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The Top 7 Investment Trends That Have Been Identified In 2019




Most people give up on their resolutions by mid-February. As we usher in the second quarter – a reminder that it’s never too late for investment goals.

The year is firmly underway and investors are searching high and low for new opportunities to grow their financial portfolios. Being abreast of these of investment trends gives some insight into how they are most likely to move.

Sonja Saunderson, Chief Investment Officer at Momentum Investments, speaks to us about seven cyclical trends and longer structural investment trends they see dominating 2019 and what they mean for investors.

Cyclical trends:

1.Better valuation in growth-orientated asset classes
Valuations are more attractive in equity and property assets in emerging and developed markets – with the United States (US) being the laggard. This is largely due to market corrections in 2018.

2. Moderating global growth
This trend has been in the headlines with 2019s growth forecasts being revised down. There is potential for a recession in the US in 2020, although there is some debate as to whether this would only be a further slowdown.

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3.Geopolitical factors
One of the biggest ticket items this year is the US-China trade war and its direction – whether it will escalate or moderate. Regional trade integration is coming to the fore more prominently.

In South Africa, Eskom and the elections are two big geopolitical issues this year. General elections take place on May 8 and the results are eagerly anticipated, as is the action thereafter.

Eskom, South Africa’s power utility that is struggling with a debt of $30 billion and power supply problems, poses a systemic risk and could affect economic growth and the country’s sovereign credit rating.

Investor take out: We are expecting a year of volatility, which gives active investment managers opportunities and strengthens the case for investing in alternative asset classes such as private equity.

Longer structural trends:

1.Lower returns
A lower return from asset classes is expected, in part due to the significant overhang of debt. Extreme volatility will mask this at times, but we expect lower returns in the medium to longer term.

2.Hunt for returns
The expectation of lower returns means the hunt for yields is on. This will lead to continuing innovation in listed and unlisted markets such as smart-beta investing, and the growth of alternative asset classes where higher returns can still be found. Although, these investments are more complex and restrictive.

READ MORE | Three Big Ideas In Warren Buffett’s 2018 Letter To Berkshire Investors

3.Pressure on fees
The pressure on asset management models will continue with the focus on lower fees. Surviving models will either be a scale approach where the volume of assets can pay for the costs of asset management, or the boutique model where smaller teams can justify higher costs on a smaller asset base.

4.Outcome-based investing
The long-term investment trend is not just about delivering a return against a benchmark, it is meeting clients’ needs and goals. This is the focus of outcome-based investing which simplifies the investment process by helping investors remain focused on what matters – staying invested.

Investor take out: Having a trusted adviser will be key to ensuring investors can develop sensible financial plans. Regular engagement with advisers will help navigate the bumps in the road and stay the course, which has proven to be the best investment strategy. Along with this, investors need to have a diversified investment portfolio.

– As told to Melitta Ngalonkulu


How To Better Support Business Innovators




We business schools pride ourselves on our commitment to the promotion of best practices, as well as our rigorous research and ability to produce tomorrow’s leaders today.

Globally, 81% of corporate recruiters interviewed by the Graduate Management Admission Council said they planned to hire MBAs.

 The cost of an MBA – including living fees while studying – is recouped in about three and a half years thanks to the salary increase it commands.

A nice, celebratory pat on the back all round, then? Not quite.

Business schools, the centers of innovative thinking and excellence, could offer so much more to the wider economy in South Africa. We need to extend our services to many more people than we currently do.

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If what we do is good, then shouldn’t more people get hold of it? We just need to step into the sunlight out of our ivory towers for a second, and look at what we could be doing to better support those business innovators who don’t have access to funding and educational opportunities right now.

In its 2018 Entrepreneurial Ecosystem Snapshot for Gauteng, the Aspen Network of Development Entrepreneurs identified 255 organizations offering support services to entrepreneurs and small businesses.

Only one of the programs listed is offered by a formal business school, which suggests that either we are not doing anything, or, if we are, what we do might be irrelevant in the wider entrepreneurial ecosystem.

Small businesses are the past, present and future of South Africa’s economy. Today, the Small Business Institute (SBI) reckons 98.5% of all companies in the country are SMEs, the vast majority of which (around two thirds) are micro-enterprises employing fewer than 10 people.

These are not the select few entrepreneurs lucky enough to have the qualifications, capital or funding to enter our program.

They’re not the high-growth startups who’ll be looking for venture capital investment at some stage in their career. But they need our help all the same.

According to the National Development Plan, small businesses are expected to provide 90% of jobs by 2030. Today, however, SBI’s figures suggest they account for less than a quarter of formal employment – well below international standards and what might be expected given their proliferation.

The most popular reason for the collapse of a small business which has been through one of the current business development programs in South Africa is that the entrepreneur was offered another job – which suggests that current programs are good at teaching entrepreneurs skills valued by business, but not the value and reward of building a business themselves.

The second most common reason is the business idea wasn’t successful, which means we could be helping them understand how to address problems earlier, understand the root issues and learn more about how to pivot before it’s too late. And teach them to build better business ideas.

  Any good business model must pass the ‘story test’ and the ‘maths test’. It’s the story test that’s hardest – visualizing how all the components fit together to reinforce themselves to build a viable, feasible, value-creating business.

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Likewise, current programs focus almost exclusively on the person leading the business as the business itself. As a result, many struggle once an organization gets too large for one person to effectively manage.

The process of capacity-building in second tiers of management is simply not taught in entrepreneur programs today.

However, there’s a twist here. In the big picture, maybe our measure of ‘success’ is too short-sighted. To become a successful business owner, learning through trial-and-error is critical, so failing fast forwards and brings rapid growth of skills into the economy as a whole.

All the big enterprises came from small ones. Oligopolies and oppressive wealth stifle the energy of creative destruction and the renewal so needed to freshen our economies and allow great new improvements and the seeds of great new companies to thrive.

Our business schools need to paint a picture of success through experimentation, rapid marginal improvements –not through a grand, elegant masterplan and the fiction of predictable implementation in complex situations.

On business ethics too, there’s much we can share. Many small businesses, for example, go through specific enterprise development (ED) programs developing products and services for corporates and government agencies.

 If we’re really going to build the people who build the businesses who build Africa, we have to make our collective wisdom accessible to more of the people who count and fast-track their skills growth.

Jonathan Foster-Pedley, The writer is Dean and Director of Henley Business School Africa.

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Three Big Ideas In Warren Buffett’s 2018 Letter To Berkshire Investors





Investors expecting big changes in tone, or radical shifts in strategy from Warren Buffett and Charlie Munger in Berkshire Hathaway’s 2018 shareholder letter were once again disappointed. Berkshire didn’t unveil a dividend, both believe the whole of the conglomerate is worth more than the sum of its component parts, and they didn’t brag that hunting for acquisitions in today’s market was easy.

But there were a few important developments of note. For years, investors have studied succession plans at Berkshire for Buffett, 88, and Munger, 95, and this year’s letter gave further evidence of what they will be.

In 2018, Berkshire named Ajit Jain head of its sprawling insurance activities, led by GEICO, National Indemnity and its reinsurance operations, and Greg Abel as head of of its non-insurance operations. Those businesses span utilities, railroads, energy, chemicals, aviation, paints and housing and athletic wear, among others.

A year in, Buffett and Munger seem pleased with the performance of both, who are also now vice chairmen. “Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins,” the letter said. “These moves were overdue.”

In 2018, Berkshire’s insurance businesses returned to profitability and ended the year with a record $122 billion in float. Its railroad, utilities and energy business saw operating profits rise 30% to $7.8 billion and the bevy of other businesses that Abel was tasked with overseeing generated a further $9.3 billion in operating earnings, up 29%.

“Buffett threw a bone to those wanting more on succession by formalizing and endorsing the Ajit Jain and Greg Abel organization structure,” said Drew Wilson, a portfolio manager at Fenimore Asset Management, which has owned Berkshire shares with little turnover since around the time of the 1987 market rout.

However, this year Buffett and Munger didn’t mention their investing lieutenants Ted Weschler and Todd Combs by name in the shareholder letter. “I’m guessing we’ll get a lot of questions wanting more detail at the annual meeting,” added Wilson, who co-manages the $1.1 billion in assets FAM Value Fund.

Another wrinkle was Buffett’s decision to downplay Berkshire’s book value, an accounting metric that has headlined the company’s annual results for decades. “Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s now time to abandon that practice,” said Buffett.

According to him, book value has lost relevance because Berkshire’s gargantuan $173 billion investment portfolio is a fraction of the firm’s overall assets, which are now weighted to operating businesses, led by insurance. New accounting rules, he argued, undervalue these operating businesses. Most important, Berkshire expects to repurchase a ton of stock, likely at prices well above book value.

“The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality,” Buffett said.

An unsurprising point, Buffett reiterated his belief that the easy buys of the post-recession market are gone. Thus Berkshire didn’t make major acquisitions in 2018, but bought $43 billion in public securities, primarily Apple. There were three finer points of Berkshires earnings and shareholder letter worth dwelling on.

Seeing The Forest From The Trees

No one wants to lose $25 billion in the span of 90-days, especially Buffett. But that’s exactly what Berkshire reported as it marked its books for a quarter in which U.S. stock markets slumped in October, and then plunged through December. Berkshire’s investment portfolio was marked down by $27 billion and it recorded a $3 billion impairment related to its share of Kraft Heinz’s recent $15.4 billion write down, where it’s a large holder.

That mark-to-market loss more than wiped out $5 billion plus in operating profits, driving a $25 billion quarterly loss. For 2018, Berkshire lost $17 billion on marks to its investment portfolio, though virtually all of those were on paper, thus overall net income was just $4 billion for the year, a 90% drop.

The loss, however, may go a long way in proving an important point in the shareholder letter. Buffett insisted investors look at the totality of Berkshire’s assets and the advantaged way in the way they’re housed. Said Buffett: “Investors who evaluate Berkshire sometimes obsess on the details of our many and diverse businesses – our economic “trees,” so to speak.

Analysis of that type can be mind-numbing, given that we own a vast array of specimens, ranging from twigs to redwoods. A few of our trees are diseased and unlikely to be around a decade from now.

Many others, though, are destined to grow in size and beauty… Fortunately, it’s not necessary to evaluate each tree individually to make a rough estimate of Berkshire’s intrinsic business value. That’s because our forest contains five “groves” of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.”

The mark-to-market loss may prove the point. There are few, if any, entities on the planet that could bear such marks. In fact, Berkshire still saw its overall cash and book value grow for the year. Those stuck looking at trees might obsess over the daily or quarterly marks of Berkshire’s growing investment portfolio, or have doubts when specific stocks like Apple falter, but the bigger picture is that its portfolio is housed in a structure that can bear the market’s inherent volatility. It is one of the biggest advantages Buffett’s enjoyed in beating the market over many decades.

Stock Buybacks And Retained Earnings

There are many examples of companies who should be criticized for buying back their stock at overvalued prices thus wasting money, or simply spending cash they don’t have. The tens of billions of dollars that banks like Lehman, Bear , Goldman, Merrill, Morgan, Citigroup and BofA spent collectively to buy back their shares in 2007 and 2008 as the housing market began cratering is one of the unforgivable sins of the crisis. They didn’t have the money for buybacks, but used them to delay a reckoning. When each imploded, or had to dilute their stock in government rescues, the folly of Wall Street’s biggest financiers was astounding.

For companies that do have the money, however, buybacks can still be effective.

Buffett did a good job showing this, using Berkshire’s holdings in American Express. Berkshire hasn’t traded Amex in the past eight years, because the company bought tens of billions in stock Berkshire’s holding has gone from 12.6% of Amex’s shares outstanding to 17.9%. As a result, Berkshire’s portion of the $6.9 billion Amex earned was about $1.2 billion, in theory. “When earnings increase and shares outstanding decrease, owners – over time – usually do well,” said Buffett.

What was unique in this explanation is Buffett didn’t dwell on stock prices. Berkshire’s $1.2 billion theoretical claim on Amex’s 2018 profits is about equal to the $1.3 billion cost it paid for its shares.

The price at which buybacks occur does matter, but the most important element in this explanation is whether investors’ holdings are increasing in a sustainably profitable business. In the case of Amex, it is the company’s fundamentals over time that have likely proven more important to Berkshire’s gains than the exact price of buybacks. Failed buybacks come at bad prices, but mostly because the business is bad.

When Berkshire Invests It Isn’t Just Stocks And Elephant-Sized Deals

A theme that deserves more study at Berkshire is how it invests cash into its operating businesses. These divisions are becoming more sizable, so it should be no surprise the size of investments are growing. Last year, Berkshire recorded nearly $10 billion in depreciation and amortization on the assets of its operating businesses and invested a record $14.5 billion in plant, equipment and other fixed assets.

As Buffett notes, “Berkshire’s $8.4 billion depreciation charge understates our true economic cost. In fact, we need to spend more than this sum annually to simply remain competitive in our many operations. Beyond those “maintenance” capital expenditures, we spend large sums in pursuit of growth. Overall, Berkshire invested a record $14.5 billion last year in plant, equipment and other fixed assets, with 89% of that spent in America.”

This spending may well be among the conglomerate’s most important and highest return in coming years. As profitable as Berkshire’s operating businesses were last year, Buffett, Munger, Jain and Abel decided in favor of growth investment, over billions in added profits they could have recorded to impress shareholders.

What will be the outcome of growth capex at BNSF versus spending cuts by many of its rail peers, or at Berkshire Hathaway Energy for that matter? Don’t sleep on Jain and Abel as investors, Berkshire’s owned businesses generated $37.4 billion in operating cash flow last year.

-Antoine Gara; Forbes Staff

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Nasdaq Is Now Working With 7 Cryptocurrency Exchanges




Cryptocurrency exchanges who want to use Nasdaq’s proprietary surveillance technology need to have more than money.

A team of about 20 people contribute to helping in an elaborate due-diligence process aimed at ensuring that any exchange who wants to use the technology that scans for fraudulent transaction patterns is both technically capable, and morally inclined to use the powerful software wisely.

For exchanges who pass the test (and can foot the bill) they’ll be granted access to the same surveillance technology Nasdaq itself uses to ensure its clients that trading volume is as free from fraud and manipulation as possible.

So far, seven cryptocurrency exchanges have passed Nasdaq’s muster, according to a Nasdaq representative speaking with Forbes, though only two, Gemini and SBI Virtual Currency, have been publicized. As more cryptocurrency exchanges seek to lure new customers, the assurance of Nasdaq’s technology is already being used to attract institutions and traders used to more mainstream venues.

During a briefing with members of media today, Nasdaq’s head of exchange and regulator surveillance team, Tony Sio, who works within the market surveillance division, shared the questions every cryptocurrency exchange must answer as part of a larger presentation on the state of the industry around the world.

“Historically, we don’t do such a large vetting process for our clients because they are much more well-known,” said Sio. “But as we started working with less well-known names, startups, then we realized we needed to do this check process.”

During the briefing at Nasdaq’s offices earlier today, Sio presented a detailed overview of how the company on-boards its crypto exchange clients, broken down in to three categories: Business Model, KYC/AML, and Exchange Governance & Controls.

While the press briefing was for educational purposes, in an interview following, Sio provided Forbes with further context, explaining how his team of legal and technical experts use the criteria to evaluate possible customers for risk. Not everyone makes the cut, he says.

The first section of a document, titled “Key Questions to Ask When Evaluating a Cryptocurrency Exchange,” was called “Business Model.” Of the questions in that section, one jumped out: “How reputable are the products available to trade on the venue?”

What’s interesting about this is that it shows Nasdaq is concerned about who is using crypto assets, and how they are being used. As questions about the importance of how a crypto asset was used in the past (Was it used to buy drugs? Does that matter?) continue to be sorted out, this point will likely only continue to raise in value.

The second section of the document is called “KYC/AML,” which stands for know-your-customer/anti-money laundering. Like the questions about business models, the most interesting question in this section relates to reputation. “What is the organizational structure and what are the founders’ backgrounds (i.e. tech expertise, financial markets expertise, etc.).”

What stands out about this question is the importance that past experience plays. From the early days of cryptocurrency, and now into other crypto-assets, the industry’s biggest value proposition was that it would democratize finance and a wide range of industries by letting retail consumers build and manage their own financial products.

Instead of innovation coming from the top down, crypto would be grassroots. While Nasdaq has shown a willingness to work with some unusual clients in the cryptospace, the ones we know about support what these questions reveal about Nasdaq’s interest in working with proven entities, something other regulated exchanges and technology providers will likely follow.

In the third and final section of the “key questions” document, “Are crypto asset listing standards in place?” is the most insightful. While some of the largest cryptocurrency exchanges, like Circle (which owns the Poloniex exchange) and Coinbase, publicly post their new asset listing process, others are much more opaque, leaving open the door to pay-to-play allegations and other potentially fraudulent activity.

Most recently, in June 2018 SBI Virtual Currencies run by Japanese financial giant SBI Holdings, announced it was using Nasdaq’s matching system. Before that, in April 2018, the heavily licensed Gemini cryptocurrency exchange run by Tyler and Cameron Winklevoss, announced it was using Nasdaq’s SMARTS surveillance system. “Our deployment of Nasdaq’s SMARTS Market Surveillance will help ensure that Gemini is a rules-based marketplace for all market participants,” said Gemini CEO Tyler Winklevoss in a statement at the time.

Beyond providing technical support to these exchanges, Nasdaq’s interest in blockchain has been largely limited to investing in other non-cryptocurrency applications of the technology. In September 2015 Nasdaq joined a $30 million investment round in Chain, a blockchain startup that eventually partnered with Nasdaq to launch Linq, a platform for issuing private equities. Then, last week Nasdaq led a $20 million investment in Symbiont, another blockchain company building services that eliminate middlemen in traditional financial workflows.

While competitors like the New York Stock Exchange have partnered with Microsoft and Starbucks to launch its own cryptocurrency exchange, Bakkt, later this year, Nasdaq’s cryptocurrency exchange guidelines are likely to be limited to providing technical support for now.

“The objective that we’re trying to work with crypto, is we see this as a growing asset class,” says Sio. “So we’re working to help provide our technology, it could be around matching, it could be around surveillance, to help our customers as they grow their marketplaces.”

Michael del Castillo Forbes Staff

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