>.<br />

The world feels trapped between Trump and Brexit, with<br />

uncertainty putting strain on economies everywhere.<br />

Myriad macroeconomic factors are catalysing global<br />

market volatility, with a host of local issues compounding<br />

pressures at home.<br />

With electricity hogging headlines, plus<br />

election hype building, there’s a sense of<br />

overriding anxiety. Add to that the fact that<br />

people are seeing their hard-earned cash lose<br />

value in a short period, and it’s no wonder<br />

that many are making knee-jerk reactions<br />

regarding financial decision-making. That’s<br />

why now’s the time, more than ever before,<br />

for intermediaries to:<br />

1. Encourage clients to ‘stay the course’.<br />

The most important principle of long-term<br />

investing is to ‘stand by’ even when times<br />

get tough.<br />

2. Stay engaged during the ‘bad times’.<br />

That’s when your clients need regular<br />

conversations and reassurance.<br />

3. Be willing to look at alternatives. It might<br />

be necessary to step away, re-evaluate and<br />

combine investment options for optimal<br />

outcomes.<br />


Given uncertain market conditions, it’s critical<br />

to establish what kind of client you’re working<br />

with. In terms of risk analysis, what end risk<br />

behaviours do you expect from your client?<br />

Correct profiling is imperative to ensure the<br />

‘right’ portfolio. There have always been two<br />

kinds of clients: those who have been in the<br />

market for a while, experienced ups and<br />

downs, and understand the need to ‘stay the<br />

course’ in the hope things will get better. Then<br />

there are those who see a 5 to 6% drop in their<br />

capital value and want to get out of the market<br />

and into something else.<br />



Increasingly, people are seeking guarantees.<br />

And it’s not really surprising. Many clients<br />

have been dismayed by returns over the last<br />

few years and are simply unwilling to take a<br />

chance any more. That’s when they opt to<br />

exit investments in search of more explicit<br />

guarantees. At times like these, the role of an<br />

intermediary is absolutely pivotal.<br />

Opting out of the market entirely can mean<br />

converting what may have been a short-term<br />

paper loss scenario into an actual loss. Or it<br />

could mean selecting a solution that foregoes<br />

a certain level of expected returns in favour<br />

of certainty. Back in 2008, when the last<br />

recession hit, we saw an upsurge in people<br />

seeking these kinds of products. Now, we’re<br />

seeing a similar kind of natural migration.

“<br />

Our recently<br />

launched Retirement<br />

Income Planner is the<br />

ideal way for you to<br />

take your client on<br />

the journey, making<br />

complex decisions<br />

suddenly seem simple.<br />

“<br />


For intermediaries, this can bring about<br />

tough conversations. Small losses can often<br />

be countenanced by clients. But when<br />

it’s sustained losses plus a particularly<br />

poor year of returns, it’s hard to convince<br />

someone to ‘stay the course’. Even though<br />

having the right mix of assets in a portfolio<br />

usually means eventually coming out<br />

trumps.<br />

The bottom-line is how essential<br />

it is to understand exactly what<br />

your client is looking for.<br />



If the primary concern is the loss of capital,<br />

there are numerous solutions available with<br />

explicit guarantees or where there can never<br />

be a negative drawdown. If the big concern<br />

is a loss of returns, then there are solutions<br />

available that will provide a certain level<br />

of guarantee. Another big thing for clients<br />

is the opportunity for offshore exposure.<br />

Frequently, people seek structures that<br />

combine capital security with all the<br />

benefits from exposure to international<br />

market growth – without the risk of currency<br />

volatility. That rand-dollar difference can<br />

cause chaos! Glacier has a number of<br />

solutions to address this need, like the Glacier<br />

Capital Enhancer.<br />

In the case of the retired client, many may be<br />

looking for a guarantee of income or some<br />

level of capital security – or a combination<br />

of the two. Retired clients can tolerate a<br />

reduction in capital, provided the market<br />

improves in the short to medium term. But<br />

a reduction in income is immediate. Hence<br />

the distinction between the client with a life<br />

annuity versus a living annuity. The client who<br />

cannot tolerate a reduction in income, even<br />

over the short term, requires the certainty<br />

that comes with a guaranteed annuity.<br />

Versus the client who has leeway to continue<br />

to participate in the market and wants<br />

to leave funds for their next of kin. In this<br />

instance, the living annuity may be the better<br />

solution. However, it needn’t be a case of one<br />

or the other. In many instances, a combination<br />

of the two produces a better outcome for<br />

the client, in the form of a more sustainable<br />

retirement income.<br />



THEM<br />

In most cases, South Africans need to secure<br />

a certain level of income for non-discretionary<br />

expenses, and want some income for those<br />

other ‘nice-to-haves’. And, of course, many<br />

want the opportunity to leave a financial<br />

legacy. It’s a question of how to structure<br />

a portfolio to do all that. That’s where our<br />

recently launched Retirement Income Planner<br />

proves invaluable in assisting intermediaries to<br />

select the best retirement income option for a<br />

particular client’s needs – centred around the<br />

level of protection and sustainability required.<br />

It’s the ideal way for you to take your client<br />

on the journey, making complex decisions<br />

suddenly seem simple. See the Glacier<br />

intermediary website for more detail.<br />

Speak to your Glacier representative for<br />

more information or visit www.glacier.co.za<br />

Glacier Financial Solutions (Pty) Ltd and Sanlam<br />

Life Insurance Ltd are licensed financial services providers


Built to last<br />

On value investing and the value of diversity<br />

In the 21 years that she has spent in<br />

the industry, Perpetua Investment<br />

Managers’ co-founder and chief<br />

investment officer Delphine Govender<br />

has witnessed profound transformations<br />

in the investment landscape, from the<br />

days when investment management<br />

was dominated by the institutional<br />

insurance companies, through the rise of<br />

the professional mega-managers, to the<br />

founding of her own boutique firm based<br />

on the principles of value and diversity.<br />

Now, with R13-billion in assets under<br />

management and counting, Perpetua has<br />

achieved lift-off. We asked Govender for<br />

insight into her approach.<br />

She began her career as an analyst at Old<br />

Mutual Asset Managers, but it was the<br />

11 years spent at Allan Gray that gave<br />

Govender the experience she would use to<br />

launch Perpetua.<br />

Those were phenomenal times, when<br />

“South Africa’s most admired asset<br />

manager” was transforming into the megamanager<br />

of today.<br />

“When I joined Allan Gray, its assets<br />

under management were R15-billion, and<br />

I was the 58th or 59th employee. When I left<br />

11 years later, it was close to R450-billion,<br />

with over 800 employees,” Govender recalls.<br />

“To have been part of that business and<br />

to have seen and witnessed that growth<br />

burst both in assets and as a business was<br />

a huge learning experience for me both<br />

from a portfolio manager perspective and<br />

as a director.”<br />

However, even though “the easier<br />

decision was to stay and not to leave”, in<br />

2011 Govender decided it was time to<br />

move out on her own.<br />

The real potential Govender saw in<br />

looking at the entire South African market<br />

over the previous two decades was the high<br />

failure rate among boutique firms.<br />

“When things are riding high, everybody<br />

thinks they can start a firm,” she reflects.<br />

“Two people might set up with a billion<br />

or two under management, have a great<br />

performance run and think they’re rockstars.<br />

Then markets tank, the tide goes out,<br />

and you see who’s wearing swimming trunks<br />

or not. The graveyard of dead fund managers<br />

is quite big and continuously growing.<br />

“So we asked what we could do<br />

differently. The opportunity I saw was that<br />

the market was genuinely missing what<br />

I call scaled boutiques. This sounds like a<br />

contradiction in terms because ‘boutique’<br />

implies ‘small’, but that’s what we were<br />

trying to challenge. Our mantra was that a<br />

boutique is not small per se – a boutique<br />

is specialised, offering something that’s<br />

different to what is currently available a) in<br />

terms of the way we exploit an investment<br />

opportunity in the market and then b) in<br />

terms of the way we put our firm together,”<br />

Govender explains.<br />

Investing in value<br />

What sets Perpetua apart from index-based<br />

investors is that the firm is fundamentally a<br />

value investor.<br />

“Simply because a fund manager says<br />

they work out the value of a share doesn’t<br />

necessarily mean they are value managers,”<br />

says Govender. “A value manager works out the<br />

true worth of a share based on their reasonable<br />

and realistic assumptions as opposed to<br />

paying for future optionality today.”<br />

For Govender, success means protecting<br />

the money that clients entrust to the fund.<br />

“The least we want to do is give them back<br />

their money that’s maintained purchasing<br />

power,” she explains. “Obviously, we also<br />

look to exploit opportunities to invest<br />

that money and grow it in real terms:<br />

we want to improve the quality of our<br />

clients’ lives, and what better way than<br />

in the form of hard-earned savings which<br />

Delphine Govender<br />

directly affect the quality of their lives at<br />

retirement. That’s why we don’t invest<br />

with the benchmark in mind. If we think<br />

Naspers is overvalued, we own zero. I am<br />

not prepared to look out very far into the<br />

future and pay for all that future profit<br />

today in the share price.”<br />

This aversion to the benchmark has<br />

earned Perpetua its share of criticism, but<br />

the turn markets have taken has vindicated<br />

the value-based approach.<br />

“For the last seven years, it’s been<br />

particularly tough to be our type of investor<br />

because the market has been driven by<br />

more technical things, such as low interest<br />

rates globally, perception of risk, attitude<br />

towards risk, bond proxies, growth, etc. The<br />

huge positive sentiment attached to this<br />

meant that multiples went way beyond what<br />

a fundamental investor would normally say<br />

would be sustainable,” says Govender.<br />

“Now the tide has shifted towards our<br />

approach. It’s ended up being the best test<br />

of what we set out to do.”<br />

The value of diversity<br />

Diversity is a value intrinsic to Perpetua’s<br />

identity. “The South African market is<br />

incredibly homogenous. We emphasise<br />

diversity, not just in terms of the South<br />

African narrative which generally focuses<br />

on race and gender, but also cognitive<br />

18 www.bluechipjournal.co.za


diversity. Not everybody has to be a<br />

CA or actuary straight out of UCT,” says<br />

Govender.<br />

“We look for three key elements in the<br />

ideal investment player. One is analytic<br />

curiosity combined with the humility<br />

that comes from knowing we don’t know<br />

everything. Investment is a probabilistic<br />

endeavour and we’re trying to work out<br />

different scenarios for the future.<br />

“The second characteristic is the inner<br />

drive to protect and grow our clients’ hardearned<br />

money. We’re not disinterested<br />

researchers, we’re investors researching<br />

whether a particular outcome will be a<br />

good investment or not.<br />

“The third quality is the relational<br />

component. What is your level of selfawareness?<br />

How constructively can<br />

you relate in a team environment? The<br />

number-one soft factor that contributes to<br />

success is whether we are invested in each<br />

other’s success.”<br />

''The number one soft<br />

factor that contributes<br />

to success is whether<br />

we are invested in<br />

each other’s success.''<br />

This mutual investment is reflected in<br />

how teams pool knowledge across areas<br />

of specialisation.<br />

“When we discuss global stocks,<br />

the entire team sits in,” says Govender.<br />

“Equally, when we discuss global stocks,<br />

the domestic team sits in because we<br />

believe there’s a very strong crosspollination<br />

effect, particularly in the<br />

current environment. When I started as an<br />

analyst, it took a good five years for global<br />

trends to hit our South African companies,<br />

but the gap is closing fast.<br />

“Technology now enables the consumer<br />

base to know what they want faster than<br />

ever before, so the pace at which adoption<br />

needs to occur is much faster. As a result,<br />

we’re finding that when we’re looking at<br />

global food companies, or global retailers,<br />

or global banks, etc, we are learning rapidly<br />

the trends that will manifest in our domestic<br />

companies. So it’s actually benefiting our<br />

domestic work, and it’s making the analysts<br />

excited about what they do.”<br />

Global vision<br />

Right from inception, Govender wanted<br />

Perpetua to have a global outlook. In 2012,<br />

globally, the boutique tail commanded a<br />

significantly higher share of assets under<br />

management than in South Africa, where<br />

boutiques command 10 to 15% as opposed<br />

to 35% globally. That 35% represented an<br />

attractive space to play in.<br />

“Part of our thinking was to quietly<br />

build our global capability. Once we had<br />

earned the confidence of our clients in<br />

the domestic space, they would trust us<br />

to deliver on the global side. We made our<br />

first global hire about four years ago and<br />

now the global team has six people. As a<br />

bottom-up stock-picking house, we don’t<br />

have to cover the entire world; we’ve got<br />

to work out how we can have an edge and<br />

be mindful that the majority of our clients<br />

are South African clients who already trust<br />

us with their domestic assets.<br />

“The way we’ve tried to diversify that<br />

single strategy risk is that everything is tied<br />

to our core approach of true value equity<br />

– so we’ve got straight domestic equity,<br />

domestic multi-asset class, global equity<br />

and global multi-asset class. Along that<br />

spectrum, even if domestic equities have<br />

a tough time, we could still have a global<br />

strategy that would do well and vice versa.”<br />

Built to last<br />

The Steinhoff case proves that homogeneity<br />

is antithetical to sustainability,<br />

whereas diversity provides a foundation<br />

for a lasting legacy.<br />

“If I look back at the last six years of<br />

running Perpetua, we’ve often been asked<br />

why we mainly do not own Naspers and<br />

Steinhoff. We simply believed they were<br />

over-valued – but why did so many other<br />

investors not see that? It’s almost as though<br />

the board of Steinhoff was constituted of<br />

the kind of individual that we have almost<br />

been programmed to perceive as successful,<br />

so they were above criticism,” says Govender.<br />

“If you look at the individuals that had<br />

the highest exposure to Steinhoff in their<br />

portfolios, I think they almost suspended<br />

their normal judgment because they were<br />

blinded by who they were dealing with.<br />

There was a huge amount of agreeability.<br />

If one of the richest men in South Africa is<br />

the biggest shareholder in a company, how<br />

could you be so audacious as to think that<br />

you would know better than him? What is<br />

your track record of wealth?”<br />

The more diverse the team, on the other<br />

hand, the more likely it is that the client will<br />

be looked after.<br />

“The nature of our industry is that we<br />

tend to build up star managers, prima<br />

donnas. This is great for the individual’s<br />

bonuses and profile, but is it in the interest<br />

of the client? When a client entrusts their<br />

money to AN Other, they want to know that<br />

the inter-generational transfer they were<br />

promised for the next 20, 30, 40 years will<br />

actually be delivered.<br />

“In starting this firm, it was clear to<br />

me it wasn’t going to be DG Capital, my<br />

initials – it was going to be something that<br />

could absolutely outlive me. The name<br />

Perpetua means enduring so that it could<br />

be something that we would stick to, to be<br />

steadfast and then last.” ■<br />

www.bluechipjournal.co.za<br />



Exercise vigilance<br />

Where to from here for equity markets?<br />

By Quaniet Richards: Head of Institutional Business, Nedgroup Investments<br />

Chart 2<br />

Rolling 3 -year real return<br />

50%<br />

40%<br />

30%<br />

20%<br />

10%<br />

0%<br />

-10%<br />

The past three years have not been an easy time<br />

for investors in SA equities. And, with growing<br />

uncertainty and volatility almost everywhere, it is<br />

understandable that many people find it hard to<br />

imagine things turning around. However, the important<br />

thing to Chart remember 1 in times like these is that SA equities have<br />

experienced this kind of underperformance before.<br />

Chart 1 below plots the three-year per annum real<br />

return (return less 8% inflation) for local and international asset<br />

classes in rands and shows that all the asset classes except<br />

6%<br />

5,6%<br />

domestic bonds and cash have underperformed inflation,<br />

4%<br />

while domestic bonds was the only asset class to have<br />

2%<br />

1,3%<br />

outperformed inflation plus 3% and 5%.<br />

Chart 1<br />

3% real return: 60 months<br />

40%<br />

Source: Morningstar<br />

-10%<br />

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

-6,7%<br />

SA Listed Property<br />

Index<br />

1,3%<br />

SA Listed Property -0,9%<br />

Index<br />

-4,3%<br />

Domestic 8% Equity Domestic Property Domestic Bond -5,3% Domestic Cash Global Equity Global Property Global Bond Global Cash<br />

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

6%<br />

5,6%<br />

World EPRA/NAREIT Bond Index deposits<br />

Developed Property<br />

Index<br />

Domestic Equity Domestic Property Domestic Bond<br />

4%<br />

Domestic Cash Global Equity Global Property Global Bond Global Cash<br />

Chart 2<br />

Rolling 3 -year real return<br />

50%<br />

30%<br />

20%<br />

10%<br />

0%<br />

3% real return: 61 months -6%<br />

-8%<br />




RATED?<br />




www.fundhouse.co.za<br />

Fundhouse Investment Advisors (Pty) Ltd is an authorised<br />

financial services provider. FSP 43960


Bubble and boom<br />

Short the Dow, bank on China<br />

Two very important trends<br />

are set to dominate hedgefund<br />

strategy in <strong>2019</strong> – the<br />

all-too plausible prospect of a<br />

recession, and the rise in popularity of<br />

the Asia Pacific region as a destination<br />

for hedge fund allocation.<br />

Rumours of a recession in 2020<br />

or 2021 are rife – according to Nobel<br />

Prize winner Robert Shiller, the wheels<br />

will come off in the next 18 months.<br />

One hedge fund has a strategy to<br />

capitalise on the looming end of the<br />

economic cycle.<br />

Crescat Capital LLC was one of<br />

2018’s best-performing hedge funds,<br />

with a consistent track record of<br />

outperforming the S&P 500 Index<br />

(its Global Macro Fund returned 41%<br />

last year alone). Crescat global macro<br />

analyst Tavi Costa told Bloomberg that<br />

they expect the recession to come<br />

22 www.bluechipjournal.co.za


sooner than that. Warning signs include<br />

a potential bubble burst indicated<br />

by a glut of stocks sold by corporate<br />

insiders. CNN reports that executives<br />

are selling their own company stock<br />

at a rate of 5:1 compared to buyers,<br />

with 2 600 executives selling shares<br />

in February – the highest level in two<br />

years. While those investors also sold<br />

heavily in early 2017 and 2018 while<br />

the S&P 500 kept going up, Crescat<br />

clients were told that “the third time<br />

should be the charm for the stubborn<br />

U.S. market”.<br />

According to Crescat, measurement<br />

of “multiple yield spreads across the<br />

curve from Fed Funds to 30-year<br />

Treasury bonds” revealed that “45%<br />

of the curve is inverted” – a situation<br />

that resulted in asset bubbles<br />

disintegrating “[t]he last two times<br />

the credit markets had such a high<br />

distortion”. The close-to 19% rebound<br />

in global stocks in <strong>2019</strong> is dismissed as<br />

little more than a bear-market rally –<br />

insider selling is a tell-tale sign that a<br />

rally is running out of steam.<br />

This sentiment is echoed by<br />

MoneyStrong founder Danielle<br />

DiMartino Booth, quoted by CNN<br />

as saying, “History is replete with<br />

examples of major recoveries<br />

following big sell-offs, many of which<br />

turn out to be head fakes otherwise<br />

known as bear market rallies.”<br />

If this prediction is accurate, the<br />

rational question is what to do about<br />

it. According to Crescat’s Costa, the<br />

answer is to bet against the Dow: 75%<br />

of the firm’s strategy is based on going<br />

long on gold in yuan terms and shorting<br />

global equities. Trade visualisation is<br />

modelled by means of the MSCI World<br />

Index in models to visualize trades;<br />

for its short position, the firm bets<br />

against selected individual stocks and<br />

exchange-traded funds.<br />

“Soon the buy-the-dip mentality<br />

and bull-market greed will turn to fear.<br />

Selling will beget more selling. That’s<br />

how bear markets work,” Crescat wrote<br />

to its clients. “There is so much more<br />

ahead to profit from the short side of<br />

the market. The bear-market rally is<br />

running out of steam!”<br />

Investor influx expected for<br />

China-focused funds<br />

If the wise money is on shorting the<br />

Dow, it’s also safe to bet on China. The<br />

Financial Times reports that hedge fund<br />

investors are looking to Asia for the<br />

best opportunities to make money this<br />

year and are planning to increase their<br />

allocations to managers who know the<br />

region – and know China in particular.<br />

According to a new Deutsche<br />

Bank survey of 425 allocators from<br />

28 different countries, pension funds,<br />

sovereign wealth funds, endowments<br />

and other investors with substantial<br />

hedge fund holdings are seeking out<br />

managers “able to deploy bread-andbutter<br />

hedge fund strategies such as<br />

equity long/short investing in Asian<br />

markets”, with China equity long/short<br />

being <strong>2019</strong>’s second-most popular<br />

hedge fund strategy.<br />

Europe has ceded its place as the<br />

world’s hottest investment region<br />

to the Asia Pacific area. Some 36% of<br />

investors will allocate more funds to<br />

managers trading in Asia Pacific this<br />

year; 26% are going to allocate more<br />

to China-focused managers; and 20%<br />

plan to increase their exposure to<br />

global emerging markets.<br />

Survey respondents manage or<br />

advise on hedge fund assets amounting<br />

to US $1.74tn, which represents more<br />

than half the industry’s total assets under<br />

management. Respondents included<br />

allocators working for sovereign wealth<br />

funds, public and private pension funds,<br />

insurance companies endowments,<br />

foundations and consultants.<br />

The FT quotes Marlin Naidoo,<br />

Deutsche Bank’s global head of capital<br />

introduction and consulting (a unit<br />

that works with prime brokerage to<br />

bring hedge fund clients and investors<br />

together), as saying, “A lot of what we<br />

used to see was allocators being very<br />

skewed to developed markets,” said.<br />

“In the last few years, there’s been a<br />

catalyst to look elsewhere. People<br />

have spent less time in Asia and<br />

they’re starting to look now.”<br />

According to Naidoo, the Hong<br />

Kong Exchange’s announced launch<br />

of MSCI China futures, combined with<br />

an increase in stock inventory, has<br />

afforded hedge funds easier access<br />

to the Chinese market. ■<br />

www.bluechipjournal.co.za<br />



Mediclinic, Tongaat,<br />

Famous Brands,<br />

Aspen… Discovery?<br />

When cash flow signals risk<br />

Royce Long, Portfolio Manager,<br />

Obsidian Capital<br />

One of the upsides of being a hedge fund manager is<br />

that excessive risk can be viewed as an opportunity,<br />

rather than a perennial enemy as it is in the long only<br />

space. Too much risk and we can take a bet against the<br />

share price. These risks come in many shapes and sizes, but one in<br />

particularly has risen to infamy of late. Its name is debt.<br />

The first four companies that comprise the heading of this piece<br />

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

often a necessary cog in growing a business. It only becomes problematic<br />

when the earnings needed to service it are insufficient.<br />

Eventually that hole needs to be plugged via rights offers or asset<br />

disposals – don’t hold the equity under this scenario.<br />

SA corporates have done exceptionally well to grow their earnings<br />

in what has been an anaemic economic landscape for some<br />

years now. But one by one, these businesses are converging to the<br />

growth rate of our economy. We’re on the lookout for companies<br />

that are facing these earnings headwinds, coupled with elevated<br />

debt levels. If they happen to be highly rated, even better.<br />

Mentioning Discovery and "short" in the same sentence may<br />

be bordering on blasphemy for some people. But there is nothing<br />

emotional about our trepidation<br />

around their earnings, and more<br />

specifically, their cash flow. In<br />

their most recent set of results,<br />

they included a shareholder<br />

cash-flow statement that illuminated<br />

our concerns. Alongside<br />

are the cash-flow figures before<br />

investing and financing activity: Source: Discovery <strong>2019</strong> Interim Results<br />

The weak cash conversion ratio is what intrigues us. The valuation<br />

of Discovery clearly indicates that investors expect vigorous<br />

growth, but that magnitude of growth requires capital expenditure,<br />

and if you’re not generating enough cash then you must<br />

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

hard cash will do.<br />

Because Discovery’s cash generation is so poor, they are<br />

having to borrow more. At the end of the 2017 financial year,<br />

Discovery’s debt-to-equity ratio stood at 26%, which has<br />

climbed to 37% as per their first half of <strong>2019</strong> results. If one<br />

adjusts the ratio for issues such as capitalised expenses and<br />

reinsurance – as we feel is prudent – the debt levels as per traditional<br />

measurements can be materially higher than the figures<br />

mentioned above.<br />

There is considerable discourse among investors as to the<br />

appropriateness of how Discovery recognises its earnings. Simply<br />

put, the Discovery bulls are betting that nascent ventures like<br />

the Discovery Bank and Ping An will spit out enough cash, in the<br />

near future, to make the debt problem go away. The aggressive<br />

accounting may, under this scenario, pass by like a ship in the night.<br />

The question the bears are asking is will these white knights<br />

arrive before investors start paying<br />

FY 2017 FY 2018 H1 <strong>2019</strong><br />

Profits from Income Statement 4,495 5,735 2,326<br />

Non-cash items (648) 782 472<br />

IFRS to EV adjustments (3,419) (4,182) (2,222)<br />

Cash flow before Investing & Financing 428 2336 576<br />

Cash conversion ratio 10% 41% 25%<br />

attention to what is unquestionably<br />

and unemotionally a cash-flow<br />

problem? Add to that the elevated<br />

valuation and the recent implosion of<br />

other debt-burdened SA equities that<br />

ran into earnings problems, and you<br />

have yourself what we would deem a<br />

risky situation. ■<br />

24 www.bluechipjournal.co.za


A culture of respect<br />

Obsidian is invested in its investors<br />

Investment returns are driven by many<br />

different factors, some predictable,<br />

some not. Knowing what works in the<br />

long run, and how to make provision<br />

for what you can’t control, comes from<br />

spending years engrossed in the fascinating<br />

machine that is financial markets.<br />

Richard Simpson and Royce Long, who<br />

founded Obsidian Capital in 2007, have<br />

been managing money together for 25<br />

years. Prior to the entrepreneurial leap to<br />

start Obsidian, they were both an integral<br />

part of the team that built RMB Asset<br />

Management into an institutional business.<br />

Their journey at RMB was an experience<br />

they both treasure deeply because of the<br />

varied investment strategies they were<br />

exposed to, setting the foundation for the<br />

multi-asset investment philosophy that<br />

they live by today.<br />

Testament to their belief of diversifying<br />

across asset classes is their significant personal<br />

wealth invested in the funds they<br />

offer to investors. The Obsidian team that<br />

supports Richard and Royce share this<br />

belief and are also invested alongside those<br />

who have partnered with us.<br />

We are first and foremost an investment<br />

business concerned with generating<br />

returns in excess of inflation for our investors.<br />

However, our desire to protect capital<br />

means that we place substantial weight on<br />

managing the risk we have in our portfolios,<br />

remembering always that what happens<br />

to investors’ money, happens to ours.<br />

Our culture is one defined by respect<br />

– respect for our investors, for the market,<br />

and for each other. ■<br />

Strictly speaking,<br />

they’re both birds.<br />

Hedge funds are often treated as one homogenous group<br />

yet one fund is to another what a pigeon is to an eagle.<br />

At Obsidian Capital, we choose to focus less on titles and more on track records.<br />

For 11 years our Multi Asset Hedge strategy has not had a negative calendar return,<br />

delivering on its objectives to protect capital, even when losses were common.<br />

To discover more about what makes our hedge funds a viable option,<br />

visit us at www.obsidiancapital.co.za or call us on +27 (11) 219 6311.<br />

Obsidian Capital is an authorised financial services provider.


Shifting climate, shifting<br />

opportunities<br />

New investment possibilities emerge<br />

Climate change – like any type<br />

of disruption – has disparate<br />

impacts on people, places and<br />

things. It can also have disparate<br />

impacts on corporations and investments.<br />

Krzysztof Musialik explores how climate<br />

change has impacted the global economy<br />

and has created new potential investment<br />

opportunities in the realm of the emerging<br />

market landscape.<br />

We truly live in a global economy, and<br />

climate change – including its causes<br />

and potential impacts – has been one<br />

of the biggest issues of discussion and<br />

debate today. It’s a galvanising topic, but<br />

one that has the potential to create many<br />

disruptions around the world, as well as<br />

potential opportunities. And emerging<br />

markets are front and centre.<br />

The rise of emerging markets<br />

One thing that’s not up for debate is the<br />

rapid rate of growth of emerging markets<br />

over the past few decades, leading to<br />

some impressive transformations.<br />

However, this explosion of growth and<br />

development in emerging markets has<br />

also led to increasing pressures on the<br />

environment. China is now regarded as<br />

the second-largest economy in the world<br />

only behind the United States and is a<br />

global leader in a number of areas. In the<br />

40 years since Deng Xiaoping led China’s<br />

economic reform to embrace a “socialist<br />

market economy,” there has been tremendous<br />

growth in wealth in China, moving<br />

millions of people out of dire poverty and<br />

dramatically improving the quality of life<br />

in the country. This, of course, has been<br />

positive, but rapid growth and industrialisation<br />

can come with consequences, particularly<br />

in areas such as environmental<br />

degradation and climate change.<br />

Of course, China certainly isn’t the only<br />

emerging market to experience rapid economic<br />

growth and development. Of the<br />

top 10 largest economies today, three are<br />

in emerging markets, and growth rates in<br />

emerging markets overall are expected to<br />

outpace those of developed markets this<br />

year and beyond.1<br />

Market liberalisation and globalisation<br />

have led to tremendous growth in consumption<br />

both in emerging and developed<br />

markets. (See chart below).<br />

Growth of a global consumer culture<br />

Once largely a developed-market designation,<br />

a new middle class has emerged in<br />

emerging markets. And these consumers<br />

have more discretionary income to spend.<br />

Take air travel, for example. In 1978, there<br />

26 www.bluechipjournal.co.za


were 378-million global airline passengers<br />

– today, there are 4-billion.2 In 1978, China<br />

saw 1.5-million passengers travel by air,<br />

while 2017 saw more than 551-million air<br />

passengers. The growth in air travel comes<br />

with corresponding consequences – more<br />

aircraft results in more fuel usage and more<br />

greenhouse gas emissions, which can be<br />

detrimental to the environment.<br />

There are many examples of how<br />

globalisation and increased trade have<br />

contributed to a rise in consumption of all<br />

types of consumer goods. Clothing is one<br />

example. Americans buy five times more<br />

clothes today than they did in 1980 – and<br />

if you live in the United States or Europe<br />

and look at the tag on your blouse or shirt,<br />

the odds are high its origin isn’t your home<br />

country. Of the world’s top 10 producers of<br />

textiles and clothing, eight are in emerging<br />

markets.3<br />

Textile production requires large<br />

amounts of water and creates polluting<br />

emissions. With today’s emphasis on “fast<br />

fashion” it can also result in a lot of waste.<br />

Emerging markets are supplying<br />

many goods and services that power the<br />

world. Increased production of goods<br />

requires more electricity, and this electricity<br />

has been produced mainly by<br />

burning fossil fuels. Global coal production<br />

increased from 3.3-billion short tons<br />

in 1980 to 8.2-billion short tons in 2010.4<br />

While China leads in coal production,<br />

the Chinese government has been promoting<br />

green-energy policies, including<br />

the use of solar. Global use of coal has<br />

been declining in recent years, but nonetheless,<br />

it remains a substantial source of<br />

electricity generation.<br />

The cost of growth<br />

While growth and development no doubt<br />

benefit many people across the world,<br />

often a solution to one problem brings<br />

another one. While millions of people<br />

have emerged from poverty, our dependence<br />

on fossil fuels has arguably led to<br />

climate change, which is now generally<br />

perceived as one of the biggest risks to<br />

the global economy and the world as a<br />

whole. Emissions from the use of fossil fuels<br />

are generally accepted as a<br />

key contributor to climate<br />

change.<br />

Climate change brings<br />

serious impacts to the investment<br />

world, too. We see four<br />

types of risk associated with<br />

climate change and its influence<br />

on investments.<br />

Long-term risks which<br />

may impact the competitive<br />

position of whole countries<br />

or even regions in the global economy.<br />

According to the World Bank, climate<br />

impacts could push 143-million people<br />

across three developing regions to become<br />

“climate migrants,” who are forced to leave<br />

their homes in search of more viable<br />

habitats.5 And, food supplies could also be<br />

significantly pressured. Low-lying coastal<br />

regions are vulnerable to sea-level rise<br />

and the increased occurrence of intense<br />

storms. This would impact a country like<br />

Bangladesh, for example. Another example<br />

would be West Africa, which is dependent<br />

on cocoa production. Climate change<br />

could make it impossible to grow cocoa in<br />

this region in a few years’ time, and it may<br />

have to shift towards other crops as a result.<br />

“Climate-smart” agriculture could prove a<br />

necessity for certain crops to survive – and<br />

could also represent interesting investment<br />

opportunities.<br />

Short-term impact on commodity prices<br />

due to adverse weather events. Adverse<br />

weather events are becoming more frequent.<br />

The scientific community at large<br />

generally regards changing ocean-current<br />

patterns amid the changing climate as<br />

a contributor to these weather changes.<br />

For example, coking coal prices soared in<br />

2011 as a result of heavy floods in Australia,<br />

which is one of the world’s largest coking<br />

coal exporters. The World Economic<br />

Forum’s <strong>2019</strong> “Global Risks Report” puts<br />

extreme weather conditions and climate<br />

change policy failures as the risk with the<br />

biggest threat over a 10-year horizon.6 El<br />

Niño and La Niña are periodic changes in<br />

Pacific Ocean sea surface temperatures that<br />

impact weather across the globe, with both<br />

positive and negative effects. While not<br />

new, they can become more powerful and<br />

unpredictable with climate change. El Niño<br />

is usually negative for a country like India,<br />

as it tends to bring lower-than-average<br />

rainfall during the monsoon season, which<br />

is critical for Indian agricultural production.<br />

Peru also suffers from a negative impact on<br />

its fisheries. On the flip side, North America<br />

tends to see milder El Niño winters and a<br />

country like Argentina in South America<br />

could see a boost in soybean production.<br />

Short-term impact on<br />

certain companies<br />

Changing weather patterns impact<br />

many businesses. In December 2018, for<br />

example, German chemical company BASF<br />

warned of considerably lower profits amid<br />

record-low Rhine river water levels, which<br />

weighed on its business that year. The<br />

company ships its products using barges<br />

on the river, so low Rhine river water levels<br />

constrained use of this cheap transport<br />

mode. Major apparel companies focus on<br />

promoting fall fashion collections several<br />

months in advance of the colder-weather<br />

season. However, milder and/or shorter<br />

winters have changed customer behaviours.<br />

People postpone winter clothing<br />

purchases or do not make them at all – not<br />

needing as many heavy coats, woollens<br />

and the like. Sometimes apparel companies<br />

have to make painful adjustments in the<br />

form of inventory write-downs, so there’s<br />

been a rise in a buy-on-demand model<br />

and transitional collections. Shifting temperatures<br />

and precipitation of course also<br />

impact the price of the raw commodities<br />

used to produce fabric and can impact<br />

emerging-market economies, which, as<br />

www.bluechipjournal.co.za<br />



noted previously, are leading exporters of<br />

these goods.<br />

Greenhouse gas emissions may be taxed<br />

which would decrease companies’ profitability.<br />

The idea here is to reduce demand for<br />

products whose production process leads to<br />

heavy greenhouse gas emission. Examples<br />

would be cement production or air travel,<br />

which emit noxious substances into the<br />

environment. By taxing such products and/<br />

or services, demand would in theory be<br />

reduced and at the same time companies<br />

would invest in more “green” technologies<br />

to offer the same product and/or service, but<br />

with less impact on climate.<br />

Part of the ESG equation<br />

Environmental, social and governance<br />

(ESG) factors are integrated into our<br />

investment analysis, and climate change<br />

is a key theme we are monitoring. We are<br />

aware of the potential risk that climate<br />

change poses to profits of companies we<br />

invest in. And, we think the fight against<br />

climate change will only intensify going<br />

forward. This may mean additional costs<br />

or a gradual shift in the business model<br />

for some companies.<br />

For example, for high-impact sectors or<br />

downstream products that are large CO2<br />

emitters, this would be a key area we would<br />

evaluate in regard to impact on operating<br />

models, as scientists believe CO2 emissions<br />

are a primary cause of climate change. The<br />

fight against climate change doesn’t only<br />

impact coal production or electricity generation.<br />

Cement production and airlines, for<br />

example, are also heavy CO2 emitters.<br />

That doesn’t mean, however, there is<br />

no case for investing in these types of<br />

companies.<br />

As part of our investment approach, we<br />

examine how any ESG risk will impact a<br />

company’s ability to generate sustainable<br />

earnings. In addition, we actively engage<br />

with company management on best ESG<br />

practices, among other factors.<br />

In the case of a cement producer, we would<br />

look to invest in companies with the most<br />

advanced technology that can limit CO2<br />

emission. Airlines have a big carbon footprint<br />

and may be forced to pay for the CO2 they<br />

emit, drawing a distinction between those<br />

with older, less efficient fleets and those<br />

with newer, more efficient ones. Those with<br />

higher CO2 emissions costs may pass them<br />

on to customers, which could decrease the<br />

demand for airline travel on certain carriers.<br />

Part of our ESG analysis involves awareness<br />

of these types of issues as we make our<br />

investment decisions. We strive to integrate<br />

ESG factors alongside our financial analysis as<br />

we assess both opportunities and risks within<br />

potential investments. This fundamental<br />

research provides an additional tool to differentiate<br />

between companies, in our view.<br />

Opening up new opportunities<br />

Climate change is not only about risks. It<br />

also creates potential opportunities. One<br />

obvious one might be companies in the<br />

clean-energy space. A shift towards renewables<br />

also brings the need to create viable<br />

electricity storage solutions. We see companies<br />

in South Korea and China as likely<br />

leaders in battery development for electricity<br />

storage and for electric vehicles<br />

Another area we see with potential<br />

is sensor designers and manufacturers.<br />

Cellular communication 5G technology<br />

and the Internet of Things will likely<br />

improve the accuracy in tracking the use<br />

of resources like water and electricity. In<br />

addition, there has been a growing need<br />

for the elimination of waste, whether<br />

through recycling or water treatment,<br />

for example, which we think represents<br />

another area of opportunity.<br />

These are just a few examples of opportunities<br />

climate change could create; we<br />

think there will be more as the world realises<br />

the risks. But really, that is true of any<br />

change – there are always people, places<br />

or industries that are displaced until new<br />

solutions emerge. And we are optimistic<br />

that they will. ■<br />

References<br />

1. International Monetary Fund, data as<br />

of 2018. There is no assurance that any<br />

estimate, forecast or projection will be<br />

realised.<br />

2. World Bank: Air transport, passengers<br />

carried. International Civil Aviation<br />

Organization, Civil Aviation Statistics of<br />

the World and ICAO staff estimates. Data<br />

as of 2017.<br />

3. World Trade Organization, world textile<br />

and apparel trade, 2017.<br />

4. US Energy Information Administration,<br />

global coal production, data through<br />

2010.<br />

5. World Bank, “Meet the Faces of Climate<br />

Migration,” <strong>March</strong> 19, 2018.<br />

6. World Economic Forum Global Risks<br />

Report <strong>2019</strong>. The report presents<br />

the results of our latest Global Risks<br />

Perception Survey, in which nearly<br />

1000 decision-makers from the public<br />

sector, private sector, academia and<br />

civil society assess the risks facing the<br />

world.<br />

Krzysztof Musialik, senior vice<br />

president, Franklin Templeton<br />

Emerging Markets Equity<br />

28 www.bluechipjournal.co.za

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30 www.bluechipjournal.co.za


A coaching way of being<br />

To survive disruption, help clients understand themselves<br />

There is much talk of the tsunami<br />

of regulation and robo-advice<br />

that is about to hit the industry.<br />

This raises the key question of<br />

what the role of the financial planner<br />

will be going forward. To answer this<br />

question fully, I think there are actually<br />

three questions to consider.<br />

How real is the tsunami?<br />

RDR probably felt like a tsunami for financial<br />

planners in countries like the UK and<br />

Australia. South African financial planners,<br />

however, are more fortunate. Requirements<br />

like the FAIS Act, TCF and regulatory<br />

examinations have prepared the way for<br />

RDR to land gently. Moreover, regulation is<br />

actually a boost for any reputable financial<br />

planning business. Warren Buffett loves<br />

investing in businesses that have a “moat”<br />

around them, something that protects<br />

their core proposition from competitors.<br />

Coke is one of Buffett’s many successful<br />

investments. A “secret” recipe has been<br />

the moat to protect this investment.<br />

Arguably, regulation is that moat for<br />

financial planners. It makes the barriers of<br />

entry higher and higher. In effect, therefore,<br />

the regulatory tsunami is probably more<br />

of a gentle wave that has already started<br />

breaking.<br />

The robo-advice wave is different. The<br />

thing about any technology evolving is<br />

that, like a tsunami, it takes no prisoners. It<br />

simply destroys existing players or changes<br />

the rules of the game. Digital photography<br />

destroyed Kodak. Amazon is destroying<br />

retail shops, one shopping centre at a<br />

time. Uber has smashed taxi companies<br />

and making many people re-think why<br />

they even own cars. Very few industries<br />

are immune to the technology tsunami. It<br />

is real.<br />

According to a Vanguard study,<br />

technology will impact “basic” skills like<br />

recording information, and “repetitive<br />

skills” like getting and processing<br />

information, monitoring, and scheduling.<br />

Advanced skills such as maintaining<br />

relationships, interacting with the<br />

public, persuading outcomes, applying<br />

knowledge, strategising, solving problems,<br />

thinking creatively and assisting or caring<br />

for others are likely to remain the domain<br />

of the human being.<br />

Much of a financial planner’s service<br />

embraces basic and repetitive skills.<br />

Machines are already doing this work.<br />

A 2018 World Economic Forum Report<br />

on the Future of Jobs estimates that<br />

by 2022, machines will do more than<br />

60% of administration work and 60% of<br />

information and data processing. The<br />

report also suggests that machines will<br />

do almost 40% of communicating and<br />

interacting and up to 30% of so-called<br />

“advanced tasks” like reasoning and<br />

decision-making.<br />

If you combine the technology threat<br />

with the thrust of regulation across the<br />

world to treat clients fairly, financial<br />

planning is ripe for a disruption of Uber<br />

proportions. After all, a robot has no<br />

incentive to line its own pockets, so any<br />

advice it offers is likely to be conflict free,<br />

or at least can be programmed that way.<br />

How will the technology tsunami<br />

impact financial planners?<br />

The good news is that the World Economic<br />

Forum report suggests that the role of<br />

financial planners and investment advisors<br />

will remain stable. In other words, they<br />

won’t become redundant. However, it<br />

depends on what sort of financial planner<br />

you are.<br />

Thirty years ago, financial planning<br />

was very much a sales-oriented business.<br />

The perspective that insurance is sold, not<br />

bought, underpinned an industry that<br />

rewarded intermediaries with commission<br />

on the sale of products. The legacy of this<br />

perspective is that many clients today<br />

still struggle to see any value in financial<br />

planning itself but rather in the products<br />

that are sold to them.<br />

Not all financial planners are sales<br />

people. Over the last 20 years the industry<br />

has been evolving into a profession. The<br />

establishment of the Certified Financial<br />

Planner® Professional mark bears<br />

testament to this. But this alone will not<br />

protect financial planners. We are already<br />

seeing how the medical profession and<br />

the legal profession are bearing the brunt<br />

of the technology revolution. According<br />

to the World Economic Forum report,<br />

many lawyers will become redundant,<br />

as will sales agents and even financial<br />

analysts. On the medical front, research<br />

already shows that robots are better at<br />

www.bluechipjournal.co.za<br />



reviewing scans and X-rays than human<br />

radiologists.<br />

If we think that financial planning is<br />

somehow going to ride out the roboadvice<br />

tsunami, we had best beware of<br />

having a Kodak moment. Already there is<br />

a local financial institution that provides<br />

a compelling robo-advisory service<br />

that includes investment advice and<br />

implementation at an all-in fee of 0.57%.<br />

And for those financial advisors who see<br />

great service as a key part of their offer, this<br />

same institution can now open an account<br />

with a client within a matter of minutes<br />

with only an ID document needing to be<br />

uploaded.<br />

The challenge that technology presents<br />

is that you can buy almost any financial<br />

product on the Internet, at very low cost.<br />

This brings into question the role of the<br />

financial planner and their value add. A<br />

2016 survey of financial planners in the<br />

US highlighted that their number one<br />

challenge was to communicate their value<br />

add to clients. Regulatory change promises<br />

fee transparency. Robo-advisors promise<br />

to add great value. Having a relevant,<br />

clearly articulated value proposition that<br />

clients will pay for will be the number one<br />

challenge for financial planners all over the<br />

world. Doing what robo-advisors can’t do<br />

will help meet this challenge.<br />

One such task is to get to know the<br />

client as a human being. A client can tell<br />

a robo-advisor that they want to save for<br />

retirement, save for a holiday or save for<br />

their children’s education. The problem,<br />

at this stage, is robo-advisors can’t help<br />

clients prioritise appropriate wants and<br />

needs. This can only happen through<br />

meaningful conversation. Once a client<br />

decides what they want or need, a roboadvisor<br />

is fantastic. But how do they decide<br />

what’s really important to them? How do<br />

they know if their wishes are being driven<br />

by real needs or just their personal money<br />

history? Money goes to the core of our<br />

beings. We develop relationship with<br />

money from an early age. We also have<br />

relationships with other human beings that<br />

involve money.<br />

The fact that many existing roboadvisors<br />

offer clients the opportunity to<br />

phone a real person while engaging with<br />

them suggests that there is a place for real<br />

people in the financial planning process.<br />

But what is their role exactly?<br />

What are the implications for the<br />

future role of the financial planner?<br />

As professionals and advisors, financial<br />

advisors are experts. Their job is to<br />

give advice. However, human beings<br />

are complex – and there is a growing<br />

recognition that effective advice demands<br />

as full an understanding of a client as<br />

possible. The problem here is that clients<br />

often don’t have a full understanding of<br />

themselves. They often don’t know what<br />

their own priorities are or how to articulate<br />

them. Nor are they clear on the potential<br />

consequences of the choices they make.<br />

Consequently, the role of the financial<br />

advisor is surely first to help the client<br />

understand themselves. This helps<br />

the advisor and client build a shared<br />

understanding of the client’s situation. It’s<br />

like tilling the soil before you plant the seed.<br />

Advice lands best on well-prepared ground.<br />

Take the story of a real client Rose (not<br />

her real name). In 1999, just before the peak<br />

in the tech bubble, she held just over R1m<br />

worth of shares in a well-known technology<br />

company. This was her retirement savings,<br />

and she was very loyal to the share. She<br />

had worked at the company for some<br />

time. Rose’s financial advisor at the time<br />

recommended that she sell her shares and<br />

invest in a diversified portfolio. Tech bubble<br />

or no tech bubble, this was very sensible<br />

advice. But it didn’t land. Rose could not<br />

bring herself to sell the shares.<br />

The tragedy of Rose’s story is that when<br />

the tech bubble popped, Rose’s shares feel<br />

to less than a 20th of their value at the<br />

time the advisor gave her the advice. The<br />

problem with the advice is that the ground<br />

had not been prepared for the advice to<br />

land. The advisor had not helped Rose<br />

understand herself and her own needs.<br />

Her dream for her retirement was to buy a<br />

smallholding and do organic farming. The<br />

advisor gave great financial advice. But this<br />

was something a robo-advisor could have<br />

done. Rose really needed a reason related<br />

to her life, rather than an investment<br />

rationale to make the right decision. The<br />

advisor’s task was to help Rose determine<br />

how much money she needed to fulfill<br />

her retirement dream, not to have an<br />

investment discussion about diversification<br />

and concentration risk.<br />

Many practitioners and experts<br />

suggest that the key value add of the<br />

financial planner is already behavioural<br />

coaching. Vanguard’s research talks about<br />

the “advisor alpha”, and suggests that of<br />

the 3% additional value an advisor can<br />

add to a client’s portfolio, 1.5% of that<br />

is through behavioural coaching. US<br />

financial advisor Nick Murray, author of the<br />

book Behavioural Investment Counselling,<br />

believes the value add of Behavioural<br />

Coaching is closer to 5%.<br />

For financial planners who want to<br />

survive the robo-advisor and regulatory<br />

Tsunami, the message seems clear. Adopt<br />

a “coaching way of being” with your<br />

clients. This means helping your clients<br />

understand themselves. Let them solve<br />

their own life riddles first. That way, when<br />

you give them the financial advice to<br />

support their life decisions, they will own<br />

that advice, and unlike Rose, will almost<br />

certainly implement it. ■<br />

References:<br />

The Future of Jobs Report 2018, Centre<br />

for the New Economy and Society, World<br />

Economic Forum<br />

Putting a value on your value: Quantifying<br />

Vanguard’s Advisor Alpha; Francis M.<br />

Kinniry Jr., Colleen M. Jaconetti, Michael A.<br />

DiJoseph, FA, and Yan Zilbering; Vanguard<br />

Research, <strong>March</strong> 2014<br />

Rob Macdonald, Head of Advisor Services,<br />

Fundhouse<br />

32 www.bluechipjournal.co.za

All Things Behavioural<br />

Financial Advice<br />

A Conference By Advisers, For Advisers<br />

Financial planning is a noble profession. Some say it is the<br />

most important profession of the 21st Century.<br />

But we face an almighty challenge. Advising people on what<br />

they need rather than what they want has never been easy.<br />

Behavioural coaching is the single most important way that a<br />

financial planner adds value.<br />

Humans Under Management exists to promote, highlight and<br />

build on the work that great advisers are doing in developing<br />

their behavioural financial advice practices.<br />

This isn’t a fad or a phase - this is who we are.<br />

Individually we can’t, together we can<br />

Date:<br />

10 September <strong>2019</strong><br />

Cost:<br />

R1 500<br />

Venue:<br />

Allan Gray Auditorium,<br />

V&A Waterfront<br />

Grab your tickets at:<br />

www.humansundermanagement.com/<br />

southafrica<br />

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

the most relevant and important conference that any financial adviser<br />

in South Africa attends in <strong>2019</strong>. Practitioners and experts go to the<br />

heart of every financial adviser’s work, engaging with human beings<br />

around their lives and their money. Don’t miss it! “<br />

Rob Macdonald, Head of Adviser Services, Fundhouse


Planning to succeed<br />

Succession is a function of automation and education<br />

34 www.bluechipjournal.co.za


Financial regulations are increasing<br />

in scope and complexity at a rapid<br />

rate in South Africa. The effect of<br />

this is to exclude greater numbers of<br />

South Africans from the advice industry at<br />

a time when there are increasing numbers<br />

of qualified, professional advisors entering<br />

the industry. Moreover, these advisors have<br />

been taught the correct way of financial<br />

planning and are looking for professional<br />

careers, in other words they don’t want<br />

to become product pushers selling lousy<br />

products for large product providers.<br />

If I consider the way regulations are being<br />

drafted and implemented in South Africa,<br />

I would guess that the regulators are keen<br />

to eliminate the role of small financial<br />

planning firms in SA. This seems woefully<br />

myopic for a number of reasons. Small<br />

financial planning firms can be a source<br />

of employment to graduates leaving university<br />

as well as a source of much-needed<br />

financial education and advice to large portions<br />

of the SA population who have never<br />

been exposed to investments before. If<br />

regulators aren’t careful the independent<br />

advice industry will be eliminated via death<br />

by regulation.<br />

Automate and educate<br />

I believe the only way that quality financial<br />

planning businesses will be able to<br />

survive and grow in this environment<br />

is if they automate as many functions<br />

within their business as possible. That<br />

means they need to narrow the range of<br />

product providers and select them differently.<br />

Personally, I would make automation<br />

a key criterion when selecting a<br />

product provider. As an example, does<br />

the product provider offer an automated<br />

FICA process? In addition, how manual<br />

is the new business and review process<br />

for clients? I also believe you need to<br />

find client relationship management<br />

(CRM) and financial planning tools that<br />

will enable clients to complete as much<br />

of their personal information online as<br />

possible. We also need to begin forcing<br />

product providers to provide client data<br />

to financial planning tools in an automated<br />

fashion so that we don’t need to<br />

manually request the information in the<br />

laborious and unproductive way it works<br />

now. If regulators really cared about clients,<br />

they would force this data integration<br />

via regulation. Currently, I believe the<br />

large product providers are resisting data<br />

integration as it suits them to retain clients<br />

who are not being serviced correctly.<br />

Financial planning firms will need<br />

to segment their clients carefully and<br />

ensure that they service clients profitably,<br />

which might mean they need to<br />

reduce the number of clients they service.<br />

This is a natural consequence of the<br />

spate of new regulations being forced<br />

on the industry.<br />

My advice to all financial planners when<br />

they ask how they should grow their businesses<br />

is to spend time educating clients<br />

about financial planning. The more you<br />

educate your clients, the more trust you<br />

build. In addition, your unplanned meetings<br />

with clients will reduce in frequency as<br />

their understanding of markets improves<br />

and their need to be pacified in stormy<br />

markets is reduced.<br />

I recommend to every advisor who is<br />

over 50 years old to employ a high-quality<br />

financial planning graduate so that you can<br />

begin training them to service your clients.<br />

It is silly and inefficient to get new financial<br />

planners to generate clients for the<br />

business. The best source of new clients<br />

is always the established, senior financial<br />

planners. New financial planners can<br />

more easily be taught to service clients<br />

and ensure that they provide the correct<br />

ongoing advice. Pay these new financial<br />

planners a monthly salary with an annual<br />

bonus based on client retention. That way<br />

they will be remunerated to look after clients<br />

and not to sell them lousy products to<br />

earn upfront fees.<br />

Advice to regulators<br />

I wish the regulators would take President<br />

Ramaphosa’s commitment to small<br />

businesses more seriously. Large product<br />

providers like banks and insurance<br />

companies do not have a great history of<br />

providing good financial advice to clients.<br />

Rather create legislation that makes it easier<br />

to operate small-scale, efficient financial<br />

planning businesses and force product<br />

providers to automate FICA processes and<br />

the provision of client data to all financial<br />

planning platforms in a uniform fashion. For<br />

far too long, regulators have allowed large<br />

product providers to lobby them to create<br />

high barriers to entry for small advisors and<br />

new product providers. More to the point,<br />

why don’t regulators contact some highquality<br />

financial planning firms to find out<br />

how we work and what impediments we<br />

face from you and the product providers.<br />

Blindly following the UK and Australia in<br />

the way they have damaged the financial<br />

planning industry is simply not smart. ■<br />

Warren Ingram, Galileo Capital<br />

www.bluechipjournal.co.za<br />



Talking about money<br />

Money stories reveal our relationship with money<br />

Financial health. It’s so much more<br />

than living within a well-planned<br />

budget, saving and investing for<br />

your eventual retirement. Holistic<br />

financial wellbeing is about having a<br />

conscious and purposeful relationship<br />

with money.<br />

We have all met clients whose earnings<br />

match their self-worth, who save (and<br />

spend) according to their values and<br />

goals. Those who fully believe that money<br />

enables them to live the life they envision<br />

for themselves. That would fall into the<br />

spectrum of a healthy relationship with<br />

money.<br />

Unfortunately, we have all met clients<br />

whose earnings, or lack thereof, can be<br />

related to poor self-esteem. Those who feel<br />

unworthy of money, or simply so fearful<br />

that they don’t (or won’t) have enough that<br />

they end up making irrational decisions<br />

when it comes to spending and saving.<br />

That’s the unhealthy relationship.<br />

As financial planners, we are poised<br />

to expand our value offering to clients<br />

beyond the functional. We have the ability<br />

– and above all the duty – to help them<br />

realise how beliefs and attitudes towards<br />

money can impact their relationship with<br />

money. By guiding our clients towards<br />

having a more positive and healthy<br />

relationship with money, and then<br />

building their Financial Plan around what<br />

they truly value, we can take them to the<br />

point that they suddenly have a plan that<br />

they are both financially and emotionally<br />

invested in.<br />

Talking about money is a<br />

vulnerable conversation<br />

Meeting with a financial planner can be<br />

a very stressful experience. Clients can<br />

feel exposed when having conversations<br />

around why they are saving, how much<br />

they have and how much they still need<br />

to achieve their ambitions.<br />

Being able to accurately advise clients on<br />

savings, investments and retirement funds<br />

is already an inexact science – but it’s much<br />

trickier if you don’t fully understand what<br />

their values are.<br />

How clients transact in the financial<br />

space is largely based on what they feel<br />

their money means to them. This in turn<br />

drives their behaviour around money. How<br />

they save, invest and spend – even how<br />

they earn – all relates to their relationship<br />

with money.<br />

Start by asking your client what<br />

money means to them<br />

A good place to start a courageous<br />

currency conversation is by asking: “What<br />

is the money for?” This should give you an<br />

indication of what values your clients hold<br />

dear. Furthermore, it will give you a deeper<br />

insight into their relationship with money.<br />

I have met clients who are so fearful<br />

of not having enough that they make<br />

irrational investment decisions when<br />

the markets fall. Others have hefty bank<br />

balances, yet still feel anxious that their<br />

money will run out.<br />

If you are able to guide your client<br />

through the process of what money means,<br />

what it’s for, and then build the financial<br />

plan around that, it will go a long way<br />

toward alleviating unnecessary stress and<br />

anxiety when it comes to implementing<br />

the plan.<br />

Everyone has a money story<br />

A worthwhile exercise to help clients<br />

understand their relationship with money<br />

is to delve into their money story.<br />

A money story is how you think,<br />

behave and communicate about money.<br />

It also reflects the relationship you have<br />

with yourself. The difficult part about<br />

money stories is that they are often<br />

subconscious. Neuroscientists estimate<br />

that 95% of our behaviours and beliefs are<br />

pre-programmed into the subconscious<br />

mind, operating on autopilot. The<br />

story you tell yourself about money<br />

becomes your internal monologue and<br />

is continuously repeated until it becomes<br />

your life journey.<br />

When I ask about my clients’ money<br />

stories, I encourage them to think back<br />

to their first impactful money memory<br />

in order to understand the roots of their<br />

behaviour. Many of our behaviour patterns<br />

and belief systems are imprinted in the<br />

first years of life. Some of the first money<br />

memories that my clients have shared<br />

range from “you have to work hard for your<br />

money” and “easy come easy go” to “you’ll<br />

never make it on your own”.<br />

One common theme I encounter is<br />

the fear of poverty. One doesn’t actually<br />

have to be poor for poverty to be the<br />

story. I even have wealthy clients who feel<br />

poverty-stricken.<br />

Stories have to do with your perception<br />

of reality and not necessarily reality itself.<br />

A story like this can be destructive and<br />

is often bedded in self-worth, or more<br />

accurately, the lack thereof.<br />

Stories are powerful. If we believe<br />

our own stories, they will come true. If<br />

you keep telling yourself that “you’re just<br />

getting by” or that you “will never be debtfree,”<br />

then that is how the story of your<br />

life will go.<br />

Making sense of money stories<br />

Once you understand your client’s money<br />

story, it becomes clearer why they behave<br />

or transact in a certain way. Based on this<br />

information, you can begin a process of<br />

helping your client analyse whether this<br />

story is based on reality or fiction, and<br />

whether their current relationship with<br />

money is based on a belief from the past.<br />

It is a very empowering experience to let<br />

go of unhealthy money patterns that no<br />

longer serve a purpose.<br />

36 www.bluechipjournal.co.za


Kim Potgieter, Marketing and Life Planning<br />

Director, Chartered Wealth Solutions<br />

This process is helpful in putting money<br />

in its proper place as an enabler. Then we<br />

can progress to focus on the financial plan<br />

to enable the client’s vision of the life they<br />

want to live.<br />

You, your client and money stories<br />

Most people feel embarrassed when<br />

sharing their true feelings about money.<br />

These beliefs are very deeply held and are<br />

often not about money at all, but rather<br />

about their relationship with themselves.<br />

Financial planners can heighten a client’s<br />

awareness about their money beliefs and<br />

take them though the journey of how<br />

early money memories impact on their<br />

money stories today. Not only will this<br />

be beneficial to the client, but you as the<br />

planner will be able to understand the<br />

many emotions that drive your client’s<br />

behaviour with regards to money.<br />

Guiding the process of programming<br />

a new set of beliefs that enable clients<br />

to make healthy and meaningful<br />

money decisions will be beneficial to<br />

both of you. ■<br />

If you would like to explore money stories<br />

further, please visit www.kimpotgieter.co.za<br />

for a series of Courageous Currency articles on<br />

understanding and changing your relationship<br />

with money. David Krueger, author of The<br />

Secret Language of Money, is a wonderful<br />

source of wisdom on money stories. Visit his<br />

website called Mentorpath® and look out for his<br />

soon-to-be published book on Money Stories.<br />

119625L<br />



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Invest for a future that matters. Read more at oldmutualinvest.com<br />



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<br />

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<br />

members of the Old Mutual Investment Group. Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No:604. | Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No:45255. |<br />

African Infrastructure Investment Managers (Pty) Ltd (Reg No 2005/028675/07), FSP No:4307. | Futuregrowth Asset Management (Pty) Ltd (Reg No 1996/18222/07), FSP No:520. Figures as at 31 December 2018 unless<br />

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


Emotional rescue<br />

Stopping your clients from sabotaging<br />

their own financial futures<br />

Carl Richards is a very wise man.<br />

As he has often pointed out1 a<br />

successful investment outcome<br />

is as much about successful<br />

investing behaviour as it is about owning<br />

successful investments. Financial advisors<br />

must help their clients make the right<br />

decisions about how to save part of their<br />

current income to provide for their future<br />

consumption needs. This leads to advisors<br />

and clients spending a lot of time trying<br />

to answer: “Who is the best investment<br />

manager in South Africa?” or “Which is<br />

the best investment fund?” What is not<br />

38 www.bluechipjournal.co.za


always appreciated is that good investing<br />

behaviour is probably even more important<br />

than these questions.<br />

The most important principle of good<br />

investing is to accept that the future<br />

is unknown and make any investment<br />

decisions accordingly. This has several<br />

important implications: firstly, once the<br />

appropriate investment solution has been<br />

identified for the goal in mind, always<br />

stay invested; secondly, any portfolio<br />

must be diversified effectively. Effective<br />

diversification means holding multiple<br />

asset classes, and then, within each asset<br />

class (where possible) holding more than<br />

one investment strategy (or style), and<br />

then finally, more than one asset in each<br />

of the strategies. Thirdly, a rebalancing<br />

strategy that is consistently implemented<br />

is required. The final rule of good investing<br />

behaviour is make sure there are enough<br />

liquid assets to meet any short-term cash<br />

flow needs. Having to sell illiquid assets (eg<br />

direct property) either at what could be a<br />

poor market for them, or where a major<br />

discount is required to turn them into<br />

cash in a hurry, can negatively affect an<br />

otherwise successful investment portfolio.<br />

The real problem advisors face is as<br />

simple as these rules may seem to be,<br />

their clients generally don’t follow them.<br />

This is because investors are human<br />

beings – they have emotions and decisionmaking<br />

biases that work against them<br />

in terms of achieving good investment<br />

outcomes. These emotions include overconfidence,<br />

fear, greed and regret, while<br />

the biases include (among others) loss<br />

aversion, mental accounting, herding and<br />

anchoring. This combination of emotions<br />

leads to several very common destructive<br />

patterns of investing behavior, namely<br />

investors commonly stay in safe but<br />

low-returning investments (for example<br />

cash) for too long, as the threat of losing<br />

money is too painful (particularly if this has<br />

happened in the recent past). However,<br />

when individual asset classes (for example<br />

equities), investment strategies (for<br />

example value) or individual instruments<br />

(for example Naspers) perform well<br />

investors eventually decide to buy them.<br />

Unfortunately, this is usually after a good<br />

portion of this outperformance has already<br />

been achieved. When this pattern reverts<br />

itself (as it always does), the investors<br />

tend to cling to their investments for far<br />

longer than they should. This is due to<br />

the emotional attachment to their past<br />

decisions – nobody likes admitting they’re<br />

wrong, after all. Moreover, crystallising<br />

losses is very painful, so it’s easier to hold<br />

on in the hope that matters will improve<br />

in the future.<br />

As people tend to make investment<br />

decisions focused on their anxietyadjusted<br />

returns (instead of their riskadjusted<br />

returns), the returns they<br />

experience are very different to those they<br />

need to get. A recent study by Dirk Louw<br />

of the North West University2 showed<br />

that South African investors typically<br />

have a drag of 1% annualised over the<br />

investment horizon caused by the poor<br />

investing behaviour discussed above. This<br />

research shows that, during the 2008/2009<br />

Global Financial Crisis, more than half of<br />

the investors in the sample acted in a way<br />

that destroyed value.<br />

While anybody can (in principle) follow<br />

the rules of good investing, professionally<br />

managed multi-asset class portfolios would<br />

be a good solution for most advisors and<br />

their clients. However, there are two<br />

different types of portfolios in this space,<br />

namely traditional balanced portfolios,<br />

managed on a peer-relative basis, and<br />

outcome-based portfolios, constructed<br />

to deliver on the investor’s specific goals.<br />

While seemingly similar, there are some<br />

important differences between these two –<br />

particularly when taking investors’ potential<br />

for self-destructive behaviour into account.<br />

Firstly, from a philosophical perspective, the<br />

outcome-based portfolios tend to have a far<br />

stronger focus on managing the probability<br />

and extent of short-term losses than their<br />

balanced competitors. Secondly, the<br />

probability of achieving the outcomes of<br />

the investor is different for these portfolios.<br />

Recent research3 compared the probability<br />

of achieving a real return target, using the<br />

average asset allocation of the balanced<br />

portfolio population compared to portfolios<br />

managed explicitly on an outcome-based<br />

Professor Evan Gilbert, Momentum<br />

Investments and University of Stellenbosch<br />

Business School<br />

philosophy. The outcome-based portfolios<br />

were between 14% and 17% more likely to<br />

achieve the return target, depending on the<br />

return target. In addition, their drawdowns<br />

(loss of capital over short-term periods)<br />

were lower.<br />

Financial advisors’ primary responsibility<br />

is to manage their clients’ emotions through<br />

turbulent times and the negative behaviour<br />

that often follows. Appropriate investment<br />

solutions are those that minimise the<br />

potential for bad investment behaviour. This<br />

means minimising the effect of short-term<br />

market turbulence, while still maximising<br />

the probability of achieving the longerterm<br />

investment goal. Outcome-based<br />

multi-asset class portfolios are explicitly<br />

designed with these in mind and the<br />

evidence suggests they are more likely to<br />

deliver satisfactory outcomes for advisers<br />

and their clients.<br />

Outcome-based investing is about<br />

helping investors realise their long-term<br />

goals – helping them turn their bucket<br />

lists into checked lists. No matter what the<br />

markets do or how trends shift, investors<br />

are able to achieve their best possible<br />

outcomes. ■<br />

1. See, for example:<br />

https://behaviorgap.com/blogs/articles/<br />

outperform-99-of-your-neighbors<br />

2. See<br />

https://orcid.org/0000-0002-4761-0485<br />

3. Available from the author.<br />

www.bluechipjournal.co.za<br />



Serving the next<br />

generation<br />

Financial planning has to make a big transition<br />

Financial planning is wrestling with<br />

the difficult transition of moving from<br />

being part of an industry to becoming<br />

a profession in its own right.<br />

In the former, it was relied on (and<br />

remunerated handsomely) to distribute<br />

the financial products of publicly listed<br />

companies. In the latter, I propose, it<br />

will be rewarded fairly for emotional<br />

work that leads to meaningful lives,<br />

transformed families, and changed<br />

communities.<br />

For those not wanting to make the<br />

transition (who likes change?), the future<br />

is looking bleaker by the day. The value<br />

propositions of most financial advice<br />

businesses have largely been commoditised.<br />

Access to investment products? Now<br />

available to the public online.<br />

Access to information? Every potential<br />

client has all the world's information in their<br />

pocket.<br />

Access to financial planning software?<br />

Online tools are becoming more and more<br />

sophisticated.<br />

How, to paraphrase a certain Mike, in<br />

Ernest Hemingway’s novel The Sun Also Rises,<br />

change happens "Gradually, then suddenly."<br />

What will hasten this change, and mark<br />

the end for those hankering after the past? I<br />

propose that this change will be accelerated<br />

by the largest transfer of wealth the world<br />

has ever seen.<br />

A recent Cerulli report predicts that in<br />

the US alone, a total of $68-trillion in wealth<br />

is to be transferred over the next quarter<br />

century by nearly 45-million households.<br />

Generation X (currently aged 39 to 53) is<br />

expected to be the primary beneficiaries<br />

but, as the oldest "millennials" are about<br />

to turn 40, Generation Y (those aged 23<br />

to 38) cannot continue to be dismissed as<br />

entitled trouble-makers.<br />

“This multigenerational shift in wealth<br />

will reshape the wealth management<br />

landscape and will force firms to alter their<br />

existing business models and services,” an<br />

analyst at Cerulli said.<br />

It remains to be seen whether the<br />

engagement and service propositions<br />

offered to the Silent Generation and Baby<br />

Boomers will be attractive to Generations<br />

X and Y.<br />

These groups are the first to grapple with<br />

the need to take personal responsibility for<br />

their retirement. Based on the available<br />

statistics, as well as experience with<br />

clients, they are not on track for a dignified<br />

retirement. They need your help.<br />

Instead of forcing our current service<br />

models onto these groups, consider how<br />

they engage with other services in their<br />

lives. The have witnessed, and welcomed,<br />

the shift from a product-centric to a servicecentric<br />

economy. Music, movies, books, and<br />

software available on-demand, and almost<br />

always as a subscription service.<br />

The technology stack currently deployed<br />

by financial planners falls woefully short of<br />

the mark in comparison.<br />

Client service that consists of reams<br />

of paper, back-and-forth emails to find a<br />

meeting time, and high turn-around times<br />

to document advice in order to please the<br />

regulator? We'll need to do better to engage<br />

busy families who are already overwhelmed<br />

by the pace of life.<br />

Financial planning that obsesses about<br />

planning for retirement? Yes, busy families<br />

in their 30s and 40s need to make provision<br />

for their future but these clients have many<br />

other needs that require us to show up with<br />

care. These include life transitions involving<br />

relocation, children, promotions, side<br />

projects and lifelong learning goals. We may<br />

even need to consider whether our view of a<br />

traditional retirement is something that the<br />

client aspires to.<br />

However, as we plan for change, let's not<br />

lose sight of the power we have to change<br />

lives. The good we do will echo through<br />

generations to come.<br />

Under pressure to stay relevant, let's<br />

remember the things that never change.<br />

As Jeff Bezos said, "I almost never get the<br />

question: 'What's not going to change in the<br />

next 10 years?' ... you can build a business<br />

strategy around the things that are stable in<br />

time ... When you have something that you<br />

know is true, even over the long term, you<br />

can afford to put a lot of energy into it.”<br />

Most discussions about the differences<br />

between generations fail to acknowledge<br />

that at a fundamental level we all want the<br />

same thing: to live a meaningful life with<br />

dignity, be financially independent as we<br />

age, and leave a legacy to those we love.<br />

On this foundation we can build a<br />

sustainable future for our profession. ■<br />

Pierre Taljaard, Certified Financial<br />

Planner, Fiscal<br />

40 www.bluechipjournal.co.za

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