Johannesburg, 07 June 2012
Craig Massey, Alwyn van der Merwe
Despite some highly publicised international trading
disasters, derivative instruments are not as controversial
as they are made out to be and have a very definite place
in South African portfolio management.
This is the view of Craig Massey, director of Stockbroking
at Sanlam Private Investments (SPI), who was speaking at an
SPI quarterly briefing session held at Johannesburg's
Hyatt Hotel today.
"The spread and sophistication of derivative
instruments has huge potential for growth in South Africa.
We are already vying with India as the biggest user of
single stock futures in the world," he said, adding
that local investors are now able to buy into major
international companies not listed on the JSE through
investing in IDX single stock futures.
While the use of derivatives has been tainted by highly
publicised losses generated by traders such as Nick Leeson,
who brought down Barings Bank in 1995, and more recently
multi-billion dollar fallouts at Societe Generale and JP
Morgan, Massey stresses that these incidences were the
result of fundamental trading protocols and management
systems being breached or abused amid the lack of proper
monitoring and controls being in place.
"If they are understood and used correctly, derivative
instruments are no more risky than buying underlying
assets. However, due to the leverage factor, if investors
get it wrong, they can get it many times wrong," added
Massey, saying that regulations have been introduced in the
US to separate financial institutions' proprietary
trading business from their commercial activities to
quarantine "the man in the street's
According to Massey, derivatives are essentially used for
three different purposes - outright speculation,
hedging/protection against uncertainty, and to enhance
returns by utilising option strategies.
He believes that derivative instruments will play an
increasingly important role in portfolio management in
South African financial markets as more investors seek to
take advantage of leveraging opportunities.
"Huge advances in computer trading have enabled
traders and investors to design their own tolerance levels
and get computers to then do the work for them. Trading can
be done extremely quickly with very thin margins,"
said Massey, adding that opportunities for arbitrage have
also been greatly increased.
In addition, he said, derivative instruments enable
investors to lock in current values of underlying assets,
retain strategic holdings and hedge positions in illiquid
In the options arena, Massey said options provided company
directors, for example, with a means to use
"zero cost collar" structures to protect
themselves against downside exposure to underlying stocks
while giving away some of the upside.
Meanwhile, commenting on the current investment outlook,
Alwyn van der Merwe, director of Investments at SPI, said
there was an important role for derivatives to play in an
uncertain international investment environment.
"The four major potholes that we flagged in the first
quarter are still very much in play - namely the ongoing
meltdown in Europe, the slowdown in the US, the possibility
of a hard landing in China and geo-political instability in
the Middle East," he said.
"Europe remains the biggest challenge, with the Greeks
going to the polls on 17 June. While many commentators are
predicting a break-up of the Eurozone, this is by no means
definite as Germany, the region's powerhouse economy,
needs Europe and the Euro."
Van der Merwe said that while Middle East tensions remained
a major uncertainty, especially the ongoing unrest in
Syria. The fall in the oil price to under US$100 a barrel
reflects concerns regarding the demand for oil against a
backdrop of slowing global activity.
Commenting on traditional stock portfolios going forward,
he said there is a need for "smart portfolio
crafting" in an environment that is "still
extremely fluid." However, said van der Merwe,
"pockets of value are emerging".
He said that four out of five of Sanlam's stock picks
in the first quarter - Capitec, MTN, Naspers and British
American Tobacco - had performed well, while Anglo American
While the four solid performers might continue to perform,
investors may need to consider changing "tyres"
if the "road" changes. Anglo American could be a
strong performer if the current bearish sentiment changes
on positive macro-economic surprises.
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