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Discover The Science Of Smart Investing With Smart Alpha

Ensure that the correct level of risk is taken with your investments with the news Smart Alpha fund range.

Absa

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It is notoriously difficult to predict movements in financial markets with any degree of accuracy. In fact, no one can predict with any statistical significance how the price of any financial instrument will behave over a given future time-frame.

In many ways, the prediction of movements in financial markets is similar to another time-series system that is notoriously difficult to predict: The weather. However, there is more predictability in weather patterns, due to seasonal certainty, compared to financial markets where there is very little certainty in what will happen tomorrow, never mind in a year’s time.

We-recommend-tickWe recommend: Investing In Your Future

The difficulty in predicting returns leads to some puzzling issues in modern empirical finance, especially since many of these modern processes rely on assumptions of future returns. Most notably, asset allocation is a process that distributes funds to different asset classes based on the long term returns the asset classes generate above a defined risk-free asset (in most cases the prevailing cash return and sometimes a rate of inflation).

In the aftermath of the 2008 financial crisis, a large pension fund turned to several of the best minds in academia in an attempt to uncover why they had suffered such severe losses. They contracted with Andrew Ang (Columbia Business School), William Goetzmann (Yale) and Stephen Schaefer (London Business School)*, who produced a journal paper on the fund which, as one may imagine, is somewhat technical and includes an extensive review on the Efficient Market Hypothesis. However, one of the key conclusions they reached is that even though the fund was well diversified across asset classes and invested with around 70 of the world’s top money managers; it was not diversified from a risk perspective.

The underlying managers were taking similar types of risks and exposing the fund, on an aggregate level, to large bets on certain risk factors which came under significant pressure during the financial crisis.

This leads to some critical thinking around the returns generated by managers and what risks are being taken with investors’ assets.

Most asset managers are intent on outperforming a specific benchmark, and they do this by utilising a predefined investment process, often referred to as the asset manager’s style.

A good example of style, ubiquitous in the equity market, is the Value philosophy which was conceptualised and formalised largely by Benjamin Graham and made famous by Warren Buffet. Most academics and market practitioners agree that value strategies outperform market capitalisation weighted indices over time.

The critical question is whether or not managers running Value styles are able to outperform, due to skill or simply because they are taking a different set of risks in their portfolios when compared to accepted market benchmarks. This, in some sense, makes the active versus passive investment debate somewhat blurred, as suddenly one may not be able to compare them reliably since they are arguably different from a risk perspective.

So much so that many consultants in the international market are now comparing active managers with benchmarks that are more representative of the risks that the managers are taking; leading to the emergence of the Smart Beta industry. Smart Beta indices utilise specific risk or fundamental factors in their construction process, and deviate from the pure market capitalisation weighted approach that is traditionally utilised in the industry.

We-recommend-tickWe recommend: Inventing the Wheel vs Investing in It

 

7193T_Absa_SmartAlpha_3rdParty_300x300Although returns themselves are extremely difficult to predict, it seems that by allocating to differentiated risks, one is able to generate a statistically significant excess return or “Alpha”, over market capitalisation weighted indices.

Curiously, there are several styles that lead to an excess return expectation. Therefore portfolios should be constructed in such a way that they are weighted across diverse risk factors, as allocating solely to any one risk factor, no matter how diverse the number of managers, may lead to significant losses in asset value, due to risk concentration.

St John Bunkell, from Absa Alternative Asset Management believes that it is possible to enhance “Smart Beta investing” further by constructing portfolios that target Alpha over Smart Beta indices.

This is achieved by allocating to diverse risk styles, specifically utilising value and momentum strategies which he sees as two of the strongest empirical regularities in finance. He further asserts that, although there seems to be very little ability to predict Beta (general market risks and returns), there is some predictability in Alpha (relative return of stocks against indices).

Combining these two strong excess return drivers (value and momentum) within a very specific risk framework, as well as utilising fundamental and mathematical definitions of value and momentum, the Absa Alternative Asset Management team has created a unique fund range, referred to as the “Smart Alpha” fund range. The most critical component of these funds is to ensure that they continuously take the correct level of risk for the investor, as too much or too little risk may have detrimental consequences.

The investment strategies utilised in these new unit trust finds were previously only available to institutional investors, but are now available to the retail market.

If you are interested in these Unit Trusts or have any enquiries, please call 0860 111 456 or email unittrust@absa.co.za

Strive for the exceptional. Prosper.

 

*Andrew Ang, William N. Goetzmann and Stephen M. Schaefer, Evaluation of Active Management of the Norwegian Government Pension Fund – Global, December 14, 2009

Absa Bank Limited (Absa Bank), with preference shares listed on the JSE Limited, is a wholly-owned subsidiary of the Barclays Africa Group. We offer a range of retail, business, corporate and investment banking, and wealth management products and services primarily in South Africa and Namibia.

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Customers Are The Heart Of Innovative Businesses

Keep your customer at the heart of your business.

Viga Interactive

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One of the main reasons start-ups fail is because they don’t create solutions that meet their customers’ needs. Failure is avoidable. Businesses that understand their customers feelings, challenges, expectations and motivations make themselves indispensable in highly competitive markets because they recognise that true innovation is led by customer insight.

An incredible example of a business that believes in innovation driven by insight is Netflix. They revolutionised the way people watch video content by listening to their customer’s needs. You’ve probably heard the story before: after paying a $40 overdue DVD fee, Reed Hastings co-founded Netflix. He was simply too busy to return his DVD. He recognised that this experience wasn’t exclusive to him, but that it was a problem that many people faced. He saw a gap in the market for receiving and returning videos more effectively, and that is how the $150 billion business was born.

If your start-up doesn’t fulfil a human need, then you’re setting yourself up for failure. It’s not enough to have a cool idea. Ask yourself, “What is the market need behind the offering?” and then test ways of delivering your offering in the most user-friendly manner. Talk to your consumers, understand their likes and dislikes and establish your business purpose before haphazardly allocating funds to R&D.

Related: How Netflix Is Now Disrupting The Film Industry By Embracing Short-Term Chaos

You can’t go from being a California based DVD-by-mail provider, to becoming the world’s largest online video streaming service without a business plan. It’s important to recognise the step-by-step process of success. Netflix didn’t go from delivering DVD’s to pouring capital into the production of video content within six months. That sort of development would have bankrupt the company almost immediately. It took 21 years for the business to become content creators.

  • In 1999, the company became a subscription service because they found that customers preferred paying a monthly fee rather than making a once off purchase.
  • Then, in 2009, the company used investor capital to expand their DVD collection because their clients wanted a larger selection of movies.
  • In 2010, the business expanded internationally because they saw a gap in the market across various countries.
  • Finally, in 2013, Netflix created its first original content series because customers craved fascinating content beyond the overused Hollywood archetype.

The point is: Progress didn’t happen overnight. The business had to set goals and objectives. They then had to fund their growth by presenting market opportunities, backed by customer insights, to their investors. Establish your start-up one step at a time and make sure every progression isn’t innovation for innovations sake – it must be inspired by a human need.

13-reasons-whyNetflix was founded by a computer scientist and a marketing director. While one partner focused on Netflix’ service development, the other focused on sales. Since the company’s origin, collaboration and balance have been the cornerstones of the business’ success.

Netflix is currently composed of a diverse team of tech-professionals and designers. They understand the importance of combining technology and design to offer customer-inspired user-experiences.

After conducting consumer research, Netflix discovered that series and movie artwork influences viewing decisions by 82%. This has resulted in the creation of more descriptive and provocative designs. Netflix is known for leveraging human-behaviour to revolutionise their service offering.

As an entrepreneur, you can increase your ROI by partnering with the experts that understand human-based innovation.

Keep your customer at the heart of your business.

Related: What These 5 Digital KPIs Say About Your Business

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Building Customer Relationships

Are you working in a retail environment? Explore the Wits Plus online short course in Customer Relationship Building through the DigitalCampus.

Wits Plus

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Most retail businesses agree that providing excellent customer experience is imperative for a retail store to be successful.

But what is customer experience?  According to Forrester, an independent market research company, customer experience is “How customers perceive their interactions with your company”.

They explain that good customer experiences have three relevant characteristics for the customer:

  1. They are useful, thus deliver value and meet customer needs.
  2. They are usable, so the value is easy to find and engage with.
  3. They are enjoyable, and emotionally engaging so people want to use them.

The customer ‘interactions’ are the two-way exchanges that customers have with the company. A customer will make a judgement as to whether the company meets their needs, is easy to use and enjoyable to do business with. These judgements happen every single time the customer interacts with the company: when they navigate the company website, call the contact centre, enter the retail store, buy company products, talk to an employee, respond to an advert and so forth.

Providing excellent customer experience is challenging. The systems and processes required for excellent customer experience include understanding your customers, building a positive emotional connection with them, capturing and acting on feedback, developing and training everyone in the company and measuring the return on investment. All this is difficult enough to manage in a national company but what does it mean in this age of international and multinational companies?

Related: Customer Control For Entrepreneurs

Providing a superb customer experience is first underpinned by understanding the cultures, history, experiences and sensibilities of customers and then respecting them. Again, this is more manageable if your company is national and its cultural values are aligned with the national values and history. However, achieving this in a multi-national organisation where the historical experience and cultural values of the organisation may not be aligned with the country they are operating in, can be a real challenge.  A diverse workforce is also imperative to providing an outstanding customer experience and the importance of diversity is magnified in a multinational organisation.

This is demonstrated by the infamous ‘H&M hoodie incident’ that happened early this year. In Sweden the only jungle is urban, there are no wild monkeys and the black population is relatively small. As one would expect in a Scandinavian organisation, the H&M group board has good male-female diversity, but there are few black Swedes in senior decision-making positions. Few Swedes have experienced how skin colour can provide an all-pervasive feeling of difference, of ‘us and them’, and they have little, if any, understanding of these issues on a personal level.

However, H&M is a global organisation and therefore needs to have an intimate understanding of the different cultures and sensibilities of their customers in the different countries where they have a footprint; and respect them. The simple expedient of introducing a process whereby a local executive ensures that a new product is culturally sensitive could have demonstrated some organisational understanding of this issue.

The H&M hoodie debacle is an excellent example of how not understanding the customer can negatively impact on customer experience; how it can break the emotional engagement with customers and lose their trust. This incident has made it difficult for South African customers to engage positively with H&M. The importance of diversity in the senior teams throughout a multinational can directly impact the customer experience and the bottom line. In short, one picture and a hoodie nearly undermined the reputation of the organisation in South Africa!

Are you working in a retail environment? Explore the Wits Plus online short course in Customer Relationship Building through the DigitalCampus.

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Company Posts

Entrepreneurs Can Explore Opportunities In Growing Digital Textile And Interior Décor Markets

Those wanting to explore opportunities in digital textile printing can speak to experts at the Sign Africa and FESPA Africa Expo, taking place from 12-14 September at Gallagher Convention Centre.

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According to Mark Sollman, application manager at Mimaki, ‘Digital printing technologies are revolutionising the interior décor business. Not only can these items be produced more rapidly and with less waste than with traditional manufacturing processes, digital printing offers the ability to customise – or even personalise – interior décor.’

The global printed textile market is huge, estimated at over 32 billion square metres of output annually. Print is widely used to decorate the surface appearance of furniture and surfaces. Digital textile printing is ideal for customisation – allowing consumers to print unique products for their homes or businesses.

There are also emerging niche opportunities. For example, with the wide use of online travel review sites, hotels are increasingly keen to deliver a fresh experience. A ‘TripAdvisor effect’ has been identified, with the claim it reduces the hotel renovation cycle from every seven years to every five years, consequently boosting the market for printed décor.

There are many T-shirt printers offering a web-to-shirt service, where the buyer uploads their own unique image to be printed on to a garment on demand. The printing takes a large part of the value and will be done close to the buyer. For a fashion collection, stock-outs may be avoided by printing and making popular sizes and styles locally in small quantities.

Related: Explore Business Opportunities In Print At The Sign Africa And FESPA Africa Expo

This makes higher manufacturing cost less of a problem, and internet retailers can extend this with only commissioning the product after a sale has been completed online. Increasingly, supply chains are being pressured to provide greater flexibility, which inkjet textile printing is able to provide.

Applications with interior décor include; customised wall coverings and photo wall murals; window coverings and wall decals; curtains and blinds, cushions, lampshades and bags.

Those wanting to explore opportunities in digital textile printing can speak to experts at the Sign Africa and FESPA Africa Expo, taking place from 12-14 September at Gallagher Convention Centre. There are also a range of educational features, including: 

Textile Experience

Visit this hands-on workshop where printers can learn different techniques all taught by Charlie Taublieb, who has been in the screen printing industry since 1976, and heads up Taublieb Consulting in Greenwood Village, Colorado, a company specialising in technical screen printing consulting for textile printers. This takes place from 12-14 September, in hall 1 on the Rexx Screen & Digital Supplies stand.

T-Shirt and Bag Printing Workshop

Free demonstrations by local experts on T-shirts and bags with speciality printing techniques, direct to transfer and screen printing. For more info visit http://bit.ly/EntrepreneurSignAfrica5

Related: Considerations For Signage And Printing Industry Start-Ups

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