In this newsletter we provide the usual extract of our commentary on investment markets and our expectations of these for 2014, in our monthly performance review; we provide a technical analysis of investments in foreign unit trusts; we review certain unexpected hurdles for funds to invest in unlisted investments; we provide an analysis of the law and payment of unclaimed benefits to the Master; and finally this newsletter presents the last part (part 5) on the Africa Cup of Investments Conference.
For those who take an interest in the pensions industry we also provide links to a few interesting articles.
As always, your comment is welcome, so open a new mail and drop us a note!
Tilman Friedrich's Industry Forum
Benchtest Monthly 01.2014
In January the average prudential balanced portfolio returned -0.34% (December: 2.77%). Top performer is Allan Gray (1.17%), Metropolitan (-1.23%) takes the bottom spot. Allan Gray, top performer for the quarter outperformed the ‘average’ by roughly 1.9%, primarily through their maximum exposure to offshore investments paired with the significant decrease of the Rand against the USD. On the other end of the scale Investment Solutions’ underperformance of the ‘average’ by 1.7% was caused primarily by sector and asset allocation.
Global investment markets have not changed since our previous newsletter. Positive economic trends are still being registered in the US, a number of European countries, Japan and China. In accordance with the 1741 Asset Management global equity valuations as of December 2013, global equity markets currently present ‘fair value’, with fairly wide disparities between overvalued markets such as the US market (+45%) and undervalued markets such as Japan (-25%). To achieve superior equity returns, investors would have to find pockets of value outside the traditional developed markets, which would usually be associated with higher investment risks. Emerging markets have fallen out of favour with investors in developed countries who now prefer to put their money on their own markets, in particular the US market.
Despite this trend having led to a correction and even to overly optimistic views of equity markets in the developed world, we believe that this trend will persist for a while.
Read our full commentary, find out how these and other developments impact on our investment views and download Benchtest 2013-12, here...
Investment in foreign unit trusts
Regulation 28 provides for funds to invest in a unit trust scheme as defined in the Unit Trust Control Act. Sub regulation (7) directs that such investment is regarded as a proportionate investment in the unit portfolio’s underlying securities.
While there appear to be different opinions whether this sub section also refers to an investment in foreign unit trusts, Namfisa has officially expressed its opinion that an investment in foreign unit trusts, either directly or indirectly via a Namibian unit trust (the more common structure), is not inconsistent with the Pension Funds Act.
We are concerned that investments in an entity not regulated and controlled by Namfisa, such as foreign unit trusts, defies the regulator’s purpose of regulation 28. The purpose of this regulation is to protect the interests of the fund members through the prudential investment guidelines and the limits it imposes on investments in single securities. To protect members’ interests in such a structure of different unit trusts, Namibian funds must take additional measures to obtain comfort on the legal and financial soundness of the structure. This is because the total investment of a fund in such a structure could be lost if the structure collapses, which cannot happen where the fund invests directly in a wide spread of securities.
Namfisa has in an unofficial communication suggested that it considers trustees to be responsible to take the necessary measures in meeting their fiduciary duties.
Being practical about this obligation, how do trustees obtain satisfaction on the legal and financial soundness of a foreign unit trust? Not only would they have to subject the contractual documentation to legal scrutiny but they would also have to ascertain that the sovereign laws governing the specific legal structure extend protection to investors equivalent to what Namibia’s laws do.
Trustees of course have the escape route of placing the onus on the Namibian unit trust through which the investment is placed in the foreign unit trust. We encourage trustees to discuss this matter with their asset managers.
Note: The valuation of investments in foreign unit trusts and securities creates a further complexity. We commented on this complexity in September 2013.
Read the article and comment here...
Unlisted investments – unit trust managers and pension funds beware
Most trustees will be aware by now that Regulation 28 directs that all Namibian pension funds shall invest a minimum of 1.75% of the market value of its investments (note not of its assets) in unlisted investments via a registered Special Purpose Vehicle (SPV) by 31 December 2014. A number of local investment houses have created vehicles they intend to register as such SPV. Stimulus is one of such vehicles and a number of investment houses have place pension fund clients’ moneys is such vehicles. Stimulus for one, has invested these pension funds’ moneys in local unlisted companies. Pension fund capital will start flowing into such SPV’s and these SPV’s will be looking for investment opportunities in unlisted Namibian companies. Chances are that SPV’s will invest moneys in companies that were partly derived from such companies’ pension funds.
Namfisa is of the opinion that such investments by pension funds are contravening section 19(4) of the Pension Funds Act.
Namfisa now requires funds to apply for exemption from the provisions of section 19(4). Its current practice is to only grant exemption for a period of 12 months.
Read the full analysis of this dilemma here…
Africa Cup of Investments Conference 2013
The theme of this year's conference was "Challenging the Investment Mindset". As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry. Here are some extracts from part 5 of our conference review.
‘Consultant round table’
Consultants’ responsibility is to -
Unpack products intelligibly.
Present appropriate solutions.
Focus on conflicts of interest.
Adhere to a code of conduct.
Professionalisation of trustees – not necessarily in terms of qualifications - becomes ever more important.
A trustee does not need to be an expert if he/she is properly advised.
Conflicts of interest cannot always be avoided but then have to be managed. Those giving advice must disclose such conflicts.
‘The changing face of distribution in the asset management industry’
Investment capital can nowadays be sourced globally
‘Sovereign investment funds’ and national pension funds are on the outlook for global investment opportunities;
Chile has invested US$ 70 billion offshore, other examples are UK, Italy, Taiwan etc;
Cost focus has moved to ‘total expense ratio’ (TER).
‘The geopolitics of modern Africa for investors’
The most evident question that arises from this conference is how to prepare your company, yourself and your children in the face of global climate, demographic and political change?
An investor in Africa must meet the following criteria:
Must have a geopolitical understanding of the World, Africa and the specific country to invest in;
Must understand the business environment , i.e. rule of law, capability of work force, government policy.
To understand the world you need to know the past.
Every empire goes through an expansive phase and a contractive phase in its history;
Expansive phase drives development in the world.
Contractive phase drives the decline i.t.o. population demographics.
Western power, including America, will collapse in the next 10 years.
The commodity cycle is over which implies that one has to time your investments.
Climate change is upon us, which will lead to greater conflict and wars.
Read the full summary here...
Compliments from a client
Here is a compliment of a different nature...
Oh you can’t see it but I`m doing a mini finger moonwalk on my desk!!!!!!
Thank you very much!
I will tell Tate S that he no longer needs to euthanize Molly the sheep.
Read more comments from our clients, here...
RFS staff movements
We are pleased to announce the permanent appointment of Giovanni van Wyk. Giovanni joined us in August 2013, after a short sabbatical break. He started his career as a waiter at the Spur to then join Deloitte & Touche as an administrative assistant. Giovanni was subsequently employed by Alexander Forbes for 10 years, before joining us. His last position was that of supervisor on Namflex and a few private funds. Giovanni has done almost all possible internal training courses on pension fund business and he was also crowned twice as administrator of the year. He is a member of our Benchmark team, applying his expertise with distinction to a large portfolio of participating employers.
We extend a hearty welcome to Giovanni and hope to have him playing in our first team for many years to come!
Payment of unclaimed benefits to the Master
A technical analysis by Sabine Halberstadt (BA, LLM), legal consultant at RFS
In a previous newsletter we commented on the disposition of unclaimed benefits through payment to the Master of the High Court. The Administration of Estates Act directs how moneys are to be disposed of that have remained unclaimed for 5 years. In the pensions industry there are no common practices with regard to disposing of unclaimed benefits. In this review the author discusses the legal requirements that pension funds should be aware of.
Questions addressed in this analysis are:
Can funds pay unclaimed benefits to the Master sooner than the 5 year period provided for in the Act?
Can the cost of advertising unclaimed benefits be offset against the benefit?
How should funds deal with certain unconstitutional provisions in this Act?
How should funds go about affecting the requirements of the Act?
Read the full article here...
News from the Namfisa
Annual Namfisa ERS returns deadline passed
The unaudited annual return for 2013 was due by 14 February 2014. For the contributions we were engaged to provide, we can report that we have met our commitment in time. Principal Officers who have not officially submitted the return, are urged to do so without delay as late submission is subject to a penalty of N$ 500 per day of late submission.
News from the market
Namibia budget 2014-2015
For those readers who are not on the circulation list of budget overviews, you will find a comprehensive overview by PWC here…
AGNIT converted to unit trust
Allan Gray Namibia announced recently that it had received approval from Namfisa to convert the Allan Gray Namibia Investment Trust to a conventional unit trust. All rights of AGNIT were ceded to Allan Gray Namibia Unit Trust Management Ltd effective 1 February 2014. In a communication to its clients, Allan Gray describes the benefits of this transaction to be:
Offer daily pricing on the underlying units,
Offer a more tax-efficient retirement vehicle to Namibian pension funds, and
Operate the Allan Gray Namibia Balanced Fund in a more transparent and regulated environment.
Having been an instigator of this development, we believe that this has been the right decision to take in the interest of its clients.
Namibia training levy becomes effective
It will by now be ‘old news’ to most readers that the Educational and Training Levy will come into effect as from 1 April 2014.
Deloitte issued a newsletter on this topic which provides the most comprehensive overview of the key issues. Download the newsletter here...
(for stakeholders of the retirement funds industry)
Interest rates and retirees
Interest rates have a big impact on pensioners reports the MoneyMarketing Newsletter of 13/02/2014.
“On 29 January, South African Reserve Bank Governor Gill Marcus announced that the repo rate would be increased from 5.00% to 5.50%. This followed a sustained period of interest rate decreases which saw interest rates fall to multi-decade lows. Consumers generally have debt obligations such as house and car bonds or even shorter term loans and have been aided by the declining cost of their debt. South African consumers have therefore reacted negatively to the announcement that sees an increase in the cost of their debt. Retirees, on the other hand, are generally free from these obligations, so the impact of rising interest rates has usually been somewhat different for them.
Here are two areas to look at:
Firstly look at your EXPENSES. Many stop, some drop, some stay the same and a handful go up when you retire.
Here are some expenses that may drop after retirement:
Firstly your debt – you should ideally settle any outstanding debt as you enter retirement;
Education – the children have hopefully left home;
The house is usually fully furnished - few new items have to be bought;
Pension fund contributions and other forms of retirement savings stop as you are retired;
Many policies mature, and
Taxes are lower.
Here are some expenses which may increase after retirement:
Recreation … you have more time;
You may travel more;
You may spend more on security; and
Medical costs tend to increase.
The key is not so much what you spend it on, but how much you spend.”
Read the full article here...
Fund administration – a nightmare reaches its peak
A board of trustees engaged a consulting firm to re-build the member data base at a cost of N$ 20 million, after serious doubts arose about the state of the fund’s data base as handed by a previous administrator to the subsequent administrator. The trustees resolved to recover from the members’ fund credits the amount paid for re-building the data-base. A fund member complained to the SA Pension Funds Adjudicator. The adjudicator determined that the trustees are to pay the cost of rebuilding the data base from their own pockets.
The trustees have appealed against this determination to the High Court – the outcome will certainly be of great interest in the pensions industry.
Read the full article by Allan Greenblo in Today’s Trustee, here...
(for investors and business)
Industrials versus resources
“Resources are the backbone of SA’s exports and remain important for our economy – an area where we have an abundance of riches. But they haven’t been the best investor story, and they are troubled by strike action, slowing growth in China, and a few other external and internal issues. So out of favour have they become that many are sitting at valuation levels similar to where they were when the Great Financial Crisis hit markets. Over the last five years industrials have become the darlings of the JSE – attracting capital to our shores and receiving much admiration for their expert management. Are they priced too high and resources too low?”
Read this illuminating review of the resources and industrials equity sectors in MoneyMarketing of 6/02/2014 here…
The myth of the bell curve
“People often believe the bell curve is "fair." There are an equal number of people above and below the average. And fairness is very important. But fairness does not mean "equality" or "equivalent rewards for all." High performing companies have very wide variations in compensation, reflecting the fact that some people really do drive far more value than others. In a true meritocracy this is a good thing, as long as everyone has an opportunity to improve, information is transparent, and management is open and provides feedback.
Many of the companies I talk with about this suddenly realize they have to rethink their compensation process - and find ways to create a higher variability in pay. Just think about paying people based on the value they deliver (balanced by market wages and scarcity of skills) and you'll probably conclude that too much of your compensation is based on tenure and history.”
Read the full 15 February 2014 article by Josh Bersin, Principal and Founder, Bersin by Deloitte, here...
Value investing the Buffet way
“We think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labelled speculation (which is neither illegal, immoral nor - in our view -financially fattening).”
In Warren Buffet’s opinion, the real risk that an investor must assess is whether his after tax returns from an investment will match inflation over the prospective holding periods plus a modest real return on the initial stake. In order to achieve this, the principles to be evaluated include the certainty of:
economic characteristics of the business;
company management (to operate the business to its potential and to wisely employ its cash flows;
management that can be trusted to run the business to reward the shareholders rather than themselves;
the purchase price of the business;
the levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.
“You know it when you see it – you don’t need complex equations or price histories.”
Download the full article by Seed Investments in Sharenet Daily of 28 January 2014 here...
"Experience is one thing you can’t get for nothing." ~ Oscar Wilde
Tilman 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.