Dear reader

In this newsletter we comment on the global investment markets; we provide guidelines for selecting asset managers to diversify risk; we provide a status update with regard to quarterly reporting to Namfisa, unlisted investments and attaining unlisted investment exposure via a unit trusts, and we provide a number of links to topical and relevant articles from various media.

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Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 08.2014

In August the average prudential balanced portfolio returned 0.29% (July: 0.84%). Top performer is Namibia Asset Management (0.80%); while Metropolitan (-0.15%) takes the bottom spot. For the 3 month period EMH Prescient is top performer outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.60%.

In last month’s newsletter we provided a graph depicting the recovery of the US industrial production to levels last seen 4 years before the financial crisis struck. Year-on-year growth now stands at around 5%, up from its trough of minus 15% in the middle of 2009. Capacity utilization improvement correlates very closely with industrial production, having improved to 79%, up from 67% in the middle of 2009.  The graph below and in this link is further evidence of the improvement of the US economy. It shows that unemployment has declined from around 10% at its peak at the end of 2009 to 6% while non-farm payroll improved from losing 300,000 jobs in a single month to currently adding around 200,000 jobs monthly.

Financial media no longer talk about monetary stimulus but rather speculate about when the Fed will start raising interest rates, after warnings having been uttered by the Fed. 10 Year US bond yields have turned up recently in anticipation of such an increase. Is this the reason why bond purchases by foreigners on the FTSE/JSE have declined from net purchases of R 21.8 billion in July to net sales of R 237 million in August? Most likely so.

If this trend continues, our local currencies will remain under pressure while local interest rates will also be under upward pressure. The 0.25% increase in SARB’s repo rate in the middle of July that followed the first rise for a long time of 0.5% at the end of January has not done much to support our currencies. Further local interest rate increases are inevitable once the Fed announces its first increase.

An interesting article in Sanlam Personal Portfolios Funds on Friday considers “the difficulty of investing in an environment where almost everything looks expensive”. It also looks at other ‘less conventional’ assets. Renee Prinsloo suggests the following three strategies for “…earning decent returns from this point forward”:

• Searching for relative value;
• Attempt to uncover unique opportunities;
• Diversify your exposure, and
• Be more cautiously positioned than one would typically be, on average, over the long-term.

Read our full commentary, find out how these and other developments impact on our investment views and download Benchtest 08.2014, here...

Selecting asset managers to diversify risk

Background

Trustees mostly understand that it is a risk to engage a single manage to manager their fund’s assets within a single investment mandate. But do they understand what risk or risks they face and which one will be reduced through the appointment of more than one manager and what is the correct number of managers to use?

What risks should we be concerned about?

First consider what risks one is facing. These are:

• Systemic risk
• Prudential risk
• Advice risk
• Market risk
• Volatility risk
• Currency risk
• Scam risk
• Lost opportunity risk
• Liquidity risk
• Investment risk

Does a combination of manager address all these risks?

Combining more than one manager will reduce the prudential risk that something can go horribly wrong with one organisation.  It will reduce the volatility of performance because the volatility of each managers will differ from that of other managers. It will also reduce the scam risk, the liquidity risk and the investment risk of capital loss and underperformance. It will not impact on the advice risk, market risk or lost opportunity risk. Advice risk and lost opportunity risk will need to be managed at fund level, while market risk needs to be addressed by spreading investments across different markets e.g. local and offshore market.

What is an optimal number of managers one should combine?

Evidently a combination of more than one manager within a single investment mandate of a fund does reduce most risks funds face when placing their investments. However will it suffice to engage only two managers or should one engage more than two manager? This is a tricky question and really depends on the skills of the trustees and their objectives.

How bold are the trustees in taking active decisions?

If the trustees are totally averse to actively engage in investment decisions and are comfortable with average returns, the answer is, ‘the more the merrier’ as each additional manager further dilutes the risks, approaching the answer very simplistically. There are of course much more sophisticated methods such as the efficient frontier model that will indicate that little further value is added after a certain number of managers have been combined and from where on one would actually produce negative outcomes.

The Namibian environment sets narrow confines

Being realistic about this within the confines of the Namibian environment, most funds are too small to employ one segregated investment mandates, let alone engaging more than one manager on a segregated mandate but have to invest via unit trusts. Since unit trusts are regulated by dedicated legislation and are subject to statutory supervision, the prudential and scam risks are already reduced to a significant extent and probably require very little additional attention of the trustees.

Due care and skill requires active engagement

Due care and skill would probably require of a board of trustees to engage actively in investment decisions and to achieve results better than the average for their members. This means that they will have to think carefully about how to combine managers and how many managers to combine. Given the wisdom of engaging at least two managers, a successful combination of two managers has the best chance of out-performing but of course also has the best chance of under-performing. The greater the trustees’ confidence in the ability of the selected manager to outperform, the fewer managers need to be combined and vise-versa.

What are your performance objective for combining managers?

The question then is what objectives do trustees have in combining different managers? The objective can be one of the following:

• Superior performance
  Choosing managers that are likely to outperform the average manager in the long-term. Such a combination may lead to all managers under-, and out-performing the average at the same time. The trustees need to be clear on this and be comfortable with the consequence thereof, particularly in times when all managers under-perform the average. This is obviously the ideal combination given the conviction that all managers should out-perform in the long-term. Unfortunately in Namibia, only very few managers have a long-term history of out-performing the average. The other managers have all had extended periods of either out-, or under-performance, or have no long-term performance history. Performance history therefore does not render any significant level of conviction for any of the managers outperforming the average in the long-term.
• Above average performance
  Choosing ‘core’ manager/s that is/are likely to out-perform the average in the long-term and an/other non-core manager/s that is/are likely to produce returns mirroring those of the average as closely as possible. The expectation of the non-core manager/s is to cushion any significant under-performance of the ‘core’ manager/s. Performance history should show which manager’s/s’ performance has most closely mirrored the average over the long-term.
• Hedged performance
  Choosing managers with an opposing investment philosophy and style (i.e. value vs growth). If all managers on each side of the spectrum were to perform equally well and equally poorly during periods advantaging and disadvantaging their investment philosophy and style, the combined performance of these managers should mirror that of the average. Again the realities of the Namibian environment are that there are very few if any managers that can clearly be placed on either side of the spectrum making it questionable whether the hedged performance strategy can be employed successfully.

RFS supports Hospice of Hope


Hospice of Hope is a charity founded by Mrs Rukia Kassa to assist less privileged and the terminally ill. In the photo below, Rauha Shivute (above), Client Manager at RFS and helping hand at Hospice of Hope hands over some basic necessities sponsored by the company.

RFS Staff movements

We welcome Justine Shipanga who joined us from Sanlam Investment Management Namibia at the beginning of May. Justine holds a B Economics and a Post Graduate Diploma in Financial Planning and has completed a programme in investment analysis and portfolio management through Unisa. Justine has taken up responsibility for the technical services to a portfolio of participating employers in the Benchmark division as well as a few private funds while she is on course to become our investment expert, being responsible for the Benchmark performance review. Justine is enjoying her new field of engagement and we hope that she will be around for many years! Justine is giving her very best effort to extend service excellence to her clients!

We would like to express our sincere appreciation to staff who  celebrated their 5 year anniversary with us this year. This milestone was achieved by Günter Pfeiffer, Amanda O’Callaghan, Belinda Carlson, Lizette Fourie and Ronél van Schalkwyk.

In the same vein we owe a special thank you to Hannes van Tonder who has celebrated his 10th anniversary with us this year! We have reason to be proud that 10 of our 60 staff have crossed this milestone already in the 15 years of our existence! This surely says something about our company that very few others can say about themselves!

News from Namfisa

Statement of Investment Holdings - update

Namfisa currently expects funds to submit the 2014 quarterly report by the end of February 2014. We have informed managers that we expect to receive the returns for the first 3 quarters of 2014 by the end of November and the returns for the last quarter by the end of January 2015, to give us sufficient time where we are required to compile reports from different managers for a pension fund client.

To date Namfisa has not issued the revised template which will once again make it very difficult for funds to meet the due date. Another date for requesting extension is approaching rapidly.

Unlisted investments – update

The avenue of pension funds investing through their portfolio manager/s is all but closed now, at least as far as unit trust managers are concerned, as was reinforced through an explanatory memorandum issued to funds by Namfisa. Fund therefore need to assume responsibility themselves and cannot rely on their asset manager/s to do this for them.

We believe that the process of a fund considering, evaluating and finalising an agreement with an unlisted investment manager will probably take 6 months or more. We also suggest that it will be unwise for a fund to take a decision without having had the benefit of considering at least 3 alternative unlisted managers.

We are aware  that Namfisa has in one instance granted extension for compliance with the unlisted investment requirement to end of June 2015. Although we are aware that one unlisted investment manager and its special purpose vehicle has passed all stages of evaluation by Namfisa we have not yet received formal confirmation that this application has been approved. There is no indication how long it will still take to approve other applications.

In the light of the state of affairs concerning the approval of unlisted investment managers we urge all pension funds to now apply for extension to at least June 2015. Funds should take note that Namfisa requires such applications to be paper-based when submitted.

Unlisted investment via unit trust

In our previous newsletter, we alerted pension funds about the need for them to get ready to invest directly in unlisted investments, based on the provisions of the Unit Trust Control Act, a draft amendment to this Act and an explanatory memorandum issued by Namfisa that reinforce the need for funds to invest directly in SPV’s.

We were informed, following a discussion between unit trust managers and Namfisa officials, that Namfisa will allow unit trusts as co-investor in an SPV and thus in unlisted investments on the ‘look-through basis’. To get around the Unit Trust Control Act, a unit trust will have to apply to Namfisa for approval of investing in an SPV.

As also pointed out in our previous newsletter, it has to be born in mind that the Unit Trust Control Act currently defines an unlisted investment as “securities other than stock exchange securities and such other securities determined by the registrar by notice in the Gazette.” Section 6(1) of the Act directs that “The registrar in concurrence with the Minister, by notice in the Gazette, may determine securities and other assets which may be included in a unit portfolio of a unit trust scheme and the minimum or maximum or both minimum and maximum restrictions and conditions subject to which such securities, classes of securities, or other assets may be included in a unit portfolio.

This means that Namfisa would have to by notice in the Gazette determine in which SPV a unit trust may invest or that unit trusts may generally invest in any approved SPV.

We have requested specific confirmation by Namfisa that it will indeed give notice in the Gazette of the above. Further developments in this regard will be communicated as soon as we become aware.

Regulatory reform newsletter

For those readers who missed the latest newsletter from Namfisa on the status of regulatory reform, specifically on these topics:

• The Namfisa and Financial Institutions and Markets Bill;
• Financial Services Ombudsman;
• Regulations and Standards’
• Regulations 15 and 28;
• Regulation 29.

download the newsletter from Namfisa, here...

Namfisa industry consultation session for pension funds

An industry consultation meeting took place on 15 September 2014. Our internal notes of proceedings can be read here...

Please note that we lay no claim on their accuracy or them fully reflecting the discussions.

You will find updates on the following topics:

• Quarterly pension fund reporting, template being revamped, target date 30 September
• Pension fund backed housing loans – Pension Fund amendment act passed by National Assembly, to be reviewed by National Council, due out soon
• Letter from Inland Revenue to Namfisa in response to various industry issues (as reported in our previous newsletter) noted but no further discussion
• FIM Bill no further developments reported (refer to Regulatory Reform newsletter above)
• Special purpose vehicles – none approved yet but one in the ‘death throes’
• Circular on approved bonds – guidelines for the asset management industry, due diligence is the responsibility of investors
• Prescribed application forms being developed for certain statutory processes (e.g. registration of fund, notification of principal officer)
• Fund management costs – inconclusive discussion on the disclosure of such costs
• Namfisa internal staff movements

Media snippets
(for stakeholders of the retirement funds industry)

The balancing act – the reality of a sound retirement

“In order to provide retirement funding which will allow members to retire in a way that will support their standard of living a net replacement values of 75% of their income would need to be secured.”

In order to achieve this replacement value, investment strategies range from conservative, balances, aggressive, member choice to life staging…”

The author has run a model that depicts the retirement savings growth of the various investment strategies, which produced some interesting results:

• Both the aggressive and balanced investment strategies surpassed the required retirement lump sum saving.
• The other investment strategies fell short of the mark.
• Conservative and member investment choice investment strategies produced the worst results.

He concludes “A balanced investment strategy should secure a retirement worth of distinction – a net replacement value greater than 75%.”

Download this insightful article by Walter van der Merwe, CEO of Fedgroup Life, in Pensions World of June 2014, here…

Get your investments for retirement right

Here are the two questions that this article answers:

Q: I have a lump sum of R150 000 which I would like to invest so that it grows reasonably. Could you please give me some advice? I do not need to have access to the invested money immediately as it would be provision for my retirement. I have some other provision for retirement held in accounts in England and Jersey.

Q: I am 72 years old and will be receiving R2 million in October. I need to invest it with minimum risk and to receive monthly income of about R10 000. What should I do?

If you are interested in the answers by Patrick Cairns, in Moneyweb of 28 August 2014, read on here...

Now it is the pension fund that complained to the PFA

“The respondent [an employer] was in arrears with the payment of contributions for the period.

Complaints about errant pension fund organisations are common at the Office of the Pension Funds Adjudicator.

However, the tables turned and it was a fund itself that recently lodged a complaint with the Pension Funds Adjudicator….”

“This Tribunal cannot condone a situation where contributions go unpaid for extended periods of time, and in that respect, the actions of the complainant to protect its members and ensure that its rules are adhered to, must be commended.

The respondent was ordered to submit all outstanding contribution schedules to the complainant in order to facilitate the computation of arrear contributions and to pay the outstanding arrear contributions together with late payment interest.”

Read the full article by Bashira Mansoor in itinews of 1 August 2014, here...

Media snippets
(for investors and business)

Buying a house vs renting and investing in shares

This is a topic that most of us have pondered on – should you buy a house or rent and invest you capital in shares?

Read this interesting analysis by Ingé Lamprecht in Moneyweb of 26 August here...

Sell your investment properties now

In this article the author looks at the pitfalls of investing in property. “Confessions of a property investor” is the sub title to this article by Magnus Heystec. The headers in the article provide a glimpse of what it covers:

• Slow or quick, you are still losing money
• Property returns difficult to measure
• Penny dropping
• Listed and liquid

Read the full article in Moneyweb of 11 September 2014, here…

Where have all the expats in China gone?

“It is clearly not a good time to have a business targeted at foreigners in Shanghai. In the last week, our landlord and several other business owners have asked us this question. Our apartment block has gone from 100% to less than 70% full for example. What’s going on?”

The global economy is changing and here is one indicator of changes happening in China. Read this interesting article by Gordon Orr, Chairman Asia, at McKinsey & Company in Linkedin of 21 August 2014, here…

What the Fed knows but will never say

“Wealthy investors watched their savings disintegrate six years ago, in a destruction of capital spurred by a severe economic downturn. Then, over the next few years, these same individuals saw their fortunes grow once again, even surpassing prior levels, thanks to the U.S. Federal Reserve’s easy money policy.

During this process though, retail investors have been hammered. With little to no wage growth, high unemployment, and declining disposable income, it shouldn't come as any surprise that most Americans don't believe the economy has truly recovered. To a great extent, policymakers share that belief. Here are five things that a central banker will never say, but actually should:…”

Read this interesting article by Anthony Scaramucci, Managing Partner of Skybridge Capital in Linkedin of 26 August 2014, here...

And finally...

"Correction does much but encouragement does more."
~ Johan Wolfgang von Goethe

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.