Sherilee Bridge
Investors spooked by the bloodbath on the global equities markets are being forced to find safer havens for their capital. South African investors have taken so well to the lower risk of the Saitrix 40 a fund that tracks the performance of the JSE Securities Exchange’s top 40 stocks that the unit trust industry’s prestige as the individual investor’s gateway to the market has been shattered. Still high on the success of the Satrix 40, the JSE plans to list more index-tracking investment products, with the next likely to be linked to the financial and industrial indices. Investments linked to foreign indices should soon follow. Saitrix 40 listed on the JSE in November last year and has since seen about 22% return on its listing price of R7,74. It is South Africa’s first index share and gives investors access to blue-chip shares like Anglo American, Rembrandt, SA Breweries and Old Mutual, but cuts the risk of betting all the money on one share.
For the unit trust industry, which had lost much of the appeal that attracted so many newcomers until recently, it couldn’t have come at a worse time. Investing in unit trust funds was pretty easy in the earlier bull market and their popularity meant no one complained as long as the industry was showing healthy growth and it was. Professor Hugo Lambrecht of the University of Pretoria says most active managers have underperformed the indices in the past 15 years and this year should be no different. He says the odds of picking an index-beating fund are one in seven and of picking one with negative returns is one in four.
It was widely predicted when exchange-traded shares and index funds launched in the United States more than five years ago, that the unit trust industry would either fold or be forced to slash pricing. Now analysts say the same will happen here. Lambrecht says the Satrix 40 may steal some funds but the real danger lies in the cash flows that will be converted from unit trusts. Unit trusts will survive, but only after reducing their fees, he says. And the fund is keeping its mangement fees low in the face of rising costs in the unit trust industry. The Satrix 40 takes a 0,2% initial fee and asset management and administration fees of 0,13%/year.
@US rallies world
leaders
Mark Milner and Larry Elliott
United States Treasury Secretary Paul O’Neill has rounded on his fellow G7 finance ministers with a demand that the world’s other leading economies should play their part in preventing the global economy sinking into recession.
As the finance ministers met in Rome last weekend, O’Neill underlined the growing anxiety about increasing turbulence in the world’s money markets. His statements came as share prices fell sharply around the world, while currency markets were again dominated by the strength of the US dollar. “We are doing our part to contribute to strong and stable growth worldwide,” said O’Neill. “Europe and Japan are obviously very big and very important. They can play a locomotive role and they need to play a locomotive role as well.”
Wall Street led the fall last week, with the Dow Jones index dropping more than 200 points in early trading in response to weaker than expected US employment figures.
The news raised fresh doubts about the speed at which the US will respond to the six cuts in interest rates from the Federal Reserve since the start of the year.
The US pointed out that the European Central Bank (ECB) has cut rates only once in the same period, and that growth in Europe has slowed markedly this year. Euroland finance ministers are likely to respond by detailing tax-cutting programmes in Germany, France and Italy to boost growth.
France’s Minister of Finance, Laurent Fabius, hit back, saying the US is to blame for the slowdown in the world economy this year and that Europe’s growth will succeed that of the US.
The US’s problems are being compounded by the steady rise of the dollar, which hit a 15-year high on a trade-weighted basis last Friday as investors saw Wall Street as a safe haven.
Christian Noyer, vice-president of the ECB, described the euro-dollar exchange rate as “ridiculous”, warning that unless the euro recovered several US industries would be out of business within 10 years. “We are now so competitive that the US cannot compete in steel, in automotives, in planes.”
The poor US jobs figures provided respite for the euro, which clambered above 84c after an eight-month low of 83,5c. Analysts believe it could test the 80c level within weeks unless there are signs of a pick-up in European growth.
@Debt clearance blowing in the windfall
Sharon Gill
Little can spur a spending spree like an unexpected windfall. A DVD player suddenly becomes essential and an iPac powerbook an entry-level machine. It is a chance to revert to childhood, and a moment any sage financial adviser will squash in a heartbeat.
That was the reaction of my sage moments after he presented me with a R10 000 tax rebate.
How you spend a financial windfall depends on one question: are you in debt? If so, the consensus among financial consultants and bank managers is consistent: use the money to pay it off. Reserve Bank figures show that South Africans spend more than half their disposable income paying off debt. With credit interest rates at more than 20%, servicing debt is an end in itself and you can easily get caught in a debt spiral. This means it is essential to plan to be debt free. First settle high-interest debt, which includes credit cards and store accounts. If your windfall falls short of squaring up all accounts, look at reshuffling or consolidating your debt. One way is to extend your bond. “If you have an Access Bond,” says Standard Bank spokesperson Erik Larsen “you can borrow from it to settle other accounts.” The reasoning is that a home loan offers one of the best borrowing rates. Interest on a housing bond is 13,75 %. The interest rate on your credit card is about 22%, and the interest rate on most store accounts is between 22% and 25%.
But know what you are getting into. A bond is only cheaper than overdraft or instalment credit finance if you commit to paying it off in five to 10 years.
Of course, being debt-free opens up a range of possibilities for investing a windfall. While you are looking into the options available, a safe bet to put your windfall in a money market account. It offers the best short-term interest rates and it also allows you to withdraw your funds whenever you decide what investment vehicle to move into.
@In brief
l Draft legislation that offers investors special tax incentives and ratify tax changes announced in the Budget has completed its passage through Parliament and awaits President Thabo Mbeki’s promulgation. Directed at long-term, employment-generating projects of more than R50-million, the strategic tax incentive envisaged in the bill will grant those investing in manufacturing and information technologies an additional (up to 100%) tax deduction. The new laws will also bring the taxation of private company directors into line with that levied on employees. They will thus become subject to pay-as-you-earn (PAYE) taxation on their salary and other remuneration. Currently directors need only settle their tax bill through provisional payments, and finally on assessment, giving them a substantial cash-flow advantage over ordinary employees.
l Legislation providing the necessary framework for Telkom’s IPO is expected to be tabled before Parliament this month. The government has promised to fast-track the bill. Niggling fears that the IPO may be again delayed have continued to plague markets. Investors view the IPO as a benchmark of government’s privatisation, which has been somewhat sullied by the controversy over payments to former South African Airways CEO Coleman Andrews.
l The probe into De Beers’ proposed jewellery venture continues. The European Commission is evaluating the plan, which would see De Beers teaming up with France’s LVMH Moet Hennessy Louis Vuitton SA to create an exclusive line of De Beers jewellery and open an international chain of shops. The commission is looking at whether De Beers will use the new venture to push other rough diamond suppliers out of the cut gem market and increase demand for its own rough diamond supply. It is expected to make a ruling next month.
ENDS