African Cup of Investments Conference 2011

A Conference Review – by Tilman Friedrich

1. Details of Conference, Participation & Venue

The two day conference was arranged by Information Management Network (IMN). It was held at International Convention Centre Tower (ICCT). It was attended by approximately 350 delegates from the financial services industry, public sector, academy, retirement funds, the audit profession, invited guests from US (academy and industry) and a number of delegates from other African countries.

Conclusion and Recommendations:

The conference organisation and venue were excellent. There were a number of high caliber speakers including a speaker from Harvard Business School and from a US asset manager. Much of the conference was presented in the form of discussion panels of 3 to 4 well known experts in their fields and lead by an expert moderator. As the result, a wide range of topics was covered although not in great depth. Provision was made for questions but there were relatively few questions, given the large audience.

This conference was definitely worth while although some may find the cost prohibitive.

Lessons:

• Presenting a conference by way of discussion panels provides a good overview of the SA environment and broad exposure to topical subjects, although it does not allow for in depth technical exposure.
• The advantage of a number of delegates promotes a great opportunity for networking but inhibits more active participation of and discussion by delegates.

2. Summary of Discussions

The discussions highlighted areas where the investment industry failed its clients in terms of promoting economic development in SA and in Africa. The statement was made that if the industry does not ‘get cracking’ the regulator will to it for the industry.

Andre Perold, chief investment officer of US investment manager Highvista spoke on ‘next generation asset management’. He questioned whether the so-called long-term investment philosophy of buying to hold really works. He suggested that risk must be considered on a dynamic basis and that risk changes as markets move up and down. The strategy should consequently be one of dynamic asset allocation.
Along similar lines, George Gund, professor of finance and banking at Harvard Business School pointed out that long-term risk cannot be measured but that current risk can be measure quite accurately and that there are a number of indices that measure the risk on various stock indices (‘VIX’). He proposed that ‘beta’ (broad market) returns are more efficiently achieved by investing in an index while ‘alpha’ should be added through active management. He explained how any manager that has shown to consistently add alpha in any particular asset class can employ a strategy whereby beta is obtained through derivative structures (e.g. swaps), i.e. by separating the alpha and beta returns while taking into account prevailing asset class risk levels, overall returns can be optimized.

Elias Masilela, CEO of the Public Investment Commission made the point that Africa realized during the global financial crisis, it is on its own and cannot count on the developed world for support. Africa will have to look at itself to fund its growth and development. The PIC has set its sights on investing in Africa and as a first in its history decided to set aside 5% of its assets to invest in Africa. I seem to recall that he was talking about an amount of R 600 million. He suggested it is not enough to just build new schools but that these projects must be maintained to make an impact.

During a panel discussion on ‘Reform and Modernisation of the Current Pension System’ Johan Anderson head of institutional strategy at Alexander Forbes moderated one of the panel discussions on modernization of the current pension system in SA. He pointed out that the number of private funds in SA had declined from 13,000 to only some 3,000 (if my memory serves me right) and how this has resulted in average costs declining from something like 1.3% to 1% (if my memory serves me right). As a result the industry now has a 30% capacity but some 15 million people were still not covered. The point was made that the new regulation 28 contained the ‘look through’ principle in terms of prudent investment guidelines. Trustees are now required to take responsibility for investment risk and can no longer rely on rating agencies as alibi. Banks receive a very preferential treatment in being recognized essentially as risk free. A fund can invest up to 70% in credit, up from 25% before and up to 100%, up to 75% in banks and up to 100% in money market instruments. One speaker went so far as to say that as the result of the new fiduciary duty of trustees with regard to managing investment risk, the life stage portfolio concept was have to undergo significant changes and can no longer be employed as in the past.

Avril Halstead, Chief Director of SA National Treasury explained how it facilitates development projects in such a manner that the rural communities benefits from such projects, at little additional costs. As an example she cited a pipeline built to supply the Jhb metropolis via rural areas to at the same time provide for these communities.

Setlakalane Molepo from the National Empowerment Fund (NEF) in SA spoke about its involvement in economic development in SA. This fund is available to SA business to invest for BBEE. Investors would receive full BBEE credentials for any investment in the NEF. The fund focuses on employment creation, skills development and access to finance by the disadvantaged communities.

During a panel discussion on ‘Focusing on Africa: Working Together to Develop Economies’, pleas were made for greater regional integration. A warning was sounded though that such development will bring with it greater market volatility and risk. The point was also made that capital projects are typically designed for the next 40 years and that it is therefore very important to design such projects taking into account the impact on the environment.

During a panel discussion on ‘Product Innovation: Beyond the Latest Trends’ Vladimir Nedeljkovic head of EFTs and Index Products at ABSA made the point that many of the new products have actually just added unnecessary features at a cost where one should really focus on simplicity and needs. He compared Apple with Microsoft, saying that Apple focuses on being user friendly and that its applications actually dropped a lot of the unnecessary features while Microsoft pursued the opposite business philosophy.

In a panel discussion on ‘Global Sustainable Investment’, one speaker advised that renewable energy and green projects should be the main focus of future economic development. In this vein, quite a lot of emphasis was placed on trustees’ fiduciary duty to ascertain that investment inculcates the ESG principles i.e. Environment, Social, and Governance.

One panel discussed ‘The Role and Benefits of Financial Intermediaries’. The point was made that the current model of commission remuneration of intermediaries is likely to change as it has in New Zealand and Australia where intermediaries are now remunerated through fees. This will necessitate innovation and the analogy of the Apple vs the Microsoft model was drawn stating that the consumer experience and simplicity will become the focus points.

Dr Alex Pestana Investment Strategist at Sanlam spoke on the ‘Role of China in Africa’. He gave an overview of China’s historic position with regard to GDP, where China represents 20% of global population. Its contribution towards global GDP used to be 20% and then later declined to only 3% with the rising of western global hegemonies. He cited Napoleon as stating ‘when China awakes, the world will tremble’. In the US and Europe 20% of the economy was investment and 70% consumption, in China 48% is investment and only 355 consumption. China has a US$ 350 bn trade surplus, the US a US$ 400 bn trade deficit. China holds 1 trn in US government bonds; its purchasing power is growing in double digits while its urban population will increase by 400-500 million over the next 20 years. The Chinese consumer is moving from a carbohydrate based diet to a protein based diet, while at the same time its arable land is experiencing rapid desertification. These developments impact on its consumption and consumption patterns. Chinese are very brand conscious and the demand for luxury goods as well as tourism is increasing rapidly. He made the interesting observation that Africa’s GDP remained stagnant for over 20 years to 2000, in line with a decrease in global commodity prices. Since then both trends turned around due to the increasing demand for commodities by China.

Here is a blog that summarizes his presentation.

September 2nd, 2011

China’s rising presence in Africa will have a big impact on food prices, land prices and agriculture on the continent. That’s according to Alex Pestana, investment strategist at Sanlam Investment Management, speaking at the Second Annual African Cup of Investment Management in Cape Town.

Pestana says agribusinesses could enjoy significant benefits as a result. China is currently the sixth largest investor in Africa. China-Africa trade increased to $120-billion last year, from negligible levels in 1999. Pestana says China’s interest in Africa is deliberate, and has specific emphasis on Africa’s arable land. He says only 15 percent of sub-Saharan Africa’s potential arable land is currently being used for agriculture.

“Given China’s growing urbanisation; increase in life expectancy; rising incomes and its limited resources as a result of the desertification in China, prices for agricultural products will undoubtedly rise, and food security will become important.” Pestana says China is urbanising at a rate of 24 million people a year.

At the same time, the consumer as a percentage of the Chinese economy is forecast to grow from 35 percent today to 50 percent by 2025. “That will have an impact on the consumption patterns in China. As the Chinese become wealthier, higher income will translate into higher food needs. So a more intense form of agriculture will be required to feed the huge population.”

As a result, China has built 20 agriculture technical demonstration centers in Africa today. It has also sent 50 agricultural technical teams to the continent. Pestana says other industries that will, and have, benefited from China’s presence in Africa are luxury goods, tourism and travel, durable goods, top brands and commodities. Base metals such as iron ore and copper have been in particular demand from China. Currently some 80 percent of South Africa’s exports to China are commodities. As an example, China consumes 62 percent of the world’s iron ore supply. But Pestana warns that a significant slowdown in China’s growth would have a big impact on commodity prices.

China has also developed a new model wherein it offers concessionary loans to the continent. While there are few conditions attached to these loans, a large portion of the repayment of the loan is expected to be channeled to Chinese contractors operating in the country. This model has led to criticism of China’s role in Africa, most notably because it fails to create jobs for locals. Pestana says, “China also doesn’t really pay heed to environmental issues, there are low safety standards and a low transfer of skills.”

Another panel discussed ‘The Implications of Investing in the Global Market’. Here the point was reiterated that the driver of Africa’s growth has been Chinese demand for Africa’s resources. There is a 91% correlation between China’s economic growth and that of sub- Saharan Africa. Reviewing economic policies of emerging economies, it was stated that China’s policies very fragmented, India and Russia have no coherent policy whereas Brazil has presented the exception with a political approach to its global economic involvement. The difference between ‘frontier markets’ and ‘emerging markets’ was discussed and it was stated that ‘frontier markets’ are a subset of ‘emerging markets’. These markets typically have low liquidity but high growth. There are political risks (e.g. the devaluation of the Pula a few years ago), institutional capacity and investible opportunities are lacking. There is a trend of emerging markets investing in other emerging markets; one example cited was a SA property investor who achieves a return of 28% on its investment in Romania.
Nerina Visser, Head: Beta Solutions at Nedbank Capital gave an overview of the different types of collective investment schemes and investment products, how they are set up legally, their costs, advantages and disadvantages. She distinguishes between ‘fund of funds’ (investment in units, no ownership of underlying investments), ‘wrap funds’ (direct investment in underlying assets), ‘linked products’ (here she distinguishes between voluntary and compulsory savings via LISPs)  and ‘multi manager funds’ (this represents an outsourcing of risk assessment). She also touches on offshore investments in a life wrapper, on ETFs (exchange traded funds, subject to tight regulation and insolvency protection) and ETNs (exchange traded notes that have are subject to a much more liberal regime).

Michael Maubossin of Legg Mason Capital Management and author of ‘Think Twice’ gave an insight into the concepts revealed in this book. Here are some of the points he made:

Reference is made to the gullibility of a person and that this depends on the person, his character and the state in which he is. One has to prepare for this, recognize the situation and apply the right methods not to fall into the trap of gullibility.

People have illusions of superiority, of optimism and of control, i.e. being better than the average.

A human being is attached to stories not statistics and is influenced strongly by what goes on around us.

Experts are vastly overrated. They squeeze from algorithms and intuition. One should try and harness the wisdom of the collective to counter one’s intuition.

One needs to recognize under which circumstances experts do well and when not.

Intuition works well in a stable and linear system, otherwise not.
To improve one’ decision making one should:

• Maintain a journal about what you decided, why you decided so, what you expected to happen and what actually happened.
• Create a checklist for decisions
• Perform a pre-mortem, i.e. look back before the event and think what will have happened.

Recognize that smart people to dumb things.

Recognize when you have to think twice.

It’s all about opportunity.

3. Concluding Remarks

The conference theme was how to apply the South Africa’s financial resources to develop the economy. Interestingly, national policies appear to be very incoherent and fail to create an appropriate environment to this end. On the one hand much emphasis is placed on the importance of housing and the role that retirement funds can play, yet recent credit legislation passed in SA, effectively terminated lending for housing by funds. Clearly housing is one of the few ways in which a member who has no access to capital, can get a direct benefit from his pension fund investment.

In another apparent contradiction, one speaker expressed sympathy for a shack dweller who chops down the trees in order to survive the winter. The same speaker on the other hand ridiculed an oil company that employs ‘fracking’ (sharply criticized in environmental circles as being damaging to our environment) to extract gas from deep underground. South African FSB exercises tremendous pressure on the reduction of costs by the financial services industry, very much in line with local public policy. Analysing the result of this drive, one speaker pointed out to what extent the industry had consequently already consolidated. This consolidation in SA no doubt would have lead to the demise of many smaller service providers and would have lost a significant number of jobs, more particularly in the smaller towns and rural areas. The question begs to be asked what a developing country such as SA and Namibia really needs first and foremost? Should the emphasis, first and foremost not be to create jobs and to prevent the loss of jobs at all cost?