In this newsletter:
Benchtest 04.2017, switching at quarter ends, RFS staff movements, status of chart of accounts project and more...


Dear reader

In this newsletter we comment on the risk of switching investments at quarter end, we inform on staff movements at RFS and we report on the status of NAMFISA chart of accounts project and its new levy structure. In the Monthly Review of Portfolio Performance we comment on the prospects of the SA equity market.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!


Tilman Friedrich

Tilman Friedrich's Industry Forum

Monthly Review of Portfolio Performance
to 30 April 2017

In April the average prudential balanced portfolio returned 1.95% (March: 1.95%). Top performer is Old Mutual (2.29%); while Investment Solutions (1.31%) takes the bottom spot. For the 3 month period, Metropolitan takes top spot, outperforming the ‘average’ by roughly 0.3%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 0.8%.

Oil and the ALSI

Since our previous newsletter, the global economic and political environment has not changed. Prevailing trends are thus likely to continue.

One of these is the long-term close correlation between the SA ALSI and the spot oil price in Rand as depicted in the chart below, that became undone as from the middle of 2014. Does this represent a permanent delinking of the SA ALSI from the spot oil price or is this a temporary phenomenon? Well, unless the spot oil price has delinked from global commodity prices the close correlation will re-establish and we do not believe the oil price has permanently delinked from other commodities. As we know SA is a resources driven economy and commodities are driving the ALSI to a significant extent. An increase in global commodity prices will drive the ALSI. Global commodity prices and with this the spot oil price will have to rise substantially again to link up with the SA ALSI or the ALSI will have to decline substantially to link up with the spot oil price as the chart indicates.

Will the ALSI decline substantially to link up with the spot oil price or vise-versa? Considering that there is not much scope for the commodity prices and the oil price to decline, all having reached a trough that made many producers unprofitable and many to actually shut down. The risk of a further decline in commodity prices is thus remote while the likelihood of an increase is much higher, particularly as the US and other global economies are in the process of recovering which will lead to an increase in the global demand for commodities.

Read part 6 of the Monthly Review of Portfolio Performance to 30 April 2017 to find out what our investment views are. Download it here...

Pension fund governance - a toolbox for trustees

The following documents can be further adapted with the assistance of RFS.

  • Download the privacy policy here...
  • Download a draft rule dealing with the appointment of the board of trustees here...
  • Download the code of ethics policy here...
  • Download the generic communication policy here...
  • Download the generic risk management policy here...
  • Download the generic service provider self-assessment here...
  • Download the generic conflict-of-interest policy here...
  • Download the generic trustee performance appraisal form here…
  • Download the generic investment policy here...
  • Download the generic trustee code of conduct here...
  • Download the unclaimed benefits policy here...
  • Download the list of fund service providers duly registered by NAMFISA here...
Tilman FriedrichTilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.
Compliment from an 80-year-old pensioner

“Hi J,

Do you know how lucky I am, also an old pensioner, to know somebody LIKE YOU, where I can only ask something, and tjop-tjop, there’s your reply.

And answered in full.  Thanks a million my dear NEW friend, wish I could meet you in person just to say thank-you…

Thanks J en nice day


Read more comments from our clients, here...

Kai Friedrich's Administration Forum

Avoid switching fund investments at quarter ends

Our pension fund clients will by now be aware that NAMFISA requires quarterly SIH returns to be submitted by their fund. This return is focusing mainly on regulation 28 compliance and any non-compliance will be investigated by NAMFISA. Such investigation usually requires the submission of further returns for the 2 months preceding the quarter end return and penalties would then be determined for any non-compliance at the rate of N$ 1,000 per day, per item that was out of line with the caps set by regulation 28.

A number of funds allow members to switch investment portfolios from time to time, while it also happens from time to time that a fund moves assets between asset managers or to another asset manager. Such switches can result in the fund not complying with the regulation 28 caps at quarter end.

To avoid this situation and to avoid being penalised for non-compliance, funds should avoid allowing members to switch at quarter end and should attempt commencing after the preceding, and completing before the current quarter end switches of or between portfolios.

Kai Friedrich, Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

New members appointed to the RFS team

Veueza Virginia Kangueehi joined our permanent establishment on 15 February 2017 as an Accountant in the Benchmark accounting department. Veueza joined us from Alexander Forbes where she served in the capacity of bookkeeper for 2 years before joining us in September 2016. She completed her school career at Mariental High School and holds a B Tech Accounting degree from NUST. We welcome Veueza and wish her an interesting and challenging career at RFS!

Zulene Bio joined our permanent establishment on 1 May 2017 as an Administrator in the administration team of the Retirement Fund for Local Authorities. She joined us from Old Mutual where she served in various administrative capacities in the employee benefits arena from 2002 until 2013, to then serve in administrative capacity for the Old Mutual Foundation. Zulene completed her school career at Academia High School and went on to obtain a B Comm Marketing Management degree from MANCOSA. She offers her clients extensive relevant experience stretching over more than 15 years.  We welcome Zulene and look forward to her applying her knowledge and experience for the benefit of her portfolio of local authorities and their staff!

Paul-Gordon Guidao-oab joined our permanent establishment as Benchmark Product Manager on 1 May 2017, after having served in the position of Manager: Internal Audit, Risk and Compliance since May 2016. Paul joined us from Magnet Bureau de Change where he held the position of Audit and Risk Manager. He completed his school career at Windhoek High School, went on to obtain a B Compt degree from Unisa and competed his articles after a 5 year stint at SGA Chartered Accountants and Auditors. Paul brings a wealth of experience to his new position and will be in an ideal position to further develop the Benchmark Retirement Fund, this flagship of umbrella funds in Namibia. We welcome Paul and look forward to a long mutually beneficial relationship!

Staff who crossed the 5-year service mark

The following staff members have this year completed their 5 years’ service with RFS:
  • Mariana Auene – Client Manager in Benchmark
  • Martha Naakambo – Administrator in Benchmark
  • Anel Pieters - Receptionist
  • Glenrose Norich – Fund Accountant in Private Funds
We express our sincere gratitude to each one of them for their dedication and commitment to our company!

Staff who crossed the 10-year service mark

This year, the following staff members have completed their 10 year service with RFS:
  • Ina Bester – Portfolio Manager in Private Funds
  • Sharika Skoppelitus – Director Client Services
  • Bianca Busch – Administration Support Manager in Benchmark
We also express our sincere gratitude to each one of them for their exceptional loyalty, dedication and commitment to our company!

Staff departures

After a 3-year stint with RFS, Justine Shipanga regrettably moved on for greener pastures. We wish Justine well with her future endeavours and that she may realise her aspirations and dreams!

News from NAMFISA

The One Chart of Accounts project

Asset managers will have to carry the brunt of the new reporting that NAMFISA proposes for the financial services industry that is to replace the current SIH reporting.

Besides numerous comments on the content of the ‘chart of accounts’, asset managers have noted the absence of guidance on the classification of instruments as one major concern. This would lead to inconsistent classification which in turn narrows the usefulness of the information provided to NAMFISA and impairs the conclusions NAMFISA can draw from the data submitted. Furthermore the urgency of implementing this proposal was questioned as asset managers envisage that it would take up to 1 year to adapt their systems to meet the requirements of this report. Concerns were raised about the additional cost burden this would present to members of pension funds as it would require the entry of specialist intermediaries to compile the reports. Consensus amongst asset managers is that they are not able to provide any cost indication or time frame until a number of questions have been answered by NAMFISA.

New NAMFISA levy structure:
fund members to pay N$ 340 p.a.      

Extensive comments were provided to NAMFISA on the proposed levy structure by various stakeholders including RFS. NAMFISA arranged a meeting to discuss these proposals for Tuesday morning 16 May. On Friday 12 May at 17h01, NAMFISA circulated a document containing its responses to the comments that were submitted by various industry stakeholders. From this document as well as the feedback received from a very well and widely attended meeting it seems that the new levy structure was a fait accompli even before it was circulated to industry stakeholders. It should have been obvious from the start that industry stakeholders would have serious concerns about the new levy structure due to the radical changes it envisages.

At the end of the day, pension fund members will contribute the major portion towards funding of NAMFISA activities. Their direct contribution will be in the region of N$ 85 million per year. Indirectly pension fund members will make a further contribution via the levy on long-term insurers, short-term insurers, stock brokers and stock exchanges. As such members will contribute a significant portion of a total contribution towards NAMFISA costs by these institutions estimated to be in the region of N$ 50 million.

Each member and pensioner will thus contribute directly at the rate of approximately N$ 240 per annum plus potentially another say N$ 100 per annum in respect of indirect levies. To put this figure into some perspective, the average fund administration fee that every member and pensioner currently pays is estimated to be in the region of N$ 1,000 per annum.

Download the RFS comments and questions, and the NAMFISA responses, here...

Media snippets
(for stakeholders of the retirement funds industry)

Review of pension fund trustee decision

Do you know which benchmark your equity fund manager is using? And does it matter?

“Every unit trust in South Africa has to publish a fund benchmark. In the case of equity funds, this benchmark is usually market index, which indicates the standard against which the fund should be measured.

“The benchmark is there so that you know what the fund manager is trying to achieve,” explains Morningstar investment analyst Gerbrandt Kruger. “It gives you an idea of their objective”…

Figures from Morningstar show that active managers in the South African general equity category are using 14 different benchmarks between them…

So should it matter to investors what benchmark is being used? Pieter Koekemoer, the head of personal investments at Coronation says that the answer really depends on its purpose.

If the manager uses a ‘clean slate’ approach, which means that they pay no attention to the benchmark when picking stocks, then the benchmark is only there to help you evaluate whether you are receiving value for money. If however the manager is charging performance fees for outperformance, then it becomes more important…”

Read the full article by Patrick Cairns in Moneyweb of 9 May 2017, here...

The p/e explained in lay man’s terms

“Think of the P/E like this. Your business has 10,000 shares outstanding, and your current share price is $10. That means your company is worth $100,000 (10,000 x $10). Now, let’s say your company earned $20,000 over the last 12 months. That works out to $2 in earnings for every share of outstanding stock ($20,000 in earnings divided by 10,000 shares). So if your stock price is $10 and your current earnings per share is $2, then your stock price is trading at a P/E of 5 (or simply $10 divided by $2 equals 5). It is simply a metric to see if your “hamburger” is pricey or cheap.

Note, this P/E calculation is based on your previous year’s earnings, not your estimated next year’s, or forward, earnings. If you expect to make $25,000 next year, then your forward P/E ratio is 4. As we will see later, optimistic earning projections can make valuations appear much better than they are. It’s like the old warning: “Objects in the mirror may be closer or larger than they appear.”

With the P/E calculation as a basic starting point, we can see if your hamburgers are expensive or inexpensive. We can look at the S&P 500 Index (a benchmark of “the market”) and we can measure what the average P/E has been over the last 52 years – call that “fair value” or a fair price for a hamburger.

What we see is that a P/E of 5 is a really cheap hamburger. Now, I believe in you, and I believe you can grow your company’s earnings over the coming years; but, wow, if I can buy your great company at a low price, odds are I’m going to make a lot of money on my investment in you. And if I really think you’re going to grow your earnings by 25%, that could make you a bargain.

We can look at the market as if it were a single company and gauge how expensive stocks are now. Over the last 52.8 years, the median fair value for the S&P 500 is a P/E of 17 (we define what we mean by median below). That means a fair price for your company would be the $2 in earnings we already calculated, times 17, or $34 per share. If I can buy your stock for $10 per share instead of its fair value of $34, good for me.

Investors who use this approach are called value investors. I should note that, relative to the actual performance of the market, value investors have been severely underperforming for the past four or five years. They have been punished by seeing assets leave their funds and go to passively managed funds that have shown much better performance at much lower fees. (Note from John: In a few weeks I’m going to talk about the source of this underperformance and what you can do about it. This is a very serious investment conundrum.)

But what if you earn $2 per share and your stock is trading today at $48 per share, or 24 times your earnings? Well then, I’m buying a very expensive burger. So price relative to what your company earns is a good way for us to see if we should sing or weep.”

What the p/e tells us about the state of the US stock market

“Here is how you read the following chart (from Ned Davis Research):
  • Median P/E is the P/E in the middle, meaning there are 250 companies out of 500 that have a higher P/E and 250 that have a lower P/E. Using the median number eliminates the effect that a few very richly valued companies have on the average P/E, which is what you normally see reported in the media and presentations.
  • The red line in the lower section shows you how P/Es have moved over time.
  • The green dotted line is the 52.8 year median P/E. So a P/E of 17 is the historical “fair value.” Simply a point of reference.
  • You can see that over time the red line moves above and below the dotted green line.
  • If you remove the 2000–2002 period (the “great bull market”), we currently sit at the second most overvalued point since 1964. (Note: 1966 marked a secular bull market high, to be followed by a bear market that lasted from 1966 to 1982.)
  • In the lower section of the chart you also see the labels “Very Overvalued,” “Overvalued,” and “Bargains.”

One last comment on the chart. At the very bottom of the chart, Ned Davis states that the market is now 7.9% above the level at which it is considered to be overvalued.
  • That means the market would need to decline from the March 31 S&P 500 Index level of 2362.72 to 2176.07 to get back down to the “overvalued” threshold.
  • It would need to decline to 1665.72 to be get to “fair value” (the median). That’s a drop of 29.5%.
  • Also note “undervalued,” which we could see in a recession (now -51.1% away).
So fair value for your company is $34 per share (that’s your $2 per share in earnings times the “fair” P/E of 17). I’m thrilled if your stock is selling for $10, because my forward returns will likely be outstanding. Let’s see what that looks like next.”

Read the article here...

Media snippets
(for investors and business)

Busting post downgrade myths

“While SA's double-whammy of downgrades has certainly made its mark, the assumption that it has killed SA as an investment destination seems tenuous. This week, COVER brings you the latest news on how SA may still be alive and kicking - from a top-four FDI rating to significant new offerings on the JSE, and practical tips for clients on how to retire post-downgrade. Read on, and feel proudly South African - We will survive.”

From Monday edition of Cover Magazine of 24 April.

A lesson in leadership: control your emotions

The first step in controlling your emotions is to understand that there are 7 different intelligences as Howard Gardner, Professor at Harvard has identified:
  • Linguistic — good with words
  • Mathematical — good at numbers
  • Musical — good with rhythm and sound
  • Visual-Spatial — good at thinking in three dimensions
  • Bodily-Kinesthetic — good at physical activity
  • Intrapersonal — good at understanding oneself
  • Interpersonal — good at interacting with other people
Intrapersonal and interpersonal intelligence is often overlooked although this is extremely important in life.

You certainly need intra- and interpersonal intelligence if you wanted to successfully jettison your anger and control your emotions to become more positive. Here is a simple two-step method to achieve this:

STEP ONE: Jettisoning anger
  • Analyze WHY you are angry.
    Thinking rationally automatically switches your brain function from the emotional to the intellectual.
  • Execute an EMOTIONAL “REFRESH.”
    Do something to take your mind off your anger. Play basketball, go for a swim, find some friends to chat to.
That’s the anger out of the way. “But what about the business of controlling my emotions?

STEP TWO: Controlling the emotions

To control your emotions, do the following.
  • Try to recognize the emotion you’re feeling.
  • Judge if that emotion is a positive or a negative one.
  • If it’s positive, amplify it. If it’s negative, reduce it.
As a general rule, you want to reduce your negative emotions (anger, frustration, fear, desperation etc.) to a minimum, while amplifying your positive emotions (joy, hope, gratitude, excitement etc.) to the maximum.

Read the interesting short article by Yoshito Hori in Linkedin of 18 May, here...

And finally...

“Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”
~ Mark Twain


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