FINWEEK
Money. Power.
17 November 2011

https://www.fintalk.co.za/

LIGHT AT THE END OF THE TUNNEL
Brian Molefe on track to rescue Transnet

• BEWARE: CREDIT BUBBLE
• DOWN WITH DOWNSIZING

CONTENTS

NOTEBOOK
IN A NUTSHELL
IN THE NEWS

• Market madness
• Are your ETFs safe?

AT THE COALFACE
Latin America: A big opportunity

IN MY VIEW
Compounding negative returns are the cancer of wealth creation

GLOBAL MARKETS
OMIGSA
Profiting from emerging markets
ASHBURTON
Ashburton’s new global equity portfolio
INDONESIA
Asia’s sleeping tiger
ALLAN GRAY
Orbis takes advantage of pessimism

GENERAL OUTLOOK
ABAX
Reaping gains in a difficult climate

DOMESTICS FUNDS
OMIGSA
A bull case for the mining sector

DOMESTIC EQUITY FUNDS
OMIGSA
Investing for growth and high returns
OMIGSA
Albaraka Equity Fund showing the way

DOMESTIC ASSET ALLOCATION
PRUDENTIAL
Uncertainty brings opportunity
INVESTEC
Making sense of the unknown

DOMESTIC FIXED INCOME
STANLIB
Fixed income franchise takes the lead

DOMESTIC CASH SOLUTIONS
NEDGROUP
New option for cash investor

FOREIGN STOCK BROKING SOLUTIONS
GLACIER BY SANLAM
Investing in offshore shares the easy and safe way

THE LAST WORD
Options for the thirsty but cautious

Cashing in on the emerging market’s bonanza

The past quarter has arguably been the most volatile since the 2008-2009 crisis and is largely reflected in this edition.

In several of our meetings we’ve had those expressing considerable longer-term confidence, while others have been overwhelmed by anxiety about short-term developments, especially in Europe. Black Swans, once a rarity, seemed to be gliding in considerable numbers across various areas of the investment pond.

The important thing is not to over-react to recent events. Emerging markets are holding up well, the US is still growing, and all around there are signs of institutions and companies taking a fresh attitude to risk and, in many cases, adjusting programmes that reflect lessons learned over many years.

On the positive side we give considerable coverage to the ongoing magic of emerging markets. Victor Hugo Rodriguez, President of the Latin America Chapter of the Hedge Fund Association in New York, provides fascinating insights on Latin American risk management and how this has been turned to good account.

We also report on Old Mutual’s new global emerging markets fund, managed by Anwaar Wagner, and aimed at leveraging the enormous opportunities emerging markets offer. That’s where most of the longer-term action will be.

Company valuations there have rarely been more attractive; price/earnings ratios are significantly lower than the MSCI World index; and they often have considerably cleaner balance sheets and lower leverage compared with their global peers.

We focus furthermore on Indonesia wish is one of the fastest growing economies in South East Asia and seems set to join the world’s top 10 economies by 2020.

Prominent resources fund manager, Ian Woodley, tells us that although mining stocks have been hard hit, they too are pointing to attractive valuations and not reflecting an absolute worst case. He says he is actively buying them also as a way of playing the emerging markets story.

We’ve reported extensively in recent quarters on investors wishing to invest directly in foreign shares instead of offshore unit trusts. Two new developments touched on in this edition are Ashburton’s brand new Global Equity Portfolio available to investors and Glacier’s highly competitive pricing.

Another newsy development that caught our eye is that former Stanlib/Liberty figures, Ian Ferguson and Sean Seger, have teamed up with Nedgroup Investments to provide dedicated cash solutions to clients. It will be interesting to see what unfolds.

Not to be outdone, Stanlib is still powering ahead in similar space, managing about R160bn across the yield curve and equating to nearly twice the size of its nearest rival. Fund performances remain highly competitive.

These are just some of the stories we’re bringing you and hope that they contribute to your strategic planning.
LEON KOK.

Latin America: A big opportunity

LATIN AMERICA was long viewed as one of the most economically volatile regions in the world, but in the past decade it has really taken off. The bad old days of authoritarianism, populism and economic chaos seem to be behind us for the most part.

Financial Times columnist Gideon Rachman wrote recently that the continent that was once synonymous with the world’s “economic crises” has become the toast of emerging markets. Countries that lived in dread of capital flight now complain that there is too much “hot money” flowing from abroad.

He points to Brazil, which has become a global power and overshadows much of the rest of the continent, and mentions Peru, its smallest neighbour, wich in some ways is even more remarkable. A country once famous for a vicious Maoist insurgency, Peru’s economy grew by nearly 9% last year and it has commitments for more than $40bn of nw foreign investment in mining alone.

In the case of Panama, central bank reserves have tripled in recent years, and in Nicaragua and Costa Rica they have doubled in the same period.

While the global crisis brought most of the developed economies to their knees, thanks to its trade links with Asia, Latin America’s economies were broadly unhurt. Economic growth across the board, though lower than Asia’s, is still in the region of 5% to 6%.

Leon Kok spoke to Victor Hugo Rodriguez about the growing hedge fund industry in the region. He is President and CEO of LatAM Alternatives in the US and President of the Latin America Chapter of the Hedge Fund Association.

LK: How is the region faring up generally – are prospects looking good or are we entering a vortex of bad news?
VR: Very much a case of perception, Is the glass half full or is it half empty? So much depends on the situations in Asia, the US and Europe.

How would you describe the general nature of the Latin American hedge fund industry?
It’s growing phenomenally, especially in Brazil, which comprises about 75% of hedge funds in the region. Greater sophistication and regulation are emerging and largely because of this the industry was able to weather the 2008-2009 global meltdown extremely well. It remains resilient despite current market dislocations in the US and Europe. Exchanges have also upgraded trading systems, eager to attract overseas investors, including funds looking for the next big emerging play.

What are the mains strengths?
The industry is underpinned by sound structures in key countries, the right macroeconomic policies, massive resources and concerted efforts to maximise sustainability.

Don’t forget that following the difficulties a decade ago, several countries were forced to restructure. In 2001 Argentina experienced a severe sovereign debt default, followed by severe sovereign debt default, followed by severe market turmoil in Brazil a year later. When the dust settled, more than $100bn had been defaulted upon, forcing many investors to take sizable haircuts when sovereign debt was restructured. But this largely set the continent in a new direction strategically.

Does the 2008-2009 global crisis still overshadow the industry?
Most certainly. Many managers have become noticeably more cautious – some – times even to the consternation of their investors. Few hedge fund managers have the flexibility they once had, investors are more demanding and regulators more exacting of what they expect and what is permissible.

To what extent are global regulatory efforts impacting  on the region?
Immensely, and they’re to be welcomed. The main countries have shown that they’re ready for it and it has contributed significantly to the quality of the industry. The need for strong structural foundations is widely recognized. It allows the region to go to the next level. Some countries have missed the boat, but that will have to be dealt with on an ongoing basis.

Which countries enjoy the greatest investment focus of leading international investors?
In this order, and because of restructuring from 1992 onwards: Brazil and Chile, followed by Colombia and Peru. Not unimportant though are Argentina, Mexico and Panama.

To what extent are international sovereign wealth funds, pension funds and institutional investors showings an interest in the region?
Immensely. They’re continually shopping around, not merely for alternative investments, but also in the traditional asset management sectors. Pension funds have become more confident about investing in hedge funds and in many cases are allocating money directly to single manager funds rather than funds of funds. São Paulo and Rio de Janeiro are the main destinations.

Would you consider the main destination countries a haven in the light of difficulties in developed countries?
Yes and no. They appeal for several of the aforementioned reasons an offer considerable opportunity, but they’re not necessarily immune from market volatility emanating from elsewhere.

Where is the greatest industry growth?
Historically, large managers have attracted most new money, but there has been a big shift towards mid-sized managers. Pension funds and sovereign wealth funds are increasing their exposure to smaller funds as the industry matures.

To what extent is retailization of the hedge fund industry taking place?
Major drives are emanating right across the major financial sectors to come to grips with alternative investments. There include educational drives supported by out organisation. Education is imperative to raise the bar. Greatest interest has emanated from pension fund trustees, listed companies, banks and even leading government officials. It is also increasingly understood in tertiary institutions that a healthy, diverse and flexible hedge fund industry is necessary to make markets work well.

Are many people still wary of hedge funds?
Most certainly, especially those who lack a strong understanding of the industry.

How is global market volatility affecting Latin American markets?
It represents both good and bad opportunities. You have to be very careful of saying that high volatility is good, especially if it largely emanates from outside the region. It has to be viewed on a case by case basis by the institutions. And regardless of it, fund managers need to do a great deal of homework. However, a hedge fund approach can cut the volatility by more than half without giving up half the returns. Shorting can produce profits, even in a region bursting with beta. A range of derivatives also exist to help protect a portfolio or to leverage it.

Is the volatility easily understood by investors?
By its nature, no, and still less manageable. Volatility has shown us that it can suddenly appear out of the blue, stay a few weeks if not months, and be very damaging if you don’t have strategies in place to deal with it.

A country once famous for a vicious Maoist insurgency, Peru’s economy grew by nearly 9% last year and it has commitments for more than $40bn of new foreign investment in mining alone.

What is the extent of opportunity it’s providing?
It’s decidedly not a buy-and-hold strategy. You need to take profits when volatility is high because it is mean-reverting. It is not a productive asset in the sense that bonds and equities are.

The most popular fund strategies?
Credit has been extremely important, given that these markets are heavily invested in fixed income. Beyond that, quantitative easing, the eurozone crisis and geopolitical instability have made a perfect environment for relative value specialists, which depend on inefficiently priced credit and bond markets. Equities are naturally important and one shouldn’t overlook the importance of private equity funds in the alternative space.

How do fixed income hedge funds make their money?
Market-neutral funds, for instance, usually buy one credit and short another. The other main strategy is rates or yield curve trading, which is the art of predicting interests rates or the price of government bonds based on trends and the analysis of macro-economic information.

How are event-driven strategies faring in the region?
They’re among the least recognised in the industry and yet many funds are associated with them. In recent years the strategy has performed roughly in line with the broader hedge fund industry. However, there’ve been fears that bread-and-butter event-driven trades are becoming over-crowded.

How have macro-managers been faring?
They haven’t necessarily been able to deliver what investors expect, though some funds have hailed the Greek crisis as a unique investment opportunity. Numerous macro-economic shocks this year particularly have dented portfolios and some are expecting worse to come. Some people are moving to cash, at least for the moment.

How are commodity funds playing out?
Big centre of interest in Latin America, but a bit crowded out from our perspective. Co-relation with other asset classes has risen.

On the other hands, the surge in commodity prices since 2002 has encouraged investors to switch money into areas which are rich in oil and resources, and with a big agricultural sectors. They provide a way for fund managers to invest in the rapid development of the region, particularly Brazil.

The general state of the banks in the top-tier countries?
An excellent question, because the banks represent the strength of the financial system in any country or region. They’re generally well run, well capitalised, and have shown remarkable resilience. No banks in the region have failed since 2008. Regulators understand the problems that emanated in the late 1980s onwards and remain vigilant about maintaining stability.

Has structured finance, particularly securitisation, become a dirty world?
No, not at all. It provides great opportunities for the right investors.

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