Rob Dower
Quarterly Commentary

2011 Q3 Comments from the Chief Operating Officer

In a 2008 global survey of trust run by Edelman, a consultancy, US and UK respondents rated banks at 70% and 46% respectively in answer to the question 'How much do you trust banks to do what is right?'. This put banks among the most trusted of industries in those two countries - well ahead of their governments. In a repeat of the same survey, which was conducted this year but before August, the number was 25% for the US and 16% for the UK. No doubt the numbers will have dropped further after the latest quarter's uncertainty.

Economies and markets need trust to operate efficiently. Trust is built on the combination of institutions who are worthy of trust and individuals who are trusting. The two can work together in a virtuous circle, or just as easily in a destructive cycle. For distressed borrowers this effect is geared: a lack of confidence increases funding costs, which reduces their ability to repay. Thus, the current crisis in Europe, and indeed in developed markets, generally has caused a parallel crisis of trust. In his article Sandy McGregor looks at the complicated European context and discusses the few ways a country mired in debt can extract itself from its predicament.

Investment views

The investment management industry has a challenging chain of trust that runs from you, the investor, potentially through pension fund trustees, investment managers, custodians and the managers and employees of listed companies in which we invest your funds. There is the potential for failures of competence and ethics at each of these layers, and yet we are bound to trust each other down the chain to make investments efficiently.

We take our role in this chain seriously and we regard your trust and confidence in us as one of our critical strategic assets - as important as our skill in investing. With the current enormous financial uncertainty, people looking for reassurance and advice can easily be confused by the many sources of commentary, and this can reduce trust and drive destructive investor behaviour. We will generally not comment on short-term market moves, even if they are dramatic. Rather, we invest time and effort in adding to our clients' ability to understand investment issues through this publication and through the media. We think it is appropriate to invest in companies that our research indicates have meaningful pricing power. This makes more sense to us than trying to predict just how high profits may go in the current high-profit environment, especially as profits usually return to historic averages. In his article Simon Raubenheimer discusses some of the reasons why we don't think current profit levels are sustainable.

One of the threats to current company profitability in South Africa is that consumers are heavily indebted. Part of this debt is flowing from the microlending industry. Alarmingly, microloans are growing at a rate of 44% per year. Jacques Plaut researches a few of the most well-known microlending crises, and concludes that the current high rate of growth in South Africa is a sign for investors to be cautious.

In the June issue we discussed the revised retirement fund regulations in some detail. With these regulations in mind, some investors have begun to question whether or not a retirement annuity fund is still a suitable product choice. Christo Terblanche and Wanita Isaacs compare saving for retirement via the Allan Gray Retirement Annuity Fund to saving with a discretionary unit trust investment.

Time flies

You may have seen our new advertisement which uses a fairytale-like story to subtly reinforce the importance of time in the journey of creating wealth. We often speak about the importance of taking a long-term approach to your investments, and once again, we encourage you to stay the course.

Thank you for your trust, we don't take it lightly. 

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