CFA South Africa Monthly Newsletter for Chartered Financial Analysts Issue 6 September - October, 2010

University of Cape Town takes Top Honours at GIRC

CFA South Africa (non-profit local society of CFA Institute) representing Chartered Financial Analysts has for a second year running, announced the as the Global Investment Research Challenge (GIRC) winners for 2010.

The GIRC is an educational initiative in which leading industry professionals guide students on how to research and report on a publicly traded company. This event spans over three months, and consisted of analyses of a public company while being mentored by a professional research analyst; writing a sell-side research report, and finally presenting the research results and recommendations to a high-profile panel of experts.

Both the written report and the presentations From left: The University of Cape Town students; Tanya Hopker, Michail contribute to the overall score for a team. Marks Scholiadis, faculty advisor Francois Toerien, Emlyn Flint, Wasseem Hassen and for the presentations are awarded to teams based Jade Misplan took top honours at the local leg of Global Investment Research on their investment case, their poise, and their Challenge in for their analysis report on Vodacom. ability to answer the judges’ questions. The event is sponsored by CFA Institute as well as local CFA region. The winner of the EMEA regional competition proceeds to the global Institute member societies, of which the latter each finals that will be held on 8 April 2011 in Omaha, Nebraska, USA. host country heats of the Challenge. “The competition this year was fierce, with the participating teams The University of KwaZulu-Natal, University of elevating the standard from last year. All the teams participating were worthy Cape Town (UCT), University of Johannesburg (UJ), competitors. It is a great achievement by UCT to have won the local GIRC two University of Witwatersrand (Wits) and the years in a row. Last year, the team made it all the way to the finals, which (UP) all participated in the demonstrates the virtues important for success in the investment profession: competition with UCT, UJ, Wits and UP reaching the ethics, analytics, rigour and tenacity. We wish them all the best going final to defend their individual reports and analysis forward,” said CFA South Africa President Elbie Louw, CFA on telecommunication company Vodacom to the panel of judges. The panel of judges for the 2010 local competition were Arthur Thompson (Past President of CFA South Africa and President Council UCT will, on 3 March 2011 represent South Representative for the EMEA East Region), Chris Gilmour (Absa Asset Africa at the Europe, Middle East, and Africa Management) and Peter Armitage (Investec). “As industry professionals with (EMEA) regional final of the GIRC in Madrid, Spain, years of experience, we were impressed by the students analytical ability and where the team of students will defend their report skill to sell their recommendations,” added Armitage. on Vodacom against the other finalists in the

OTHER CFA PUBLICATIONS

CFA Institute and Foundation for Governance Research and Education Launch Stewardship Project

Task Force to Look at Role of Institutional Investors in Improving Corporate Governance

CFA Institute, in conjunction with Professor John Mellor and the Foundation for Governance Research and Education (FGRE), announces the launch of a project to analyse any impediments to investors seeking to be more effective stewards in the area of corporate governance and responsible share ownership. With research being undertaken through the autumn, CFA Institute and FGRE expect to publish a report in March 2011 outlining findings and recommendations to address the issues. The project comes on the heels of a recent consultation and launch of the Stewardship Code from the United Kingdom’s Financial Reporting Council.

CFA Institute and FGRE have established a task force of senior figures from the issuer, investment management, and trustee communities to steer the project. Contributors to this group, which met for the first time yesterday, will be added throughout the project.

The current advisory group members are listed below:

 Charles Cronin, CFA, head, Standards and Financial Market Integrity EMEA, CFA Institute  Professor John Mellor, founder and executive director, Foundation for Governance Research and Education  Alan Brown, group chief investment officer, Schroders  Carmine Di Noia, deputy director general, Head Capital Markets and Listed Companies, ASSONIME  Will Goodhart, chief executive, CFA Society of the UK  Howard Jacobs, trustee, Universities Superannuation Scheme  David Pitt-Watson, chair, Hermes Focus Asset Management Ltd

Co-Chairperson of the task force, Charles Cronin, CFA, head, EMEA, Standards and Financial Market Integrity at CFA Institute, said, “Following the financial crisis, many stakeholders around the world are seeking ways to improve corporate governance. The spotlight of attention is increasingly being focused on what the investment community can do to help promote better governance practices at firms in which they invest. Through this project, we are seeking to identify any significant impediments that impact an institutional investor’s ability to get involved and propose solutions to address them. The findings from the research will be a timely complement to initiatives such as the Stewardship Code for Institutional Investors launched by the Financial Reporting Council in the United Kingdom, as well as to inform discussions relating to the Green Paper on Corporate Governance issued by the European Commission, among other proposals.”

Co-Chairperson, Professor John Mellor, executive director of FGRE, said, “I am delighted that this project has attracted such a breadth of senior interest from the issuer, institutional investors, and beneficiaries. This is testament to how serious these figures see the issue and their desire to understand and foster improvements in governance, and the concept of responsible ownership. The outputs from this project should help outline a greater understanding of the complexities surrounding stewardship under the prevailing joint stock owner model.”

SOUTH AFRICA’S ECONOMY IS OPERATING UNDER CAPACITY

Views from Speakers at the Annual CFA South Africa Conference

In the recent World Competitiveness Report, South Africa was ranked 25th overall for the size of its economy, and 54th for its competitiveness. This, says Gordon Institute of Business Science (GIBS) Director Nick Binedell, is the wrong way round. A country’s competitiveness index should be ahead of its market size if it is to grow.

Speaking at the recent annual not-for-profit professional society CFA South Africa (Chartered Financial Analysts) conference, Binedell said that, “In addition to strength of innovation and competitiveness in the private sector, it is clear that in emerging countries (dynamic markets) it is vital that the State provides effective and appropriate infrastructure. Such “…South Africa … has an inherited history of capacity to infrastructure should include education, technology produce champion multinational global companies and strong- willed entrepreneurs...” and other physical requirements such as road and rail,” he said. A particular example for competitive growth is Japan, which has gone from a smaller economy than The South African economy, he says, has a GDP in South Africa and has become one of the world’s excess of $300 billion and in a global economy of $50 biggest economies in fourteen years. trillion; South Africa remains a very small player – in fact less than half a percent of the world economy. The South Africa, on the other hand, has an inherited competitiveness indicators also show South Africa is history of capacity to produce champion multinational very highly ranked with regard to governance, auditing, global companies and strong-willed entrepreneurs but, security regulation and banking, and in fact scores currently, our map as businesspeople is incomplete. exceptionally highly for a country of our size (in the top We need to build a map that can increase our ten for these indicators) but ranks only 135th in Maths. economy as the country is currently operating below “It is unlikely that a country in a knowledge intensive, its potential. global economy can generate high levels of growth Eighty percent of future economic growth is set to without a highly skilled and educated workforce. come from dynamic markets and European, Japanese, Clearly we are going into battle without being and American interests are rebalancing as economics, adequately armed,” he says. and politics of the world is changing. “However, for "The low rankings South Africa achieved in the South Africa to take advantage of the changing areas of education and maths, once again puts the markets and become a leader, we must be literate and spotlight on the writing on the wall: to achieve educated to be able to find the opportunities. We sustainable economic growth in South Africa, we need must be connected to conflicts around us and to invest in our youth in a tangible consistent manner," understand them to know how to use it to our adds CFA South Africa President Elbie Louw, CFA. advantage.”

CFA INSTITUTE DIGEST

The Ultimate ‘Must Read List’ for All Financial Professionals

Extreme Risk Analysis CFA Digest Nov 2010, Vol. 40, No. 4. Effective risk management requires identifying sources of risk and understanding their effects on a portfolio’s overall risk. The authors present a generalised risk analysis that extends volatility-based techniques to estimate the size of extreme losses when they occur, which is known as shortfall. By analysing volatility and extreme risk together, the authors confirm that no single measure can fully characterise portfolio risk.

Time to Print, Print, Print CFA Digest Nov 2010, Vol. 40, No. 4. Ben Bernanke, the U.S. Fed Chairperson, has acknowledged the uncertain economic outlook but has said that the Fed wants to see further weakness before enacting another round of quantitative easing. The author believes that immediate action is needed because the risks of deflation and increasing consumer pessimism outweigh the risk of moderate inflation.

Are Member Firms of Corporate Groups Less Risky? CFA Digest Nov 2010, Vol. 40, No. 4. The authors examine Japanese keiretsu companies and the impact that such a corporate group structure has on company-level and market-level risk. They find that through the practice of sharing profits and risks, keiretsu companies reduce company-level risk and increase market-level risk, resulting in a negative impact on shareholder wealth.

Expected Volatility, Unexpected Volatility, and the Cross-Section of Stock Returns CFA Digest Nov 2010, Vol. 40, No. 4.

The authors decompose idiosyncratic volatility into an expected component and an unexpected component and study the relationship between these components and share returns. The authors find a statistically significant positive relationship between expected idiosyncratic volatility and expected return, suggesting that expected idiosyncratic volatility of shares is a priced risk measure.

Amber Waves of Pain CFA Digest Nov 2010, Vol. 40, No. 4.

The authors contend that commodity exchange-traded funds (ETFs) transfer wealth from retail investors to financial institutions and professional futures traders. Commodity ETFs can disrupt the supply and demand conditions for commodities and create unpredictable price patterns, leading to increased costs for consumers.

The Long-Horizon Benefits of Traditional and New Real Assets in the Institutional Portfolio CFA Digest Nov 2010, Vol. 40, No. 4.

The demand for real asset investments is driven by the correlation between asset returns and price inflation, especially for pension plans with inflation-sensitive liabilities. The author tests nine asset classes and finds that inflation-linked bonds, commodities, timber, and farmland offer the best hedges against short- and long-term inflation.

The Flaws of Our Financial Memory CFA Digest Nov 2010, Vol. 40, No. 4.

Although highly evolved, human cognitive ability is not necessarily well adapted to the challenges of modern life. Memories tend to change over time and do not always represent an accurate description of facts and autobiographical events. Investment policy statements and investment diaries are two possible ways investors can address these memory “flaws”.

Robust Performance Measures for High Yield Bond Funds CFA Digest Nov 2010, Vol. 40, No. 4. The authors compare high-yield bond mutual funds with non-high-yield bond mutual funds to determine the suitability of ranking fund performance with raw return data. Because of serial correlation, ranking fund performance based on raw returns seems misguided, but corrected measures considering excess return do not always agree with the performance rankings.

Andrew Mitchell at the CFA South Nick Binedell at the CFA South Africa Jamie Ziegler at the CFA South Africa Africa Conference held in JHB Conference held in JHB Conference held in JHB

CFA Institute FINANCIAL ANALYSTS JOURNAL CFA Institute Take 15

Video Podcasts

The Art of the Better Forecast Faith Consistent Investing Financial Analysts Journal Nov 2010, Vol. 66, No. 6. In this episode, Rev. Séamus P. Finn shares his Not All Buybacks Are Created Equal: The Case of Accelerated Stock Repurchases Financial Analysts Journal Nov 2010, Vol. 66, No. 6. views on faith consistent

The authors documented the characteristics and market performance of ASR (accelerated investing in the Christian share repurchase) stock. They found that post-announcement ASR stock performance is tradition. Download Now poor, unlike that documented in the literature for other repurchase methods, which implies that SRs do not signal undervaluation, a frequently suggested motivation for repurchases.

Performance Attribution: Measuring Dynamic Allocation Skill

Financial Analysts Journal Nov 2010, Vol. 66, No. 6.

Classical performance attribution methods do not explicitly assess managers’ dynamic allocation skill in the factor domain. The authors propose a generalised framework for performance attribution that decomposes the allocation effect into value added from both static and dynamic factor exposures and thus yields additional insight into sources of manager alpha.

TIPS, Inflation Expectations, and the Financial Crisis Financial Analysts Journal Nov 2010, Vol. 66, No. 6.

The authors show that inefficiencies in the U.S. market for inflation-linked bonds can be exploited by informed traders who include survey estimates or inflation model forecasts in trades on breakeven inflation. The Treasury Inflation-Protected Securities market has yet to fulfill investors’ expectations as a low-risk, efficient, and liquid financial instrument.

CFA South Africa members and Media attended the annual Judges at the annual Global Investment Research Challenge hosted conference held at the Gordon Institute of Business, JHB. by CFA South Africa, held in Johannesburg in October.

Global News Coverage for Investment Professionals

. Democrats want an investigation of possible foreclosure fraud . U.S. House Speaker Nancy Pelosi, D-Calif., and other Democrats in Congress said they want the Justice Department to investigate major mortgage lenders, as more evidence of fraudulent court filings become public. The request was made in a letter to U.S. Attorney-General Eric Holder. The AFL-CIO has joined a growing list of organisations calling for a broad moratorium on residential foreclosures. . . Risks to financial stability remain high, the IMF says . The International Monetary Fund released a report that outlines threats to financial stability, including exposure to sovereign debt, ongoing weakness in the banking sector and slow economic growth worldwide. "Policymakers in many advanced countries will need to confront the interactions created by slow growth, rising sovereign-debt indebtedness and still-fragile financial institutions," the IMF said. The IMF also urged policymakers to reconsider the way credit ratings are used to asses sovereign debt.

. U.S. Treasury expects to lose $29 billion on rescue programmes . A report from the U.S. Treasury Department shows an estimated loss of $29 billion tied to rescues during the financial crisis. Aid to the auto industry and the government's housing-finance programme account for a majority of the loss. The Home Affordable Modification Program and other housing programs are expected to cost the government about $46 billion, while investment in auto-finance companies will result in a $17 billion loss, according to the Treasury. Profit in other areas offsets some of those losses.

. Bair downplays concern about a risk-retention rule for ABS . Sheila Bair, Chairperson of the U.S. Financial Deposit Insurance Corp., tried to downplay industry concern about a requirement that issuers of asset-backed securities retain some risk. Many have voiced concern that the requirement will hinder the securitisation market, which is seen as crucial for the recovery of the housing market.

. REITs and property developers will be winners in BoJ's asset buying . Japan's property sector posted a major advance on the stock market after the Bank of Japan announced an unorthodox asset-buying program that includes a wide range of asset types, including real estate investment trusts, exchange-traded funds, commercial paper and corporate bonds. Fund managers and economists said the liquidity injection is likely to be uniquely beneficial to Japan's REITs, which have lost two-thirds of their value since the beginning of the financial crisis.

CFA SOUTH AFRICA Ann Marie Wood ABOUT CFA INSTITUTE Phone: +27 11 791 0105 CFA Institute is the global association for investment professionals. It administers the Fax: +27 11 791 0107 CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts Email: [email protected] professional development programs; and sets voluntary, ethics-based professional and Website: www.cfa.ac.za performance-reporting standards for the investment industry. CFA Institute has nearly 100,000 members, who include the world’s 87,500 CFA Charterholders, as well as 137 ADDRESS affiliated professional societies in 58 countries and territories. More information may be found at www.cfainstitute.org Executive Office: Unit 2, West Square

407 West Avenue

Ferndale ABOUT CFA SOUTH AFRICA Johannesburg CFA South Africa, an affiliate of CFA Institute, serves the investment community of

Southern Africa by promoting the highest standards of professional excellence and Communications: integrity. In our mission to promote global-best-practice, CFA South Africa supports the Leandi Cameron CFA Code of Conduct & Standards of Practice and the Chartered Financial Analyst (CFA) Cell: +27 71 606 5553 Program. CFA South Africa members are principally investment and financial service Email: [email protected] professionals, academics, and regulators. CFA South Africa is a non-profit organisation Website: www.moonwritecreations.com that seeks to be financially sustainable.

CFA South Africa is a society formed under the auspices of the CFA Institute, Charlottesville, Virginia, USA. CFA and Chartered Financial Analyst are registered trademarks

Directors of CFA South Africa: TB Berry, CFA, A Canter, CFA, PJ Knibbs, CFA, E Louw, CFA, L Raff, CFA AD Thompson, CFA, NL Waisberg, CFA, M Efstathiou,CFA, NJ Suliaman, CFA, Ann Marie Wood, CFA.