Caveat Equity Funds

F.A.Q

 

Fundamental Analysis

Based on our market hypothesis of fundamental analysis, in the long term the market is efficient, but in the short term it is very inefficient.

 

Stock Selection and Execution Process

  1. Sector performance.
    The strength of a sector relative to the Top 40 P/E Rating (Determined by Fundamental and Technical Analysis) relative to the All Share/Top 40
  2. Screening of individual stocks within sectors relative to its peer stock
  3. Degree of liquidity of stocks: High, Medium and Low
  4. Fundamental Analysis based on:

Forward earnings per annum
Earnings per share growth per annum
Foward dividend yields
Return on equity (ROE)
Return on assets (ROA)
Internal Rate of Return (Discounted Cash Flows)
Forward Price Earnings
Pretax Profit Growth

 

Technical Analysis

  1. Relative strength of a sector index and company relative to the All Share Index or Top 40 Companies against it's piers according to price action on a daily and weekly basis.
  2. Currency strength of ZAR rates in comparison with the USD, GBP and Euro
  3. Comodities strength of the USD versus the Gold, Oil and Platinum prices and trends (Dollar Index)
  4. Moving Averages:  200, 89 and 50 day
  5. S&P 500 and Dow Jones 30 strength and intermediate equity and sector trend strength versus the mighty US Bond Market (i.e. Trend on bond yields on the US Treasury Notes: 5 and 10 Years)

 

Act 28 of the Pension Funds Act

DRAFT REGULATION 28 (to replace the existing Regulation 28)

 

Limits relating to assets in which a registered fund may invest

28 (1) The board of each registered fund shall invest the assets of the fund in accordance with an investment strategy established, monitored, reviewed and reported on as set out in subregulation (2), provided that the limits established in subregulation

(3) are not exceeded.

(2) The investment strategy must be determined, monitored, reviewed and reported on in accordance with the following process:

(a) The board shall establish an investment strategy

(i) This investment strategy must take due account of

  • the objectives of stakeholders
  • the nature and term of the liabilities
  • the funding methods used in the fund, including, in the case of a defined contribution fund, any smoothing of investment returns accrued to individual member accounts, and
  • the risks to which the assets and the liabilities of the fund will be exposed.
  • (ii) The strategy must set out what percentages of the total fair value of the total assets of the fund may be invested in various classes and categories of asset, and what powers the investment manager will have to diverge from these percentages with, or without, the consent of the board.
  • (iii) The strategy should include the criteria with which investment managers shall be selected and the manner in which, and the frequency with which, their performance will be assessed.
  • (iv) The board shall consult experts with sufficient skill and experience to advise the board on an appropriate investment strategy, unless the board, itself, includes members with sufficient skill and experience to perform such function.
  • (b) The actuary to the fund must confirm that he or she is satisfied that the strategy is consistent with the objectives of the fund and the management of the risks to which the fund is exposed, and will result in an appropriate relationship between the assets and the liabilities.
  • (c) Where the fund will hold investments in its own name, the board must select investment managers who are competent to carry out their strategy.

 

Where the fund will invest in either a collective investment scheme, or a policy of insurance, the board should select a collective investment scheme or investment portfolio offered by an insurer such that the investment strategy of the collective investment scheme or investment portfolio will satisfy the strategy determined by the trustees.

 

(d) In selecting an investment manager, collective investment scheme, or insurance policy, the board members and any advisors assisting them should disclose any actual or potential conflict of interest, including any benefit that will be derived personally or by their employer as a result of the actual or potential placement of the investments of the fund.

(e)     The board shall monitor the performance of the investment manager, including compliance with the mandate, using the methods and frequency set out in the strategy.

(f) The board shall review the investment strategy either when there is a material change to the fund or in anticipation of a major change, or, failing such a change, on at least an annual basis. For the purpose of this sub-regulation, a material change to the fund will be a significant change in the membership of the fund or a significant change in the benefit structure or a significant change in the asset and / or liability values as a result of movement in the market or the transfer of assets and / or liabilities between funds or a change in valuation assumptions which has resulted in a material change to the actuarial values of either the assets or the liabilities.

(g) The board shall appoint a compliance officer who may be an official of the fund, such as the principal officer, or a consultant to the fund (provided such consultant is independent of the investment manager), or the auditor, or an official working for the administrator of the fund, provided that the board is satisfied that the compliance officer has the required skills and expertise to perform such a function in a responsible manner.

(h) The compliance officer shall report annually to the registrar providing the following information:

(i) the split of assets by class of asset in the format prescribed in Annexure A to Schedule I, distinguishing between Local Investments and Investments Outside RSA with an explanation of where the asset composition is not in accordance with the strategy, if this is applicable.

(ii) whether the investments are being managed in accordance with the strategy, including confirming that the trustees are monitoring the performance of the investment managers;

 

(iii)confirmation that the trustees have reviewed the strategy with their professional advisors, including the fund’s actuary, and the fund’s actuary remains satisfied with the appropriateness of the strategy taking account of the risks to which the fund is exposed, the way in which the fund is managed, and the objectives of stakeholders.

 

(i) The board shall report the strategy, in summary form, to the members in such a way that a typical member will be able to understand the objectives set for the investment manager and will be able to reconcile these objectives with the overall investment strategy set by the board.

(j) Where the board offers all, or some, members choice over the investment medium in which those particular members’ interest in the fund shall be invested, the board shall ensure that

(i) any members who are offered choice over the investment medium in which their interest in the fund is invested either have the skills and expertise to manage such choice themselves, or have access to advisors who have such skills and expertise and who will advise the members on their choice of investment medium, provided that this requirement shall not apply where all the following conditions are satisfied:

  • continued employment by a particular employer is not a condition of membership of the fund,
  • the member requests individual choice of investment portfolio, and
  • the member indemnifies the board against any diminution of his or her investment account as a result of an inappropriate selection of investment portfolios;
  • (ii) the investment portfolios in which members may invest are selected because the portfolios have strategies which are consistent with those that the trustees feel may be appropriate to members of different risk profiles and ages, or which offer members the opportunity to combine in such a way that an appropriate individual strategy may be matched;
  • (iii) the strategies adopted by the investment managers in respect of each such investment portfolio are explained to members in language that they can reasonably understand;
  • (iv) the performance of each investment portfolio is monitored and compared with criteria established by the board prior to appointment of the investment manager in a manner consistent with that set out in (e) above.
  • (v) in case any members who are entitled to select their investment portfolio do not exercise a choice, the board must establish a default investment option in which the fund will invest those members’ interests in the fund. Such default option may include a range of investment options depending on factors such as the age of the member.
  • (vi) if an investment manager is not adhering to the strategy notified to the board and the members, the appointment of the investment manager is reviewed by the board and, if they decide to retain the investment portfolio as an option for members, members are informed of the failure to adhere to the strategy set out, and are invited to review their selection of investment portfolio. Where the board does not retain the investment portfolio as a permitted investment option, they shall transfer members’ interests in that portfolio to another portfolio of the member’s choice, failing which, to the default portfolio.
  • (k) The registrar may on prior written application by a fund grant such fund exemption from any of the provisions of this subregulation upon such conditions as he may impose.
  • (3) (i) The fair value of any single investment at the date of purchase of the investment shall not exceed the following percentages of the total fair value of the total assets of the fund, as determined within one month of the date of purchase of the investment:
  • (a) if the investment is in quoted shares of a listed company with a market capitalisation of R2 billion or more, 5%
  • (b) where the fund is established for the benefit of employees of a sponsoring employer, if the investment is a loan to the sponsoring employer, or an investment in the shares of the sponsoring employer, or some combination of loan and purchase of shares, 5%
  • (c) otherwise, 2,5%.

 

For the purpose of this sub-regulation, “sponsoring employer” means

 

  • the company for whom the member works, where only one company participates in a fund;
  • any company within a group, where “group” describes a company and its subsidiaries (where the company owns at least 50% of the subsidiary), or all companies with a common holding company, and the employee works for one of the companies in such group.

 

(ii) The fair value of foreign investments shall not exceed 30%of the value of the South African liabilities of the fund plus 100% of the value of any foreign liabilities of the fund.

(iii) The registrar may on prior written application by a fund grant such fund exemption from any of the provisions of this subregulation upon such conditions as he may impose.

(iv) In this regulation, “fair value” in relation to

(a) the value of every listed asset, means the price at which it was quoted on the Johannesburg Stock Exchange or the Bond Exchange of South Africa within a period of three months immediately preceding the date on which the value is being determined, provided that this amount shall be adjusted in the case of

(i) any interest-bearing asset, by the difference between the amount of the interest which had accrued in the period from the last date on which interest was payable up to the date of the quotation, and the amount of interest accrued for the period to the date on which the value is being determined; and

(ii) any share on which dividends have been declared, by the difference between the amount of any dividend which had been declared but not paid on the date of the quotation and the amount of any dividend which had been declared but not paid on the date on which the value is being determined.

(b) the value of other assets, the value determined in accordance with section 19(5A) of the Act.

 

The definition of “fair value” applies mutatis mutandis to investments outside the Republic and in such application the reference to the “Johannesburg Stock Exchange or the Bond Exchance of South Africa” in paragraph (i) must be construed as a reference to “any exchange recognised by the registrar” and the reference to “the Republic” in section 19(5A) of the Act as a reference to “any territory recognised by the registrar”.