2. From Defined Benefit to Defined Contribution
• First wave (1980s) driven by members; second wave (1990s) by employers
• Shifted all of the “risk” from sponsoring employer to the member
• Governance impacts?
Reg 28 PIGs promulgated(1989)
50/50 (member/employer) board representation (1998). Trustee skill sets?
• Led to the “professionalization” of the investment management industry
Co-incided with academic advancements re investment management theory
Previously assets were typically managed by sponsor’s internal corporate treasury or
an external life co.
Investment strategies were inefficient, expensive and opaque
SOME HISTORY
| 2
3. A shifting industry
• Beginning of the “independent asset manager” industry
Independent firms and products proliferate
Excon relaxation led to foreign expansion over time
Was near impossible for foreign managers to compete in SA – this is changing
SOME HISTORY
| 3
4. A shifting industry
• What of post-retirement?
No more % of final salary paid by the Fund until death
DC Funds typically fund for cash lump-sum at retirement or withdrawal
Retiring member is then responsible for purchasing a retirement income stream
• The life companies did very well
Life company dominated (traditional life annuities)
Explosion of the CIS industry later led to birth of Living Annuities
SOME HISTORY
| 4
5. Rise of the gatekeepers
• Also led to growing reliance on “agents”
Asset consultants to advise Trustee Boards on investment strategy matters.
“Brokers” to advise members on post-retirement products etc. (dominated by tied
life co agencies)
• Agents/aggregators (consultants, multi-managers, brokers, DIMs etc.) become
powerful intermediaries
Trustee boards increasingly dependent on professional advice
Concentration of AUM (60%+ invested with top 5 !)
Asset managers increasingly detached from the client
Retiring members often with little financial acumen left at the mercy of product
salesmen
SOME HISTORY
| 5
6. Significant regulatory reform
• Social Security Reform is the government’s bigger picture
• Closing the “gaps” in the social security landscape
Guiding principle – “Social Solidarity”
• Enhance all citizens’ access to:
Retirement income
Risk benefits (Death, Disability, Unemployment, RAF etc.)
Linked to NHI
• Grow National Savings pot
• But has been stagnant for years (political logjams?)
WHERE ARE WE GOING?
| 6
7. 1. Architecture (the “hardware”)
New structures to capture the uncovered
Slower than anticipated (inter-departmental, DSD & NT drivers, ideological
differences?)
Will have significant impact on the industry
2. Rules of the game (the “software”)
Taking aim at “inefficiencies”
Cost
Governance (PF130 etc.)
Leakage (compulsory preservation, annuitisation, regulated defaults etc.)
Simplicity and transparency
TWO KEY TRACKS
| 7
8. POAG – basic welfare net
NSSF (GSRF) – proposed new govt. “default” tier
ACCREDITED Pvt. RFs – Occ. Funds, UFs, Industry Funds, RAs etc.
VOLUNTARY SAVINGS – CIS, Life prods etc.
MULTI-TIER STRUCTURE
SOCIAL SECURITY SYSTEM
| 8
9. • Will have to meet strict criteria to be “accredited”:
• Cost will be big focus (expect more prescription)
• Scale an explicit objective (expect major consolidation)
• Governance (see PF130 guidelines, more impetus for consolidation)
• Limited investment choice where offered
• Must offer a default preservation vehicle (compulsory
preservation)
• Must offer default annuitisation route at retirement (compulsory
annuitisation)
• Must allow for (limited) portability
• Other policy levers? ESG? BEE? SRI?
• Level playing field with GSRF i.e. they will compete
ACCREDITED RFs – This is where you sit!
TIER 3
“ACCREDITED” RETIREMENT FUNDS
| 9
10. 1. Consolidation & Professionalisation
Corporate sector will continue to shrink (umbrella funds will grow)
GSRF + tier 3 Accredited RFs will be small in number but large in AUM
Improved fund governance and an internal executive (PF130)
“Gatekeeper” power should diminish
Focus on cost will force more efficient use of fee and risk budgets resulting in
“bifurcation” of AM providers:
Will be more pure passive, smart passive etc.
High conviction, high alpha offerings will populate the “active risk budget”
component
Only the “real” active managers will survive – product pushers will fade
IMPLICATIONS
| 10
11. 2. Private sector could lose significant AUM & flows to GSRF
~50% of formal workforce earn below GSRF threshold of R150k
Will likely allow for transfer of accumulated savings to GSRF
Impact on large asset gatherers, Life Cos etc.?
How will government manage these assets? PIC? Already dominant on the JSE
3. Separation of duties
The end for one stop shop business model ? (accreditation criteria should see to
that)
Greater separation between “aggregators” and service providers?
Impact on asset gatherers, Life Cos etc.?
IMPLICATIONS
| 11
12. • Some things never change
Beware the salesman promising to “revolutionise” the industry
Rise of “cheap” passive; smart beta; beware of “cost vs. value”
Look out for principal/agent problems…
• In a low return environment, providers will scrap for crumbs!
Governance structures will have to be more robust than ever
• Simplicity is your friend
Its worked well for our retirement fund investors for 37 years…
PARTING COMMENTS
| 12
15. • Geopolitical risk is high – dominated by Trump’s inauguration
• US share markets discounting substantial increase in earnings
• “Risk-on” Trump rally should fade in 2017
• Increased protectionism and trade wars uncertainties
• Interest rate differentials between US and other developed market
economies will continue to widen
• Commodity prices will be volatile after a recovery in 2016
• Political risks remain elevated (Brexit, elections in France, Netherlands etc.)
• Inflation picking up globally
MACRO OUTLOOK – GLOBAL
Economic growth remains on track
| 15
16. SA ECONOMY
Facing headwinds
| 16
• Economic growth is unlikely to recover significantly
• Domestic focused companies may struggle to grow earnings
• Significant tax increases
• Stubbornly high inflation and interest rates will impact consumer
• Lack of job creation and weak real wage increases
• Political risk remains elevated
• Business and consumer confidence low
• Potential downgrade by rating agencies
• Longer term currency outlook is poor
22. Top 10 equity holdings at 28 February 2017
| 22
FOORD FLEXIBLE FUND OF FUNDS
% of portfolio
Roche Holding 2.7
CF Richemont 2.6
CVS Health Corp 2.5
BHP Billiton 2.5
FMC Corp 2.4
Gilead Sciences 2.3
PICC Property & Casualty 2.2
Alphabet Inc 2.2
China Construction Bank 1.9
Royal Caribbean Cruises 1.6
22.9
23. R 299
R 238
Mar 08 Sep 09 Mar 11 Sep 12 Mar 14 Sep 15
Foord Regulation 28
Best house view
FOORD FLEXIBLE FUND OF FUNDS
| 23
10.2%
13.1%
The chart compares the investment returns of the unconstrained Foord Flexible Fund of Funds (Class R) to Regulation 28 mandates managed by Foord (the Foord Balanced Fund (Class R) returns
are net of fees and therefore have been used for direct comparative purposes). The chart shows that the Foord Flexible Fund has outperformed the Foord Balanced Fund by more than 3% per
annum since its inception, illustrating the long-term opportunity cost of investing discretionary savings in a Regulation 28 portfolio.
CashValue(R’000s)
R100
25. INVESTMENT OUTLOOK
In a low growth, low yield environment
| 25
• Target attractively valued sectors and businesses with structural tailwinds, above
market growth potential and exceptional management.
- Healthcare: Increasingly complex healthcare needs of an ageing global population
- Financials: Rising middle class in Asia to drive higher financial services penetration
- Technology: Shift of media and advertising spend to online
- Consumer: Consumption moving towards experiences from goods
26. HEALTHCARE: AGEING POPULATION
| 26
Source: United Nations
Number of people aged 60 or over, 1950-2050
...health care spend increases as the population
ages
The world is getting older...
US health care spending per person (2014 US$)
Source: Health Affairs
Portfolio Holdings: Roche, Gilead, CVS, JNJ
28. FINANCIALS: RISING MIDDLE CLASS IN ASIA
| 28
Asia’s share in the global middle class is growing
rapidly…
…a rising middle class will lead to higher financial
services penetration in Asia
Source: Sanford Bernstein
Source: Brookings Institute, OECD, Deloitte Services
LP
Portfolio Holdings: PICC, AIA, CCB
Asia’s share of in the global middle class population 2009-2030
29. TECHNOLOGY: MOBILE ADVERTISING
| 29
…mobile’s scale is unprecedented and will lead to
a vastly bigger advertising opportunity
Advertisers remain over-indexed to legacy media…
Source: Kleiner Perkins Caufield & BeyersSource: Kleiner Perkins Caufield & Beyers
Portfolio Holdings: Alphabet
30. | 30
THANK YOU
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Foord Unit Trusts (RF) (Pty) Ltd (Foord Unit Trusts) is an approved CISCA Management Company (#10). Assets are managed by Foord Asset Management (Pty) Ltd (Foord), an
authorised Financial Services Provider (FSP: 578). Collective Investment Schemes in Securities (unit trusts) are generally medium- to long-term investments. The value of
participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Performance is calculated for the portfolios.
Individual investor performance may differ as a result of the actual investment date, the date of reinvestment and withholding taxes Performance may be affected by
changes in the market or economic conditions and legal, regulatory and tax requirements. Foord Unit Trusts does not provide any guarantee either with respect to the
capital or the performance return of the investment. Unit trusts are traded at ruling prices and can engage in borrowing. Foord Unit Trusts does not engage in scrip lending.
Commission and incentives may be paid and if so, this cost is not borne by the investor. A schedule of fees and charges, including performance fees, and maximum
commissions is available on www.foord.co.za or directly from Foord Unit Trusts. Distributions may be subject to mandatory withholding taxes. Portfolios may include
underlying foreign investments. Fluctuations or movements in exchange rates may cause the value of underlying foreign investments to go up or down. Underlying foreign
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