Turnover for SA businesses
According to data collected by StatsSA, the average SA business generated 11 cents of profit for every R1 of turnover. In certain industries, such as construction, this dropped as low as 2 cents for every R1.
These figures are important when you begin to interrogate share incentive schemes and the impact that they have on ordinary shareholders.
In SA, share incentive schemes for management have historically been an effective and fair way to reward high-performing executives.
As markets edged higher, executives (and shareholders) fortunes improved as the value generated was transparent and measurable.
Today, with stagnant equity markets and increasing questions regarding the effectiveness of long-term incentives, this trend is under pressure. As a result, traditional share incentive structures are proving cumbersome and expensive.
In addition to poorly performing equity markets, new legislation, most notably Section 8C of our Income Tax Act, has added further drains on the effectiveness of current share incentive structures.
All gains arising under employment-linked share incentives (options or share purchase schemes) are taxable as income.
Taken with the recent increase in the marginal tax rate to 45%, companies are awarding greater tranches of shares to executives to compensate for this increased “cost”. In effect, ordinary shareholders are paying the price.
Despite these headwinds, progress is being made by, for example, the introduction of outcomes-based governance principles in the latest King Codes.
Improvements in financial reporting and disclosure of executive remuneration also allows ordinary shareholders to better understand how management are being remunerated.
In addition the role that non-executive directors play within internal structures such remuneration committees has been brought into focus.
Certain asset managers and individual “Activist” shareholders are also starting to make a difference.
However, much still needs to be done in this important sphere of our economy. The adage that “necessity is the mother of invention” is appropriate in such circumstances.
Share incentives have largely become a commoditised cookie cutter structure. This needs to change with new structures to better align performance conditions.
This continued innovation to share incentives structures should be focused on achieving win-win arrangements for executives and shareholders alike.
Ain 2019. So says Old Mutual Investment Group’s Hywel George. He highlights four global investment trends for the year ahead. Mix in some passive There has been a significant drive towards indexation globally – particularly in the US equity market, with almost $1 trillion flowing from active to passive management over a 10-year period, largely driven by fees.
Yet active management still holds the lion’s share of assets and has been growing, probably because markets have been strong.
George says this also impacts SA. The chart shows index investment strategies’ growth.
Source: Morningstar/Old Mutual Investment Group
The active versus passive management debate has evolved to where investors are debating how to blend them in portfolios to reduce fees while allowing for potential upside. Look for returns elsewhere There are merits to including alternative assets like infrastructure, private equity, agriculture and real estate assets in portfolios, George says.
Globally several trillion dollars have flowed into real assets, private equity and hedge funds, but investors must also be careful when buying into this area, he adds.
In a global end-investor survey from 2013 to 2016, 66% said hedge fund performance had fallen short of expectations in 2016 (2015: 33%).
“Whether hedge funds can work in South Africa I think is an open question.”
Global investors seem more familiar with alternative assets and willing to allocate capital to it.
In SA, only around 2% of institutional assets goes to alternative assets, George says.
“We really need to do more here in terms of allocating – particularly, in my view, to real assets.” Integrate ESG into everything George says environmental, social and governance (ESG) factors are increasingly integrated into clients’ assets management. Investors, particularly millennials who want to make an impact while investing, care about this. “If you invest in sensibly managed companies – those that are well-governed, have a social conscience, and which protect the environment – you will generally get better quality companies; those that out-perform.” The trend’s most pronounced in emerging markets as the prevalence of quality is less pronounced than in developed markets.
This is also true in SA, where the ESG SWIX Index has outperformed the vanilla SWIX over the last few years. Understand and integrate AI AI will have a profound effect on people’s lives over the next five to 10 years and will be integrated into the investment process to improve outcomes, George predicts.
This will impact a few areas – fund managers will be able to source more real-time data and mine it for interesting investment trends.
“AI should be able to help us construct portfolios in an even more intelligent way and identify potential risk clusters that could be harmful, which may be now hidden to us.”
George says AI should help fund managers where they have suspicions around a specific company to find it in the data and help fund managers make better stock-specific decisions.
You will generally get better quality companies; those that out-perform