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In this newsletter:
Benchtest 08.2012, company news, interesting snippets from a recent investment conference, the final (?) version of Regulation 29, media clippings and more...

Dear reader

In this newsletter, we welcome a new client and a new member of our team, we provide interesting snippets from the Africa Cup of Investments Conference that took place in Cape Town recently, we provide an update on developments concerning the FIM Bill and more specifically the proposed 90 day reporting timeline, changes brought about by the latest version of regulation 29 and some interesting media clippings.

You will have received the newsletter on the Annual Members Meeting of the Benchmark Retirement Fund with the link to the page containing the Annual Report, financial highlights and actuarial report. If you have not yet opened it, find it here...


Please feel free to comment: tell us what you value and how we can improve the content.

Regards

Tilman Friedrich


Tilman Friedrich's Industry Forum

Benchtest Monthly 08.2012

In August our average prudential balanced portfolio returned 2.3% (July 2.37%). Top performer is Namibia Asset Management/Coronation (3.04%), Old Mutual (1.8%) takes bottom spot.

Economic stimulus measures taken by the ECB and more recently once again by the US Fed, will continue for quite a while and are likely to lead to further repo rate reductions by the SA Reserve Bank and a further decline in general interest rates. Despite the latest US stimulus package, we believe that inflow of foreign capital both into equities and bonds is likely to ebb, which should lead to a weaker Rand. As the result our equity markets are unlikely to show any significant growth over the next year or even longer but should still produce inflation hedging returns. Stocks that will benefit from a weakening Rand such as industrials and Rand hedge companies should outperform the Alsi. With our expectation of a further decline in interest rates, bonds should benefit in the medium term, while cash returns will be zero, more likely negative in real terms. Property under current circumstances is also likely to produce respectable returns for the medium term.

For further analyses and our views download Benchtest 2012-08, here...


RFS company news

RFS welcomes CRAN

The Communications Regulatory Authority of Namibia resolved to join the Benchmark Retirement Fund effective 1 September. We welcome this institution and its staff heartily and look forward to a long, mutually satisfying relationship.

RFS welcomes new staff member

We extend a hearty welcome to our new colleague, Glenrose Norich, who joined us as a fund accountant to create some capacity in the private funds accounting department for recent appointments. Since joining us, Glenrose obtained her Bachelors of Accounting degree from Unam a few weeks ago and we congratulate her on this achievement. Glenrose worked as an office administrator at Multi Odds Supermarket for 3 years before she joined Namibia Fish Consumption Promotion Trust as a bookkeeper in 2007. She entered the pensions industry in 2008 when she started as a fund accountant at Old Mutual.

Compliment by the Principal Officer of a Namibian utility company

“I am very pleased to work with your staff. They are service driven and surely they do make a big difference in the Administration of our Fund. It is very rare to get customer service as provided by the two ladies. Really very satisfied.” (Dated 4 September 2012.)

News from the market

IMN Africa Cup of Investments conference

This annual conference focusing on institutional and retail investments, took place in Cape Town on 6 and 7 September. In the next few issues we will report back on some of the more interesting observations, trends and discussions presented at this conference:

Part 1

How the industry has changed over past 50 years:
  • The individual investor was replaced by institutional investors;
  • Advent of derivatives that now dominate market trading;
  • Advent of technology driven market activity, where 40% of trading on the NYSE is now algorithmic;
  • Large proportion of managers underperforming their benchmarks;
  • Absence of predictive value of performance, where research has shown that only the bottom decile has any predictive value for future performance;
  • Strong emphasis on performance without reference to risk;
Major mistakes in investment decisions:
  • Manager mandates are terminated after the manager has gone through poor performance and are hired after the manager has had its good returns;
  • Managers’ mission is to beat the market, which is impossible by the law of averages;
  • Professional managers increasingly make decisions on disciplines outside their areas of expertise, as the result of the business focus being on generating growth through buying up other businesses and the replacement of experts by professional managers;
Lessons and observations:
  • The manager with the lowest fees is likely to produce best future performance (a US academic);
  • Unlisted investments over the past 10 years generated a net return of 23% versus 17% for the ALSI;
  • Asset consultants have failed their clients by focusing on returns rather than risk (a consultant);
  • The asset consultant should only be considered successful if the fund’s income replacement rati0 improves over time (a consultant);
  • Funds need to put more emphasis on due diligence of consultants and other service providers (a consultant);
  • The asset consultant should serve as ‘gate keeper’ only for the purpose of keeping away product floggers from the trustees but not to serve self-interests (a consultant);
  • Member choice has massively destroyed value for members (a trade union member);
  • ETF’s offer a lower cost, more transparent alternative to unit trusts but are less well regulated;
  • Low volatility investment has outperformed high volatility investment, despite entailing lower risk;
  • Momentum investment becomes more sustainable if it combines earnings momentum with market movement momentum;
  • Infrastructure investments (e.g. water, roads, electricity, hospitals, schools) offer worthwhile opportunities for pension funds, provided an appropriate regulatory framework is in place:
    • Assists with liability driven investment;
    • Protects against inflation;
    • Is usually a monopoly/quasi monopoly;
    • Has high entry barriers;
    • Has an inelastic demand;
    • Steady and predictable cash flows.
  • Listed preference shares offer attractive investment opportunities. They are a hybrid asset class, an alternative to cash with capital preservation, low volatility and preference rights. Standard Bank share return vs. its preference shares (nominal return of 7.2%, but fluctuation with interest rates) vs. its bond, produces following results:
    • Shares net after tax return is 4.1%;
    • Preference shares net after tax return is 5.8%;
    • Bond net after tax return is 3.8%.
This will be continued in our next newsletter.

News from Namfisa

SEPTEMBER UPDATE:
New quarterly reporting requirements


Namfisa recently arranged a meeting with pension funds on the topic of its new reporting requirements that was well attended. An industry meeting was scheduled for 25 September, starting at 8h30. We encourage our clients to ensure that their fund is represented.

The new reporting is to be submitted as at the end of every calendar quarter, within 90 days thereof. Where a fund’s financial year does not end on a calendar quarter, the provision of information to Namfisa will become very cumbersome and undoubtedly more costly as two sets of records will effectively have to be maintained. We suggest that funds consider and discuss with their service providers changing their year end to a calendar quarter end.


FIM Bill: 90 day reporting timeline

The Institute of Chartered Accountants of Namibia identified two main concerns about the FIM Bill being the 90 day reporting timeline and new reporting obligations of the fund’s auditors which were taken up with Namfisa. The Institute expressed its concern about the lack of capacity in the profession and about the bottle necks that currently already exist around certain periods of the year that would be further exacerbated by such tight reporting timelines.

In its response Namfisa confirmed the legislator’s (and Namfisa’s) resolve to stick to the 90 day period and to retain this in the body of the Bill, and made reference to jurisdictions where the timeline is even shorter (60 days). Namfisa indicated however that transitional arrangements could be considered, to facilitate adjustment to the 90 day period. It was also confirmed that the Bill was handed to the Minister and that the matter was now out of Namfisa’s hands.

In the meantime a new initiative has been started by local actuary, Carmen Foster, to engage all key role players in all industries to be regulated by the FIM Bill, in order to make a last attempt of providing the legislator with meaningful contributions on the Bill.


Law and legal snippets

Regulation 29 final version (?)

The latest and possibly final version of Regulation 29 contains a few interesting changes to the previous version reported on in our May newsletter that may be indicative of a mind change at Namfisa.
  • All references to the tax treatment of the income of Special Purpose Vehicles (SPV) has been removed;
  • The requirement that directors or trustees of SPV’s must ensure its Unlisted Investment Manager (UIM) observes good faith, due care skill and diligence and must apply sound business principles for managing this special asset class has been removed;
  • The requirement that directors or trustees of SPV’s must submit very detailed financial information on its activities, on the receipts and accruals attributable to each of its investors and setting out income tax calculations with regard to each investor has been removed;
  • The requirement that the UIM must be at least 35% owned by Namibian citizens has been removed;
  • The requirement that a UIM must take a long-term view of the portfolio investments has been removed;
  • The requirement to report on a quarterly basis has been extended to half-yearly reporting.
  • The requirement to provide details of the financial performance of portfolio companies (i.e. those invested in), individually and in aggregate including details on capital and operational expenditure has been removed.
As an interesting observation, in the light of latest intentions regarding the 90 day reporting timeline for pension funds to submit annual financial statements, SPV’s in contrast only need to submit audited annual financial statements within 180 days.

The following is a summary of some of the other key stipulations of the regulation:
  • A Special Purpose Vehicle (SPV) can be established in the form of a company or a trust;
  • An SPV set up as a company, principally has to comply with the Companies Act (e.g. disqualification of director, annual reporting as per IFRS);
  • The requirements for an unlisted investment manager are:
    • Its minimum paid-up share capital must be equal to at least 1% of the committed capital of its SPV.
    • Must have at least 3 directors.
  • The co-investment of an unlisted investment manager in an SPV must be at least 1% of the contributed capital of the SPV;
  • Requirements for a subscription agreement are specified;
  • The Registrar needs to follow certain procedures should he intend to remove a director or trustee of an SPV, or remove an unlisted investment manager or remove officers of an unlisted investment manager;
  • Entities other than pension funds, may also invest in an SPV;
  • The maximum period for an SPV to invest in unlisted investments, failing which it would have to deregistered, is 24 months;
  • The majority of 75% of holders of contributed capital in an SPV need to decide to deregister the SPV before this can be executed.
Regulation 29 – where to from here?

The asset managers association has taken the initiative to set up an industry Special Purpose Vehicle (SPV). It appears that most consultants support this notion. However, this SPV has to be managed by an Unlisted Investment Manager (UIM) as the regulation currently reads. This impairs the ability of pension funds to steer the business in its own bests interests and militates against the principle of ownership, considering that the pension funds are the owners of all investment in any unlisted investments, whereas the UIM only manages these assets for the industry.

We suggest that principal officers should table this idea as soon as possible, with the view to funds taking an early decision that will guide their principal officer and investment managers on how they need to respond to this challenge.


Interesting media snippets

10 good reasons why to invest in money market funds

In the Particia Holburn Money Marketing newsletter
of Media24, a few very valid reasons are listed and explained why an investor should consider rather holding his cash investment in a money market fund. Read the article here...

A disabled child could cost you your job

In this article
by Shanaaz Cajee in Cover Magazine, the author makes the point that, while many South African adults have some sort of personal accident cover, either through their employers or individually, few children are covered – despite a disabled child being a big risk to a family’s financial security. This of course equally applies to any other dependant of the family. Every family with dependent children or other dependants should heed the advice provided and speak to their financial adviser without delay.

Financial Advisers to pay up for losses of their clients

The liability of brokers and financial advisers for losses suffered by their clients is a very topical subject in South African media currently. It appears that SA’s new proliferating quasi-courts have singled out the service provider as first port of call for any person who has incurred a loss. Namibia is following the same route and service providers will have to brace themselves for what is likely to come their way too!

In this article by Professor Robert Vivian which appeared in Cover Magazine, the author laments the proliferation of ‘quasi-courts’ in SA in the form of a whole host of new institutions (ombudsmen, adjudicators and tribunals) that multiply and grow and are de facto replacing the judiciary. A second article by same author on the same topic can be accessed here...

A financial adviser has been held liable by the South African High Court for losses incurred by a client in the Sharemax debacle. The FAIS ombud first ruled the adviser liable, whereupon the adviser referred the ruling to the High Court arguing that the FAIS ombud did not have the jurisdiction to rule on this matter and that his actions in terms of the FAIS Act were unconstitutional, as is also argued in the preceding article. The High Court rejected the adviser’s argument for having failed to prove that the relevant section in the Act was indeed unconstitutional. Read the article here...


Pension fund curatorship: Valuation of underlying assets a concern

Yet another debacle in the financial services industry hit SA media headlines, when 3 Rockland group companies were placed under curatorship. The FSB is questioning the fact that a piece of land has appreciated by 2,125% in just 3 years. Apparently this piece of land represents some R 600 million of total asset of just over R 800 million of the Rockland TDI Fund. Access this case study article here...



 
tilman-friedrichTilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman Friedrich is a qualified chartered accountant and a Certified Financial Planner® practitioner, specialising in the pensions field. He is a member of the legal and technical committee of RFIN. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

 

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