10X has shied away from alternate asset classes, such as hedge and private equity funds. Among our key concerns: high fees, poor transparency, complexity and trading restrictions. Admittedly, some of these concerns had an anecdotal basis, but not anymore. Simon Lack’s exposé of the hedge fund industry (The Hedge Fund Mirage) supports our ‘prejudice’ with insider insight and hard numbers. His conclusion: yes, hedge funds have created a huge amount of wealth, but almost all of this has gone to managers rather than investors. Which raises the question whether upping the local prudential limit on hedge funds, as permitted by revised Regulation 28, is really all that prudent.

Retirement saving would be far more successful if left to parents, rather than their children. Why? Because we tend to take much better care of our children, than of ourselves. We may neglect our own retirement, but we would think twice about prejudicing our children that way. So it would a lot of sense from a behavioral perspective. It would make even more sense financially: by bagging 65 years of compound returns (and keeping a lid on costs), we could cut total retirement savings contributions by up to 90%!

Is there a difference between a fair outcome and a fairness outcome in the pension fund industry? The question arises as the FSB’s “Treat Customers fairly (TCF)” initiative, set for 2014, mandates fairness outcomes in the financial sector. But will those deliver the fair outcomes that investors anticipate? The investing reality in South Africa This [...]

If South Africa’s healthcare sector was run by the investment industry: our lighthearted take on a serious subject.

The bulk of retirement investors are disengaged from the savings process. Their apathy and ignorance is shamelessly exploited by the industry’s marketing and distribution machine, which creates illusions of future wealth and suggests the possible rather than the probable. To this end, the industry perpetuates six investment myths that serve the interests of the industry but not the investor. Most realise far too late they have been duped, with severe consequences to their pension. The sooner they become aware of these myths – and the positive alternatives available in the market – the better.

The ‘treat customers fairly’ regulation fails to answer the most basic of questions: what is fair for the investor? It evades this issue by listing six fairness outcomes that are, for the most part, vague and meaningless. The form of the investor experience may well change on the back of this initiative, but probably not the substance; the unfair distribution of investor returns is simply too ingrained in the industry DNA.

How rotten does an industry have to be, that it must be forced – by threat of sanctions – to treat its customers fairly? The FSB’s ‘treat customers fairly’ initiative is perverse, even if has noble intentions. Sadly, the unfair treatment of investors is so ingrained in the industry DNA that little will change.

Historical performance charts – typically showing dramatic outperformance over the benchmark – are often a source of envy and regret. The competitors’ envy is understandable, but the investors’ regret sometimes unnecessary, as they would have been just as well off investing in the benchmark. The reason is that relative performance charts are based on the time-weighted return, before the impact of fees. Investors however receive the money-weighted return, after fees. The money-weighted return is typically lower than the time-weighted return (as the fund grows over time, so opportunities and outperformance moderates), and more often than not, the bulk of the outperformance is pocketed by the fund manager in fees. The upshot: assuming active management risk and paying high fees pays off on rare occasions, but for the average investor it is a losing strategy.

This is the second part of our study exploring the return prospects of the key local asset classes – SA Equity, Bonds and Cash – both individually, and combined within a balanced portfolio. In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. In Part 2 we examine the outlook for SA Bonds and Cash, and the likely impact on balanced portfolio returns.

In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Yet investors have done much better in recent years. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. This will make it even more important to follow a consistent and adequate savings strategy, and to keep a watchful eye on fees, to prevent the retirement industry pocketing an even larger share of returns. In Part 1 of this two-part study we explore the outlook for SA Equity.